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Financing capital equipment exports through the export development corporation Schram, Douglas Charles 1976

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Oy, j FINANCING CAPITAL EQUIPMENT EXPORTS THROUGH THE EXPORT DEVELOPMENT CORPORATION by DOUGLAS CHARLES SCHRAM A THESIS SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE (BUSINESS ADMINISTRATION) in the D i v i s i o n of INTERNATIONAL BUSINESS STUDIES WG a c cep t t h i s t h e s i s as c o n f o r m i n g to the r e q u i r e d s t a n d a r d . THE UNIVERSITY OF BRITISH COLUMBIA A p r i l 1976. In p r e s e n t i n g t h i s t h e s i s in p a r t i a l f u l f i l m e n t of the r e q u i r e m e n t s f o r an advanced degree at the U n i v e r s i t y of B r i t i s h C o l u m b i a , I agree t h a t the L i b r a r y s h a l l make i t f r e e l y a v a i l a b l e f o r r e f e r e n c e and s t u d y . I f u r t h e r agree t h a t p e r m i s s i o n f o r e x t e n s i v e c o p y i n g of t h i s t h e s i s f o r s c h o l a r l y purposes may be g r a n t e d by the Head of my Department or by h i s r e p r e s e n t a t i v e s . It i s u n d e r s t o o d t h a t c o p y i n g or p u b l i c a t i o n • of t h i s t h e s i s f o r f i n a n c i a l g a i n s h a l l not be a l l o w e d w i t h o u t my w r i t t e n p e r m i s s i o n . F a c u l t y of Commerce and B u s i n e s s A d m i n i s t r a t i o n D i v i s i o n of I n t e r n a t i o n a l B u s i n e s s S t u d i e s The U n i v e r s i t y of B r i t i s h Co lumb ia 2075 Westbrook P l a c e V a n c o u v e r , Canada V6T IW5 A p r i I 30, 1976. i i ABSTRACT The o b j e c t i v e of t h i s t h e s i s i s to e v a l u a t e the e f f e c t i v e n e s s of the E x p o r t Development C o r p o r a t i o n , C a n a d a ' s n a t i o n a l e x p o r t c r e d i t g r a n t i n g agency , in p romot ing and f i n a n c i n g t r a d e in c a p i t a l equ ipment . T h i s o b j e c t i v e can be d i v i d e d i n t o f o u r t a s k s , an e x a m i n a t i o n of the C o r p o r a t i o n ' s a c t i v i t i e s in the f i e l d of e x p o r t c r e d i t , an e x a m i n a t i o n of the market s of the p u r c h a s e r s of Canad ian c a p i t a l equipment e x p o r t s , the development of some i n t e r n a t i o n a l s t a n d a r d s a g a i n s t wh ich to measure the pe r fo rmance of the EDC and an assessment of the pe r f o rmance of the C o r p o r a t i o n in f a c i l i t a t i n g and d e v e l o p i n g t r a d e in c a p i t a l goods. In C h a p t e r I the impor tance of c a p i t a l equipment e x p o r t s to the w o r l d ' s economy i s examined. The e v o l u t i o n and impor tance of c r e d i t in f a c i l i t a t i n g t r a d e in c a p i t a l equipment i s o u t l i n e d . The a n a l y s i s in the c h a p t e r shows t h a t t h e r e a re no e f f e c t i v e i n t e r n a t i o n a l agreements to c o n t r o l the f i e l d of e x p o r t c r e d i t . T h i s i n t r o d u c t o r y c h a p t e r a l s o conce rn s i t s e l f w i t h examin ing the r o l e of e x p o r t c r e d i t i n s u r a n c e . The b a l a n c e of the s tudy c o n c e n t r a t e s on examin ing the f i e l d of expor t c r e d i t in t h r e e n a t i o n s . C h a p t e r II i s concerned w i t h examin ing the system used by the B r i t i s h government to promote and f i n a n c e B r i t i s h c a p i t a l equipment e x p o r t s . The purpose of t h i s r e v i e w i s to d e v e l o p some b a s i c measures a g a i n s t wh ich the pe r fo rmance of the EDC can be measured. C h a p t e r III examines the programs used by the E x p o r t - I m p o r t Bank of the U n i t e d S t a t e s to promote and f i n a n c e Amer i can c a p i t a l equipment e x p o r t s . The c h a p t e r a l s o examines the s t r u c t u r e of the market f o r such e x p o r t s . The a n a l y s i s i s used to d e t e r m i n e i f the e x p o r t s be ing suppo r ted by Exim B a n k ' s f i n a n c e f a c i l i t y have the same b a s i c t r a d e p a t t e r n as t o t a l Amer i can e x p o r t s . A r e v i e w of the Wor ld B a n k ' s a c t i v i t i e s in the f i e l d of deve lopment f i n a n c e i s p r e s e n t e d in o r d e r to e s t a b l i s h t h a t c e r t a i n t y p e s of e x p o r t c r e d i t a re r e a l l y n o t h i n g more than a s u b - s e t of development f i n a n c e . The commod i t ie s be ing s u p p o r t e d by the Exim B a n k ' s f i n a n c i n g a re a n a l y z e d to d e t e r m i n e i f a c o m p a r a t i v e advantage type of t h e o r y can be a p p l i e d to the p r o d u c t s s u p p o r t e d by expor t c r e d i t . The Ex im B a n k ' s o p e r a t i o n s a l s o p r o v i d e a s t a n d a r d a g a i n s t wh ich to measure the EDC ' s a c t i v i t i e s . Chap te r IV o u t l i n e s and a n a l y z e s the f i n a n c i n g a c t i v i t i e s of the E x p o r t Development C o r p o r a t i o n . The a n a l y s i s i n c l u d e s a l l phases of the f i n a n c e f a c i l i t y — t h e type of p roduc t e l i g i b l e f o r s u p p o r t , the d o l l a r volume of e l i g i b l e goods b e i n g s u p p o r t e d , the impor tance of the f i n a n c e d goods to the Canad ian economy, the s t r u c t u r e of the Canad ian e x p o r t e r s and the s t r u c t u r e of the f o r e i g n marke t . The c h a p t e r a l s o a t tempt s to r e l a t e the c o m p a r a t i v e advantage t h e o r i e s of i n t e r n a t i o n a l t r a d e to t h i s s p e c i f i c p a r t of the Canad ian m a n u f a c t u r i n g s e c t o r . C h a p t e r V c o n c e r n s i t s e l f w i t h a n a l y z i n g how the C o r p o r a t i o n i s f i n a n c i n g i t s l e v e l s of a c t i v i t y . The C o r p o r a t i o n ' s cash f l ows r e s u l t i n g from i t s f i n a n c i n g a c t i v i t y are a n a l y z e d . The s tudy sugge s t s t h a t the C o r p o r a t i o n w i l l r e q u i r e s u b s t a n t i a l amounts of c a p i t a l in the near f u t u r e . A new method of f i n a n c i n g the a c t i v i t y of the EDC i s a l s o p r e s e n t e d in t h i s c h a p t e r . Chap te r VI i s the c o n c l u d i n g c h a p t e r to t h i s s t u d y . i v It i n i t i a l l y o u t l i n e s the s i m i l a r i t i e s and d i f f e r e n c e s of the systems used by the t h r e e n a t i o n s to promote e x p o r t s of c a p i t a l equ ipment . The c h a p t e r then f o c u s e s on d e t e r m i n i n g how e f f e c t i v e the mechanisms used by each of the t h r e e c o u n t r i e s a re in a c h i e v i n g t h e i r g o v e r n m e n t ' s p o l i c y g o a l . T h i s compar i son shows t h a t the EDC i s by f a r the l e a s t e f f e c t i v e of the t h r e e a g e n c i e s in a c h i e v i n g i t s p o l i c y g o a l s . The s tudy a l s o d e m o n s t r a t e s t h a t both Canada and the U.S.A. use expor t c r e d i t to suppor t c e r t a i n i n d u s t r i a l s e c t o r s . In the Amer i can case the a i r c r a f t i n d u s t r y r e c e i v e s a g r e a t dea l of suppor t f rom the Exim B a n k ' s f i n a n c i n g a c t i v i t y . T h i s f a c t i s a l s o t r u e f o r C a n a d a ' s s h i p bui Id ing i n d u s t r y . The s tudy then o f f e r s a s e r i e s of recommendat ions to improve the f a c i l i t i e s o f f e r e d by Canada in suppor t of e x p o r t s of c a p i t a l equ ipment . It i s sugges ted t h a t expor t c r e d i t f a c i l i t i e s in Canada can be made more e f f i c i e n t t h rough the i n t r o d u c t i o n of t he se new measures . v TABLE OF CONTENTS PAGE ABSTRACT i i i CHAPTER I. CAPITAL EQUIPMENT EXPORTS IN THE WORLD ECONOMY . . . . I I. I n t r o d u c t i o n II. Def i n i t i ons M l . A t t empt s to Deve lop Un i f o rm C r e d i t P o l i c i e s i ) Growth of I n t e r n a t i o n a l C o m p e t i t i o n i i ) The Berne Un i on i i i ) GATT i v) OECD v) European Economic Community IV. E x p o r t C r e d i t Insurance V. Banks and E x p o r t C r e d i t CHAPTER II. THE EXPORT CREDITS GUARANTEE DEPARTMENT . I. F l e x i b i Ii t y of System ||. I n t e r e s t Rate f o r E x p o r t C r e d i t I I I . O ther Forms of E x p o r t C r e d i t IV. C o n c l u s i o n s CHAPTER II I. THE EXPORT IMPORT BANK OF THE UNITED STATES 53 I. Purpose and Govern ing A u t h o r i t y of the Exim Bank v i II. S e r v i c e s P r o v i d e d by Exim Bank i ) P a r t i c i p a t i o n F i n a n c i n g i i ) D i r e c t L e n d i n g i i i ) D i s c o u n t Loan Program iv ) P r i v a t e E x p o r t F u n d i n g C o r p o r a t i o n I I I. The Wor ld Bank i ) T r a n s p o r t a t i o n i i ) E l e c t r i c Power i i i ) I n d u s t r i a l P r o j e c t s i v ) T e l e c o m m u n i c a t i o n s Equipment IV. Commodi t ies Suppor ted by the Exim B a n k ' s Programs V. C o n c l u s i o n s CHAPTER IV. EXPORT DEVELOPMENT CORPORATION I. E x p o r t C r e d i t Insurance II. F o r e i g n Investment Insurance I I I . E x p o r t F i nance IV. A n a l y s i s of Long Term F i n a n c i n g C o n t r a c t s CHAPTER V. FINANCING THE-CAPITAL NEEDS OF THE EXPORT DEVELOPMENT CORPORATION CHAPTER V I . CONCLUSIONS I. P o l i c y Goa l s of E x p o r t C r e d i t G r a n t i n g A g e n c i e s v i i P A G E II. E f f e c t i v e n e s s of the Th ree Systems I I I . Recommendations IV. E x p o r t C r e d i t in the Wor ld Env i ronment BIBLIOGRAPHY 166 APPENDIX I 172 APPENDIX II 173 v i i i CHAPTER I CAPITAL EQUIPMENT EXPORTS IN THE WORLD ECONOMY I. INTRODUCTION In the t h i r t y yea r p e r i o d s i n c e the end of Wor ld War II wor ld t r a d e has i n c r e a s e d d r a m a t i c a l l y to a l e v e l e x c e e d i n g $ U.S. 778 b i l l i o n in the yea r ended December 31 , 1974. In the I970 ' s a l o n e , wor ld t r a d e has n e a r l y t r i p l e d from the $ u .S .282. I bi 11 ion r e c o r d e d in 1970. Measured in r e a l t e r m s , wor ld t r a d e has a l s o i n c r e a s e d at a n 1 above average r a t e . In the f i r s t f o u r y e a r s of the t r o u b l e d s e v e n t i e s wor ld t r a d e r e c o r d e d an annual compound growth r a t e of 9%. Whi l e t h i s d r a m a t i c i n c r e a s e in t r a d e has been w e l l documented in the l i t e r a t u r e , l i t t l e has been w r i t t e n about how the p u r c h a s e s r e s u l t i n g from t h i s t r a d e are p a i d f o r . The p u r c h a s e r of imported goods can pay f o r h i s pu rcha se by any one of t h r e e m e t h o d s — h e may be s u f f i c i e n t l y l i q u i d to pay c a s h , he may a r r ange s h o r t term c r e d i t w i t h a l o c a l f i n a n c i a l i n s t i t u t i o n o r he may a r r a n g e long term f i n a n c i n g p r o v i d e d by s p e c i a l t y p e s of f i n a n c i a l i n s t i t u t i o n s . The f i n a n c i n g term a c c o r d e d v a r i o u s t y p e s of a s s e t s i s g e n e r a l l y r e g a r d e d as u n i f o r m th roughou t the w o r l d . In the case of consumer d u r a b l e s or a g r i c u l t u r a l commodi t ie s s h o r t term c r e d i t i s u s u a l l y a r r anged because of the n a t u r e of the t r a n s a c t i o n . However, in the case of c a p i t a l goods , the p u r c h a s e r u s u a l l y t r i e s to match the I 2 expec ted economic l i f e of the a s s e t w i t h a debt of a s i m i l a r term i . e . the funds r a i s e d by i s s u i n g long term debt w i l l be used to pu rcha se long l i v e d a s s e t s . A s u b s t a n t i a l p a r t of wor l d t r a d e c o n s i s t s of c a p i t a l goods and s e r v i c e s . F o r example , in 1973, $143.9 b i l l i o n or 27 .4$ of t o t a l wor ld e x p o r t s c o n s i s t e d of m a c h i n e r y and t r a n s p o r t a t i o n equ ipment . The s a l e of such c a p i t a l goods in t u r n r e q u i r e s t h a t some type of long term f i n a n c i n g be p r o v i d e d f o r the p u r c h a s e r . The concept of c r e d i t in e x p o r t t r a d e i s r e l a t i v e l y new. C a p i t a l goods p u r c h a s e r s in i n d u s t r i a l i z e d c o u n t r i e s have a c c e s s t o r e l a t i v e l y e f f i c i e n t c a p i t a l market s and have I i t t l c d i f f i c u l t y a r r a n g i n g long term c r e d i t . However, the s i t u a t i o n f a c i n g the p u r c h a s e r in the I e s s ' d e v e I oped n a t i o n s (LDCs) of the w o r l d i s somewhat d i f f e r e n t . On one hand c a p i t a l goods a re sought to speed up the r a t e of deve lopment w h i l e on the o t h e r hand, they do not have a c c e s s to the funds needed to pay f o r such a s s e t s . P r i o r t o Wor ld War II most o f the LDCs were c l o s e l y t i e d to c o l o n i a l c e n t e r s and were r e q u i r e d to m a i n t a i n a 100% r e s e r v e r e q u i r e m e n t . The L D C s „ o b t a i n e d the n e c e s s a r y funds to pay f o r c a p i t a l equipment p u r c h a s e s e i t h e r by way of d i r e c t g r a n t s from t h e i r c o l o n i a l pa ren t or by i s s u i n g s e c u r i t i e s in one of the i n t e r n a t i o n a l c a p i t a l m a r k e t s . The London market was o f t e n used f o r t h i s p u r p o s e . S i n c e the m i d - 1 9 4 0 ' s the LDCs have had l i m i t e d a c c e s s to t he se c a p i t a l market s because of the l a r g e number of d e f a u l t s , b a l a n c e of payments d i f f i c u l t i e s , and c u r r e n c y i n c o n v e r t i b i l i t y . In a d d i t i o n , the i n v e s t i n g p u b l i c has o n l y had a r e l a t i v e l y s h o r t p e r i o d in wh ich to e v a l u a t e the c r e d i t - w o r t h i n e s s of the newly emerg ing n a t i o n s t a t e s . 3 C a p i t a l equipment e x p o r t s a re impor tan t to both e x p o r t e r s and i m p o r t e r s . F o r the LDCs c a p i t a l equipment i s the key to i n d u s t r i a l i z a t i o n , w h i l e f o r the d e v e l o p e d n a t i o n s the e x p o r t s a re n e c e s s a r y to m a i n t a i n t h e i r p o s i t i o n in the wor ld economy. In the l a t e I 940 ' s c r e d i t was not a b i g f a c t o r in the s a l e of c a p i t a l goods because the European n a t i o n s and Japan were busy r e b u i l d i n g t h e i r i n d u s t r i a l s e c t o r s . As e a r l y as 1955, however, the f a c t o r s a f f e c t i n g the e x p o r t marke t s began to change as the i n d u s t r i a l i z e d s tates l r e a l i z e d t h a t the s u c c e s s f u l n a t i o n s and the s u c c e s s f u l companies would be tho se t h a t expanded t h e i r t r a d e and inves tment a c t i v i t i e s beyond the b o r d e r s of t h e i r own c o u n t r i e s . T r a d i t i o n a l l y , the p r i v a t e s e c t o r has p r o v i d e d the funds needed to f i n a n c e wor ld t r a d e . Commerc ia l banks th roughou t the wor ld have se rved as both a s ou rce and a channel f o r the f i n a n c i n g of i n t e r n a t i o n a l t r a d e . The banks p r o v i d e the f o r e i g n exchange , hand le the documents , p r o v i d e the c r e d i t and t r a n s f e r the funds r e q u i r e d to f a c i l i t a t e t r a d e t r a n s a c t i o n s . Banks have a lways conce rned t h e m s e l v e s w i t h t r a d e and payments and the e x t e n s i o n of t h e s e a c t i v i t i e s i n t o the i n t e r n a t i o n a l market p l a c e was a l o g i c a l s t e p . However, banks have t r a d i t i o n a l l y v iewed t h e i r r o l e as one of p r o v i d i n g s h o r t term c r e d i t o n l y . T h e n a t u r e of t h e i r l i a b i l i t i e s , i c e . t ime and demand d e p o s i t s r e q u i r e s t h a t they have a r e l a t i v e l y l i q u i d a s s e t p o r t f o l i o . Hence, they have been r e l u c t a n t to g r an t i n t e r m e d i a t e term c r e d i t . A f t e r Wor ld War II most e x p o r t s of c a p i t a l goods were f i n a n c e d th rough the use of b i l a t e r a l payment ag reements . Such agreements u s u a l l y s p e c i f i e d a 1-3 year maximum repayment p e r i o d . Such loans c o u l d , of c o u r s e , be p r o v i d e d by the commerc ia l banks. T h i s s h o r t repayment p e r i o d d i d not match the g e n e r a l t h e o r y of f i n a n c e , in t h a t the co s t of the 4 a s s e t s was not be ing a p p o r t i o n e d over i t s economic l i f e . As a r e s u l t , d e b t o r s soon found themse l ve s unab le to meet the repayment s c h e d u l e and the c r e d i t o r s , in o r d e r to m a i n t a i n a normal f l ow of e x p o r t s , were f o r c e d to n e g o t i a t e r e s c h e d u l i n g ag reements . In e f f e c t , nominal s h o r t term c r e d i t e v o l v e d i n t o de f a c t o medium term c r e d i t . W i th the wor ld bank ing system r e l u c t a n t to p r o v i d e such medium term c r e d i t , the governments of the i n d u s t r i a l i z e d c o u n t r i e s began to c r e a t e new a g e n c i e s or r e d e s i g n e d e x i s t i n g a g e n c i e s to p r o v i d e the much needed e x p o r t c r e d i t . A l l of these n a t i o n a l e x p o r t c r e d i t g r a n t i n g i n s t i t u t i o n s have s i m i l a r o b j e c t i v e s i n c l u d i n g : 1) the p romot ion of e x p o r t s f rom t h e i r r e l a t i v e c o u n t r i e s . The a g e n c i e s v iew t h e i r r o l e as b e i n g one of s u p p o r t i n g normal commerc ia l a c t i v i t i e s . They are not o v e r l y concerned w i t h the prob lem of development f i n a n c e . E f f o r t s t o d e v e l o p the i n d u s t r i a l s e c t o r of t he LDCs are of s e c o n d a r y impor tance to the expor t g r a n t i n g i n s t i t u t i ons 2) the i n s u l a t i o n of the co s t of e x p o r t f i n a n c e from chang ing d o m e s t i c c r e d i t c o n d i t i o n s 3) the i m p l e m e n t a t i o n of more f l e x i b l e terms in o r d e r t h a t commerc ia l t r a n s a c t i o n s may compete a g a i n s t t i e d a i d t r a n s a c t i ons . The development of c r e d i t g r a n t i n g a g e n c i e s in meet ing the chang ing needs of the e x p o r t e r s has taken d i f f e r e n t forms in v a r i o u s c o u n t r i e s and i s dependent upon: I) the s t r u c t u r e of the f i n a n c i a l sys tem the n a t u r e of e x i s t i n g i n s t i t u t i o n a l a r rangements 3) the s t a t e of development of the i n s u r a n c e i n d u s t r y . 5 The U n i t e d S t a t e s of A m e r i c a has moved from s p e c i a l i z e d i n s t i -t u t i o n a l f i n a n c i n g of e x p o r t s towards i n s u r a n c e , wh ich i s p r o v i d e d j o i n t l y by the F o r e i g n C r e d i t Insurance A s s o c i a t i o n and the E x p o r t Import Bank, w h i l e o t h e r n a t i o n s such as the U n i t e d Kingdom and Canada have moved from heavy r e l i a n c e on the i n s u r a n c e mechanism to the a c t i v a t i o n of s p e c i a l i z e d a r rangements f o r e x p o r t c r e d i t . The system of f i n a n c i n g e x p o r t s in the U n i t e d Kingdom, w i t h the e x c e p t i o n of the r e d i s c o u n t f a c i l i t y , does not make use of any p u b l i c f und s . The A m e r i c a n system i n v o l v e s d i r e c t and i n d i r e c t l oans be ing made to the i m p o r t e r by the E x p o r t Import Bank (Exim Bank ) . Under the fo rmer p l a n , the funds a re advanced d i r e c t l y by the Exim Bank, w h i l e under the l a t t e r p l a n known as p a r t i c i p a t i o n f i n a n c i n g , some o f the funds a re p r o v i d e d by a f i n a n c i a l i n s t i t u t i o n such as a commerc ia l bank. The Canad ian E x p o r t Development C o r p o r a t i o n (EDC) ha s , u n t i l r e c e n t l y , r e l i e d a lmost e x c l u s i v e l y on p r o v i d i n g d i r e c t loans to the f o r e i g n p u r c h a s e r s of Canad ian c a p i t a l goods . The p r i n c i p a l c h a r a c t e r i s t i c of a l l such c r e d i t g r a n t i n g i n s t i -t u t i o n s i s t h a t they are s t r u c t u r e d to be m a r g i n a l l y p r o f i t a b l e . They more than cove r a l l of t h e i r d i r e c t c o s t s by c h a r g i n g a s u f f i c i e n t l y h i gh r a t e of i n t e r e s t on t h e i r loans to pay f o r t h e i r a d m i n i s t r a t i v e e x p e n s e s , to pay f o r the co s t of bo r row ing the needed c a p i t a l and to accumu la te a r e a s o n a b l e amount of r e s e r v e s . The c o s t s of bo r row ing i n c l u d e an annual d i v i d e n d to the f i r m ' s s t o c k h o l d e r s as w e l l as i n t e r e s t on any o u t s t a n d i n g d e b t . The Exim Bank, f o r example , in the f i s c a l year ended June 30, 1975, r e c o r d e d a net income of $80 .5 m i l l i o n of which $20 m i l l i o n was t r a n s f e r r e d to the U. S. T r e a s u r y as a d i v i d e n d and the b a l a n c e of $60 .5 m i l l i o n was added to the r e s e r v e a c c o u n t . On June 3 0 , 1975, t h i s r e s e r v e account had 6 a b a l a n c e of $1623.5 m i l l i o n . The v a r i o u s government a g e n c i e s a re a l s o i n t e r e s t e d in p romot ing more e f f i c i e n t d o m e s t i c m a r k e t s . One of the r e q u i r e m e n t s of an e f f i c i e n t market i s t h a t a l l market p a r t i c i p a n t s must have an equal o p p o r t u n i t y to purchase r e l e v a n t i n f o r m a t i o n . No one p a r t i c i p a n t may have the e x c l u s i v e use of such i n f o r m a t i o n . In d e a l i n g w i t h f i r m s s i t u a t e d around the wor ld i t i s v i r t u a l l y i m p o s s i b l e f o r the e x p o r t e r to have adequate knowledge of the f i n a n c i a l s t a t e of a l l p u r c h a s e r s of h i s p r o d u c t s . The government a g e n c i e s , t h rough t h e i r v a r i o u s depar tment s a re a b l e to a c q u i r e t h i s knowledge. T h e y , t h e r e f o r e , he lp the e x p o r t e r b e t t e r e v a l u a t e the p o t e n t i a l r i s k and w i l l , i f n e c e s s a r y , p r o v i d e e x p o r t c r e d i t i n s u r a n c e to reduce bo th the commerc ia l and p o l i t i c a l r i s k s f a c e d by t h e e x p o r t e r . In the p a s t , e x p o r t s were b a s i c a l l y a f u n c t i o n of p r i c e and q u a l i t y . Now, w i t h the i n c r e a s e d c o m p e t i t i o n f o r w o r l d m a r k e t s , f l e x i b i l i t y and the a b i l i t y to re spond to market changes have i n c r e a s e d g r e a t l y in i m p o r t a n c e . In a d d i t i o n to q u a l i t y and p r i c e , e x p o r t s a l e s a re now a f u n c t i o n of a v a i l a b i l i t y , s e r v i c e , r e p u t a t i o n , m a r k e t i n g e f f o r t , i n t e r -c h a n g e a b i l i t y of p a r t s and c r e d i t . The major e x p o r t i n g n a t i o n s have g r e a t l y i n t e n s i f i e d the c o m p e t i t i o n f o r wor ld market s and as a r e s u l t , c r e d i t has become one of the key f a c t o r s i n v o l v e d in g a i n i n g s a l e s or m a i n t a i n i n g market s h a r e . The r o l e of f i n a n c e in e x p o r t s a l e s has i n c r e a s e d as a r e s u l t of the h e i g h t e n e d c o m p e t i t i o n among the major t r a d i n g n a t i o n s , the r e a l i z a t i o n t h a t the growth a r e a s i n v o l v e p r o d u c t s which a re t e c h n o l o g y i n t e n s i v e and the s p e c i a l f i n a n c i n g prob lems of the l e s s d e v e l o p e d n a t i o n s . The r a p i d growth of expor t c r e d i t can bes t be shown by c o n s i d e r i n g the f o l l o w i n g s t a t i s t i c s . The annual volume of Canad ian e x p o r t s a s s i s t e d 7 by the EDC th rough c i t h e r d i r e c t loans or e x p o r t c r e d i t i n s u r a n c e i n c r e a s e d by more than twenty t imes in the f i f t e e n y e a r p e r i o d ended December 31 , 1975. In I960, the annual volume was $101 .7 m i l l i o n , w h i l e t he comparab le f i g u r e f o r 1975 was $2045 .7 m i l l i o n . M e r c h a n d i s e e x p o r t s on the o t h e r hand i n c r e a s e d j u s t over 600$ in the f o u r t e e n yea r p e r i o d ended December 3 1 , 1974 to a volume of $32,383 m i l l i o n . E x p o r t s s u p p o r t e d by the f a c i l i t i e s of the E x p o r t Import Bank of Japan grew from ¥ 1 0 8 . 