What is an Export Credit Agency (ECA)?
An export credit agency (ECA) is an institution that works to support companies with their international trade. Export credit agencies can be private, quasi-governmental, or entirely run by the government. They offer financing solutions and risk insurance (guarantees) for companies trying to export and import products.
An ECA’s services can be received as credit, credit insurance, or a combination of both. Their services are often very similar to regular banking or insurance companies – the difference being that they accept taking on the risk of international trade.
Understanding Export Credit Agencies
Export credit agencies originally came to fruition through the government trying to support local companies and increase their product/service export business. Their respective services were offered to minimize the risk of participating in international markets and decrease the barriers to entry for domestic businesses.
It is more common for export credit agencies to assist companies and banks from their own country; however, it is becoming more usual to see ECAs work with international businesses or affiliate companies on the other end of trade deals. Banks can also come into play during such deals. One example would be a bank supporting a domestic company’s export and an export credit agency helping the international organization on the receiving end.
Similarly to banks, export credits or insurance can be supplied for short-term (up to 2 years), medium-term (2 to 5 years), and long-term (over 5 years). An export credit agency will be chosen over a bank or insurance company due to their specialization in their practice and in foreign markets.
Many banks and insurance companies do not want to take on the additional risk that comes with international trade. It is why many ECAs have taken on a more significant role since the 2008 Global Financial Crisis, as many private lenders have become wary of lending. Before the financial crisis, ECAs were often seen as a last resort and were used only if there was no private funding available.
- An export credit agency supplies financial support and insurance to help domestic companies make the transition to riskier overseas markets for their goods and services. ECAs can be privately held, government-run, or a combination of both.
- ECAs exploded after the 2008 Global Financial Crisis as banks became more risk-averse, leaving many companies looking for a new alternative to support their exports in riskier or more volatile markets.
- An export credit agency is held to regulations by the World Trade Organization and local government rules, similar to a bank. Ultimately, corporations seek the help of export credit agencies to reap the benefits of international growth.
Government and Private Export Credit Agencies
An export credit agency can be privately held, a government organization, or a quasi-government organization. Ultimately, ECAs are in place to support domestic businesses of all sizes. With that in mind, the government may see it as beneficial to their country and economy to step in as their own export credit agency if no suitable private corporations are already doing it.
Governments with extremely risky and volatile markets will often take charge with an ECA. It can help provide their economy with the benefits and profits of those riskier industries, especially when private institutions are hesitant to support such markets. There are now thousands of ECAs worldwide, both government-run and privately held, and they have become a leader in global financing post-financial crisis.
With billions of dollars flowing through export credit agencies, governments and authoritative powers sought more control. Similar to financial institutions and other companies, congressional oversight became mandatory for export credit agencies. They check competitiveness, business activities, financial support, and more.
ECAs are also held accountable by the World Trade Organization (WTO)’s mandates and regulations. The regulations were implemented closely after ECA’s rapid growth toward becoming a major player in international trade. Regulations for one country may vary from others depending on their economic policies and beliefs. When policies vary between countries, the WTO’s guidelines will come into play, making for fair overseas imports and exports.
Why Companies Choose an Export Credit Agency
As previously stated, governments often create or support export trade agencies because of their beneficial effects on the economy. Creating an export plan can boost business sales and overall growth for small and large companies. It can also connect them with potentially untapped niche markets without the need to move operations abroad.
The transitions most often increase the financing or insurance needs for companies, which is where export credit agencies come into effect. ECAs can help facilitate the transition to overseas export. They offer services that other banks have chosen not to supply for risk and volatility purposes. Their specialization in overseas markets is also an appealing aspect to most companies looking to get into international trade.
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