The trade effect of export credit guarantees and insurance

The purpose of this dissertation is to examine the overall economic impacts of public and/or private export credit insurance and/or guarantees on trade flows in which risks of non-payment on export sales were considered. First, this dissertation developed a simple model that incorporated the non-payment risks associated with the importing countries into the certainty equivalent profit maximization approach to determine a relationship between exports and the credit risks of the importing countries. The theoretical and empirical results show that there is a negative relationship between exports and the credit risks of the importing countries.; These results led this dissertation to develop an economic framework analyzing the impact of an export credit insurance and/or guarantee on trade flows within the context of a two-country partial equilibrium trade model, incorporating non-payment risks. In deriving the domestic demands of the exporting and importing countries, this dissertation applied the utility maximization approach to capture secondary benefits from an export credit that the importing country may or may not receive. The theoretical results show that if the importing country was to receive the secondary benefits, its import demand shifts outwards vertically relative to the scenario without receiving the secondary benefits. In deriving the supplies of the importing and exporting countries, this dissertation employed conventional profit maximization under the assumption of the absence of non-payment risks, and the certainty equivalent profit maximization approach under the assumption of the presence of non-payment risks. The theoretical results explore various scenarios of the exporting country's export supply under different types of export credit insurance and/or guarantees.; The impact of an export credit program derived from the theoretical framework was graphically compared with the impact of an export subsidy. The results show that the operational regions of a fixed per unit export subsidy and export credit insurance and/or guarantees are different relative to the benchmarked inverse excess supply. The operational region of the export credit program lies above and to the left of the benchmarked inverse excess supply while the operational region of a direct export subsidy lies below and to the right. This shows that an export credit program leads to increase exports, raises the domestic price in the exporting country, and lowers the price in the importing country. Likewise, an export subsidy also leads to increase exports, raises the domestic price in the exporting country, and lowers the price in the importing country. However, while similar price effects may be observed, the mechanisms by how price change comes about differ. With an export credit guarantee/insurance, the higher inelastic excess supply (due to non-payment risks) moves towards the benchmark (no risks of non-payment) excess supply. In the model of an export subsidy, the benchmark excess supply (without export subsidy) becomes the starting point, and the excess supply with an export subsidy moves away from this benchmark excess supply. Furthermore, the results show that from the perspective of recovering efficiency loss due to non-payment risk, the use of an export credit program is justifiable.