6 b i l l i o n in 1962-63 to ¥ 3 0 8 . 2 b i l l i o n in 1967-68. E x p o r t c r e d i t s g r a n t e d by the A u s f u h r k r e d i t G e s e l l s c h a f t mbH, the i n s t i t u t i o n which p r o v i d e s e x p o r t c r e d i t i n the F e d e r a l R e p u b l i c o f Germany, grew from DM402 m i l l i o n i n 1955 to DM2719.7 m i l l i o n in 1967. In the U n i t e d S t a t e s of A m e r i c a e x p o r t s s u p p o r t e d by the E x p o r t Import Bank have grown from an annual volume of $ U . S .533 .0 mi I I ion in I960 to an annual volume of $ U.S. 8315.0 mi I Ii on in 1975. In r e a l terms a l l of t he se i m p l i e d growth r a t e s would be r e d u c e d . In the s i x yea r p e r i o d ended December 3 1 , 1974, the e x p o r t s s u p p o r t e d by the d i r e c t loan program and the e x p o r t c r e d i t i n s u r a n c e program of t h e EDC i n c r e a s e d , in r e a l t e r m s , at an annual compound r a t e of 25$. The compound annual " r e a l " r a t e f o r e x p o r t s s u p p o r t e d by the Japanese E x p o r t Import Bank from 1962-63 to 1967-68 was a p p r o x i m a t e l y 30$. Both of t h e s e r e a l growth r a t e s p r o v i d e suppor t f o r the b e l i e f t h a t e x p o r t c r e d i t by any measure i n c r e a s e d at an above average r a t e . Wh i l e a l l t he se f i g u r e s i n d i c a t e how impor tan t a f a c t o r c r e d i t i s becoming in t he s a l e of goods and s e r v i c e s in t he w o r l d market p l a c e , the t r u e s t a t e of n a t u r e may be u n d e r s t a t e d in c e r t a i n c a s e s . F o r example , c o n s i d e r o n l y t ho se c a p i t a l e x p o r t s which have been d i r e c t l y f i n a n c e d by 8 Canada ' s E x p o r t Development C o r p o r a t i o n . In 1970, EDC g r a n t e d t w e n t y -two such loans f o r a t o t a l of $100 m i l l i o n . In 1974, f o r t y - s i x loan agreements f o r a t o t a l of $659 .4 m i l l i o n were s i g n e d . D u r i n g t h i s same p e r i o d e x p o r t s c l a s s i f i e d as o t h e r m a n u f a c t u r e d goods , e x c l u d i n g motor v e h i c l e s and p a r t s e x p o r t e d to the U . S . A . , grew from $2970 m i l l i o n to $5453.0 mi I I i o n . T h e r e f o r e , in 1970 3.3$ of e l i g i b l e Canad ian e x p o r t s were b e i n g f i n a n c e d by EDC, w h i l e by 1974 t h i s same f i g u r e had i n c r e a s e d to 12.1$. W i th t e c h n o l o g y a d v a n c i n g and p r i c e s r i s i n g , more c r e d i t w i l l u n d o u b t e d l y be needed in the f u t u r e . The co s t of a j e t a i r c r a f t , f o r i n s t a n c e , in the not too d i s t a n t pa s t was in the $7 -8 m i l l i o n r a n g e , but now w i t h the w i d e - b o d i e d j e t s , the co s t has i n c r e a s e d to the $20 -25 m i l l i o n range . Such i n c r e a s e s have p l a c e d a s t r a i n on the cash f l ows of the p u r c h a s e r s and have c r e a t e d a wor ldw ide c h a l l e n g e f o r t he i n s t i t u t i o n s charged w i t h the r e s p o n s i b i l i t y of d e v e l o p i n g adequate f i n a n c i a l measures . II. DEFINITIONS C a p i t a l goods as d e f i n e d by the U.S. Department of Commerce are s a i d to c o n s i s t of e l e c t r i c a l m a c h i n e r y , c o n s t r u c t i o n m a c h i n e r y , m i n i n g and o i l f i e l d m a c h i n e r y , s t e e l and r o l l i n g m i l l m a c h i n e r y , mach ine t o o l s , o f f i c e m a c h i n e r y , a g r i c u l t u r a l m a c h i n e r y , a i r c r a f t , r a i l r o a d equ ipment , t r u c k s , b u s e s , a u t o m o b i l e s , and p a r t s f o r a l l of the a b o v e . ' T h i s d e f i n i t i o n w i l l be i m p l i e d whenever the terms c a p i t a l equipment or c a p i t a l goods a r e used in t h i s s t u d y . The terms commerc ia l c r e d i t , e x p o r t f i n a n c e , or expor t c r e d i t w i l l be used i n t e r c h a n g e a b l y in t h i s s t u d y . However, each must c o n t a i n 9 the f o l l o w i n g e l e m e n t s : 1) an o b l i g a t i o n of the buyer to make a down payment p r i o r to the sh ipment of the goods 2) the loan must be a m o r t i z e d over a p e r i o d such t h a t r e g u l a r equal payments a re made w i t h no a c c u m u l a t i o n of unpa id debt at the end of the repayment p e r i o d 3) the loan must c a r r y an i n t e r e s t r a t e which in some way i s r e l a t e d to the i n t e r e s t r a t e s o f f e r e d f o r s i m i l a r loans in the l e n d i n g c o u n t r y - i . e . the i n t e r e s t r a t e must be a commerc ia l r a t e as opposed to an " a i d " r a t e 4) the c r e d i t i s c o n f i n e d to the f o r e i g n exchange co s t of the t r a n s a c t i o n , w i t h an e x c e p t i o n be ing made f o r t ho se l o c a l c u r r e n c y c o s t s wh ich a re d i r e c t l y a s s o c i a t e d w i t h the c o n t r a c t 5) the c r e d i t s h a l l be e l i g i b l e f o r n a t i o n a l e x p o r t c r e d i t i n s u r a n c e 6) the c o n t r a c t s h a l l not p r o v i d e f o r any e x p l i c i t g r ace p e r i o d s . The l e s s d e v e l o p e d n a t i o n s of the wor ld (LDCs) w i l l be d e f i n e d as c o n s i s t i n g of a l l c o u n t r i e s in the Western Hemisphere w i t h the e x c e p t i o n of the U.S.A. and Canada, a l l of the c o u n t r i e s in A f r i c a w i t h the e x c e p t i o n of the Un ion of South A f r i c a , a l l of the c o u n t r i e s in A s i a w i t h the e x c e p t i o n of Japan and M a i n l a n d C h i n a , a l l of the c o u n t r i e s in O c e a n i a w i t h the e x c e p t i o n of A u s t r a l i a and New Z e a l a n d and the Eu ropean c o u n t r i e s o f G r e e c e , S p a i n , T u r k e y , P o r t u g a l , Y u g o s l a v i a , M a l t a , G i b r a l t a r and C y p r u s . Development f i n a n c e must have as i t s p r i m a r y o b j e c t i v e the i n d u s t r i a l deve lopment of the r e c i p i e n t c o u n t r y . The l e n g t h of the c r e d i t , the i n t e r e s t r a t e a t t a c h e d to such l o a n s , as w e l l as the commerc ia l and p o l i t i c a l r i s k q u e s t i o n s must be of s e c o n d a r y impor tance to the l e n d e r . 10 DeveIopment f i n a n c e and f o r e i g n a i d a re both used synonymous ly t h roughou t t h i s s t u d y . F o r e i g n a i d programs have been r e f e r r e d to as the " b a n k e r s 2 of the p o o r " . T h e r e i s no hard and f a s t r u l e about when an e x p o r t c r e d i t c o n t a i n s enough of a g r an t or c o n c e s s i o n a r y e lement to q u a l i f y as a i d or development f i n a n c e . C o n c e s s i o n a r y f l o w s , f o r the purpose of t h i s s t u d y , a re d e f i n e d as o f f i c i a l f i n a n c i a l f l ows c o n t a i n i n g a l a r g e g r an t e lement and m o t i v a t e d by an i n t e r e s t in the r e c i p i e n t c o u n t r y . The s o f t e n i n g of the terms of c r e d i t i m p l i e s any s tep t h a t t ends to r a i s e the c o n c e s s i o n a l e lement in a t r a n s a c t i o n . The g r an t p o r t i o n of a i d f l ows i s deemed to i n c r e a s e as the i n t e r e s t r a t e i s lowered or as the m a t u r i t y i s l e n g t h e n e d . F o r t h i s s t u d y , a s h o r t term c r e d i t w i l l have a repayment p e r i o d of one year or l e s s , an i n t e r m e d i a t e or medium term c r e d i t w i l l be r e p a i d over a p e r i o d g r e a t e r than one year but l e s s than f i v e y e a r s , and a long term c r e d i t w i l l have a repayment p e r i o d in exces s of f i v e y e a r s . I I I. ATTEMPTS TO DEVELOP UNIFORM EXPORT CREDIT POLICIES i ) GROWTH OF INTERNATIONAL COMPETITION By the mid 1950 's the r e t o o l i n g of the m a n u f a c t u r i n g s e c t o r of the European i n d u s t r i a l i z e d n a t i o n s was c o m p l e t e . The c a p i t a l goods market t u r n e d from a s e l l e r s to a buyer s m a r k e t , and as a r e s u l t , the c r e d i t f a c t o r became more impor tan t in the s a l e of goods . The i n d u s t r i a l i z e d n a t i o n s d e s i r e to promote t h e i r e x p o r t s of c a p i t a l goods and the LDCs i n a b i l i t y t o pay f o r t he se same goods caused a d r a m a t i c change in the 11 method by which i n t e r n a t i o n a l t r a d e in goods was f i n a n c e d . The U.S. E x p o r t Import Bank was founded in 1934 and f o r a number of yea r s was the o n l y l a r g e s o u r c e of e x p o r t c r e d i t . In Canada , a f e d e r a l crown c o r p o r a t i o n , the E x p o r t C r e d i t s In surance C o r p o r a t i o n was founded in 1945 f o r the purpose of p r o v i d i n g e x p o r t i n s u r a n c e f o r Canad ian e x p o r t s . In the U n i t e d Kingdom, the E x p o r t Gua ran tees A c t of 1949 s t i p u l a t e d t h a t any funds a l l o c a t e d under the Ac t had to be u t i l i z e d to pu rcha se goods or s e r v i c e s manu fac tu red in the U n i t e d Kingdom. Up u n t i l 1952, a l l U.K. e x p o r t c r e d i t s e x c e e d i n g s i x months in l e n g t h were s u b j e c t to the a p p r o v a l of the F o r e i g n Exchange C o n t r o l Commis s ion . A l l c o n t r a c t s approved by the Commiss ion r e q u i r e d t h a t o n e - h a l f of the c o n t r a c t p r i c e be r e p a i d w i t h i n s i x months w i t h the b a l a n c e p a y a b l e over a two yea r p e r i o d . s agg ing e x p o r t s ex tended the maximum c r e d i t p e r i o d f o r t r a n s a c t i o n s w i t h buyer s o u t s i d e the s t e r l i n g a rea to t h r e e y e a r s . The term c o u l d be i n c r e a s e d to a maximum of f i v e yea r s in ca ses of n a t i o n a l i m p o r t a n c e . Other i n d u s t r i a l i z e d n a t i o n s began a d o p t i n g s i m i l a r s t r a t e g i e s and soon i n t e r n a t i o n a l c o m p e t i t i o n in the f o l l o w i n g a rea s d e v e l o p e d : In 1952, the U n i t e d K ingdom, in an e f f o r t to s t i m u l a t e i t s I) the c o s t and a v a i l a b i l i t y of c r e d i t 2) the p o r t i o n of the c o n t r a c t p r i c e the e x p o r t e r i s r e q u i r e d to r e t a i n f o r h i s own account 3) the amount of the downpayment r e q u i r e d by the p u r c h a s e r 4) the l eng th of the term a c c o r d e d the c r e d i t 5) the speed w i t h which the a p p l i c a t i o n i s p r o c e s s e d the premiums charged f o r c r e d i t i n s u r a n c e . 12 i i ) THE BERNE UN I ON The governments of the i n d u s t r i a l i z e d n a t i o n s r e c o g n i z e d t h a t a c r e d i t war was not d e s i r a b l e , so they c r e a t e d the Union d ' A s s u r e u r s des C r e d i t s I n t e r n a t i o n a u x (Berne Un ion) to t r y and b r i n g about an i n t e r n a t i o n a l exchange of i n f o r m a t i o n on e x p o r t c r e d i t terms and c o o r d i n a t i o n o f p o l i c i e s o n - a v o l u n t a r y b a s i s . 3 The Berne Un ion can not r e q u i r e i t s members to a b i d e by i t s d e c i s i o n s . It m e r e l y p r o v i d e s u n d e r s t a n d i n g s and recommendat ions . Wh i l e the member governments do not have to a b i d e by the se recommendat ions they are r e q u i r e d to r e p o r t any d e p a r t u r e s f rom the recommended s t a n d a r d s . Members may q u e s t i o n o t h e r members on the terms and c o n d i t i o n s of p o l i c i e s about to be i s s u e d . The Union f o s t e r e d the deve lopment of the " m a t c h i n g p r i n c i p l e " and p r e v e n t e d the buyer and the s e l l e r f rom o v e r s t a t i n g the terms b e i n g o f f e r e d . In 1953, the members of the Un ion came to an u n d e r s t a n d i n g w i t h r e g a r d to the maximum terms t h a t s hou ld be p r o v i d e d f o r v a r i o u s t y p e s of 4 expor t c r e d i t i n s u r a n c e . They agreed t h a t the maximum c r e d i t p e r i o d s h o u l d not be g r e a t e r than f i v e y e a r s . T h i s maximum te rm would o n l y be g r a n t e d s a l e s of heavy c a p i t a l goods. L i g h t c a p i t a l equipment was to have a maximum term of t h r e e y e a r s . W h i l e i t was a p p r e c i a t e d t h a t these terms were c o n s i d e r a b l y s h o r t e r than the l i f e of the a s s o c i a t e d a s s e t , i t was f e l t t h a t the debt c o u l d be r e p a i d more q u i c k l y t h r o u g h the use of d e p r e c i a t i o n , the cash f l ow from the u n d i s t r i b u t e d p r o f i t s and the c a p i t a l a s s e t r ep l a cement f u n d s . U n t i l the e a r l y I 960 ' s the Un ion was e f f e c t i v e in c o o r d i n a t i n g the l e n g t h of i n s u r a n c e p o l i c i e s t h e r e b y l i m i t i n g the term of e x p o r t c r e d i t . 13 By tha t t i m e , the d e s i r e to improve t h e i r c o m p e t i t i v e p o s i t i o n caused some of the n a t i o n s to g r a d u a l l y g r an t more l i b e r a l te rms . Longer repayment terms were g r an ted de f a c t o by a d o p t i n g l a t e s t a r t i n g p o i n t s from which to count repayment p e r i o d s . In a d d i t i o n , the maximum terms o u t l i n e d above d i d not a p p l y to d i r e c t loans made by the v a r i o u s i n s t i t u t i o n s . The p r a c t i c e of g r a n t i n g i m p l i c i t g r a c e p e r i o d s appear s to s t i l l be p r a c t i c e d t o d a y . T a b l e I i n d i c a t e s t h a t w h i l e some of the loans g r a n t e d by the Ex im Bank are r e p a y a b l e in ten s e m i - a n n u a l i n s t a l l m e n t s , repayment does not commence f o r up to f i v e - s i x y e a r s . The f a c t t h a t a s u b s t a n t i a l number of the Exim B a n k ' s loans i n v o l v e p a r t i c i p a t i o n f i n a n c i n g makes i t d i f f i c u l t to d e t e r m i n e i f g r ace p e r i o d s a re be ing g r a n t e d . Under the p a r t i c i p a t i o n f i n a n c i n g scheme, commerc ia l banks and the Ex im Bank combine to p r o v i d e the n e c e s s a r y f u n d s . The bor rower u s u a l l y r e p a y s the commerc ia l b a n k ' s loan f i r s t and then repay s any funds advanced by the Exim Bank. The E x p o r t Import Bank d i d not beg in o f f e r i n g e x p o r t c r e d i t i n s u r a n c e u n t i I 1961, when the FCIA was f o rmed , so in e f f e c t i t s a c t i v i t i e s were not c o n s t r a i n e d by the recommendat ions of the Berne Un ion u n t i l t h a t t ime . J a p a n , a major e x p o r t i n g n a t i o n , o n l y r e c e n t l y j o i n e d the Berne Un i on . In the e a r l y I 960 ' s the Un ion recommended t h a t i n s u r a n c e p o l i c i e s w i t h terms of g r e a t e r than f i v e y e a r s be extended o n l y to LDCs. The members a b i d e d by t h i s recommendat ion f o r a s h o r t p e r i o d , but g r a d u a l l y t h e y began to i n c r e a s e the terms a c c o r d e d any p u r c h a s e r of heavy equ ipment . The Berne Un ion in the mid I 970 ' s c o n t i n u e s to f a c e many of the same prob lems i t f a c e d in the e a r l y I 9 6 0 ' s . The i n a b i l i t y of the members of t he Berne Un ion to b i n d t h e i r governments to the TABLE I EXPORT-IMPORT BANK OF THE UNITED STATES DETAILS OF CREDITS AUTHORIZED IN THE F ISCAL YEAR ENDED JUNE 30 , 1974 OBLIGOR PURPOSE, RATE AND TERMS AMOUNT ( $ MILLIONS ) BRAZIL V a r i g - V i a c a o Aereo R io Grande CANADA A i r Canada A i r c r a f t , one jumbo j e t DC-IO. Repayab le in 10 sem i - annua l payments . Repayment to commence b e g i n n i n g May 2 0 , 1980. A i r c r a f t , one jumbo j e t 747. Repayab le in 10 sem i - annua l payments to commence on May 2 0 , 1980. 12.6 I 1.6 Co Iomb i a Co rp . E l e c . D La C o s t a A t l a n t i ca DENMARK Steamsh ip Co. and Svendborg 1912 G e n e r a t o r s . Repayab le in 15 sem i - annua l payments to commence on May 30 , 1984. Steam t u r b i n e u n i t s r e p a y a b l e in 8 s e m i -annual payments to commence on Dec. 5, 1979. 10.6 1.8 SENEGAL M i n i s t r y of F i n a n c e Tuna f i s h i n g v e s s e l s , r e p a y a b l e in 8 s e m i -annual payments b e g i n n i n g on May 10, 1980. 4 . 2 SOURCE: E x p o r t - I m p o r t Bank of the U n i t e d S t a t e s , C u m u l a t i v e R e c o r d s , 1974 15 recommendat ions of the Union p r e v e n t s the Union from a c h i e v i n g m e a n i n g f u l r e s u l t s . Wh i l e the o f f i c e r s of the v a r i o u s o r g a n i z a t i o n s , such as EDC, may agree w i t h the recommendat ions of the Un ion they f i n d i t hard to r e s i s t l o c a l p o l i t i c a l p r e s s u r e . The p o l i t i c i a n s , in an e f f o r t t o he lp t h e i r l o c a l e x p o r t e r s , s t r i v e to have the terms a cco rded e x p o r t c r e d i t e x t e n d e d . In a d d i t i o n , membership in the Un ion compr i se s o n l y twen ty -one c o u n t r i e s and i t i s d o u b t f u l i f the p o s i t i o n of the LDCs i s a d e q u a t e l y r e p r e s e n t e d in the U n i o n . A r e c e n t s tudy of The Ro le of E x p o r t C r e d i t in Development F i n a n c e by M c K i t t e r i c k and M i d d l e t o n found t h a t a l l the members of the 5 Union d i d not submit comparab le s t a t i s t i c s . The Germans and the I t a l i a n s , f o r example , do not submit any breakdown of s t a t i s t i c s by l e n g t h of m a t u r i t y w h i l e the Japanese s t a t i s t i c s a re at l e a s t two y e a r s o l d . The U n i o n ' s c o n c e n t r a t i o n on e x p o r t c r e d i t i n s u r a n c e f u r t h e r r e s t r i c t s i t s a b i l i t y to e f f e c t i v e l y dea l w i t h c u r r e n t p rob lems . At t i m e s , however, w h i l e the Un ion may be e f f e c t i v e in r e d u c i n g the l e v e l of c o m p e t i t i o n amongst the v a r i o u s i n d u s t r i a l n a t i o n s i t s a b i l i t y to b r i n g about s i g n i f i c a n t changes in the f i e l d of expor t c r e d i t i s l i m i t e d . i i i . GATT Pa rag r aph f o u r of A r t i c l e XVI of the Genera l Agreement f o r T a r i f f s and T r a d e (GATT) s p e c i f i e s t h a t t he f o l l o w i n g s h a l l be c o n s i d e r e d as forms of e x p o r t s u b s i d y and as such are p r o h i b i t e d : " t h e g r an t by governments (or s p e c i a l i n s t i t u t i o n s c o n t r o l l e d by governments ) of expor t c r e d i t s at r a t e s below those which t h e y have to pay in o r d e r to o b t a i n the funds so employed. 16 T h i s r e s t r i c t i o n l i m i t s to some degree the i n t e r e s t r a t e s t h a t may be o f f e r e d on e x p o r t c r e d i t l o an s . However, T a b l e II shows a wide V a r i a t i o n in the r a t e s charged by v a r i o u s c o u n t r i e s . In December 1968, the r a t e f o r medium term c r e d i t s v a r i e d from a low of 4 . 5 $ to a h i gh of 8 .5$ . Wh i l e t he se r a t e s a re not c u r r e n t t h e r e i s no r ea son to b e l i e v e t h a t s i m i l a r sp reads do not e x i s t in t o d a y ' s ma rke t . In the s p r i n g of 1976 the l o c a l o f f i c e of t he EDC i n d i c a t e d t h a t the c u r r e n t Canad ian r a t e was in the 9 -11$ r ange . TABLE I I AVERAGE COST OF EXPORT CREDIT ON DECEMBER 3 1 , 1968. COUNTRY MEDIUM TERM CREDITS LONG TERM CREDITS Be Ig i urn Canada Denmark F r a n c e F e d e r a l I t a l y Japan Sweden U n i t e d U n i t e d RepubI i c of Germany Ki ngdom S t a t e s 5.75 6 7 . 0 - 8 . 5 6 6 5.9 6 5 .75-8 4 . 5 6 -7 6 6 7 . 0 - 8 . 5 5.7 6 - 6 . 