Importance of Export Financing

by Walter Johnson; Updated September 26, 2017

Without exception, every country on the globe has some form of export financing or guarantee program. The point of this is to both encourage exports and boost the profitability of the domestic firms involved in exporting. The importance of this sort of financing is difficult to exaggerate, since so much hard currency is earned through exports. Entire economies, such as the Korea or Chinese, are based around exports. Export financing has helped turn third world countries into international economic powerhouses.

Financing

Export financing programs, especially for American exporters, often take the form of guarantees for foreign buyers. The Export-Import Bank of the United States is the federal agency charged with this program. The purpose here is to identify credit-worthy foreign buyers and make cheap loans to them. These loans are meant to solely be used to buy American exports and boost the profitability of American exporters.

Credit

Export financing is about making it easy for buyers to favor American exports over competitors. In a sense, this is a form of “corporate welfare” because tax payer guaranteed loans, under normal interest rates, are being extended to foreign buyers so as to buy American goods. The profits do not go to the tax payer, but to the private firm. However, the theory is that such export expansion will eventually trickle down to the tax payer through the earning of hard currency, the slow elimination of the trade deficit and the creation of local jobs. Therefore, the importance of this sort of loan guarantee is meant to focus around the creation of domestic employment that might otherwise go to foreign exporters.

Development

The United States Department of Agriculture administers the “Facility Guarantee Program,” first developed in 2007. This is a form of export finance that is designed to permit third-world states to update their infrastructure. In one sense, this is a form of foreign aid. In another, it is a form of export financing. The theory is that American exports will be boosted if the facilities of the developing world are regularly updated so as to handle increasing volumes of American products. The U.S. government will service ports, warehouses, processing plants and loading equipment under the condition that the government increases its American imports. With the new and updated equipment, the country in question can import more American goods while at the same time increasing its capacity to handle more imports.

Exports

Export financing is central to improving the present dismal balance of trade in the U.S. Companies can take advantage of these loan programs to not just make it easier to export, but also identify which buyers are credit worthy. There are always risks in exporting, since the buyers are not under American law. This means that the power of the firm to recover losses is minimal in case of default or fraud. With these and many other similar programs, American firms can boost exports through assistance given to foreign buyers. These buyers become loyal to American products, which in the long run, can only help the American economy.

About the Author

Walter Johnson has more than 20 years experience as a professional writer. After serving in the United Stated Marine Corps for several years, he received his doctorate in history from the University of Nebraska. Focused on economic topics, Johnson reads Russian and has published in journals such as “The Salisbury Review,” "The Constantian" and “The Social Justice Review."