Let Sense Conquer Sensibility over the Trade Finance Disputes between China and the United States

Visiting Scholar, RIETI

The latest U.S. stories of Huawei (Note 1), China's top network equipment maker, have aroused many discussions domestically and globally. Among various kinds of accusations that the United States has thrown against Huawei--such as posing a national security threat to the United States, holding close relations with the Chinese government and military, etc.--there is a less political but more financial allegation worth debating: state-owned financial institutes in China are providing generous cheap trade finance to Huawei, including loans and insurance, which has helped it increase overseas market share and make unfair export subsidies (Note 2). Is the allegation justified?

The Chinese government is not wrong in supporting export and overseas investment through official ECAs

Cross-border exchange needs the support of trade finance, including loans, insurance, and guarantees. At the same time, inherent risks in foreign trade transactions are much higher than in domestic trade. Especially in capital-intensive and long-term overseas deals, a seller's nonpayment risks, which can occur due to commercial or political events, are too high against which private companies provide coverage. Hence, there is a market failure in export credit, and the government has to intervene. From this perspective,

i) It is a standard international practice for Chinese stated-owned financial institutes to provide export credit for domestic enterprises. Most nations have established state-supported export credit agencies (ECAs) to provide financial support for export transactions, e.g. Export-Import Bank of the United States (Ex-Im Bank), which provides loans and insurance simultaneously; Japan Bank for International Cooperation (JBIC) and Nippon Export and Investment Insurance (NEXI) in Japan; and Export-Import Bank of China (China Ex-Im Bank) and China Export and Credit Insurance Corporation (SINOSURE) in China, which provide loans and insurance respectively. ECAs that are seemingly managed by private companies, such as those in France and Germany, have to take direct orders from their governments.

ii) China's ECAs are not more strongly mandated to pursue policy interests than those of the United States. It's common for governments to use ECAs as a policy tool to pursue national interest objectives. They only vary in the content of mandates and the degree of enforcement. ECAs in Japan, Korea, and China are mandated to provide support for resource security and overseas infrastructure development (Note 3), while the U.S. Ex-Im Bank has a unique, explicit mission to promote domestic employment except for promoting exports. The U.S. Ex-Im Bank even receives mandates from the U.S. Congress in a more specific way and operates under greater policy requirements where other G7 ECAs have broad directives, e.g. the U.S. Congress has required that the U.S. Ex-Im Bank make available a certain percentage of its export financing for small business (20% now) and promote exports to sub-Saharan Africa, etc (Note 4).

Ignition of disputes comes from competition pressure felt by the rich nations' club due to the big size and flexible practices of China's ECAs

Why did standard practices become "guilty"? There are two main reasons as follows:

i) Rapid growth in export credit activities of China's ECAs. Over the past decade, especially since the global financial crisis, official ECAs from emerging economies such as BRICs have experienced rapid expansion. In China, which became the second largest economy in 2010, the growth of ECAs parallels that of its economy and trade. According to statistics from the Berne Union, China's official export credit insurance company, SINOSURE, had underwritten a total of $179.2 billion and became the largest official ECA in 2010 (Note 5). The China Ex-Im Bank has expanded similarly. In contrast, the U.S. Ex-Im Bank is growing at a relatively modest pace.

Most criticisms against China's trade finance are based on its rapid growth and big size. If it is undeniable that China's economic growth and "going out" policy does not harm but rather benefit the world economy, especially in the periods of lackluster recovery, then it is unfair and inappropriate to criticize China's export credit activities on the basis of its size. In addition, according to SINOSURE's data, short-term business still dominates, and the medium- and long-term business, which possesses the most obvious trait of government support and is subject to the most intense international competition, remains quite low in its overall business portfolio.