5 5.9 6 5 .75-8 5.5 6 -7 SOURCE: U n i t e d N a t i o n s , Department of Economic and S o c i a l A f f a i r s , E x p o r t C r e d i t s and Development F i n a n c i n g , N a t i o n a l  E x p o r t C r e d i t Sy s tem, 1969, p.2 i v . OECD The OECD has a l s o e x p r e s s e d c o n c e r n about the p rob lem of e x p o r t c r e d i t and in 1963 formed the Group on E x p o r t C r e d i t s and C r e d i t Gua ran tees 17 f o r the purpose of d i s c u s s i n g p o l i c i e s and improv ing c o o p e r a t i o n among member governments in t h i s f i e l d . 7 T h i s i n t e r n a t i o n a l o r g a n i z a t i o n has a l s o had l i t t l e s u c c e s s in b r i n g i n g about more i n t e r n a t i o n a l c o o p e r a t i o n in the expor t c r e d i t f i e l d . F o r example , in 1964, the Government of trie N e t h e r l a n d s p roposed t h a t a maximum repayment p e r i o d of f i v e y e a r s be e s t a b l i s h e d f o r a l l l oans i n v o l v i n g e x p o r t s a l e s to i n d u s t r i a l i z e d c o u n t r i e s . Loans to suppor t sma l l e x p o r t s a l e s ( l e s s than $1.5 m i l l i o n ) to LDCs would have a maximum term of f i v e y e a r s . A maximum term of e i g h t and t e n y e a r s r e s p e c t i v e l y would a p p l y to loans g r a n t e d to suppor t medium and l a r ge s c a l e s a l e s to LDCs. Medium s i z e d s a l e s were d e f i n e d to be between $1.5 and $5.0 m i l l i o n , w h i l e s a l e s of g r e a t e r than $5 m i l l i o n were c l a s s i f i e d as l a r g e . The normal r e q u i r e m e n t s w i t h r e g a r d to down payments , l o c a l c o s t s , and equal repayment i n s t a l l m e n t s would have a p p l i e d in a l l c a s e s . T i e d a i d c r e d i t would have a m a t u r i t y of f i f t e e n y e a r s . The N e t h e r l a n d s ' p r o p o s a l was d i s c u s s e d f o r two y e a r s and e v e n t u a l l y dropped when no m e a n i n g f u l agreement was r e a c h e d . The OECD Committee was, however, s u c c e s s f u l in e n a b l i n g i t s members to r e a c h an u n d e r s t a n d i n g w i t h r e g a r d to the c r e d i t terms a c c o r d e d the s a l e of s h i p p i n g v e s s e l s . The t h i r t e e n major s h i p b u i l d i n g n a t i o n s agreed t h a t expor t s h i p p i n g c r e d i t s u p p o r t e d by each government would conform to the f o l l o w i n g c o n d i t i o n s : 1) a minimum down payment of 20% would be r e q u i r e d of the p u r c h a s e r 2) the minimum net i n t e r e s t r a t e a p p l i c a b l e to the c r e d i t would be 6% Q 3) the maximum repayment p e r i o d would be e i g h t y e a r s . These c o n d i t i o n s appear to s t i l l be in e f f e c t in 1976. v . EUROPEAN ECONOMIC COMMUNITY The European Economic Community ( E E C ) , has a t tempted to f o s t e r more i n t e r n a t i o n a l c o o p e r a t i o n in the a r e a of e x p o r t f i n a n c e not o n l y among i t s members, but among a l l i n d u s t r i a l i z e d n a t i o n s . In I960, the members of the EEC formed a P o l i c y C o o r d i n a t i o n Group " t o put fo rward s u g g e s t i o n s f o r the h a r m o n i z a t i o n between member s t a t e s of terms and c o n d i t i o n s f o r e x p o r t c r e d i t i n s u r a n c e , f i n a n c i a l c r e d i t s , and inves tment g u a r a n t e e s t a k i n g i n t o account the recommendat ions 9 of the Berne U n i o n " . Over the next t h i r t e e n yea r s the members of the EEC c o u l d not come to an a l l encompass ing t ype o f agreement c o v e r i n g a l l f a c e t s of e x p o r t c r e d i t . The P o l i c y Group then p roposed t h a t the n i n e member s t a t e s come to a " g e n t l e m e n ' s a g reement " w i t h r e g a r d to expor t c r e d i t c o n t a i n i n g the f o l l o w i n g terms and c o n d i t i o n s : 1) a l l c r e d i t s of g r e a t e r than two y e a r s d u r a t i o n would have a minimum i n t e r e s t r a t e o f 7% 2) expor t s a l e s to i n d u s t r i a l i z e d c o u n t r i e s would have a maximum repayment p e r i o d of f i v e y e a r s 3) e x p o r t s a l e s to s o c i a l i s t c o u n t r i e s would have a maximum repayment p e r i o d of 8.5 y e a r s 4) e x p o r t s a l e s to LDCs would hayg a maximum repayment p e r i o d of 10 y e a r s . By l a b e l l i n g i t s recommendat ions a " g e n t l e m e n ' s a g reement " the P o l i c y Group hoped to g a i n a p p r o v a l f o r i t s p r o p o s a l s more q u i c k l y than i f i t had p roceeded in a more c o n v e n t i o n a l f a s h i o n . " G e n t l e m e n ' s 19 ag reement s " o n l y r e q u i r e the a p p r o v a l of the Committee of Permanent R e p r e s e n t a t i v e s ( the Ambassadors to the EEC of the n i n e member s t a t e s ) and not the l a r g e r C o u n c i l of M i n i s t e r s . The P o l i c y Group d i d not want i t s recommendat ions to be l o s t in the p o l i t i c a l p r o c e s s . A f t e r c o n s i d e r a b l e d i s c u s s i o n the members adopted the recommendat ions of the P o l i c y Group. R e p r e s e n t a t i v e s of the EEC then se t out to o b t a i n A m e r i c a n and Japanese suppor t f o r the p r o p o s a l s . It was hoped t h a t e v e n t u a l l y a l l of the members of the OECD would adopt t he se f o u r b a s i c c o n d i t i o n s . However, the Amer i can s f a v o r e d a minimum a l l - i n c l u s i v e r a t e of 8 .5$ . T h i s a l l - i n c l u s i v e r a t e would i n c l u d e the c o s t of any e x p o r t c r e d i t i n s u r a n c e and bank commitment f e e s . 1 ' The EEC r e p r e s e n t a t i v e s ag reed w i t h the concept of an a l l - i n c l u s i v e r a t e , but would o n l y agree to a minimum r a t e of 8$. In a d d i t i o n , both the U.S. and Japan r e j e c t e d the concept t h a t c r e d i t s to i n d u s t r i a l i z e d c o u n t r i e s c o u l d have a maximum term of f i v e y e a r s . They argued t h a t s o c i a l i s t c o u n t r i e s s hou ld not r e c e i v e b e t t e r terms than the Wes tern N a t i o n s . The EEC a c c e p t e d t h i s argument and ag reed to i n c r e a s e the maximum term a c c o r d e d i n d u s t r i a l i z e d c o u n t r i e s to 8.5 y e a r s . The U.S. and Japan sought a number of o t h e r changes i n c l u d i n g s p e c i a l terms f o r a l l c o n t r a c t s in exce s s of $100 m i l l i o n . The d i s c u s s i o n s e v e n t u a l l y t e r m i n a t e d w i t h o u t coming to comple te agreement on a I I cond i t i ohs . The a t tempt s of the EEC to b r i n g about more c o o p e r a t i o n in the f i e l d of expor t c r e d i t show how d i f f i c u l t i t i s to o b t a i n i n t e r n a t i o n a l agreement on any major i s s u e . In Oc tobe r 1974, B r i t a i n , F r a n c e , Germany, I t a l y , Japan and the U.S .A. agreed t h a t a minimum of 7 .5$ i n t e r e s t would be charged on a l l o f f i c i a l c r e d i t s wh ich had a term in exce s s of f i v e y e a r s . 20 I n t e r n a t i o n a l c o o p e r a t i o n on b r i n g i n g about more u n i f o r m r u l e s on o t h e r a s p e c t s of expor t c r e d i t has not yet been a c h i e v e d . The EEC P o l i c y Group has a l s o a t tempted to i n t r o d u c e a s t a n d a r d t ype of e x p o r t c r e d i t i n s u r a n c e p o l i c y . The Group and Commiss ion b e l i e v e t h a t such p o l i c i e s a re r e a l l y a type of s t a t e a i d and as such d i f f e r e n c e s 12 in p o l i c i e s may cause t r a d e d i s t o r t i o n s w i t h i n the Community. The members of the EEC a c c o r d i n g l y have ag reed on the terms and c o n d i t i o n s to be i n c l u d e d in a s t a n d a r d p o l i c y , but they a re unab le to agree on a common premium s c h e d u l e . The G r o u p ' s p r o p o s a l would see d i f f e r e n t premium s c h e d u l e s adopted f o r p u b l i c and p r i v a t e p u r c h a s e r s . In a d d i t i o n , p r i v a t e buyer s would be s u b d i v i d e d i n t o at l e a s t two c l a s s e s . The B r i t i s h have v o i c e d o p p o s i t i o n to the p roposed premium s c h e d u l e s b e c a u s e , w h i l e the proposed premiums f o r p u b l i c p u r c h a s e r s a re comparab le w i t h those charged by the E x p o r t C r e d i t s Guarantee Department (ECGD), the p u b l i c body charged w i t h f i n a n c i n g B r i t i s h e x p o r t s , the p roposed r a t e s f o r p r i v a t e p u r c h a s e r s a re up to f o u r t imes as l a r g e as t ho se charged by the E C G D . ' 3 The B r i t i s h b e l i e v e t h a t the p roposed r a t e s would p l a c e the European e x p o r t e r s at a c o m p e t i t i v e d i s a d v a n t a g e Wi th e x p o r t e r s in the U.S .A. and J a p a n . One of the g o a l s of a l l c o r p o r a t e b o d i e s charged w i t h p r o v i d i n g e x p o r t c r e d i t and i n s u r a n c e i s to ensure t h a t t h e i r e x p o r t e r s a re not p l a c e d at a c o m p e t i t i v e d i s a d v a n t a g e . The EEC members have agreed to the f o l l o w i n g : t o ensure t h a t ho o f f i c i a l a i d i s p r o v i d e d to e x p o r t e r s f o r s a l e s w i t h i n the community; t o c o o r d i n a t e t h e i r a c t i v i t i e s w i t h r e g a r d to s a l e s to t h i r d c o u n t r i e s ; and to a u t o -m a t i c a l l y i n c l u d e w i t h i n the mas te r i n s u r a n c e c o n t r a c t some of the goods manu fac tu red by s u b c o n t r a c t o r s . In a d d i t i o n , the members have agreed to 21 a d v i s e the Commiss ion b e f o r e g r a n t i n g i n s u r a n c e f o r c r e d i t s w i t h a term of more than f i v e y e a r s or any type of cove r t h a t d e p a r t s from p r e v i o u s l y a c c e p t e d r u l e s w i t h r e s p e c t to s u p p l i e r c r e d i t s , buyer c r e d i t s , l i n e s of c r e d i t or mixed c r e d i t s . The o t h e r members have seven days to v o i c e t h e i r d i s a p p r o v a l o f t he p roposed t r a n s a c t i o n and may c a l l f o r a meet ing of the P o l i c y Group to debate the i s s u e . F o r example , in 1,970, F r a n c e n o t i f i e d the Commiss ion t h a t i t wanted to i n c r e a s e the maximum term acco rded to c r e d i t s a l e s to E a s t Germany. A f t e r a d i s c u s s i o n of the p r o b l e m , the Commiss ion agreed to extend the maximum p e r i o d to e i g h t y e a r s f rom f i v e . T h i s c o n s u l t a t i v e p r o c e s s a c t s as a r e s t r a i n i n g i n f l u e n c e a g a i n s t the p r o g r e s s i v e s o f t e n i n g of t e rms . In t h e i r agreements on s u b c o n t r a c t s , the members a u t o m a t i c a l l y i n c l u d e in the cover p r o v i d e d f o r a main c o n t r a c t o r , cover f o r goods produced under a s u b c o n t r a c t in a member s t a t e . The maximum coverage p r o v i d e d f o r s u b c o n t r a c t o r s v a r i e s from 30 -40$ depend ing on the s i z e of the main c o n t r a c t . The i n c r e a s i n g w o r l d emphas i s on l a r g e s c a l e p r o j e c t s such as power p l a n t s , i n d u s t r i a l f a c i l i t i e s and a i r c r a f t has r e s u l t e d in f i r m s band ing t o g e t h e r e i t h e r in j o i n t v e n t u r e s or in c o n s o r t i a to p roduce the r e q u i r e d p r o j e c t s . The f i n a n c i a l and p r o d u c t i o n r i s k s i n v o l v e d in t he se major p r o j e c t s may be beyond a c c e p t a b l e l i m i t s f o r a p a r t i c u l a r f i r m . The European c o n s o r t i a a r e at a c o n s i d e r a b l e d i s a d v a n t a g e when compet ing a g a i n s t Japanese or A m e r i c a n g roups . The d i s a d v a n t a g e s i n c l u d e the r i s k i n c u r r e d in u s i n g s e v e r a l c u r r e n c i e s as w e l l as the p rob lem e n c o u n t e r e d in c o o r d i n a t i n g the m u l t i t u d e of d i f f e r e n t programs o f f e r e d by a g e n c i e s th roughou t the community. In a d d i t i o n , the Amer i can s have a c c e s s t o a 22 l a r ge r e s o u r c e base and the Japanese have a c l o s e r r e l a t i o n s h i p w i t h t h e i r government and f i n a n c i a l community. In an at tempt to overcome t h e s e d i f f i c u l t i e s the Commiss ion p roposed t h a t a community e x p o r t bank be e s t a b l i s h e d . T h i s bank, to be c a l l e d E u r e x b a n k , would p r o v i d e both an a l t e r n a t e sou rce of e x p o r t f i n a n c e and a means of s t a n d a r d i z i n g expor t c r e d i t i n s u r a n c e p o l i c i e s . The n a t i o n a l i n t e r e s t s of the member c o u n t r i e s as w e l l as p r a c t i c a l d i f f i c u l t i e s w i l l u n d o u b t e d l y hamper the deve lopment of such an i n s t i t u t i o n . IV. EXPORT!;CREDIT INSURANCE P r i o r to the i n t r o d u c t i o n of e x p o r t c r e d i t i n s u r a n c e a vendor was somewhat r e l u c t a n t to s e l l h i s p r o d u c t s abroad f o r f e a r t h a t i t might be both c o s t l y and c o m p l i c a t e d to c o l l e c t pas t due f o r e i g n a c c o u n t s . In a d d i t i o n , the average e x p o r t e r was aware t h a t exchange r e s t r i c t i o n s might p r e v e n t him from r e p a t r i a t i n g h i s funds once the r e c e i v a b l e had been l i q u i d a t e d . To overcome both these prob lems the i n d u s t r i a l i z e d n a t i o n s , as e a r l y as the 1 9 3 0 ' s , began to i n t r o d u c e a form of e x p o r t c r e d i t i n s u r a n c e to reduce both the commerc ia l and the p o l i t i c a l r i s k s a s s o c i a t e d w i t h f o r e i g n s a l e s . The i n s u r a n c e of the commerc ia l r i s k can be v iewed as be ing s i m i l a r to t h a t p r o v i d e d f o r any o t h e r r i s k , such as f i r e , l i f e , or a u t o m o b i l e . The p o p u l a t i o n i n v o l v e d i s l a r ge and i t s c e l l s a re i ndependen t . F o r p o l i t i c a l r i s k , however, i t i s not p o s s i b l e f o r a c t u a r i e s to p r o p e r l y e v a l u a t e the r i s k s because of the r e l a t i v e l y sma l l number of independent n a t i o n s t a t e s in the w o r l d . The commerc ia l r i s k s which a re i n s u r e d i n c l u d e the i n s o l v e n c y of the buyer and p r o t r a c t e d d e f a u l t . The f a i l u r e of the p u r c h a s e r to pay f o r the goods w i t h i n s i x months of the due da te c o n s t i t u t e s p r o t r a c t e d d e f a u l t . The p o l i t i c a l r i s k s i n s u r e d u s u a l l y i n c l u d e : 1) the t r a n s f e r r i s k wh ich i s d e f i n e d as t he r i s k a s s o c i a t e d w i t h c o n v e r t i n g the p u r c h a s e r ' s l o c a l c u r r e n c y i n t o the c u r r e n c y r e q u i r e d by the vendor 2) the c a n c e l l a t i o n or non - renewa l of a v e n d o r ' s e x p o r t I i cence 3) the c a n c e l l a t i o n of the a u t h o r i t y of the buyer to import the sh ipment 4) war, h o s t i l i t i e s , c i v i l war, r e b e l l i o n , r e v o l u t i o n , i n s u r r e c t i o n , c i v i l commotion or s i m i l a r d i s t u r b a n c e s 5) e x p r o p r i a t i o n or c o n f i s c a t i o n of the p r o d u c t s or the b u s i n e s s of the buyer by a government a u t h o r i t y 6) any a c t i o n hav ing the f o r c e of law which p r e v e n t s the buyer f rom making payment. In the case of the Exim Bank o n l y t ho se non -commerc i a l r i s k s s p e c i f i c a l l y o u t l i n e d in the p o l i c y a re c o v e r e d , whereas the E x p o r t C r e d i t s Gua ran tee Department and the EDC c o v e r a l l r i s k s wh i ch a re deemed t o be beyond the c o n t r o l of the s u p p l i e r or t he b u y e r . The premiums charged f o r i n s u r i n g t he se r i s k s v a r y a c c o r d i n g to the type o f p o l i c y i s s u e d , the b u y e r ' s c r e d i t w o r t h i n e s s and the g r a d i n g a s s i g n e d to the b u y e r ' s c o u n t r y . The r i s k a t t a c h e d to a p a r t i c u l a r c o u n t r y i s in t u r n a f u n c t i o n of t h a t n a t i o n ' s g e n e r a l economic s t a b i l i t y , i t s l e v e l of f o r e i g n exchange r e s e r v e s , i t s f o r e i g n exchange p o l i c y and i t s b a l a n c e of payments p r o s p e c t s . The i n s u r e r l ook s in d e t a i l a t such f a c t o r s as t he p r o d u c t i v e c a p a c i t y of the n a t i o n , the t e c h n i c a l a b i l i t y of the p e o p l e , the s t r u c t u r e of the f o r e i g n government and the amount of 24 e x t e r n a l debt o u t s t a n d i n g . The i n s u r e r i s i n t e r e s t e d in the a b i l i t y of the f o r e i g n c o u n t r y to s e r v i c e i t s f o r e i g n d e b t . The ECGD, as r e p o r t e d by T o m l i n s o n , does not l i k e to see a debt s e r v i c e r a t i o , d e f i n e d as the r a t i o of debt payments to f o r e i g n exchange e a r n i n g s , of g r e a t e r than 12$ f o r a narrow economy or a r a t i o of g r e a t e r than 20$ f o r a b r o a d l y based economy. Once the c o u n t r y ' s p o s i t i o n has been c a r e f u l l y a n a l y z e d , i t i s a s s i g n e d to one of f o u r r i s k c a t e g o r i e s , A , B, C, or D. The A marke t s a re c o n s i d e r e d the s a f e s t and as such are a s s i g n e d the lowest premiums. D e s p i t e the f a c t t h a t the p o s i t i o n s of a l l n a t i o n s a re under c o n s t a n t r e v i e w , upward m o b i l i t y in the r a n k i n g s t r u c t u r e i s l i m i t e d . T o m l i n s o n found in h i s r e v i e w t h a t the ECGD was p a r t i c u l a r l y conce rned about the p o s s i b l e i n t r o d u c t i o n of f o r e i g n exchange c o n t r o l s . An o f f i c e r of the ECGD s t a t e d t h a t i f a c o u n t r y i n t r o d u c e d any p r o c e d u r e s wh ich d e l a y e d or c a n c e l l e d payment t h rough the lack of f o r e i g n exchange then t h a t c o u n t r y would a u t o m a t i c a l l y l o se i t s c l a s s i f i c a t i o n and a lmos t c e r t a i n l y would be r e c l a s s i f i e d to the C or D c a t e g o r y . He s t a t e d i t i s " u n l i k e l y 15 ever to be r e c l a s s i f i e d as A or B". T a b l e III shows how some of the c o u n t r i e s were c l a s s i f i e d by the ECGD in J u l y 1969. It shou ld not be assumed t h a t the i n s u r a n c e p o l i c i e s p r o v i d e 100$ coverage f o r a l l r i s k s o u t l i n e d in the p o l i c y , f o r such i s not the c a s e . A l l p o l i c i e s c o n t a i n some type of c o - i n s u r a n c e c l a u s e under which they o n l y p r o v i d e 90 -95$ coverage f o r the p o l i t i c a l and commerc ia l r i s k s i n s u r e d . In some ca se s the p o l i c y o n l y c o v e r s 70$ of the l o s s f o r p o l i t i c a l r i s k s . The premiums v a r y a c c o r d i n g to the t ype of p o l i c y i s s u e d - w h e t h e r i t c o v e r s a l l e x p o r t s a l e s or o n l y c e r t a i n s p e c i f i e d i t e m s , TABLE: I 11 E . C . G . D . RISK GRADING 1969 A B C D A u s t r a 1 i a C z e c h o s l o v a k i a A r g e n t i n a A f g h a n i s t a n A u s t r i a Greece C h i n a B r a z i 1 Be l g ium 1srea1 Co 1omb i a C e y l o n Canada M a l a y a s i a Guatemala Chi Ie F r a n c e Po1 and I ran Cuba German F e d e r a l Repub 1 i c Saudi A r a b i a 1 r a q . Ghana I t a l y Venezue I a Korea (South) I nd ia Japan Pak i s t an I ndones i a Mex ico Pe ru Korea (Nor th ) P o r t u g a l Paraguay Spa in Syr i a Swed en T u r k e y Swi t ze r1 and U n i t e d Arab Repub I i c U.S .A. V a t i c a n C i t y SOURCE: T o m l i n s o n , J .W.C . E . C . G . D . R i s k G r a d i n g , U n p u b l i s h e d R e s e a r c h P a p e r , 1969, p. 1-3 26 the o v e r a l l expor t c r e d i t e x p e r i e n c e of the f i r m and the p e r c e n t a g e of the c o - i n s u r a n c e c a r r i e d by the e x p o r t e r . In g e n e r a l , the premiums charged on e x p o r t c r e d i t i n s u r a n c e p o l i c i e s have d e c l i n e d d r a m a t i c a l l y in the pas t few y e a r s . Premiums to i n s u r e " no rma l t y p e " s a l e s a re c u r r e n t l y l e s s than o n e - h a l f of one p e r c e n t of the amount i n s u r e d . The r e d u c t i o n in premium s c h e d u l e s has o c c u r e d as a d i r e c t r e s u l t of the i n c r e a s e d volume of goods b e i n g i n s u r e d . In a d d i t i o n , the a b i l i t y of the i n s u r e r to e v a l u a t e p o l i t i c a l r i s k more a c c u r a t e l y has c o n t r i b u t e d t o a r e d u c t i o n in premiums. The i n s u r e r s a re u s u a l l y p u b l i c b o d i e s and as such a re not p r o f i t m a x i m i z e r s . They are o n l y conce rned w i t h g e n e r a t i n g s u f f i c i e n t income to c o v e r any l o s s e s , t o p r o v i d e a r e a s o n a b l e l e v e l of r e s e r v e s f o r f u t u r e l o s s e s and to c o v e r t h e i r c u r r e n t o p e r a t i n g expense s . In a l l c o u n t r i e s the e x p o r t c r e d i t i n s u r a n c e l o s s r a t i o s have been v e r y s m a l l . In t h e i r f i r s t t h i r t y - t h r e e y e a r s o f o p e r a t i o n , t h e E x p o r t C r e d i t s Guarantee Department i n s u r e d a p p r o x i m a t e l y $28 b i l l i o n of U n i t e d Kingdom e x p o r t s . D u r i n g t h i s same p e r i o d l e s s than 1$ of the amount i n s u r e d ($244 m i l l i o n ) was p a i d out in c l a i m s . In i t s f i r s t t h r e e y e a r s of o p e r a t i o n in the U n i t e d S t a t e s the i n s u r a n c e program i n s u r e d $ 1 . 4 b i l l i o n o f e x p o r t s . Net l o s s e s d u r i n g t h i s p e r i o d amounted to $ 1 . 