Insuring Canada's exports: the case for reform at export development Canada.(Public Services)

The Study in Brief

With Parliamentary review of the Export Development Act due in 2008, the federal government should seize the opportunity to streamline the operations and priorities of Export Development Canada (EDC). Straightforward economic reasoning and ongoing developments in the global financial services industry call into question the scope of financial services now marketed by EDC. Policymakers should consider restructuring EDC's operations to create a truly competitive export finance and export insurance environment for Canadian companies.

This Commentary contends that the privatization of EDC's short-term insurance portfolio is an overdue and easily implemented option. Withdrawing from the short-term credit insurance market would make EDC a more streamlined organization, enhance government revenues and bring Canada's export-credit insurance regime in line with international norms. More importantly, the withdrawal of the government-backed insurer from the market would level the playing field and spur the development of a more robust private credit insurance market. Ultimately, this will benefit Canadian exporters.

Highlighting the experience of other OECD countries, this Commentary contends that EDC's withdrawal from short-term credit insurance would not adversely affect Canadian exporters. Indeed, expanded competition would enhance companies' access to these financial tools. Although this Commentary concedes the inevitability of government involvement in some export financing and insurance--principally due to political considerations--a restructuring of a portion of EDC's activities would constitute a first step in ensuring a more vibrant credit insurance industry in Canada to the benefit of exporters and the economy.

Export credits have been called the "financial lubricant" of international trade (Moravcsik 1989, 176). However, selling goods on credit to foreign customers carries many risks--a buyer may become insolvent, a war might break out or a foreign government may impose currency controls. Export credit insurance offers companies a simple way to manage such risks. By insuring their accounts receivable, exporters can reduce their exposure to commercial and political risks.

Two characteristics distinguish the Canadian market for export credit insurance. First, unlike the practice in most OECD countries, a state corporation--Export Development Canada (EDC)--enjoys a dominant market share in both short-term and medium-term credit insurance. Second, also unlike in most OECD countries, EDC competes with private insurers in marketing its services to Canadian companies. While some observers may consider a competitive state corporation as benign, many also recognize the market distortion that EDC's activities entail, especially if they crowd out private competitors. Together, these peculiarities make Canada's export credit insurance regime anomalous and anachronistic.

Globally, export credit insurance has emerged over the past two decades as a primarily private-sector activity, with most governments withdrawing to underwrite only extreme and speculative risks. In Europe, for example, private insurers account for 95 percent of export credit insurance. Some countries, such as the United Kingdom and Australia, have privatized large segments of their previously government-administered programs. In Canada, however, the Export Development Canada, markets and underwrites the bulk of export credit risk. International experience suggests that government intervention in export credit insurance markets--and in short-term, export credit insurance in particular--is not necessary. The Government of Canada should reduce this sphere of EDC's operations. Such action would spur the development of the private insurance market in Canada, add a modest source of tax revenue to the federal government, result in insurance being offered on unambiguously market terms, remove a distortion from the Canadian financial market, and bring Canada more in line with its OECD peers and trading partners.