Table: Business structure in terms of underwritten amount by insurance type: SINOSURE
Insurance type20072008200920102011
Export credit insurance84.7%68.8%84.3%83.5%85.2%
Of which, short-term business76.0%64.6%77.4%78.6%80.9%
Middle and long term business8.7%4.2%6.9%4.9%4.2%
Overseas investment insurance9.8%8.5%4.0%6.2%6.6%

Source: Annual reports of SINOSURE

ii) More flexibility in conducting export credit service of China's ECAs. Hitherto, the main internationally agreed upon disciplines governing officially supported export credits is the Organization for Economic Co-Operation and Development (OECD) Arrangement. Since its formation in 1978, its scope and content have expanded over time. Under the OECD Arrangement, participating members must adhere to rules such as minimum interest rates and minimum premium rates, which reduce ECAs' flexibility in pricing commercial transactions and negotiating terms and conditions. Additionally, participating members have a variety of reporting requirements to follow. On the other hand, China, as well as other BRICs nations including India, which has ever-growing ECA financing activities, is not a member of the OECD--the so-called "rich nations' club." Hence, China's ECAs can conduct business more flexibly since China is not obligated to adhere to the OECD Arrangement.

Flexibility in China's export credit does not necessarily equal unfair export subsidies. Even the United States itself cannot deny that. In the U.S. Government Accountability Office (GAO)'s recent report to Congress, it was said that "as nonparticipants in the OECD Arrangement," although these countries can offer terms more favorable than terms under the Arrangement, "more favorable terms to buyers do not necessarily constitute subsidies--the terms may be market-based and compliant with World Trade Organization requirements (Note 6)."

Currently, more political concerns on the trade finance issue might blur the core of problems and cause harm in seeking the right solutions

In conclusion, the core of trade finance disputes between China and the United States is that the former is a non-member and thus not subject to the OECD Arrangement, which is bringing increasingly more competitive pressure to the United States (and other OECD members) with its ever-expanding export credit activities. By nature, the problem is how China should adapt itself to an internationally accepted framework of export rules. Furthermore, it is a problem on how the existing international rules should adapt themselves to an ever growing and influential China. There is no doubt that international negotiation is the right pathway. During China's Vice President Xi Jinping's visit to the United States in February 2012, the Chinese and U.S. governments agreed to establish an international working group that included other major providers of government-backed export credit with the goal of concluding a set of international guidelines by 2014. That is a positive sign of making concrete progress towards a new and more extensive international framework.

However, due to political events such as the U.S. presidential election and a new round of re-authorization of the U.S. Ex-Im Bank, there is a growingly stronger political atmosphere hovering over the trade finance disputes in both China and the United States. Export credit can't be a pure economic concern, but it's absolutely not a pure political issue either. Some people might say it is just a temporary "election" effect, but temporal noise might leave long-lasting adverse results behind, escalating mutual mistrust between China and the Western world at least. Ashes to ashes, dust to dust, sense over sensibility. Speeding up international negotiations should become the top priority.

  1. ^ E.g., The U.S. House Intelligence Committee released a report recently warning U.S. companies to avoid doing business with Chinese technology companies Huawei and ZTE. In addition, U.S. regulators are encouraged to ban the use of Huawei or ZTE products in government computer hardware and block any attempted mergers or acquisitions of U.S. firms. http://asia.cnet.com/the-us-doesnt-trust-huawei-and-zte-62218993.html
  2. ^ E.g., "BACKGROUND MATERIAL FOR US-CHINA ECONOMIC AND SECURITY REVIEW COMMISSION," http://www.uscc.gov/hearings/2012hearings/written_testimonies/12_6_14/McCarthy.pdf, June 6,2012; U.S.-China Economic and Security Review Commission Staff Research Backgrounder," Export Assistance and the China Challenge," http://www.uscc.gov/researchpapers/2012/5.7.2012_ExportAssistanceandtheChinaChallenge.pdf, Apr. 27, 2012
  3. ^ "Export Credit Agencies in the Asian Century," Export Finance and Insurance Corporation (EFIC) submission to the 'Australia in the Asian Century' White Paper, http://asiancentury.dpmc.gov.au/sites/default/files/public-submissions/efic.pdf, Apr. 27,2012
  4. ^ United States Government Accountability Office (GAO), "U.S. EXPORT-IMPORT BANK, Actions Needed to Promote Competitiveness and International Cooperation," Report to Congressional Requesters, http://www.gao.gov/new.items/d10682.pdf, February 2012
  5. ^ Mei Xinyu, "China Trade Finance Report In 2010," Chinese Market, Volume 3, 2011
  6. ^ See notation No.4

October 15, 2012

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