9 m i l l i o n , a p p r o x i m a t e l y o n e - t e n t h of one p e r c e n t of the amount i n s u r e d . The volume of e x p o r t s i n s u r e d under the v a r i o u s t y p e s of i n s u r a n c e p o l i c i e s has grown r a p i d l y . The annual volume of i n s u r a n c e a u t h o r i z a t i o n s of the E x p o r t Import Bank i n c r e a s e d from $693 m i l l i o n in 1966, to $2929 m i l l i o n in 1975. The annual volume 0 f e x p o r t s insured by the EDC i n c r e a s e d from $263 mi I I ion in 1969 to $911 m i l l i o n in 1975. In o r d e r to p r o v i d e a comprehens i ve a n a l y s i s of the e n t i r e expor t c r e d i t p i c t u r e , i t i s u s e f u l to p r o v i d e a b r i e f d e s c r i p t i o n the v a r i o u s t y p e s of i n s u r a n c e p o l i c i e s a v a i l a b l e to the e x p o r t e r s . The b a s i c t y p e s of p o l i c i e s o f f e r e d by the F o r e i g n C r e d i t Insurance A s s o c i a t i o n (FCIA) in c o n j u n c t i o n w i t h the Exim Bank i n c l u d e : ' 6 I) Mas te r Comprehens ive P o l i c y P r o v i d e s b l a n k e t coverage ( u s u a l l y 90$) f o r both p o l i t i c a l and commerc ia l r i s k s on a l l o f an e x p o r t e r ' s e l i g i b l e s h o r t and medium term c r e d i t s a f e s . 2) Shor t Term Comprehens ive P o l i c y P r o v i d e s 90$ coverage f o r commerc ia l r i s k s and 95$ coverage f o r p o l i t i c a l r i s k s on a l l of an e x p o r t e r ' s e l i g i b l e c r e d i t s a l e s which have a term of l e s s than 180 day s . To be e l i g i b l e each s a l e must have at l e a s t 50$ A m e r i c a n c o n t e n t . 3) Medium Term Comprehens ive P o l i c y P r o v i d e s 90$ coverage f o r both p o l i t i c a l and commerc ia l r i s k s on s a l e s of c a p i t a l or q u a s i - c a p i t a l goods s o l e l y of U.S. o r i g i n . E l i g i b l e s a l e s must o f f e r terms of 181 days to f i v e y e a r s . T h i s t y p e of p o l i c y u s u a l l y i s i s s u e d on a buyer by buyer b a s i s . 4) Shor t Term P o l i t i c a l R i s k P o l i c y P r o v i d e s 90$ coverage f o r p o l i t i c a l r i s k o n l y . E l i g i b l e e x p o r t s a l e s a re u s u a l l y r e q u i r e d to have a term of l e s s than 180 day s . Medium Term P o l i t i c a l R i s k P o l i c y P r o v i d e s 90$ coverage f o r p o l i t i c a l r i s k s o n l y . U s u a l l y i s sued on a buyer by buyer b a s i s . C o v e r s e l i g i b l e e x p o r t s a l e s wh ich have a term from 5 - 5 y e a r s . Combined Sho r t Term, Medium Term Comprehens ive P o l i c y P r o v i d e s coverage f o r the s a l e of c a p i t a l o r q u a s i - c a p i t a l goods to o v e r s e a s d i s t r i b u t o r s and d e a l e r s . T h i s t ype of p o l i c y i s i s s u e d on a d e a l e r by d e a l e r b a s i s and p r o v i d e s coverage f o r the t o t a l i n v e n t o r y w h i l e i t i s in the d e a I e r s ' p o s s e s s i o n . If and when the p r o d u c t s a re s o l d the coverage cea se s in the case of a cash s a l e . In the case of a c r e d i t s a l e , the coverage w i l l remain in e f f e c t u n t i l the debt i s r e t i r e d p r o v i d e d t h a t the p u r c h a s e r makes a 10$ down payment and f o rward s p r o m i s s o r y n o t e s f o r the b a l a n c e to the e x p o r t e r . Mas ter P o l i t i c a l R i s k P o l i c y P r o v i d e s coverage of 70$ f o r p o l i t i c a l r i s k s o n l y . E l i g i b l e e x p o r t s a l e s must have a term of l e s s than f i v e y e a r s . The premium i s based upon the sp read of the r i s k s in the f o r e i g n m a r k e t s . The premium f o r t h i s t ype of p o l i c y i s c o n s i d e r a b l y lower than t h a t charged f o r o t h e r t ypes of p o l i c i e s because the e x p o r t e r i s r e t a i n i n g 30$ of the r i s k . 29 8) Sma!I B u s i n e s s P o l i cy T h i s p o l i c y i s de s i gned to meet the needs of f i r m s j u s t e n t e r i n g the e x p o r t market and to a s s i s t those e x p o r t e r s w i t h a modest e x p o r t s a l e s vo lume. Under t h i s p o l i c y wh ich p r o v i d e s 90$ comprehens i ve coverage f o r a l l s h o r t and medium term s a l e s , the e x p o r t e r may choose to i n s u r e a l l e x p o r t s a l e s or j u s t c e r t a i n s a l e s to s p e c i f i c m a r k e t s . To q u a l i f y f o r t h i s t ype of p o l i c y the e x p o r t e r must have an annual e x p o r t volume of l e s s than $200,000. The coverage rema ins in e f f e c t u n t i l an agg rega te of $500,000 of e x p o r t s have been i n s u r e d f o r the e x p o r t e r or u n t i l two y e a r s have e l a p s e d s i n c e the i s s u e d a t e , w h i c h e v e r comes f i r s t . The premiums v a r y , but a re s i g n i f i c a n t l y l e s s than those charged on o t h e r t ypes of comprehens i ve pd I i cy . 9) D i s c r e t i o n a r y C r e d i t L i m i t P o l i c y Once an e x p o r t e r has a p roven r e c o r d w i t h the F C I A , he may, under a s p e c i a l t ype of ag reement , be a b l e to q u a l i f y t r a n s a c t i o n s f o r i n s u r a n c e coverage w i t h o u t s u b m i t t i n g a s p e c i a l a p p l i c a t i o n to the FC IA . The e x p o r t e r i s a s s i g n e d a maximum c r e d i t l i m i t and as r e c e i p t s a re r e c e i v e d f o r pas t e x p o r t s a l e s , he may a u t o m a t i c a l l y make new expor t s a l e s and i n c l u d e them in h i s i n s u r e d a s s e t s . In e f f e c t , the e x p o r t e r has a l i n e of c r e d i t w i t h the FCIA and as long as he f i l e s a month ly r e p o r t of h i s e x p o r t s a l e s w i t h the FCIA and pays the r e q u i r e d premium, he can c o n t i n u e to i n s u r e h i s e x p o r t s a l e s . The maximum amount o f cove rage t h a t may be o u t s t a n d i n g at any one p o i n t in t ime i s , of c o u r s e , s p e c i f i e d by the FC IA . In a d d i t i o n to r e d u c i n g the commerc ia l and p o l i t i c a l r i s k s f a c i n g the e x p o r t e r , i n s u r a n c e p o l i c i e s f a c i l i t a t e the f i n a n c i n g of e x p o r t s a l e s . The e x p o r t e r may a s s i g n the p r o c e e d s of an expor t c r e d i t i n s u r a n c e p o l i c y t o a f i n a n c i a l i n s t i t u t i o n as s e c u r i t y f o r a loan to f i n a n c e h i s o p e r a t i n g r e q u i r e m e n t s . The commerc ia l banks a re u s u a l l y w i l l i n g to make such loans on a n o n - r e c o u r s e b a s i s because of the s t r e n g t h of the c o r p o r a t i o n i s s u i n g the i n s u r a n c e p o l i c y . The bank u s u a l l y r e t a i n s the r i g h t of r e c o u r s e to the e x p o r t e r in the case of d e f a u l t not cove red by the p o l i c y . The bank a l s o r e q u i r e s the e x p o r t e r to r e t a i n a p o r t i o n of the c r e d i t f o r h i s own a c c o u n t . F o r example, i f the p o l i c y p r o v i d e s 90$ coverage f o r a l l p o l i t i c a l and commerc ia l r i s k s , then the e x p o r t e r may be r e q u i r e d to r e t a i n 10$ of the net amount of the s a l e f o r h i s own a c c o u n t . The net amount of the s a l e i s the g ro s s c o n t r a c t v a l u e l e s s the down payment p r o v i d e d by the p u r c h a s e r . The sma l l e x p o r t e r i s u n l i k e l y t o p roduce the type of c a p i t a l good which r e q u i r e s a repayment p e r i o d in e x c e s s of f i v e y e a r s . He w i l l , t h e r e f o r e , make l i t t l e use of the d i r e c t l e n d i n g f a c i l i t i e s of the n a t i o n a l expor t c r e d i t g r a n t i n g i n s t i t u t i o n s . F o r example , the EDC has no s p e c i a l f a c i l i t i e s to meet the needs of the sma l l e x p o r t e r . He must o b t a i n any n e c e s s a r y f i n a n c i n g from a c h a r t e r e d bank on the s t r e n g t h of h i s e x p o r t c r e d i t i n s u r a n c e p o l i c y or he must ensure t h a t h i s p r o d u c t s q u a l i f y f o r d i r e c t loans under S e c t i o n 29 or 31 of the E x p o r t Development A c t . The Exim Bank, on the o t h e r hand, has d e v e l o p e d a c o o p e r a t i v e f i n a n c i n g f a c i l i t y (CFF) wh ich has g r e a t l y a i d e d the sma l l Amer i can e x p o r t e r in f i n a n c i n g h i s s a l e s . ( T h i s f a c i l i t y w i l l be d i s c u s s e d in g r e a t e r d e t a i l l a t e r in the s t u d y . ) In the f i s c a l yea r (FY) ended June 30, 1974, the Exim Bank a u t h o r i z e d 1563 loans f o r a t o t a l of $212.6 m i l l i o n under i t s CFF and R e l e n d i n g f a c i l i t y . The s u c c e s s of t he Exim B a n k ' s program i n d i c a t e s t h a t e x p o r t c r e d i t i n s u r a n c e 31 by i t s e l f cannot meet a l l o t the f i n a n c i n g needs of the sma l l e x p o r t e r . V . BANKS AND EXPORT CREDIT The impor tant r o l e t h a t commerc ia l banks p l a y in f i n a n c i n g economic a c t i v i t y must not be u n d e r s t a t e d . Wh i l e the banks have been r e l u c t a n t to g rant c r e d i t beyond a f i v e year p e r i o d , they a re s l o w l y b e g i n n i n g to extend t h e i r h o r i z o n s to a 7-r8 year p e r i o d . In a d d i t i o n , i n t e r n a t i o n a l bank ing c o n s o r t i a a re be ing formed to p r o v i d e the f i n a n c i n g needed to meet the e v e r - c h a n g i n g needs of i n t e r n a t i o n a l b u s i n e s s . An e x p o r t e r who f i n d s i t n e c e s s a r y to o f f e r extended c r e d i t in o r d e r to complete an e x p o r t s a l e u s u a l l y seeks the a d v i c e of h i s banker f i r s t because of h i s e x p e r t i s e in the f i e l d . If the banker i s unab le to p r o v i d e the n e c e s s a r y f i n a n c i n g , he may be a b l e to i d e n t i f y o t h e r p o t e n t i a l s o u r c e s of f und s . The c r e d i t terms o f f e r e d by a bank w i l l not exceed tho se which a re customary in i n t e r n a t i o n a l t r a d e f o r the type of p roduc t i n v o l v e d . The bank w i l l o n l y match the c r e d i t terms a l r e a d y e s t a b l i s h e d in t he i n t e r n a t i o n a l community. Banks have a t tempted to i n c r e a s e t h e i r i n t e r n a t i o n a l f l e x i b i l i t y th rough the development of f i n a n c i a l c o n s o r t i a . F o r example , the MAIBL c o n s o r t i u m was c r e a t e d in 1964 f o r the purpose of p r o v i d i n g medium term f i n a n c i n g f o r p r o j e c t s t h roughou t the w o r l d . T h e f o u n d i n g members were the M i d l a n d Bank and the S t anda rd Bank from the U n i t e d Kingdom, the Commercia l Bank from A u s t r a l i a and the T o r o n t o Dominion Bank from Canada. MAIBL became a t r e n d s e t t e r in i n t e r n a t i o n a l f i n a n c e by l e n d i n g s u b s t a n t i a l amounts of funds in the 2-7 year a r e a . Banks on t h e i r own 32 were r e l u c t a n t t o e n t e r the i n t e r n a t i o n a l term c r e d i t f i e l d f o r a number of r ea sons i n c l u d i n g custom and l e g i s l a t i o n . MA IBL ' s s u c c e s s p roved t h a t the l u c r a t i v e i n t e r m e d i a t e term c r e d i t f i e l d c o u l d be tapped i f the banks c o o p e r a t e d and p o o l e d t h e i r r e s o u r c e s . Banks a re s l o w l y becoming more a c t i v e in the i n t e r n a t i o n a l term c r e d i t f i e l d . The major f a c t o r s r e s t r i c t i n g t h e i r growth in t h i s a r e a a re the b a n k s ' i n a b i l i t y to p r o p e r l y e v a l u a t e both f o r e i g n commerc ia l and p o l i t i c a l r i s k s , t h e i r d e s i r e to keep t h e i r p o r t f o l i o in a r e l a t i v e l y l i q u i d form and t h e i r l ack of e x p e r i e n c e d p e r s o n n e l . The bank s ' i n a b i l i t y to p r o p e r l y e v a l u a t e the commerc ia l and p o l i t i c a l r i s k s can be o f f s e t t h r o u g h the use of e x p o r t c r e d i t i n s u r a n c e . The banks w i l l p r o b a b l y neve r t o t a l l y overcome t h e i r d e s i r e to r e t a i n a r e l a t i v e l y l i q u i d p o r t f o l i o , but i f even a sma l l p o r t i o n of t h e i r loan p o r t f o l i o i s a l l o c a t e d to l onger term c r e d i t s i t may p rove to be a s i g n i f i c a n t s o u r c e of c r e d i t . The development of c o n s o r t i a l i k e MAIBL and the ORION group may i n d i c a t e f u t u r e p a t t e r n s in i n t e r n a t i o n a l b a n k i n g . The p rob lem of d e v e l o p i n g b e t t e r p e r s o n n e l in the f i e l d of i n t e r n a t i o n a l f i n a n c e may prove to be the most d i f f i c u l t b a r r i e r to overcome. The b r i g h t , young f i n a n c i a l e x e c u t i v e r a r e l y sees h i s f u t u r e in i n t e r n a t i o n a l f i n a n c e . I n s t e a d , he sees h i s f u t u r e managing p r i v a t e inves tment f l ows between h i s company and s p e c i f i c f o r e i g n c o u n t r i e s . The i n c r e a s i n g impor tance of i n t e r n a t i o n a l f i n a n c e w i l l h o p e f u l l y change t h i s a t t i t u d e in the not too d i s t a n t f u t u r e . V I . CONCLUSIONS The f i r s t c h a p t e r of t h i s s tudy has shown the i n c r e a s i n g l y 33 impor tant r o l e t h a t expor t c r e d i t i s p l a y i n g in d e t e r m i n i n g t r a d e f l ows th roughout the w o r l d . T h i s i n t r o d u c t i o n has a l s o demons t ra ted t h a t n a t i o n a l expor t c r e d i t p r a c t i c e s have d e v e l o p e d in a r e l a t i v e l y u n c o n t r o l l e d c o m p e t i t i v e env i r onment . Each n a t i o n i s p r i m a r i l y i n t e r e s t e d in e n s u r i n g t h a t i t s market sha re of wor l d e x p o r t s does not d e c r e a s e . The n a t i o n s , t h e r e f o r e , adopt whatever t ype of s t r a t e g y i s deemed n e c e s s a r y to p r o t e c t t h e i r p o s i t i o n . The p r o b a b i l i t y t h a t the i n d u s t r i a l i z e d n a t i o n s w i l l s i g n an agreement g o v e r n i n g i n t e r n a t i o n a l c r e d i t p r a c t i c e s i s not l a r g e . T h i s v iew i s s u p p o r t e d by the a t tempt s of the Berne U n i o n , the OECD, and the EEC to b r i n g about a g r e a t e r amount of i n t e r n a t i o n a l c o o p e r a t i o n . The prob lems a s s o c i a t e d w i t h e x p o r t c r e d i t have at l e a s t two d i m e n s i o n s , — e x p o r t c r e d i t i n s u r a n c e and l o a n s . E x p o r t c r e d i t i n s u r a n c e p r o v i d e s the e x p o r t e r w i t h the c o l l a t e r a l needed to a r r a n g e the n e c e s s a r y f i n a n c i n g w i t h a commerc ia l bank. Loans to the p u r c h a s e r a l l o w him to pay cash to the vendo r . D i r e c t loans a re g r a n t e d by the n a t i o n a l e x p o r t c r e d i t g r a n t i n g i n s t i t u t i o n , which in e f f e c t i s a type of s e l f - f i n a n c i n g f i n a n c i a l i n t e r m e d i a r y . At some p o i n t in i t s f u t u r e , the i n s t i t u t i o n ' s cash i n f l o w c o n s i s t i n g of payments on o u t s t a n d i n g l o a n s , v a r i o u s n o n - c a s h e x p e n d i t u r e s and net p r o f i t s hou ld a p p r o x i m a t e l y equal the cash o u t f l o w c r e a t e d by g r a n t i n g new l oan s . Any funds t h a t may be r e q u i r e d to accomodate a r e a s o n a b l e r a t e of growth would be o b t a i n e d by bo r row ing in the c a p i t a l m a r k e t s . The r a p i d growth of e x p o r t c r e d i t ha s , however, p r e v e n t e d t h i s t h e o r y from be ing a p p l i e d by the n a t i o n a l e x p o r t c r e d i t g r a n t i n g i n s t i t u t i o n s . The Exim B a n k ' s t o t a l debt o u t s t a n d i n g has i n c r e a s e d by over 400$ in the ten year p e r i o d end ing June 30, 1975. In the l a s t f i s c a l 3 4 year Exim B a n k ' s t o t a l bo r row ing s i n c r e a s e d by $ 1 . 5 b i l l i o n to $6 .85 b i l l i o n . The E x p o r t Development C o r p o r a t i o n has shown a s i m i l a r r a p i d growth in t o t a l o u t s t a n d i n g d e b t . On December 31 , 1969, EDC ' s t o t a l o u t s t a n d i n g debt was $253.6 m i l l i o n . By December 31 , 1975, the comparab le f i g u r e was $965.1 m i l l i o n , an i n c r e a s e of 280$ in j u s t s i x y e a r s . In the past f i s c a l year EDC s i gned a t o t a l of f o r t y - o n e a g r e e -ments f o r a t o t a l of $1 ,135 m i l l i o n . The v a l u e of the c o n t r a c t s s i g n e d , net of bank p a r t i c i p a t i o n , was $935 .7 mi I I i o n . In the FY 1973, EDC s i gned t h i r t y - s i x loan agreements w i t h a t o t a l v a l u e of $462.9 m i l l i o n . If t he se phenomenal growth r a t e s c o n t i n u e i n t o the f u t u r e a r e v i e w of the c o s t s and b e n e f i t s of t h i s t ype of a c t i v i t y shou ld be u n d e r t a k e n . It can be argued t h a t o r g a n i z a t i o n s such as the Exim Bank and the EDC are not a d i r e c t co s t to the t a x p a y e r . Wh i l e i t i s t r u e t h a t they do not r e q u i r e a d i r e c t s u b s i d y f o r t h e i r o p e r a t i o n s a s u b s t a n t i a l p o r t i o n of t h e i r o u t s t a n d i n g debt i s p a y a b l e to the T r e a s u r y of t h e i r r e s p e c t i v e n a t i o n s . fn the case of the EDC, on December 3 1 , 1975, o n l y $14.9 m i l l i o n of i t s t o t a l o u t s t a n d i n g debt of $965.1 m i l l i o n was p a y a b l e to i n v e s t o r s in the p r i v a t e marke t . In a d d i t i o n , one must a l s o c o n s i d e r the commitment t he se o r g a n i z a t i o n s a re i n c u r r i n g by s i g n i n g l a r g e volumes of new loan ag reements . In the case of EDC, i t appear s as i f a commitment to o b t a i n funds at a c e r t a i n r a t e of i n t e r e s t i s not o b t a i n e d when the funds a re committed v i a a loan agreement . N o r m a l l y , the funds a re d i s b u r s e d over a p e r i o d of t ime as the goods are manu fac tu red by the e x p o r t e r and r e c e i v e d by the p u r c h a s e r . The EDC borrows a s u b s t a n t i a l p o r t i o n of the funds i t d i s b u r s e s , and the i n t e r e s t r a t e a p p l i c a b l e to t he se bo r row ing s i s e s t a b l i s h e d when the funds a re drawn down. The i n t e r e s t r a t e 35 a p p l i c a b l e to the c r e d i t , on the o t h e r hand, i s e s t a b l i s h e d when the c r e d i t i s s i g n e d , wh ich may have been 1-2 y e a r s e a r l i e r . Canad ian Crown C o r p o r a t i o n s such as EDC are a b l e to borrow the n e c e s s a r y funds needed to meet t h e i r o p e r a t i n g needs from the C o n s o l i d a t e d Revenue Fund at a r a t e of l /8$ above the r a t e a p p l i c a b l e to s i m i l a r f e d e r a l government b o r r o w i n g s . Wi th the e s c a l a t i o n of i n t e r e s t r a t e s in the pas t few y e a r s i t would appear t h a t the o p e r a t i n g marg in a t t a c h e d to EDC ' s d i r e c t loans shou ld be d e c r e a s i n g . The t o t a l of u n d i s b u r s e d f i n a n c i n g under the s i g n e d agreements has i n c r e a s e d d r a m a t i c a l l y in the pas t t h r e e y e a r s . At the end of FY 1972, t o t a l u n d i s b u r s e d f i n a n c i n g was $422.9 m i l l i o n and the comparab le f i g u r e on December 3 1 , 1975 was $1461.8 m i l l i o n . The u n d i s b u r s e d f i n a n c i n g f i g u r e means t h a t i f t he EDC s topped s i g n i n g loan agreements on December 3 1 , 1975, i t would s t i l l have to borrow an a d d i t i o n a l $ 1 . 5 b i l l i o n to meet i t s pa s t commitments. The r e l a t i v e l y sma l l s i z e of the C a n a d i a n c a p i t a l m a r k e t , the g r e a t demand f o r f e d e r a l government f u n d s , and the c a p i t a l needs of p r o j e c t s such as the Mackenz ie V a l l e y P i p e l i n e a l l d i c t a t e t h a t EDC must r a i s e a s u b s t a n t i a l p o r t i o n of i t s funds in the o f f s h o r e marke t . The l a r ge i n t e r e s t d i f f e r e n t i a l t h a t p r e s e n t l y e x i s t s between the Eurobond market and the Canad ian market shou ld ensure t h a t funds can be r a i s e d at a comparab le i n t e r e s t r a t e to t h a t a v a i l a b l e t h rough the C o n s o l i d a t e d Revenue F u n d . The b a l a n c e of t h i s s tudy w i l l be concerned w i t h examin ing the o v e r a l l e f f e c t i v e n e s s of the E x p o r t Development C o r p o r a t i o n . The f i n a n c i a l impact t h a t EDC ' s a c t i v i t i e s w i l l have on the Canad ian c a p i t a l marke t s w i l l be a n a l y z e d ; the c o s t s and b e n e f i t s t h a t a c c r u e to Canada from hav ing a p u b l i c c o r p o r a t i o n such as EDC promote Canad ian 3 6 e x p o r t s w i l l be d i s c u s s e d and some recommendat ions f o r the f u t u r e w i l l be p r e s e n t e d . In e f f e c t , the o b j e c t i v e f u n c t i o n of t h i s s t udy i s to f i n d a method by which Canad ian c a p i t a l e x p o r t s can be max imized in o r d e r to maximize the b e n e f i t s to the Canad ian economy. In o r d e r to d e v e l o p a b e t t e r u n d e r s t a n d i n g of how e f f e c t i v e the Canad ian system i s meet ing i t s o b j e c t i v e s , p o r t i o n s of the systems in o p e r a t i o n in the U n i t e d Kingdom and the U n i t e d S t a t e s of A m e r i c a w i l l be r e v i e w e d . The a n a l y s i s s e c t i o n w i l l i n c l u d e a breakdown by type of p roduc t of a l l Amer i can and Canad ian c a p i t a l equipment e x p o r t s . The Canad ian a n a l y s i s w i l l a l s o p r o v i d e a breakdown a c c o r d i n g to the s i z e of the e x p o r t i n g f i r m . I n t e r n a t i o n a l t r a d e t h e o r i e s based on v a r i o u s c o n c e p t s of c o m p a r a t i v e advantage b a s i c a l l y s t a t e t h a t n a t i o n s shou ld e x p o r t t ho se p r o d u c t s in wh ich they have some t y p e o f c o m p a r a t i v e a d v a n t a g e , be i t in raw m a t e r i a Is, n a t u r a l r e s o u r c e s , s k i l l e d l abour or t e c h n o l o g i c a l know-how. The a n a l y s i s of C a n a d a ' s c a p i t a l equipment e x p o r t s w i l l a t tempt to d e t e r m i n e the a p p l i c a b i l i t y of the c o m p a r a t i v e advantage t h e o r y . F i n a n c i n g f a c i l i t i e s and g r a n t s such as t ho se p r o v i d e d by EDC, the F e d e r a l B u s i n e s s Development Bank, the Department of R e g i o n a l Economic E x p a n s i o n , and the Department of I n d u s t r y , T r a d e and Commerce are used to broaden the base of Canada ' s i n d u s t r i a l s e c t o r . T h i s s tudy w i l l a t tempt to a n a l y z e how s u c c e s s f u l the f i n a n c i n g f a c i l i t i e s p r o v i d e d by the EDC accompI i sh t h i s g o a l . A s i m p l e w e l l - s t r u c t u r e d method w i l l be d e v e l o p e d to f o r e c a s t the f u t u r e cash needs of the E x p o r t Development C o r p o r a t i o n . The p rob lem of how and where the n e d e s s a r y funds shou ld be r a i s e d wiI I be d i s c u s s e d 37 and a un ique s o l u t i o n to the prob lem u t i l i z i n g the seconda ry r e s e r v e p o s i t i o n of the c h a r t e r e d banks w i l l be p r e s e n t e d . W h i l e t he goa l o f m a x i m i z i n g the net b e n e f i t to Canada i s the b a s i c c o n c e r n of t h i s s t u d y , the p u r c h a s e r of the goods be ing e x p o r t e d must a l s o be c o n s i d e r e d . If a l a r g e p o r t i o n of such c a p i t a l equipment e x p o r t s are be ing pu rcha sed by LDCs then perhaps the EDC shou ld be c o n c e n t r a t i n g on d e v e l o p i n g a h y b r i d t ype of f i n a n c i a l p o l i c y t h a t encompasses both e x p o r t c r e d i t and development f i n a n c e . It i s e x t r e m e l y d i f f i c u l t to de te rm ine where e x p o r t c r e d i t s t o p s and where deve lopment f i n a n c e b e g i n s . However, the d e v e l o p e d n a t i o n s cannot expec t to c o n t i n u e to m a i n t a i n the e x i s t i n g f l o w s o f c a p i t a l e x p o r t s to t he d e v e l o p i n g n a t i o n s w i t h o u t i n c r e a s i n g the a i d component of such f l o w s . If the i n d u s t r i a l i z e d n a t i o n s c o n t i n u e t h e i r e x i s t i n g p o l i c i e s the d e v e l o p i n g n a t i o n s w i l l f a c e a s e r i o u s debt s e r v i c i n g p rob lem or e l s e the annual volume of e x p o r t s t o the LDCs w i l l have to be s u b s t a n t i a l l y r e d u c e d . At p r e s e n t , Canada has a chance to be a wor ld l e a d e r in d e v e l o p i n g a new p o l i c y f o r d e a l i n g w i t h c a p i t a l equipment e x p o r t s to LDCs. C h a p t e r II w i l l p r o v i d e a d e s c r i p t i o n and an a n a l y s i s of the a c t i v i t i e s of the E x p o r t C r e d i t s Guaran tee Department in the U n i t e d Kingdom. Chap te r III w i l l f o c u s i t s a t t e n t i o n on the a c t i v i t i e s of the E x p o r t Import' Bank of the U n i t e d S t a t e s . Chap te r IV w i l l p r o v i d e both the d e s c r i p t i o n and the a n a l y s i s of the a c t i v i t i e s of C a n a d a ' s E x p o r t Development C o r p o r a t i o n . The f o c u s of a t t e n t i o n f o r the c h a p t e r w i l l be the f i n a n c i n g agreements and g u a r a n t e e s s e c t o r . The E D C ' s a c t i v i t y in the expor t c r e d i t i n s u r a n c e f i e l d has a l r e a d y been b r i e f l y d i s c u s s e d 38 and w i l l not be d e a l t w i t h at any l eng th in t h i s s t udy . The expor t c r e d i t i n s u r a n c e f a c i l i t y i s b a s i c a l l y p r o v i d e d on a co s t p l u s v e r y marg i na l markup b a s i s . The p r o b a b i l i t y of the i n s u r a n c e s e c t o r r e q u i r i n g a l a r ge i n j e c t i o n of funds i s v e r y low and c o u l d o n l y occur i f a s u b s t a n t i a l p o r t i o n of the p u r c h a s e r s d e f a u l t e d on t h e i r c o n t r a c t s at the same t i m e . In a d d i t i o n , i t i s i m p o s s i b l e to do an a n a l y s i s of the e x p o r t s s u p p o r t e d by i n s u r a n c e because of a l ack of p u b l i s h e d i n f o r m a t i o n . The a n a l y s i s w i l l , t h e r e f o r e , c o n c e n t r a t e on the e x p o r t c r e d i t and g u a r a n t e e s s e c t o r of the expor t c r e d i t f i e l d . In Chap te r V the cash f o r e c a s t i n g t e c h n i q u e w i l l be deve l oped as w i l l the proposed method of r a i s i n g the n e c e s s a r y funds f o r the E x p o r t Development C o r p o r a t i o n . C h a p t e r VI w i l l c o n c l u d e by summar iz ing the o b j e c t i v e s of the s tudy and the more impor tan t r e s u l t s . 39 FOOTNOTES CHAPTER I 1. N e h r t , Lee C . , F i n a n c i n g C a p i t a l Equipment E x p o r t s , S c r a n t o n , P a . , I n t e r n a t i o n a l Tex tbook C o . , 1966. p.3 2. M c K i t t e r i c k , N a t h a n i e l and B. J e n k i n s M i d d l e t o n , " T h e Bankers of the R i c h and the Bankers of the P o o r : The Ro le of E x p o r t C r e d i t in Development F i n a n c e " , New D i r e c t i ons in  DeveIopment, Co Ii n B r a d f o r d and O t h e r s , New Y o r k , P r a e g e r P u b l i s h e r s , 1974. p.102 3. F a i r , D. E . , " E x p o r t C r e d i t P r o b l e m s " , The Th ree Banks Rev iew, December 1970, No. 8 8 , p. 30 4. U n i t e d N a t i o n s , Department of Economic and S o c i a l A f f a i r s , E x p o r t C r e d i t s and Development F i n a n c i n g - P a r t One C u r r e n t P r a c t i c e s  and P r o b l e m s , 1966. p. 3 5. M c K i t t e r i c k and M i d d l e t o n , op. c i t . p. 143. 6. As quoted i n , A z i z a l , Mohammed, ' T h e Use of Commercia l C r e d i t s by D e v e l o p i n g C o u n t r i e s f o r F i n a n c i n g Imports of C a p i t a l Goods " , I n t e r n a t i o n a l Monetary Fund S t a f f P a p e r s , V o l . XV I I , 1970. p. 62 7. Ibid_g_ p.64 8. I b i d , p. 65 9. T e r r e l l , H a r r y , " H a r m o n i z a t i o n of E x p o r t C r e d i t in the E E C " , The B a n k e r , V o l . 122, Dec. 1972. p. 1591 10. T e r r e l l , H a r r y , " T h r e e I n i t i a t i v e s in E x p o r t C r e d i t " , The B a n k e r , V o l . 124, Dec. 1974. p. 1497 I I. I b i d , p. 1498 12. i b i d , p.1499 13. T e r r e l l , H a r r y , " H a r m o n i z a t i o n of E x p o r t C r e d i t in the E E C " , The Banke r , V o l . 122, Dec. 1972. p. 6 14. T o m l i n s o n , J . W i l l i a m C , E .C .G .D . R i s k G r a d i n g , U n p u b l i s h e d Re sea rch P a p e r , 1969. p.6 15. L o c . c i t . 40 FOOTNOTES CONTINUED 16. A comprehens ive but somewhat dated r e v i e w o f the i n su rance p o l i c i e s o f f e r e d by the FCIA i s i n c l u d e d in H a s k e l l , Pau l T . , T C I A , A V i t a l A i d to E x p o r t F i n a n c e " , The J o u r n a l of Commercia l Bank L e n d i n g , S e p t . 1971. pp. 4 0 - 9 The E x p o r t Import B a n k ' s P u b l i c a t i o n , Ex im Bank - How i t Works . p r o v i d e s c u r r e n t i n f o r m a t i o n on any new type of p o l i c i e s being i n t r o d u c e d . 17. , " I n t e r n a t i o n a l Bank ing S u p p l e m e n t " , The Economi s t , Nov. 15, 1969. pp. 11-58, C i t e d in L . C Nehr t ( e d i t o r ) , I n t e r n a t i o n a l  F i n a n c e f o r M u l t i n a t i o n a l B u s i n e s s , Second E d i t i o n , S c r a n t o n , P a . , i n t e x t E d u c a t i o n a l P u b l i s h e r s , 1972. p. 370 CHAPTER I I THE EXPORT CREDITS GUARANTEE DEPARTMENT The goal of the B r i t i s h government in e s t a b l i s h i n g the E x p o r t C r e d i t s Guarantee Department was to ensure t h a t e x p o r t e r s in the U n i t e d Kingdom are a b l e to compete on equa l terms w i t h any f o r e i g n c o m p e t i t i o n t h a t has c r e d i t i n s u r a n c e or e q u i v a l e n t government s u p p o r t . ' ECGD does not n o r m a l l y i n i t i a t e any l e n g t h e n i n g of the g e n e r a l terms of c r e d i t in i n t e r n a t i o n a l t r a d e . In o r d e r to a c h i e v e i t s o b j e c t i v e s , ECGD p r o v i d e s both expor t c r e d i t i n s u r a n c e and f i n a n c i a l g u a r a n t e e s f o r the e x p o r t e r . The s t a n d a r d i n s u r a n c e p o l i c y p r o v i d e s coverage a g a i n s t the t r a n s f e r , i n s o l v e n c y , d e f a u l t , war and o t h e r r i s k s a s s o c i a t e d w i t h e x p o r t t r a d i n g . The f i n a n c i a l g u a r a n t e e s a re p r o v i d e d by ECGD to the B r i t i s h e x p o r t e r who then o b t a i n s the n e c e s s a r y f i n a n c i n g from a c l e a r i n g house bank. To o b t a i n a gua ran tee the e x p o r t e r approaches the ECGD to a c e r t a i n i f they w i l l s uppo r t the t r a n s a c t i o n i n v o l v i n g h i s p o t e n t i a l s a l e . ECGD in e v a l u a t i n g the a p p l i c a t i o n c o n s i d e r s such f a c t o r s as the terms be ing o f f e r e d , the n a t u r e of the e x p o r t , the c r e d i t w o r t h i n e s s of the p o t e n t i a l buyer and the f i n a n c i a l s t a n d i n g of the p u r c h a s e r ' s c o u n t r y — the same b a s i c f a c t o r s t h a t a re c o n s i d e r e d in e v a l u a t i n g an i n s u r a n c e r i s k . The e x p o r t must have a v a l u e g r e a t e r t h a n , £ 100,000 and the repayment p e r i o d must be g r e a t e r than t h r e e yea r s from the date of 41 42 s h i p m e n t . O n c e the ECGD gua ran tee i s i s sued the s u p p l i e r approaches h i s bank to n e g o t i a t e a loan agreement between the p u r c h a s e r and the bank. The B r i t i s h bank ing system has been v e r y r e c e p t i v e to such loan a p p l i c a t i o n s and g e n e r a l l y g r a n t s the loan on the s t r e n g t h of the ECGD's g u a r a n t e e . Once the goods a re m a n u f a c t u r e d by the s u p p l i e r and r e c e i v e d by the p u r c h a s e r , the funds a re r e l e a s e d to the e x p o r t e r . A f t e r p a y i n g the ECGD i t s fee f o r i s s u i n g the gua ran tee he i s no l onger i n v o l v e d in the t r a n s a c t i o n . If the p u r c h a s e r d e f a u l t s on payment, the bank has no r e c o u r s e to the e x p o r t e r but must look to the ECGD to implement i t s g u a r a n t e e . The ECGD ag rees to p r o v i d e u n c o n d i t i o n a l payment w i t h i n n i n e t y days of the due d a t e . The ECGD r e t a i n s the r i g h t of r e c o u r s e to the e x p o r t e r f o r any d e f a u l t on payment not cove red by the g u a r a n t e e . 3 The B r i t i s h system r e v o l v e s around the i s s u a n c e of i n s u r a n c e p o l i c i e s and f i n a n c i a l g u a r a n t e e s . The ECGD i s not i n v o l v e d in g r a n t i n g d i r e c t loans to e i t h e r the p u r c h a s e r or the s u p p l i e r . The Bank of E n g l a n d , however, p r o v i d e s a r e d i s c o u n t f a c i l i t y f o r e x p o r t loans g r a n t e d by the banks. T h i s r e d i s c o u n t f a c i l i t y w i l l be examined l a t e r in the c h a p t e r . A s u b s t a n t i a l p o r t i o n of the e x p o r t c r e d i t g r a n t e d in B r i t a i n i s p r o v i d e d by the c l e a r i n g house banks in London and S c o t l a n d . The d i s c o u n t h o u s e s , the E x p o r t R e f i n a n c e C o r p o r a t i o n and the bank ing s y n d i c a t e s a l s o s u p p l y funds to suppor t B r i t i s h e x p o r t s . The r e l i a n c e on the p r i v a t e s e c t o r to p r o v i d e the bu lk of e x p o r t c r e d i t makes i t d i f f i c u l t to o b t a i n r e l e v a n t da ta on the volumes of c a p i t a l equipment e x p o r t s which a re suppor ted by the ECGD's a c t i v i t i e s . The B r i t i s h do 4 3 not appear to p r o v i d e a d e t a i l e d breakdown of the goods f i n a n c e d as a r e s u l t of g u a r a n t e e s i s sued by the ECGD. Both the Exim Bank and the EDC p r o v i d e the name of the p u r c h a s e r , the p r o d u c t s s o l d and the terms of repayment . In a d d i t i o n , the Exim Bank i n d i c a t e s the i n t e r e s t r a t e a p p l i c a b l e to each l o a n , but f a i l s to i n d i c a t e the name of the e x p o r t e r . The EDC, on the o t h e r hand, p r o v i d e s the name of the e x p o r t e r , but does not i n d i c a t e the a p p l i c a b l e i n t e r e s t r a t e . S i m i l a r i n f o r m a t i o n does not appear to be a v a i l a b l e f o r B r i t i s h e x p o r t s and as a r e s u l t , i t i s not p o s s i b l e to a n a l y z e the B r i t i s h s i t u a t i o n in g r e a t d e t a i l . The b a l a n c e of t h i s c h a p t e r w i l l c o n c e n t r a t e on p r o v i d i n g some d a t a to i n d i c a t e the growth and f l e x i b i l i t y of the B r i t i s h sy s tem. I. FLEX IB I L ITY OF SYSTEM The annual volume of expor t i n s u r a n c e and f i n a n c i a l g u a r a n t e e s i s s u e d by the ECGD i n c r e a s e d f romj^300 -400 m i l l i o n a year in the e a r l y 1950 's to more than £ 2 b i l l i o n a year in the e a r l y I 9 7 0 ' s . The d e c l i n e in o v e r s e a s f o r e i g n exchange e a r n i n g s has r e s u l t e d in the a d o p t i o n of f l e x i b l e p o l i c i e s by the ECGD. In Oc tobe r I960, f o r example , the ECGD was a u t h o r i z e d to suppor t B r i t i s h e x p o r t s which r e q u i r e d a repayment p e r i o d of more than f i v e y e a r s p r o v i d e d t h a t s i m i l a r terms were be ing o f f e r e d by o t h e r n a t i o n a l e x p o r t c r e d i t g r a n t i n g i n s t i t u t i o n s . The ECGD was a u t h o r i z e d to match the terms be ing o f f e r e d p r o v i d e d t h a t the suppor t d i d not take the form of d i r e c t a i d to the b u y e r ' s c o u n t r y . By 1964, the ECGD had p r o v i d e d expor t i n s u r a n c e w i t h m a t u r i t i e s r a n g i n g 4 up to t h i r t e e n y e a r s . 44 In the e a r l y I 960 ' s the bank ing s y s tem, which p r o v i d e d n e a r l y a l l of the n a t i o n ' s expor t f i n a n c i n g , and the ECGD appeared to be on a c o l l i s i o n c o u r s e . On the one hand, the ECGD was be ing f o r c e d by i n t e r n a t i o n a l c o m p e t i t i o n to extend the terms of i t s i n s u r a n c e and g u a r a n t e e s to more than f i v e y e a r s , w h i l e the banks v iewed loans w i t h repayment p e r i o d s of up to t h i r t e e n y e a r s as be ing f a r beyond the t r a d i t i o n a l v iew of an a p p r o p r i a t e term f o r a bank l o a n . T h i s c o n f l i c t was r e s o l v e d w i t h the i n t r o d u c t i o n of the r e d i s c o u n t f a c i l i t y by the Bank of E n g l a n d . In 1961, the Bank of E n g l a n d agreed t h a t when the banks were in a t i g h t l i q u i d i t y p o s i t i o n , i t would r e f i n a n c e a p o r t i o n of t h e i r e x p o r t c r e d i t p o r t f o l i o . The C e n t r a l B a n k ' s d i s c o u n t f a c i l i t y a p p l i e d o n l y to i n s u r e d e x p o r t c r e d i t s which had a term of l onger than t h r e e ' y e a r s . The amount e l i g i b l e f o r r e f i n a n c i n g was the g r e a t e r of t h a t p o r t i o n of the e l i g i b l e c r e d i t wh ich matured in more than 18 months or 30$ of the t o t a l amount of the e l i g i b l e c r e d i t . T h i s f a c i l i t y p roved to be e x t r e m e l y p o p u l a r w i t h the bank ing community because i t a l l o w e d the banks to c l a s s i f y t h e i r e l i g i b l e e x p o r t c r e d i t a s s e t s as a l i q u i d a s s e t f o r l i q u i d i t y r a t i o r e q u i r e m e n t s . T h e r e f o r e , even i f the e l i g i b l e loan were not r e f i n a n c e d w i t h the Bank of E n g l a n d , the r e d i s c o u n t f a c i l i t y a s s i s t e d the B r i t i s h e x p o r t e r . To ensure t h a t the p e r c e n t a g e of e l i g i b l e l oans d i d not become too l a r ge a p o r t i o n , the banker s agreed t h a t each would r e f i n a n c e t h a t p o r t i o n of f i x e d - r a t e e x p o r t and s h i p b u i l d i n g c r e d i t wh ich exceeded 5% of the average of the b a n k ' s g r o s s d e p o s i t s over the p r e v i o u s twe l ve month p e r i o d . The r e d i s c o u n t i n g f a c i l i t y has not been used e x t e n s i v e l y 45 by the B r i t i s h banks. In 1970, the banks made use of the f a c i l i t y f o r the f i r s t t ime when J[\27 m i l l i o n of e l i g i b l e expor t c r e d i t was r e f i n a n c e d . In 1965, as a r e s u l t of the g r adua l l e n g t h e n i n g of the repayment p e r i o d a p p l i c a b l e to expor t c r e d i t , the Bank of Eng l and i n t r o d u c e d a f u r t h e r measure f o r r e f i n a n c i n g expor t c r e d i t . At t h a t t i m e , the c e n t r a l bank agreed to r e f i n a n c e the whole of the o u t s t a n d i n g b a l a n c e of any e x p o r t c r e d i t wh ich had a term of g r e a t e r than f i v e y e a r s and wh ich had been g r a n t e d more than f i v e y e a r s ago. That i s , the f a c i l i t y d i d not become o p e r a t i v e u n t i l 1970, when those c r e d i t s g r a n t e d in 1965 w i t h a term in e x c e s s of f i v e y e a r s became e l i g i b l e f o r r e f i n a n c i n g . T h i s r e f i n a n c i n g f a c i l i t y e f f e c t i v e l y reduced the term of any expor t c r e d i t g r a n t e d by an e l i g i b l e bank to f i v e y e a r s , a term more a c c e p t a b l e to the c o n s e r v a t i v e bank ing community. II. INTEREST RATE FOR EXPORT CREDIT P r i o r to 1962, the i n t e r e s t r a t e charged f o r bank loans s e c u r e d by expor t c r e d i t i n s u r a n c e p o l i c i e s was 5 t o l g $ m o r e than the Bank of Eng l and r a t e . The i n t e r e s t r a t e on such loans was u s u a l l y t i e d to the Bank of Eng l and r a t e and c o u l d f l u c t u a t e over the l i f e of the l o a n . I t , t h e r e f o r e , became i n c r e a s i n g l y d i f f i c u l t f o r the B r i t i s h e x p o r t e r to compete a g a i n s t f o r e i g n e x p o r t s which were s u p p o r t e d by low, f i x e d - r a t e c r e d i t s . The B r i t i s h banks as w e l l as some i n s u r a n c e compan ies , in 1962, agreed to p r o v i d e e x p o r t f i n a n c i n g at a f i x e d r a t e . The r a t e f o r bank loans r e p a y a b l e w i t h i n seven y e a r s was i n i t i a l l y e s t a b l i s h e d at 5.5$. T h i s agreement was reached one year a f t e r the Bank of Eng l and i n t r o d u c e d 46 i t s refinancing f a c i l i t y . The 5.5$ rate was maintained u n t i l 1967, at which time the matter was reviewed. The banks agreed to continue to provide export credit at a 5.5$ rate for a further f i v e year period with the under-standing that the agreement would be subject to review i f there was a major change in the basic structure of the interest rates. The increase in world interest rates in the late 1960's caused the banks some concern as they began to r e a l i z e that both they and t h e i r customers were subsidizing the U.S. exporter or the overseas buyer on a substantial s c a l e . 6 In October 1970, a new agreement, c a l l i n g for a fixed rate of 7$ for export credit was reached. In addition, the banks were permitted to charge a 1$ commitment fee for a l l approved applications for long term c r e d i t . ^ In 1974, the ECGD was reorganized and a new interest rate structure was adopted. For loans repayable over a 2-5 year period a f i x e d rate of 7$ was to be charged, while for those loans repayable over more than f i v e years a variable rate schedule of from 6-8g$ was adopted. Most of the longer term loans supported by the ECGD are believed to be granted at the lower end of the range. Export c r e d i t s provided under the fixed rate schedule as well as c r e d i t s provided for ship building loans are excluded from any o f f i c i a l monetary r e s t r a i n t s imposed by the Bank of England. The problem of est a b l i s h i n g a competitive interest rate for export credit is constantly being reviewed and is subject to a number of d i f f e r e n t interpretations. On the one hand, i t can be argued that a hardening of interest rates w i l l make the B r i t i s h exporter less competitive 47 and i t w i l l c r e a t e more of a debt s e r v i c i n g burden f o r the d e v e l o p i n g n a t i o n s . The LDCs p u r c h a s e a s u b s t a n t i a l volume of the w o r l d ' s c a p i t a l equipment e x p o r t s . On the o t h e r hand, one can argue t h a t the owners and cus tomers of the B r i t i s h banks shou ld not be asked to s u b s i d i z e the B r i t i s h e x p o r t e r and /o r the o v e r s e a s p u r c h a s e r . The banks argue t h a t i f the e x p o r t e r and /o r the p u r c h a s e r i s to be s u b s i d i z e d , then such a s u b s i d y s h o u l d come from g o v e r n m e n t ' s g e n e r a l r e v e n u e s . The A r t i c l e s of GATT, however, t h e o r e t i c a l l y p r e v e n t any government from d i r e c t l y s u b s i d i z i n g e x p o r t s th rough the use of lower than market i n t e r e s t r a t e s . The t o t a l c o s t of expor t c r e d i t c o n s i s t s of the i n t e r e s t r a t e charged by the l e n d e r , commitment f e e s , management f e e s and e x p o r t c r e d i t i n s u r a n c e p r e m i a . The t o t a l c o s t c o u l d be w e l l beyond the f i g u r e e x p r e s s e d 9 by the i n t e r e s t r a t e . F a i r , in h i s s tudy of E x p o r t C r e d i t P r o b l e m s , showed t h a t cha rges o t h e r than the i n t e r e s t r a t e c o u l d i n c r e a s e the co s t of e x p o r t c r e d i t by 0 . 7 5 - 1 . 7 5 $ . I I I. OTHER FORMS OF EXPORT CREDIT The ECGD may i s s u e f i n a n c i a l g u a r a n t e e s to encourage U n i t e d Kingdom e x p o r t s or to p r o v i d e economic a s s i s t a n c e to a d e p r e s s e d B r i t i s h i n d u s t r y . In the l a t t e r c a s e , the hope i s t h a t by p r o v i d i n g the f i n a n c i a l g u a r a n t e e , the i n d u s t r y may be more s u c c e s s f u l in s e l l i n g i t s p roduc t a b r o a d . The B r i t i s h s h i p b u i l d i n g i n d u s t r y has been the b e n e f i c i a r y of suppor t from both the ECGD and the p r i v a t e s e c t o r t h rough the Sh ip Mortgage F i n a n c e Company L i m i t e d . The ECGD o f f e r s a s h i p b u i l d i n g gua ran tee which i s a type of i n s u r a n c e p o l i c y t h a t p r o v i d e s 95$ 48 coverage a g a i n s t a l l commerc ia l and p o l i t i c a l r i s k s i f the s h i p b u i l d e r bear s a l l the p re sh ipment r i s k . The ECGD's p o s i t i o n i s s e cu red by mortgage s e c u r i t y over the s h i p . The Sh ip Mortgage F i n a n c e Company L t d . i s a p r i v a t e l y owned company founded in 1951 f o r the purpose of p r o v i d i n g medium term loans to the p u r c h a s e r s of s h i p s c o n s t r u c t e d in the U n i t e d Kingdom. Both d o m e s t i c and f o r e i g n p u r c h a s e r s a re e l i g i b l e to a p p l y f o r such l o a n s , which a re s e c u r e d by f i r s t mortgages on the s h i p s . 1 0 U n f o r t u n a t e l y s t a t i s t i c s o u t l i n i n g the s u c c e s s of t he se two programs are not a v a i l a b l e . The B r i t i s h e x p o r t e r may a l s o o b t a i n e x p o r t c r e d i t f rom the E x p o r t R e f i n a n c e C o r p o r a t i o n ( ERC ) , a p r i v a t e c o r p o r a t i o n founded in 1961 f o r the e x p r e s s purpose of p r o v i d i n g medium and long term e x p o r t c r e d i t . A l l funds advanced by the ERC a re s e c u r e d by ECGD g u a r a n t e e s or i n s u r a n c e p o l i c i e s . The ERC p r o v i d e s the e x p o r t e r w i t h 85% of the f i n a n c e d p o r t i o n of the expor t s a l e . As the payments a re made by the p u r c h a s e r , the funds a re d i v i d e d p r o p o r t i o n a t e l y between the ERC and the e x p o r t e r . ' ' The f a c i l i t i e s of the ERC appea l to the sma l l e x p o r t e r and to the f i r m which e n c o u n t e r s d i f f i c u l t y in f i n a n c i n g i t s e x p o r t s th rough one of the l o c a l banks. IV. CONCLUSIONS The ECGD t ake s g r e a t p r i d e in i t s a b i l i t y to re spond to the needs of the B r i t i s h e x p o r t e r . It c l a i m s to be the w o r l d ' s l a r g e s t c r e d i t i n s u r e r and r e p o r t s tha t i t i n s u r e s in some form over 25% of I 2 the U n i t e d K ingdom's e x p o r t s . By c o m p a r i s o n , o n l y about 5% of C a n a d a ' s t o t a l e x p o r t s r e c e i v e d some type of EDC suppor t in the year 4 9 ended December 31 , 1974. The B r i t i s h i n s t i t u t i o n a l s o c l a i m s to approve 80$ of a l l i n s u r a n c e a p p l i c a t i o n s w i t h i n 48 hours of r e c e i p t . ' 3 The ECGD has s i x t e e n o f f i c e s l o c a t e d th roughou t the U n i t e d Kingdom as w e l l as an o f f i c e in New York . Over the y e a r s the B r i t i s h c o r p o r a t i o n has b u i l t up a mas s i ve c r e d i t f i l e on over 150,000 p u r c h a s e r s of U n i t e d 14 Kingdom e x p o r t s . The a b i l i t y to a c c e s s t h i s i n f o r m a t i o n u n d o u b t e d l y speeds up the p r o c e s s i n g of i n s u r a n c e a p p l i c a t i o n s . The ECGD o f f e r s a un ique p l a n th rough i t s F u l l P e r c e n t a g e Insurance C o n t r a c t . T h i s p l a n p r o v i d e s t h a t f o r c o n t r a c t s of g r e a t e r than t h r e e y e a r s d u r a t i o n , the normal p e r c e n t a g e coverage (80 -90$ , depend ing upon the type of p o l i c y and the r i s k i n v o l v e d ) w i l l be p r o v i d e d f o r both commerc ia l and p o l i t i c a l r i s k s d u r i n g the f i r s t two y e a r s of the c o n t r a c t . At the end of two y e a r s , i f the c o n t r a c t has run s a t i s f a c t o r i l y , the coverage on a l l r i s k s i s i n c r e a s e d to 100$ f o r the b a l a n c e of the c o n t r a c t at no e x t r a c h a r g e . The e x p o r t c r e d i t f a c i l i t i e s o f f e r e d in the U n i t e d Kingdom r e l y a lmost e x c l u s i v e l y on the p r i v a t e s e c t o r to p r o v i d e the n e c e s s a r y f u n d s . The government a u t h o r i t i e s have so f a r r e s i s t e d the p r e s s u r e s to form an e x p o r t - i m p o r t bank m o d e l l e d a f t e r the U.S. Ex im Bank because they b e l i e v e tha t the p r i v a t e market i s c a p a b l e of p r o v i d i n g the needed f und s . The c o m p e t i t i v e n a t u r e of the p r i v a t e market h e l p s to d e v e l o p more e f f i c i e n t d o m e s t i c c a p i t a l m a r k e t s . The p u b l i c s e c t o r th rough the Bank of Eng land and the ECGD p r o v i d e s the " f i n e t u n i n g " needed to shape the p r i v a t e marke t . The r e d i s c o u n t f a c i l i t y of the Bank of Eng l and i s a good example of the " f i n e t u n i n g " p r o c e s s . 50 However, a l l systems a re s u b j e c t to some form of c r i t i c i s m or at l e a s t doubt . W h i l e ECGD p r o u d l y s t a t e s t h a t 25$ of a l l U.K. e x p o r t s a re s u p p o r t e d by e x p o r t c r e d i t i n s u r a n c e p o l i c i e s , t h i s f a c t may i n d i c a t e t h a t expor t c r e d i t i s not be ing p r o v i d e d u n l e s s the goods a re i n s u r e d by ECGD. The e x p o r t e r s have been c r i t i c a l of the c o n s e r v a t i v e a t t i t u d e of the banks. The m a n u f a c t u r e r s b e l i e v e t h a t the bankers a re too c a u t i o u s and do not suppor t the m a n u f a c t u r e r s ' s a l e s e f f o r t s because of the b a n k e r s ' i gno rance of the p r o d u c t s be ing p roduced and t h e i r u n w i l l i n g n e s s to send bank s t a f f abroad on s a l e s m i s s i o n s or to t r a d e f a i r s . The s a l e s r e p r e s e n t a t i v e s of the m a n u f a c t u r e r s a r e , in e f f e c t , f o r c e d to r e p r e s e n t the p o s i t i o n of the B r i t i s h banks . The e x p o r t e r s b e l i e v e t h a t the i n a b i l i t y of the ECGD to e f f e c t i v e l y c o o r d i n a t e the e f f o r t s of bankers and bus inessmen i s one o f ; E C G D ' s major f a i l u r e s . G r o s s f i e I dJ 6 i n a s tudy of the e f f e c t i v e n e s s of investment i n c e n t i v e s j i s c r i t i c a l of the a t t e n t i o n f o c u s e d on e x p o r t c r e d i t . It i s h i s b e l i e f t h a t e x p o r t c r e d i t i s i n e f f e c t i v e , both in h e l p i n g a n a t i o n deve l op i t s i n d u s t r i a l s t r u c t u r e and in f a v o r a b l y i n f l u e n c i n g the b a l a n c e of payments p o s i t i o n of t h a t n a t i o n . He argues t h a t i n d u s t r i a l growth o c c u r s p r i m a r i l y as a r e s u l t of e x p l i c i t deve lopment p o l i c i e s . E x p o r t s a l e s , in t u r n , a c c r u e to those f i r m s c r e a t e d in r e s p o n s e t o t h i s type of government p o l i c y . E x p o r t c r e d i t i s , t h e r e f o r e , r e l a t i v e l y i n e f f e c t i v e in d e v e l o p i n g a n a t i o n ' s i n d u s t r i a l s e c t o r . G r o s s f i e l d a l s o s t a t e s t h a t the b a l a n c e of payments p o s i t i o n of a n a t i o n can o n l y be improved in the s h o r t r u n , i f the i n c r e a s e d e x p o r t s a re not o f f s e t by an i n c r e a s e in e x p o r t c r e d i t . If both f a c t o r s i n c r e a s e , the n a t i o n ' s b a l a n c e of payments w i l l o n l y be improved over the long run as the 51 f o r e i g n borrower r e p a y s the debt i n c u r r e d when he purchased the a r t i c l e . The type of arguments p r e s e n t e d by G r o s s f i e l d show t h a t the deve lopment of an op t ima l s t r a t e g y w i t h r e g a r d to e x p o r t c r e d i t i s a d i f f i c u l t t a s k . 52 FOOTNOTES CHAPTER I I 1. F a i r , D . E . , " E x p o r t C r e d i t P r o b l e m s " . The T h r e e Banks Rev iew, Number 8 8 , December 1970. p. 31 2. N e h r t , Lee C . , F i n a n c i n g C a p i t a l Equipment E x p o r t s , S c r a n t o n , P a . , I n t e r n a t i o n a l Textbook Company, 1966. p. 10 3. L o c . c i t . 4 . U n i t e d N a t i o n s , Department of Economic and S o c i a l A f f a i r s , E x p o r t C r e d i t s and Development F i n a n c i n g , P a r t One, C u r r e n t P r a c t i c e s  and P r o b l e m s , 1966. p. 5 5. V e r g h e s e , S .K . , E x p o r t C r e d i t and C r e d i t In surance F a c i l i t i e s in Ind ia and A b r o a d , New D e l h i , Ind ian I n s t i t u t e of F o r e i g n T r a d e , 1970. p. 124 6. F a i r , D . E . , Op. c i t . p. 38 7. F a i r , D . E . , Op. c i t . p. 40 8. , " P l a y i n g the E x p o r t Game", The B a n k e r , V o l . 124, S e p t . 1974. p. I 162 9. F a i r , D . E . , Op. c i t . p. 40 10. N e h r t , Lee C . , Op. c i t . p. 12 11. V e r g h e s e , S .K . , Op. c i t . p. I 10 12. , F i n a n c i n g F o r e i g n O p e r a t i o n s , Second E d i t i o n , London , B u s i n e s s I n t e r n a t i o n a l , 1964. p. 112 13. L o c . c i t . 14. , F i n a n c i n g F o r e i g n O p e r a t i o n s , Second E d i t i o n , London , B u s i n e s s I n t e r n a t i o n a l , 1964. p. 112 15. , . " P l a y i n g the E x p o r t Game", The B a n k e r , Vo 1. 124, S e p t . 1974. p. 1163 16. G r o s s f i e l d , K., " T h e E f f e c t i v e n e s s of Investment I n c e n t i v e s " , The B a n k e r . V o l . 119, O c t . 1961. pp. 1028-37 CHAPTER I I I THE EXPORT IMPORT BANK OF THE UNITED STATES The U n i t e d S t a t e s i s , by f a r , the w o r l d ' s l a r g e s t e x p o r t i n g n a t i o n . In each of the pas t t h i r t y y e a r s the U.S. has p roduced at l e a s t 11$ of t o t a l wor ld e x p o r t s . The- enormous s i z e of the U.S. market can be shown by c o n s i d e r i n g the e x p o r t s of one type of m a n u f a c t u r e d goods. In 1973, U.S. e x p o r t s of m a c h i n e r y and t r a n s p o r t a t i o n equipment ( r e v i s e d s i t e 7) were $26.6 b i I I ion whi Ie t o t a l Canad ian e x p o r t s were $25 .4 bi I I i o n . In the same y e a r , C a n a d a ' s e x p o r t s of m a c h i n e r y and t r a n s p o r t a t i o n equipment were $7 .9 b i l l i o n . C o n s i d e r e d in a no the r way, U.S. e x p o r t s in t h i s one c a t e g o r y in 1972 exceeded t o t a I e x p o r t s f o r each of the f o l l o w i n g r e g i o n s : a l I of the d e v e l o p i n g n a t i o n s in N o r t h , South and C e n t r a l A m e r i c a ; a l l of the LDCs in A f r i c a ; a l l of the n a t i o n s in the M i d d l e E a s t ; a l l of the c o u n t r i e s in O c e a n i a ; and a l l of the c o u n t r i e s of A s i a w i t h the e x c e p t i o n of J a p a n . On ly the t o t a I e x p o r t s of the EE C , E F T A , the C e n t r a l l y P l anned E c o n o m i e s , and Japan exceeded U.S. e x p o r t s of mach ine ry and t r a n s p o r t a t i o n equ ipment . W h i l e t h i s compar i son does not a l l o w f o r the i n c r e a s e in p e t r o l e u m p r i c e s in 1973, i t does i n d i c a t e the enormous s i z e of the Amer i can marke t . The l a t e s t pub I i s hed t r a d e f i g u r e s i n d i c a t e t h a t the c o u n t r i e s or r e g i o n s which have the g r e a t e s t share of wor l d t r a d e are the European Economic Community, the O r g a n i z a t i o n of P e t r o l e u m E x p o r t i n g C o u n t r i e s and the U n i t e d S t a t e s . In 1973, the U n i t e d S t a t e s had 65$ of the w o r l d ' s e x p o r t market f o r a i r c r a f t ; i t e x p o r t e d n e a r l y 12$ of a l l t e l e c o m m u n i c a t i o n s equipment 53 54 and n e a r l y 19$ of a l l r a i l w a y v e h i c l e s . A l l of t he se p r o d u c t s a re c a p i t a l equipment and as such are e l i g i b l e f o r expor t f i n a n c e . The E x p o r t - I m p o r t Bank i s the Amer i can e x p o r t c r e d i t g r a n t i n g i n s t i t u t i o n d e s i g n e d to suppor t Amer i can e x p o r t s . The Exim B a n k ' s a c t i v i t i e s have shown a d r a m a t i c i n c r e a s e in the pas t ten y e a r s . In FY 1966, the Exim Bank s u p p o r t e d e x p o r t s a l e s w i t h a t o t a l v a l u e of $2.1 b i l l i o n , w h i l e the comparab le f i g u r e f o r 1975 was $12 .5 b i l l i o n . T o t a l annual loan and gua ran tee a u t h o r i z a t i o n s n e a r l y doub led in the f i v e yea r p e r i o d 2 end ing June 30 , 1975. One of the pu rpo se s of t h i s s tudy i s to c o n s t r u c t i v e l y c r i t i c i z e t h e 1 o p e r a t i o n s of Canada ' s E x p o r t Development C o r p o r a t i o n . In o r d e r to have a s t a n d a r d a g a i n s t wh ich to measure the EDC ' s a c t i v i t i e s t h i s c h a p t e r w i l l p r o v i d e a r e v i e w and an a n a l y s i s of the Exim B a n k ' s o p e r a t i o n s . I. PURPOSE AND GOVERNING AUTHORITY OF THE EXIM BANK Edge A c t s u b s i d i a r i e s of U.S. banks , inves tment compan ie s , f a c t o r i n g f i r m s , and commerc ia l banks in a d d i t i o n to the Exim Bank a l l p r o v i d e some form of d i r e c t e x p o r t c r e d i t . In a d d i t i o n , both the Domest i c I n t e r n a t i o n a l S a l e s C o r p o r a t i o n s (DISCS) and the Western Hemisphere T r a d e C o r p o r a t i o n s (WHTC) a re aimed at i n c r e a s i n g U.S. e x p o r t s . The Agency f o r I n t e r n a t i o n a l Development (AID) p r o v i d e s d i r e c t loans to f o r e i g n governments or t h e i r a g e n c i e s to f o s t e r the development of the i n d u s t r i a l s e c t o r of the r e c i p i e n t n a t i o n , but i t s a c t i v i t i e s a re more c o r r e c t l y c l a s s i f i e d as development f i n a n c e . 5 5 The Ex im Bank was o r i g i n a l l y e s t a b l i s h e d in 1934 to p r o v i d e a means of f i n a n c i n g Amer i can t r a d e w i t h R u s s i a . No loans were , however , made f o r t h a t purpose and the o b j e c t i v e s of the o r g a n i z a t i o n were changed so t h a t i t was i n v o l v e d in f a c i l i t a t i n g and f i n a n c i n g U.S. e x p o r t t r a d e in g e n e r a l . The Exim Bank i s p r i m a r i l y conce rned w i t h the p romot i on of U.S. e x p o r t s and h e l p i n g the LDCs d e v e l o p t h e i r i n d u s t r i a l s e c t o r s i s of s econda ry impor tance to the bank. It i s the o n l y U.S. g o v e r n -ment agency which i s a c t i v e l y engaged in p r o j e c t f i n a n c i n g in both d e v e l o p e d and d e v e l o p i n g n a t i o n s . The loans and c r e d i t s g r a n t e d by the Exim Bank can o n l y be spent to pu r cha se goods p roduced by f i r m s d o m i c i l e d in the U.S .A. The Bank i s i n tended to supplement and e n c o u r a g e , but not compete d i r e c t l y w i t h p r i v a t e c a p i t a l j . e . the Exim Bank i s to ac t as a l ender of l a s t r e s o r t and i s o n l y to c o n s i d e r those a p p l i c a t i o n s which have been r e j e c t e d by the p r i v a t e f i n a n c i a l i n s t i t u t i o n s . - 3 Any loans g r a n t e d by the Exim Bank must o f f e r a r e a s o n a b l e a s s u r a n c e of repayment . The E x p o r t - I m p o r t Bank A c t of 1945 (which was amended on J a n u a r y 4, 1975) s p e c i f i c a l l y p r o h i b i t s the Bank from p a r t i c i p a t i n g in g r a n t i n g c r e d i t to a Communist c o u n t r y u n l e s s the P r e s i d e n t d e t e r m i n e s t h a t i t i s in the bes t i n t e r e s t of the U.S.A. F u r t h e r , the Bank may not have any d e a l i n g s w i t h those n a t i o n s wh ich engage in armed c o n f l i c t w i t h the Armed F o r c e s of the U.S.A. The g o v e r n i n g A c t a l s o r e q u i r e s t h a t a l l U.S. e x p o r t s , s u p p o r t e d by the a c t i v i t i e s of the Exim Bank, s h a l l be t r a n s p o r t e d in Amer i can v e s s e l s u n l e s s the U.S. M a r i t i m e Commiss ion c e r t i f i e s t h a t i t i s i m p o s s i b l e to meet t h i s c o n d i t i o n . If the e x p o r t e r i s unab le to meet t h i s r e q u i r e m e n t and o b t a i n s the U.S. M a r i t i m e C o m m i s s i o n ' s a p p r o v a l , the goods may be 56 sh ipped in the most c o n v e n i e n t manner. The A c t s p e c i f i e s t h a t the Bank s h a l l remain in e x i s t e n c e u n t i l June 3 0 , 1978, at which t ime the B a n k ' s a c t i v i t i e s must be r ev i ewed by Cong re s s . In the past Congres s has r e a d i l y approved the renewal of the B a n k ' s g o v e r n i n g A c t f o r an a d d i t i o n a l f o u r year p e r i o d . The A c t a l s o s p e c i f i e s t h a t the maximum amount of l o a n s , g u a r a n t e e s and i n s u r a n c e t h a t the Bank may have o u t s t a n d i n g at any one i t ime s h a l l not be g r e a t e r than $25 b i l l i o n . Wh i l e 100$ of a l l loans a re taken i n t o account when c a l c u l a t i n g t h i s c e i l i n g , o n l y 25$ of any o u t s t a n d i n g g u a r a n t e e s and i n s u r a n c e p o l i c i e s a re i n c l u d e d . The Bank may, t h e r e f o r e , have a maximum o u t s t a n d i n g l i a b i l i t y of $40 b i l l i o n . The A c t and i t s t e n a p p e n d i c e s appear to be a l l - e n c o m p a s s i n g and i n c l u d e a c o n f l i c t of i n t e r e s t c l a u s e f o r the gu i dance of d i r e c t o r s , o f f i c e r s , agent s and employees of the Bank; a s e c t i o n r e q u i r i n g the Bank to d e s i g n a t e a s p e c i f i c o f f i c e r to r e p o r t to the P r e s i d e n t of the Bank on a l l m a t t e r s c o n c e r n i n g sma l l b u s i n e s s e s ; a s e c t i o n s p e c i f y i n g the annual s a l a r i e s of the P r e s i d e n t , the F i r s t V i c e - P r e s i d e n t and the t h r e e o t h e r d i r e c t o r s of the Bank; and innumerab le s e c t i o n s d e s c r i b i n g i n t e r e s t s or p a r t i e s w i t h whom the Bank may not e n t e r i n t o c o n t r a c t s . F o r example , the Exim Bank i s e x p r e s s l y p r o h i b i t e d by S e c t i o n 409 of Append ix X from e x t e n d i n g c r e d i t to any nonmarket economy which d e n i e s i t s c i t i z e n s the r i g h t or o p p o r t u n i t y to j o i n p e r m a n e n t l y th rough e m i g r a t i o n , a v e r y c l o s e r e l a t i v e in the U n i t e d S t a t e s . II. SERVICES PROVIDED BY EXIM BANK The p romot ion of U.S. e x p o r t s i s a s s i s t e d in f o u r d i f f e r e n t ways by the Ex im Bank. The methods used by the Bank to a c c o m p l i s h i t s o b j e c t i v e s a r e : 1) s h o r t and medium term e x p o r t c r e d i t r i s k s a re u n d e r w r i t t e n in c o n j u n c t i o n w i t h the F o r e i g n C r e d i t Insurance A s s o c i a t i o n 2) d i r e c t and i n d i r e c t long term c r e d i t i s g r a n t e d to o v e r s e a s p r o j e c t s wh ich r e q u i r e f i n a n c i n g a s s i s t a n c e . The p r o j e c t s must use U.S. made c a p i t a l equipment 3) g u a r a n t e e s a re i s s u e d to commerc ia l banks and o t h e r f i n a n c i a l i n s t i t u t i o n s which p r o v i d e medium term expor t c r e d i t 4) l i n e s of c r e d i t are g r a n t e d f o r e i g n governments t o e n a b l e the sma l l f o r e i g n b u s i n e s s to g a i n a c c e s s tp the c a p i t a l goods produced by Amer i can i n d u s t r y P r i o r to 1962, the Exim Bank d i d not p r o v i d e any t ype of expor t c r e d i t i n s u r a n c e . At t h a t t i m e , the F o r e i g n C r e d i t Insurance A s s o c i a t i o n ( F C I A ) was c r e a t e d as a p a r t n e r s h i p of some s e v e n t y s t o c k and mutual i n s u r a n c e companies and the Exim Bank. The FCIA u n d e r w r i t e s a l l commerc ia l r i s k s up to $150,000 per p o l i c y . Any commerc ia l r i s k s beyond t h a t f i g u r e are u n d e r w r i t t e n j o i n t l y by the FCIA and the Ex im Bank. The e n t i r e p o l i t i c a l r i s k i s u n d e r w r i t t e n by the Exim Bank. The i n s u r a n c e i s a v a i l a b l e to any e x p o r t e r r e s i d e n t in the U.S.A. who p roduce s or m a n u f a c t u r e s goods in the U n i t e d S t a t e s t o the e x t e n t t h a t at l e a s t 50$ of the v a l u e has been added by l abour or 58 m a t e r i a l e x c l u s i v e l y of U.S. o r i g i n . * The p o l i t i c a l and commerc ia l r i s k s i n s u r e d by the FCIA and the Ex im Bank are s i m i l a r to those o u t l i n e d e a r l i e r in t h i s s t u d y . The t y p e s of p o l i c i e s i s s u e d range from a s h o r t term p o l i t i c a l p o l i c y to a medium term comprehens i ve p o l i c y . The premiums f o r e x p o r t i n s u r a n c e a re d e t e r m i n e d by a method s i m i l a r t o t h a t f o l l o w e d by the ECGD in the U n i t e d Kingdom. The c o u n t r i e s are a s s i g n e d to one of f o u r r i s k c l a s s e s , w i t h c a t e g o r y A be ing the lowest r i s k . T a b l e IV o u t l i n e s the c o u n t r i e s a s s i g n e d to each r i s k c a t e g o r y . In i t s f i f t e e n year h i s t o r y , the FCIA has been c r i t i c i z e d f o r i t s r e l a t i v e l y h i gh premium s c h e d u l e and f o r the l e n g t h of t ime needed to p r o c e s s a p p l i c a t i o n s . ^ As a r e s u l t of such c r i t i c i s m , the FCIA was r e o r g a n i z e d to make i t more r e s p o n s i v e to the needs of e x p o r t e r s . Twelve r e g i o n a l o f f i c e s were e s t a b l i s h e d th roughou t the U.S.A. and the FCIA embarked on an e d u c a t i o n program d e s i g n e d to b e t t e r a c q u a i n t the v a r i o u s i n s u r a n c e b r o k e r s l o c a t e d th roughou t the c o u n t r y w i t h the f a c i l i t i e s o f f e r e d by the FCIA and the Exim Bank. Independent i n s u r a n c e b r o k e r s a re a u t h o r i z e d to i s s u e i n s u r a n c e p o l i c i e s on b e h a l f of FC IA- The Ex im Bank and the FCIA have a l s o deve l oped a much c l o s e r work ing r e l a t i o n s h i p -In e f f e c t , the U.S. now has a q u a s i - p u b l i c t ype of body p r o v i d i n g e x p o r t c r e d i t i n s u r a n c e . i ) PARTICIPATION FINANCE P r i o r to 1971, the Exim B a n k ' s growth was c o n s t r a i n e d by the TABLE IV FCIA R i s k G r a d i n g f o r E x p o r t Insurance, 1964. B D AI I c o u n t r i es in Western Europe w i t h the e x c e p t i o n of S p a i n , P o r t u g a l , F i n l a n d , Y u g o s l a v i a and T u r k e y Canada Japan Mex ico and most of the C e n t r a l Amer i can c o u n t r i es F i n I and I nd i a Pak i s t a n Por tuga I S p a i n Most L a t i n Amer i can C o u n t r i e s A r g e n t i na Bo I i v i a B r a z i I I ndones i a SOURCE: Bus i n e s s ed i t i o n , I n t e r n a t i o n a l , F i n a n c i n g F o r e i g n O p e r a t i o n s , 2nd 1964, p. 39 60 f e d e r a l g o v e r n m e n t ' s annual budget . The u n i f i e d f e d e r a l budget concept r e q u i r e d t h a t a l l of Exim B a n k ' s d i s b u r s e m e n t s be d e s i g n a t e d as f e d e r a l bud g e ta r y e x p e n d i t u r e s and as such t h e y were r e q u i r e d to be o f f s e t by bud g e ta r y r e c e i p t s . Ex im B a n k ' s b o r r o w i n g s , even i f made in the p r i v a t e m a r k e t , were not c o n s i d e r e d to be budge ta ry r e c e i p t s . 7 From a budge ta ry s t a n d p o i n t , t h e r e f o r e , i t was c o n s i d e r e d e s s e n t i a l to m i n i m i z e d i s b u r s e m e n t s and as a r e s u l t the Bank began to c o n c e n t r a t e on p a r t i c i p a t i o n f i n a n c i n g i n s t e a d of d i r e c t l e n d i n g . In 1971, the Exim B a n k ' s a c t i v i t i e s were removed from the u n i f i e d F e d e r a l budget . Under the p r e s e n t s y s tem, the Ex im Bank i s o n l y r e q u i r e d to have Congres s a n n u a l l y approve i t s a d m i n i s t r a t i v e expense s . Wh i l e the d i r e c t loan program c o n t i n u e s to p r o v i d e much of the B a n k ' s b u s i n e s s , p a r t i c i p a t i o n f i n a n c i n g and the c o o p e r a t i v e f i n a n c i n g f a c i l i t y (CFF) a re both r a p i d l y i n c r e a s i n g in i m p o r t a n c e . Both of t h e s e l a t t e r programs enab le the Ex im Bank to ex tend i t s funds f u r t h e r w h i l e drawing p r i v a t e funds i n t o the marke t . In a d d i t i o n , the programs enab le the e x p o r t e r to o b t a i n a b lended i n t e r e s t r a t e on any expor t c r e d i t he o b t a i n s . The Exim Bank i s p r e p a r e d to lend i t s funds g at a r a t e lower than t h a t charged by the commerc ia l banks . Hence the b l e n d i n g p r o c e s s r e d u c e s the e f f e c t i v e r a t e which the bor rower must pay. In a d d i t i o n , under the p a r t i c i p a t i o n f i n a n c i n g program the Ex im Bank w i l l p r o v i d e a g u a r a n t e e , c o v e r i n g a s u b s t a n t i a l p o r t i o n of the p o l i t i c a l and commerc ia l r i s k s , to the f i n a n c i a l i n s t i t u t i o n . The c o o p e r a t i v e f i n a n c i n g f a c i l i t y was i n t r o d u c e d in l a t e 1970 f o r the purpose of e x t e n d i n g e x p o r t c r e d i t to the thousands of p o t e n t i a l p u r c h a s e r s of U.S. goods and s e r v i c e s who e i t h e r d i d not have the 61 f i n a n c i a l r e s o u r c e s to pu r cha se the goods f o r c a s h , or who were unaware of how to a r r a n g e the f i n a n c i n g n e c e s s a r y to enab le them to p u r c h a s e the goods." ' The Exim Bank, under the c o o p e r a t i v e f i n a n c i n g f a c i l i t y , has e n t e r e d i n t o agreements w i t h n e a r l y t h r e e hundred commerc ia l banks l o c a t e d th roughout the w o r l d . 1 0 Under the terms of the ag reement , each bank i s d e s i g n a t e d as a c o o p e r a t i n g i n s t i t u t i o n (CI) and must agree to f i n a n c e U.S. e x p o r t s of goods and s e r v i c e s a c c o r d i n g to the p o l i c y o u t l i n e d by the Exim Bank. A p o t e n t i a l p u r c h a s e r of a U.S. e x p o r t , whether he i s in Z a i r e , Co lomb ia or Y u g o s l a v i a , can approach the CI in h i s a r e a to o b t a i n a loan to pu r cha se goods made in the U.S.A. The CI t ake s the a p p l i c a t i o n and e s t a b l i s h e s the c r e d i t w o r t h i n e s s of the cus tomer . If the a p p l i c a n t ' s c r e d i t s t a n d i n g i s s a t i s f a c t o r y , t h e 1 a p p l i c a t i o n i s approved by the CI and fo rwarded to the Exim Bank. The a p p l i c a t i o n i s u s u a l l y r e a d i l y approved p r o v i d e d t h a t the f o l l o w i n g c o n d i t i o n s a re met: 1) the p u r c h a s e r must p r o v i d e a minimum down payment of 10$ of the c o n t r a c t p r i c e 2) the r e m a i n i n g b a l a n c e i s then e l i g i b l e f o r f i n a n c i n g . The e x p o r t e r must agree to r e t a i n at l e a s t 10$ of t h i s e l i g i b l e amount f o r h i s own a c c o u n t . He may, of c o u r s e , a r r ange an o p e r a t i n g c r e d i t th rough h i s own bank to f i n a n c e t h i s amount 3) the r e m a i n i n g b a l a n c e , 81$ of the o r i g i n a l c o n t r a c t p r i c e , i s then f i n a n c e d j o i n t l y by the CI and the Exim Bank. The Exim Bank w i l l p r o v i d e a maximum of o n e - h a l f of the needed funds (40 .5$ of the t o t a l c o n t r a c t p r i c e ) 4) the CI may charge the bor rower i t s normal r a t e of i n t e r e s t on t h a t p o r t i o n of the loan i t p r o v i d e s . However, on any funds p r o v i d e d by the Exim Bank 62 "the CI may charge the bor rower a r a t e 2 .5$ above the Ex im B a n k ' s r a t e to the CI 5) the repayment terms must be tho se n o r m a l l y g r a n t e d in i n t e r n a t i o n a l t r a d e f o r t h a t p a r t i c u l a r t ype of p r o d u c t . Loans which r e q u i r e a repayment p e r i o d of g r e a t e r than f i v e yea r s a re a c c e p t a b l e to the Exim Bank 6) the goods must , i f p o s s i b l e , be s h i p p e d on a U.S. ves se I. The development of the CFF has p roven to be a boon t o bo th sma l l U.S. e x p o r t e r s and to sma l l u n s o p h i s t i c a t e d p u r c h a s e r s t h roughou t the w o r l d . In FY 1974, the f o u r t h f u l l year t h a t the CFF was o f f e r e d , a t o t a l of 1491 a p p l i c a t i o n s f o r a t o t a l of $207 .7 mi I I i on were a p p r o v e d . The c o n t r a c t s ranged in s i z e from $350 to cover the pu rcha se of an i n d u s t r i a l food machine by the Roya l C l i f f Beach Ho te l in T h a i l a n d to $1 ,400 ,000 to cover the s a l e of a i r c r a f t to the New Zea l and N a t i o n a l A i r w a y s . The mean s i z e of the c o n t r a c t was $139,000. The p r o d u c t s e x p o r t e d i n c l u d e d spa re p a r t s f o r shr imp t r a w l e r s , a i r c o n d i t i o n e r s , t r u c k s , sewing m a c h i n e s , and paper cup mach ine s . The terms of repayment 12 ranged from 1-7 y e a r s e x c l u s i v e of i m p l i e d g r ace p e r i o d s . T a b l e V p r o v i d e s a breakdown o f the p u r c h a s e r s of t h e s e r e l a t i v e l y sma l l Amer i can e x p o r t s . The i m p o r t e r s have been grouped i n t o t h e i r r e s p e c t i v e c o u n t r i e s . The t a b l e i n c l u d e s a l l e x p o r t s under the CFF and r e l e n d i n g f a c i l i t i e s of the Exim Bank f o r the FY 1974. The a n a l y s i s shows t h a t o n l y 7.9$ by number and 13.1$ by d o l l a r volume of t h i s group of e x p o r t s a re b e i n g pu rcha sed by r e s i d e n t s of d e v e l o p e d n a t i o n s . By f a r , the l a r g e s t r e g i o n a l i m p o r t e r s of t h i s group of p r o d u c t s were the d e v e l o p i n g n a t i o n s of C e n t r a l and South A m e r i c a . TABLE V LOANS GRANTED UNDER THE EXIM BANK'S CFF AMD RELENDING FAC IL ITY IN THE F ISCAL YEAR ENDED JUNE 30 , 1974. ( A l l c u r r e n c y f i g u r e s a re e x p r e s s e d in m i l l i o n s of U.S. d o l l a r s ) Coun t ry where the p u r c h a s e r was r e s i d e n t I DEVELOPED NATIONS NUMBER AMOUNT IN MILLIONS OF U.S. DOLLARS A u s t r a l i a A u s t r i a Be l g ium Canada Denmark F i nI and F r a n c e Germany I r e l a n d I t a l y Japan N e t h e r l a n d s New Z e a l and U n i t e d Kingdom 28 2 6 17 123 12 2 7 I I 3 6 21 5 2 2. I 0 .4 1.8 2 .7 0 .2 2.4 5.4 0 .8 0 .5 0.3 4 .3 1.6 1.6 3.8 27 .9 T o t a l I I DEVELOPING NATIONS A. CENTRAL AND SOUTH AMERICA Braz i I C h i l e Co lombia C o s t a R i c a Domi n i can RepubI i c Ecuador E l S a l v a d o r Honduras Mexi co Panama Peru Venezue I a V i r g i n I s l and s 680 9 21 2 2 7 49 66 15 2 9 89.8 0 . 5 1.3 1.4 0 .5 0 . 7 0 .4 1.6 7.5 2. I 0 .3 2.2 0. I T o t a l 864 108.4 TABLE V CONT'D C o u n t r y where the p u r c h a s e r was r e s i d e n t NUMBER AMOUNT IN MILLIONS OF U.S. DOLLARS B. ASIA Ta iwan 1 0 3 , 3 / ^ Hong Kong 4 Korea 190 2 2 - 5 P a k i s t a n 1 * P h i l i p p i n e s 14 * 5 S i n g a p o r e 6 ' T h a i l a n d 6 9 T o t a l ^ 387 4 4 . 7 C. THE MIDDLE EAST Iran 34 I s r a e l 84 T o t a l 118 D. EUROPE Greece 5 1.2 P o r t u g a l 6 I. I Spa in 33 5.7 Y u g o s l a v i a 9 3.4 T o t a l 53 11.4 E. AFRICA A l g e r i a 4 1.2 L i b e r i a 2 0 .6 Z a i r e 8 0 . 4 T o t a l 14 2.2 F . NOT ELSEWHERE CLASSIFIED Green l and I 0 .3 Po l and I 0 .2 Romania 2 0 . 4 T o t a l 4 0 .9 TABLE V CONT'D NUMBER $ AMOUNT IN $ MILLIONS OF U.S. DOLLARS Deve loped N a t i o n s 123 7.9 27 .9 13. 1 LDCs C. & S. Ameri ca 864 55.3 108.4 51 .0 LDCs A s i a 387 24.8 4 4 . 7 21 .0 LDCs M i d d l e E a s t 1 18 7.5 17. 1 8.0 LDCs Europe 53 3.4 M . 4 5.4 LDCs A f r i c a 14 0 .9 2.2 1.0 Other LDCs 4 0 .2 0 .9 0 . 5 T o t a l 1563 . 100$ 2 J 2 . 6 100$ SOURCE: E x p o r t Import Bank, Cumu1 at i ve R e c o r d s , 1974, p. 95 -172 66 B r a z i l , w i t h 680 loans f o r a t o t a l of $89 .8 m i l l i o n was the l a r g e s t i n d i v i d u a l i m p o r t e r . The s u c c e s s of c o o p e r a t i v e f i n a n c i n g f a c i l i t y c l e a r l y i n d i c a t e s t h a t t h e r e i s a wor ld wide demand f o r such a s e r v i c e . The p u r c h a s e r s of U.S. e x p o r t s are u t i l i z i n g the f i n a n c i n g p r o v i d e d j o i n t l y by t h e i r l o c a l f i n a n c i a l i n s t i t u t i o n s and by the Ex im Bank. The r e l a t i v e l y sma l l U.S. e x p o r t e r a l s o appear s to be b e n e f i t t i n g from t h i s a c t i v i t y . The f a c i l i t y must have some m e r i t when one c o n s i d e r s t h a t a food machine c o s t i n g l e s s than $800 can be produced in the U n i t e d S t a t e s , s o l d to a h o t e l in T h a i l a n d and be f i n a n c e d j o i n t l y by the Tha i bank and the Exim Bank. The f a c t tha t n e a r l y t h r e e hundred banks a re now d e s i g n a t e d as c o o p e r a t i n g i n s t i t u t i o n s i n d i c a t e s t h a t they a re a l s o f i n d i n g the f a c i l i t y a t t r a c t i v e . The f i v e b i g Canad ian banks and the Bank of B r i t i s h Co lumbia are d e s i g n a t e d as c o o p e r a t i n g i n s t i t u t i o n s . In the FY 1974, they g r a n t e d loans t o t a l l i n g j u s t under $1 m i l l i o n to cover the i m p o r t a t i o n of Amer i can goods i n t o C a n a d a . ' 3 In a d d i t i o n to the c o o p e r a t i v e f i n a n c e f a c i l i t y , the Exim Bank a l s o o f f e r s a wide a r r a y of d i r e c t loan and f i n a n c i a l gua ran tee programs. Under the Commercia l Bank E x p o r t e r Guarantee Program f o r i n s t a n c e , the Exim Bank e n t e r s i n t o a mas ter gua ran tee agreement w i t h each bank, wh ich not o n l y s p e c i f i e s the terms and c o n d i t i o n s of the p r o t e c t i o n o f f e r e d by the Exim Bank g u a r a n t e e , but i t a l s o g r a n t s the commerc ia l bank a d i s c r e t i o n a r y l i m i t of a p p r o v a l . Under t h i s d i s c r e t i o n a r y l i m i t the commerc ia l bank may commit Exim Bank to the i s s u a n c e of g u a r a n t e e s w i t h i n s p e c i f i e d l i m i t s w i t h o u t the p r i o r app rova l of the Exim Bank. The commerc ia l bank r e t a i n s a p o r t i o n of the fee p a i d 67 by the e x p o r t e r to compensate i t f o r the work i n v o l v e d in p r o c e s s i n g the , . . . 14 a p p I i c a t i o n . The gua ran tee agreement u s u a l l y r e q u i r e s t h a t the p u r c h a s e r make a minimum down payment of 10$ of the c o n t r a c t p r i c e , w i t h the b a l a n c e p a y a b l e , in equal i n s t a l l m e n t s , as c a l l e d f o r in a p r o m i s s o r y n o t e . The e x p o r t e r must agree to c a r r y at l e a s t 10$ of the f i n a n c e d p o r t i o n . The rema inder of the c o n t r a c t p r i c e (81$) i s p r o v i d e d by the commerc ia l bank on a n o n - r e c o u r s e b a s i s . Under the comprehens i ve gua ran tee p l a n , the commerc ia l bank ag rees to a c c e p t 100$ of a l l commerc ia l r i s k s on the e a r l y i n s t a l l m e n t s of the l o a n . E a r l y i n s t a l l m e n t s a re d e f i n e d as those which o c c u r w i t h i n the f i r s t h a l f of any c o n t r a c t w i t h a m a t u r i t y of l e s s than t h r e e yea r s or those i n s t a l l m e n t s wh ich o c c u r w i t h i n the f i r s t e i g h t e e n months of any c o n t r a c t w i t h a term e x c e e d i n g t h r e e y e a r s . Ex im Bank assumes the commerc ia l r i s k on the l a t e r i n s t a l l m e n t s and , of c o u r s e , assumes the p o l i t i c a l r i s k on a l l i n s ta I Iments . '~ * The Ex im B a n k ' s f e e s f o r i s s u i n g t h i s t ype of gua ran tee v a r y a c c o r d i n g to the l eng th of the c r e d i t p e r i o d , the c r e d i t w o r t h i n e s s of both the p u r c h a s e r and h i s c o u n t r y of r e s i d e n c e and the amount of coverage p r o v i d e d . A r a t i n g system s i m i l a r to the one used f o r i n s u r a n c e purposes i s u s e d . The gua ran tee f ee f o r a one year c r e d i t to a p u r c h a s e r in the lowest r i s k c a t e g o r y i s l e s s than l / 3 $ . The gua ran tee fee f o r a t h r e e year c r e d i t to a p u r c h a s e r in the D c a t e g o r y i s a p p r o x i m a t e l y 5$ of the g u a r a n t e e ' s v a l u e . These f e e s a re one t ime charges and not annual i n t e r e s t c h a r g e s . ' 6 68 The Exim Bank r e c e n t l y i n t r o d u c e d a l ea se gua ran tee f a c i l i t y . Under t h i s t ype of gua ran tee the Bank ag rees to p r o v i d e comprehens ive coverage f o r both commerc ia l and p o l i t i c a l r i s k s , p r o v i d e d the l ea se o c c u r s as the r e s u l t of the e x p o r t of U.S. equ ipment . The Exim Bank charges an annual fee r a n g i n g from 0 .5 - 0 .75$ on the e s t i m a t e d average o u t s t a n d i n g l i a b i l i t y of the f o l l o w i n g y e a r ! 7 The Exim Bank i s a l s o p r e p a r e d to gua ran tee loans g r a n t e d to the f o r e i g n p u r c h a s e r of used Amer i can equ ipment . In i s s u i n g i t s gua ran tee the Exim Bank c o n s i d e r s such f a c t o r s as the c o n d i t i o n and age of the equ ipment ; the method used to d e t e r m i n e the v a l u e of the equ ipment ; and whether the vendor i s go ing to pu r cha se new U.S. made 18 equipment to r e p l a c e the equipment b e i n g s o l d . The Ex im Bank i s p r e p a r e d to i s s u e i t s gua ran tee to bo th domes t i c and f o r e i g n f i n a n c i a l i n s t i t u t i o n s . Both the c o - o p e r a t i v e f i n a n c i n g f a c i l i t y and the commerc ia l bank e x p o r t e r gua ran tee program o f f e r a number of advantages over the d i r e c t loan type of program. In the former cases n e i t h e r the s u p p l i e r nor the p u r c h a s e r d e a l s d i r e c t l y w i t h the Exim Bank. They approach t h e i r l o c a l bank, where they are known, and submit t h e i r a p p l i c a t i o n . T h e i r l o c a l bank does most of the a d m i n i s t r a t i v e work i n v o l v e d in p r o c e s s i n g the a p p l i c a t i o n . When the l o c a l bank p r o c e s s e s the a p p l i c a t i o n , the t u r n a r o u n d t ime can be s i g n i f i c a n t l y l e s s than i f the a p p l i c a t i o n i s fo rwarded to the c e n t r a l o f f i c e of the Ex im Bank f o r p r o c e s s i n g . Tu rna round t ime i s d e f i n e d to be the t ime e l a p s e d from the da te of s u b m i s s i o n of the a p p l i c a t i o n to the da te t h a t the a p p l i c a n t i s n o t i f i e d of a p p r o v a l or r e j e c t i o n . 69 The t u r n a r o u n d t ime w i l l be e s p e c i a l l y low where the l o c a l bank i s o p e r a t i n g under the d i s c r e t i o n a r y l i m i t g r a n t e d i t by the Exim Bank. T h i s t ype of p a r t i c i p a t i o n f i n a n c i n g a l s o r educe s the s t r a i n on the Ex im B a n k ' s f i n a n c i a l r e s o u r c e s . It s t r e t c h e s the B a n k ' s l i m i t e d r e s o u r c e s by r e d u c i n g the volume of d i r e c t l o a n s . In a d d i -t i o n , o n l y 25$ of the o u t s t a n d i n g g u a r a n t e e s a re charged a g a i n s t the Exim B a n k ' s l e n d i n g a u t h o r i t y . i i ) DIRECT LENDING The Ex im Bank has been s u c c e s s f u l in e x t e n d i n g the p r i n c i p l e of p a r t i c i p a t i o n f i n a n c i n g to the f i e l d of d i r e c t l o a n s . The B a n k ' s c u r r e n t p o l i c y i s to p r o v i d e l e s s than 50$ of the funds needed to f i n a n c e 19 the e x p o r t of Amer i can c a p i t a l goods . It i s , however, p r e p a r e d to extend i t s gua ran tee to a f i n a n c i a l i n s t i t u t i o n which p r o v i d e s p a r t of the funds r e q u i r e d by the i m p o r t e r . The j o i n t f i n a n c i n g agreements e n t e r e d i n t o by the Ex im Bank and the commerc ia l banks u s u a l l y p r o v i d e t h a t any funds advanced the commerc ia l bank w i l l be r e p a i d w i t h i n f i v e y e a r s . Repayment on any funds p r o v i d e d by the Exim Bank w i l l commence a f t e r the commerc ia l b a n k ' s loan i s r e t i r e d . In c e r t a i n ca se s the Ex im Bank p r e f e r s t o g r an t d i r e c t loans to the p u r c h a s e r . I f , f o r example , the c o n t r a c t i s too l a r g e f o r one f i n a n c i a l i n s t i t u t i o n or a group of i n s t i t u t i o n s to hand le the Ex im Bank w i l l p a r t i c i p a t e in the p r o j e c t . In some ca se s i t i s n e c e s s a r y to lower the o v e r a l l i n t e r e s t r a t e to meet i n t e r n a t i o n a l c o m p e t i t i o n . The b l e n d i n g of Exim Bank and commerc ia l bank funds a c h i e v e s t h i s p u rp o se . On o c c a s i o n the Ex im Bank p r e f e r s to be in d i r e c t c o n t a c t 70 w i t h the bo r rower . The Exim Bank has a c h i e v e d some s u c c e s s in r e d u c i n g the volume of d i r e c t loan suppor t p r o v i d e d to Amer i can e x p o r t s . In FY 1973 over 44$ of the expor t v a l u e of the goods f i n a n c e d under the B a n k ' s d i r e c t loan program was p r o v i d e d by the Exim Bank. In FY 1975, the comparab le f i g u r e i s s l i g h t l y l e s s than 38$. In an e f f o r t to speed up the p r o c e s s i n g of d i r e c t loan a p p l i -c a t i o n s the Bank i n t r o d u c e d a p r e l i m i n a r y commitment f a c i l i t y . Under t h i s p l a n , the Bank i s p r e p a r e d to p r o v i d e a commitment to f i n a n c e the s a l e of a c e r t a i n p r o j e c t or o f s p e c i f i e d goods at a v e r y e a r l y s t a g e . The a p p l i c a t i o n may be s u b m i t t e d by the p r o s p e c t i v e b o r r o w e r , the U-S. s u p p l i e r or a p a r t i c i p a t i n g f i n a n c i a l i n s t i t u t i o n , and must i n c l u d e d e t a i l s of the proposed p r o j e c t , c u r r e n t f i n a n c i a l i n f o r m a t i o n on it he b o r r o w e r , a p p r o p r i a t e e n g i n e e r i n g and m a r k e t i n g da ta to demons t r a te the f e a s i b i l i t y of the p r o j e c t and r e l e v a n t i n f o r m a t i o n about i n t e r n a -, . . . . . 20 t i o n a l c o m p e t i t i o n . The Amer i can e x p o r t e r has made good use of t h i s f a c i l i t y . As e a r l y as 1971 the Exim Bank r e p o r t e d t h a t a p p l i c a t i o n s f o r p r e l i m i n a r y commitments were be ing r e c e i v e d at the r a t e of $750 m i l l i o n per month. At t h a t t ime a p p r o x i m a t e l y 13$ of the a p p l i c a t i o n s r e c e i v e d by the Bank 21 were e i t h e r d e n i e d f o r c r e d i t and t e c h n i c a l r ea sons or c a n c e l l e d , i i i ) DISCOUNT LOAN PROGRAM In 1966 in an e f f o r t to reduce the c o m p e t i t i o n f o r bank c r e d i t in t imes of monetary r e s t r a i n t , the Exim Bank i n t r o d u c e d a d i s c o u n t loan program. Even in t i g h t money s i t u a t i o n s government a u t h o r i t i e s 71 t r y to ensure t h a t the l e v e l of e x p o r t s i s m a i n t a i n e d . In o r d e r to i n c r e a s e the e x p o r t e r ' s a b i l i t y to o b t a i n the n e c e s s a r y c r e d i t when the banks a re in a t i g h t l i q u i d i t y s i t u a t i o n the Exim Bank i n t r o d u c e d i t s d i s c o u n t loan program. Exim n o r m a l l y a g rees to pu rcha se the debt o b l i g a t i o n s from the bank at a r a t e 0.5-1.0$ be low the we i gh ted average i n t e r e s t y i e l d 22 of the b i l l . The y i e l d to the commerc ia l bank may not be l e s s than the a p p l i c a n t b a n k ' s pr ime l e n d i n g r a t e . To be e l i g i b l e f o r t h i s program the loan must have a term of g r e a t e r than one year and the commerc ia l bank must s t a t e p r i o r to g r a n t i n g the loan t h a t i t i s unab le to p r o v i d e the n e c e s s a r y funds u n l e s s the loan q u a l i f i e s under the d i s c o u n t loan f a c i l i t y . It i s i m p e r a t i v e t h a t a l l loans in t h i s c a t e g o r y must have the a p p r o v a l o f the Ex im Bank p r i o r t o b e i n g g r a n t e d . The term of the loan g r a n t e d the d i s c o u n t i n g bank may not exceed the 23 term of the o r i g i n a l l o a n . The loan may be p r e p a i d w i t h o u t p e n a l t y . T h i s program has a i d e d the e x p o r t e r in two ways. It p r o v i d e s a d d i t i o n a l l i q u i d i t y f o r the commerc ia l banks w h i l e at the same t ime i t r educe s the c o m p e t i t i o n the e x p o r t e r f a c e s f o r a s c a r c e r e s o u r c e , namely expor t c r e d i t . In a d d i t i o n , i t h e l p s reduce the r a t e of i n t e r e s t wh ich i s charged on e x p o r t c r e d i t . T h e r e i s no i n c e n t i v e f o r the l e n d i n g i n s t i t u t i o n s to charge the bor rower a h i gh r a t e of i n t e r e s t , f o r i f he d i s c o u n t s the note w i t h the Exim Bank he w i l l be f o r c e d to pay 5 ~ l $ l e s s than the r a t e charged the b o r r o w e r . i v ) PRIVATE EXPORT FUNDING CORPORATION 72 The P r i v a t e E x p o r t F u n d i n g C o r p o r a t i o n (PEFCO) was e s t a b l i s h e d in 1971 by a number of p r i v a t e i n s t i t u t i o n s i n v o l v e d in i n t e r n a t i o n a l t r a d e and f i n a n c e and the Exim Bank. PEFCO i s c o n t r o l l e d by the Ex im Bank and i s d e s i g n e d to m o b i l i z e p r e v i o u s l y untapped p r i v a t e c a p i t a l 24 s o u r c e s of expor t c r e d i t . |t has a t tempted to a t t r a c t i n s t i t u t i o n a l funds from p e n s i o n funds and i n s u r a n c e companies th rough the i s s u a n c e of both s h o r t and long term o b l i g a t i o n s wh ich a re s u p p o r t e d by e x p o r t paper g u a r a n t e e d by the Exim Bank. To d a t e , i t has met w i t h l i m i t e d s u c c e s s in a c h i e v i n g i t s o b j e c t i v e s . In 1973, f o r example , i t g r a n t e d on Iy one Ioan. The m a r g i n a l s u c c e s s of PEFCO i n d i c a t e s how d i f f i c u l t i t i s to a t t r a c t p r i v a t e funds i n t o the e x p o r t c r e d i t f i e l d . Why shou ld the i n s t i t u t i o n a l i n v e s t o r i n v e s t h i s funds in a r e l a t i v e l y low y i e l d i n g a s s e t ? An i n v e s t o r , f o r example , can o b t a i n a h i g h e r y i e l d w i t h no f o r e i g n exchange or p o l i t i c a l r i s k by i n v e s t i n g in the d o m e s t i c m o r t -gage marke t . I l l THE WORLD BANK To t h i s p o i n t t h i s c h a p t e r has shown t h a t the Exim Bank o f f e r s a wide range of s e r v i c e s to meet the needs of the Amer i can e x p o r t e r . In o r d e r to i d e n t i f y the net b e n e f i t s t h a t the Amer i can economy r e c e i v e s from the Exim B a n k ' s a c t i v i t i e s i t i s f i r s t n e c e s s a r y to a n a l y z e the e x p o r t s which are be ing s u p p o r t e d by the B a n k ' s programs. Such an a n a l y s i s w i l l p r o v i d e some i n s i g h t i n t o whether a H e c k s c h e r - O h I in t ype of compara t i ve advantage ho ld s t r u e f o r e x p o r t s s u p p o r t e d by 73 expor t f i n a n c e programs. The a n a l y s i s w i l l a l s o p r o v i d e an i n d i c a t i o n of whether expor t c r e d i t i s e f f e c t i v e in a l t e r i n g t r a d e p a t t e r n s . The Wor ld B a n k ' s a c t i v i t i e s have been chosen as the s t a n d a r d a g a i n s t which to measure the e x p o r t s of the i n d u s t r i a l i z e d n a t i o n s . The Wor ld Bank i s p r i m a r i l y concerned w i t h h e l p i n g the n a t i o n s of the T h i r d Wor ld d e v e l o p t h e i r economies in o r d e r to e f f e c t a b e t t e r d i s t r i -b u t i o n of the w o r l d ' s w e a l t h . T h i s Bank i s not concerned w i t h p romot ing c e r t a i n t y p e s of e x p o r t s from c e r t a i n n a t i o n s and , t h e r e f o r e , p r o v i d e s a good i n d i c a t i o n of the type of c a p i t a l goods t h a t a re be ing demanded by the d e v e l o p i n g n a t i o n s . A r e v i e w of the Wor ld B a n k ' s a c t i v i t i e s w i l l be p r e s e n t e d in t h i s s e c t i o n to i d e n t i f y the t y p e s of c a p i t a l p r o j e c t s t h a t a re be ing s u p p o r t e d by the Wor ld Bank. The r e v i e w w i l l a l s o i n d i c a t e in which n a t i o n s the p r o j e c t s a re be ing u n d e r t a k e n . The c a p i t a l goods be ing p roduced by the U n i t e d S t a t e s and f i n a n c e d under the d i r e c t l o a n , C F F , or gua ran tee programs of the Ex im Bank w i l l be a n a l y z e d in a p p r o x i m a t e l y the same f a s h i o n in S e c t i o n IV of t h i s c h a p t e r . S o c i a l and economic p r o g r e s s can not be a c h i e v e d w i t h o u t growth in the f i e l d of a g r i c u l t u r e , i n d u s t r y and e d u c a t i o n . In a d d i t i o n , the d e v e l o p i n g n a t i o n s must s t r i v e to a c h i e v e a "more n o r m a l " p o p u l a -t i o n growth r a t e . An a n a l y s i s of the prob lems f a c i n g d e v e l o p i n g n a t i o n s in the a r e a s of a g r i c u l t u r e , e d u c a t i o n and p o p u l a t i o n i s beyond the scope of t h i s s t u d y . The Wor ld B a n k ' s e f f o r t s in f o s t e r i n g the d e v e l o p -ment of adequate i n f r a s t r u c t u r e s on which i n d u s t r i a l s e c t o r s can be deve l oped i s of c o n c e r n to t h i s s t udy . The term i n f r a s t r u c t u r e can be 74 broken down i n t o f o u r main c a t e g o r i e s - t r a n s p o r t a t i o n , e l e c t r i c power, t e l e c o m m u n i c a t i o n s and water s u p p l y . A p r e l i m i n a r y r e v i e w of the f i n a n c i n g a c t i v i t i e s of both the Exim Bank and the EDC i n d i c a t e s t h a t few, i f any, e x p o r t s i n v o l v i n g water s u p p l y systems are f i n a n c e d by these a g e n c i e s . T h e r e f o r e , o n l y the o t h e r t h r e e i n f r a s t r u c t u r e c a t e g o r i e s and the development of i n d u s t r i a l p r o j e c t s w i l l be rev iewed in t h i s s e c t i o n . i ) TRANSPORTATION The demand f o r t r a n s p o r t a t i o n i s a d e r i v e d demand depend ing on the volume of commod i t ie s c a r r i e d and on the b e n e f i t s a t t a c h e d t o ! p e r s o n a l t r a v e l . The d i s t a n c e the commodity or the p e o p l e a re to t r a v e l must a l s o be c o n s i d e r e d . In the d e v e l o p i n g n a t i o n s the movement of b u l k y low v a l u e a g r i c u l t u r a l and p r i m a r y p r o d u c t s i s a s s i g n e d a h i gh p r i o r i t y . A l a r ge p e r c e n t a g e of the e x p o r t s of LDCS a r e such p r o d u c t s . R a i l r o a d s a re n o r m a l l y the most e f f i c i e n t and economic means 25 of moving bu lk t r a f f i c over i n t e r m e d i a t e or long d i s t a n c e s . Some type of s h i p p i n g v e s s e l i s a l s o u s u a l l y r e q u i r e d to move the e x p o r t s of the LDCs to t h e i r e v e n t u a l m a r k e t s . S h i p s a re e f f i c i e n t at moving b u l k y commodi t ie s at a low cos t per ton m i l e over g r e a t d i s t a n c e s . A i r t r a n s p o r t a t i o n has the advantage of speed and i s aimed at the movement of p e o p l e and goods when t ime p o s s e s s e s a h i gh v a l u e . By the end of 1971, t r a n s p o r t a t i o n equipment had become the 26) l a r g e s t s i n g l e component of the Wor ld B a n k ' s f i n a n c i n g a c t i v i t y . It a ccounted f o r more than 30% of both l e n d i n g volume and number of 75 a p p l i c a t i o n s . The d e v e l o p i n g n a t i o n s of E a s t A f r i c a , I n d i a , M e x i c o , P a k i s t a n , Spa in and Y u g o s l a v i a were the p r i m a r y a rea s where the p r o j e c t s were u n d e r t a k e n . In the f i v e year p e r i o d ended December 3 1 , 1976 the Bank f o r e c a s t t h a t $4 .3 b i l l i o n would be a l l o c a t e d to t r a n s p o r t a t i o n p r o j e c t s 27 in the d e v e l o p i n g n a t i o n s . T h i s f i g u r e i m p l i e s a 90% i n c r e a s e in spend ing over the p r e v i o u s f i v e year p e r i o d . In the most r e c e n t f i v e year p e r i o d the Wor ld B a n k ' s a c t i v i t i e s were c o n c e n t r a t e d on : 1) d e v e l o p i n g b e t t e r f e e d e r roads in the v a r i o u s r e g i o n s of the d e v e l o p i n g w o r l d . 2) r e v i t a l i z i n g d e c a y i n g r a i l w a y s . 3) d e v o t i n g more r e s o u r c e s to the deve lopment o f c o a s t a l and ocean s h i p p i n g f a c i l i t i e s . The prob lems f o r a n a t i o n a r i s i n g from p u r c h a s i n g i t s own s h i p s i n c l u d e the h i gh c a p i t a l co s t as w e l l as the h i gh o p e r a t i n g c o s t s . The b e n e f i t s i n c l u d e be ing a b l e to c o n s e r v e f o r e i g n exchange e a r n i n g s and h a v i n g an a s su red means of t r a n s p o r t a t i o n f o r i t s e x p o r t s . The LDCs must a l s o c a r e f u l l y examine the prob lem of c o n t a i n e r i z a t i o n . T h i s l abour s a v i n g d e v i c e i s be ing w i d e l y adopted by the d e v e l o p e d n a t i o n s but i s o f l i t t l e v a l u e to the LDCs. 4) d e v e l o p i n g a i r p o r t f a c i l i t i e s and n a v i g a t i o n a l a i d s f o r a i r t r a n s p o r t . The Wor ld Bank does not n o r m a l l y provide funds to f i n a n c e the p u r c h a s e of l a r ge a i r c r a f t . i i ) ELECTRIC POWER The d e v e l o p i n g n a t i o n s i nves tment in g e n e r a t i n g p l a n t s d e s i g n e d to produce e l e c t r i c i t y has been i n c r e a s i n g at an annual r a t e 76 of 10$ and t h i s r a t e of growth i s expec ted to c o n t i n u e in the f u t u r e . " 1 A power g e n e r a t i n g system u s u a l l y c o n s i s t s of an i n t e g r a t e d network of g e n e r a t i o n , t r a n s m i s s i o n and d i s t r i b u t i o n f a c i l i t i e s . Such p r o j e c t s are c a p i t a l i n t e n s i v e and a v e r y s u b s t a n t i a l p a r t of the t e c h n o l o g y and the equipment must be imported from the i n d u s t r i a l i z e d n a t i o n s . Through 1971 t h i s a r e a had r e c e i v e d the b e n e f i t of $5 .3 b i l l i o n of Wor ld Bank f i n a n c i n g . The volume of funds a l l o c a t e d to t h i s a rea in the f i v e year p e r i o d end ing in 1976 i s f o r e c a s t to be $ 2 . 5 b i l l i o n , or 24$ above the a c t u a l f i g u r e f o r the p r e v i o u s f i v e 30 y e a r s . The development of n u c l e a r power g e n e r a t i n g f a c i l i t i e s t h r o u g h -out the wor ld has been s t e a d i l y i n c r e a s i n g . However, the development of n u c l e a r power p l a n t s in the d e v e l o p i n g n a t i o n s poses a number of p rob lems . The c a p i t a l c o s t s of n u c l e a r power p l a n t s a re about o n e -t h i r d h i g h e r than c o n v e n t i o n a l steam i n s t a l l a t i o n s . The p r o j e c t s a re i d e a l l y s u i t e d f o r use in r e l a t i v e l y l a r g e systems and the prob lem of u s i n g the new t e c h n o l o g y f o r purposes o t h e r than tho se f o r which i t was i n tended must a l l be c a r e f u l l y c o n s i d e r e d by both the s u p p l i e r and the p u r c h a s e r . i i i ) INDUSTRIAL PROJECTS Through i n d u s t r i a l i z a t i o n a n a t i o n can g e n e r a t e an i n c r e a s e d volume of manu fac tu red goods , i n c r e a s e d employment, improved b a l a n c e of payments and g r e a t e r e f f i c i e n c y and m o d e r n i z a t i o n th roughout i t s economy. The World Bank has devoted 15$ of i t s t o t a l f i n a n c i n g 77 a c t i v i t y to t h i s a r e a ? ' The impor tance of the B a n k ' s a c t i v i t y i s u n d e r s t a t e d because i t o f t e n p a r t i c i p a t e s w i t h o t h e r f i n a n c i a l i n t e r -m e d i a r i e s in f i n a n c i n g i n d u s t r i a l p r o j e c t s . The Wor ld B a n k ' s d i r e c t loans u s u a l l y suppor t r e l a t i v e l y l a r ge p r o j e c t s , w h i l e i t s i n d i r e c t loans a re c o n c e n t r a t e d more on l i g h t and heavy m a n u f a c t u r e r s . The m a j o r i t y of the p r o j e c t s c o n c e n -t r a t e on p r o d u c i n g goods which may be c l a s s i f i e d as s u b s t i t u t e s f o r i m p o r t s . In the c u r r e n t f i v e year p e r i o d the Wor ld Bank p ropose s to i n c r e a s e i t s a c t i v i t y in t h i s a r e a by some two and a h a l f t imes the $1.3 b i l l i o n spent in 1967-1971? 2 I t s funds w i l l be a l l o c a t e d to those p r o j e c t s r e q u i r i n g a l a r ge c a p i t a l i n p u t , such as s t e e l p r o d u c -t i o n f a c i l i t i e s , f e r t i l i z e r p l a n t s and f o r e s t p r o d u c t i o n comp lexes . Of s e c o n d a r y impor tance w i l l be s m a l l e r s c a l e p r o j e c t s o r i e n t e d towards the p r o d u c t i o n of e x p o r t s . i v ) TELECOMMUNICATIONS EQUIPMENT T e l e c o m m u n i c a t i o n s equipment a i d s the economic development of a n a t i o n by p r o v i d i n g an e f f i c i e n t means of communica t ion f o r both i n d u s t r y and government. It a l s o a i d s in the n a t i o n a l movement of goods and s e r v i c e s and i n c r e a s e s the f a c i l i t i e s p r o v i d e d f o r the growing t o u r i s t i n d u s t r y . The v a l u e of t e l e c o m m u n i c a t i o n s f a c i l i t i e s i s shown by the u n s a t i s f i e d demand which e x i s t s f o r t e l e p h o n e s , r a d i o s and o t h e r t ypes of t e l e c o m m u n i c a t i o n f a c i l i t i e s . In 1970, the d e v e l o p i n g 78 n a t i o n s had o n l y 6.8$ of t o t a l wor l d t e l e p h o n e s ? 3 By 1971 the Wor ld Bank had p r o v i d e d $600 m i l l i o n f o r the development and expans i on of t e l e c o m m u n i c a t i o n f a c i l i t i e s . Wh i l e t h i s a r e a r e c e i v e d the s m a l l e s t amount of s uppor t from the Wor ld Bank, the impor tance of the development of such f a c i l i t i e s must not be u n d e r -s t a t e d . A number of the d e v e l o p i n g n a t i o n s , . i n c I u d i n g A r g e n t i n a , B r a z i l , C o l o m b i a , V e n e z u e l a , Iran and E g y p t , a re s l o w l y d e v e l o p i n g t h e i r own p r o d u c t i o n f a c i l i t i e s . One of the key f a c t o r s a f f e c t i n g the deve lopment o f t e l e c o m m u n i c a t i o n s f a c i l i t i e s i s the l ack of s t a n d a r d -34 i z a t i o n in the equipment p roduced by the d i f f e r e n t m a n u f a c t u r e r s . T h i s f a c t o r v i r t u a l l y d i c t a t e s t h a t f u t u r e e x p a n s i o n of the system must be under t aken by the i n i t i a l s u p p l i e r . The a b i l i t y of the p u r -cha se r to c o n s i d e r the p r i c e , q u a l i t y and f i n a n c e f a c t o r s i s s i g n i f i -c a n t l y r e d u c e d . The Wor ld Bank f o r e c a s t i t s a c t i v i t y in t h i s a rea w i l l i n c r e a s e by 50$ in the f i v e year p e r i o d ended December 31 , 1976?^ In c o n c l u d i n g t h i s r e v i e w of the Wor ld B a n k ' s a c t i v i t i e s in the f i e l d of development f i n a n c e a few c o n c l u s i o n s can be made. W h i l e a l l a r e a s o f deve lopment a r e i m p o r t a n t , the Wor ld Bank a p p e a r s to be e x p r e s s i n g some doubt about the need f o r l a r g e a i r c r a f t , modern bu lk c a r r y i n g water c a r r i e r s and n u c l e a r g e n e r a t i n g p l a n t s . The d e v e l o p i n g n a t i o n s shou ld be p r i m a r i l y concerned w i t h b u i l d i n g the i n f r a s t r u c t u r e needed to d e v e l o p t h e i r i n d u s t r i a l s e c t o r s . IV COMMODITIES SUPPORTED BY THE EXIM BANK'S PROGRAMS T a b l e s VI and VII p r o v i d e b e t t e r i n s i g h t i n t o the p r o d u c t s 0 TABLE VI EXPORT-IMPORT BANK OF THE UNITED STATES ANALYS1S OF CREDITS AUTHORIZED FROM JULY 1, 1973-JUNE 30, 1975 MILLIONS OF U.S. DOLLARS EXPORTED COMODITY / IMPORTER OEVELOPED NATIONS COMMAND ECONOMIES DEVELOPING ; NATIONS TOTAL AMOUNT * AMOUNT % AMOUNT % AMOUNT $ INDUSTRIAL PROJECTS (485.8) (29.5) (444.3) (94.1) (1705.6) (38.1) (2635.7) (39.9) Greater than $2 M i l l i o n 454. 1 27.6 386. 1 81.8 1158.9 25.9 1999. 1 30.3 Less than $2 Mi 11 ion 20.8 1.3 22.3 4.7 1 14.9 2.6 158.0 2.4 Mineral Development 10.9 0.6 35.9 7.6 431.8 9.6 478.6 7.2 TRANSPORTATION EQUIPMENT (873.1) (53.1) (6.1) (1.3) (1083.1 ) (24.2) (1962.3) (29.7) A i r c r a f t 838.3 51.0 6. 1 1.3 787.8 17.6 1632.2 24.7 Rai Iroads 11.8 0.8 — — 228.7 5. 1 240.5 3.6 Ships 23.0 1.3 — — 66.6 1.5 89.6 1.4 ELECTRIC POWER PROJECTS (65.3) (4.0) (16.5) (3.5) (966.2) (21.6) (1048.0) (15.9) Conventional Generating 40.3 2.4 16.5 3.5 392.3 8.8 449. 1 6.8 Nuclear Generating 25.0 1 1.6 — — 573.9 12.8 598.9 9. 1 TELECOMMUNICATIONS — — — — (103.1) (2.3) (103.1) (1.6) COOPERATIVE FINANCING FACILITY (50.7) (3.1) (5.4) (1.3) (331.9) (7.4) (388.0) (5.9) ALL OTHERS (170.4) (10.3) — — (291.2) (6.4) (461.6) (7.0) TOTAL 1645.3 100.0 472.3 100.0 4481.1 100.0 6598.7 100.0 SOURCE: Export- import Bank, Annual Reports 1^ TABLET VII EXPORT-IMPORT BANK OF THE UNITED STATES ANALYSIS OF CREDITS AUTHORIZED FROM JULY I, 1973-JUNE 30 1975 MILLIONS OF U.S. DOLLARS ' EXPORTED C0M0DITY / IMPORTER INDUSTRIAL PROJECTS Greater than $2 Mi I I I on Less than $2 Ml 11 Ion Mineral Development TRANSPORTATION EQUIPMENT A i r c r a f t RaiIroads Ships ELECTRIC POWER PROJECTS Conventional Generating Nuclear Generating TELECOMMUNICATIONS COOPERATIVE FINANCING FACILITY ALL OTHERS TOTAL SOURCE: Export-Import Bank, Annual Reports ULVLLUKtU ' NATIONS COMMAND ECONOMIES DEVELOPING NATIONS TOTAL AMOUNT % AMOUNT % AMOUNT % AMOUNT (485.8) (18.4) (444.3) (16.8) (1705.6) (64.8) (2635.7) 454. 1 20.8 10.9 22.7 13.2 2.3 386. 1 22.3 35.9 19.3 14. 1 7.5 1158.9 1 14.9 431.8 58.0 72.7 90.2 1999.1 158.0 478.6 (873.1) (44.5) (6.1) (0.3) (1083.1 ) (55.2) ( 1962.3) 838.3 11.8 23.0 51.4 4.9 25.7 6. 1 0.4 787.8 228.7 66.6 48.2 95. 1 74.3 1632.2 240.5 89.6 (65.3) (6.2) (16.5) (1-6) (966.2) (92.2) (1048.0) 40.3 25.0 9.0 4.2 16.5 3.7 392.3 573.9 87.3 95.8 449. 1 598.9 —• — (103.1) (100.0) (103.1) (50.7) (13.1) (5.4) (1.4) (331.9) (85.5) (388.0) (170.4) (36.9) — — (291.2) (63.1) (461.6) 1645.3 24.9 472.3 7.2 4481.1 67.9 6598.7 . 00 o 81 be ing f i n a n c e d by the E x p o r t Import Bank. The e x p o r t s be ing s u p p o r t e d , in ranked o r d e r , a re l a r ge s c a l e i n d u s t r i a l p r o j e c t s ; l a r ge a i r c r a f t and the m u l t i t u d e of c a p i t a l goods be ing f i n a n c e d under the c o o p e r a t i v e f i n a n c i n g f a c i l i t y . N e a r l y 68$ of the f i n a n c e d e x p o r t s were s o l d to d e v e l o p i n g n a t i o n s , w i t h the m a j o r i t y be ing l o c a t e d in C e n t r a l and South A m e r i c a and Sou thea s t A s i a . In the two year p e r i o d , the l a r g e number of d e v e l o p i n g n a t i o n s in A f r i c a impor ted a p p r o x i m a t e l y the same d o l l a r volume of f i n a n c e d e x p o r t s from the U.S.A. as d i d the sma l l number of d e v e l o p i n g n a t i o n s in E u r o p e . T a b l e VI c l e a r l y shows the impor tance of a i r c r a f t in the Exim B a n k ' s o p e r a t i o n s . In the two yea r p e r i o d a n a l y z e d , n e a r l y 25$ of the e x p o r t s s uppo r ted by the Exim B a n k ' s e x p o r t c r e d i t f a c i l i t i e s c o n s i s t e d of a i r c r a f t . Over 50$ of t ho se f i n a n c e d a i r c r a f t were s o l d t o the r e l a t i v e l y sma l l number of d e v e l o p e d n a t i o n s . F o r the d e v e l o p e d n a t i o n s w i d e - b o d i e d a i r c r a f t such as the Boe ing 747 and Lockheed 101 I, as w e l l as the more c o n v e n t i o n a l Boe ing 727 and 737 models account f o r more than o n e - h a l f of the t o t a l f i n a n c e d impor t s from the U n i t e d S t a t e s . The a n a l y s i s i n d i c a t e s t h a t the d e v e l o p i n g n a t i o n s a re i n t e r -e s t e d in p u r c h a s i n g a l l t y p e s of c a p i t a l e x p o r t s . D u r i n g the two year P e r i o d r e v i e w e d , the a n a l y s i s a l s o shows t h a t l a r g e i n d u s t r i a l p r o j e c t s , a i r c r a f t , n u c l e a r power p l a n t s and m i n e r a l development p r o j e c t s were the main t y p e s of p r o d u c t s imported from the U n i t e d S t a t e s . A i r c r a f t equipment was the o n l y group of c a p i t a l e x p o r t s in wh ich the d e v e l o p i n g n a t i o n s had l e s s than 50$ of the t o t a l marke t . T a b l e VI shows t h a t t e l e c o m m u n i c a t i o n s equipment and r a i l -road equipment c o n s t i t u t e two of the l e s s e r groups of p r o d u c t s wh ich 82 a rc f i n a n c e d by the Exim Bank. One would a lno expect t h a t U.S. e x p o r t s of t h i s t ype of p r o d u c t would be f a i r l y s u b s t a n t i a l . I n t e r -n a t i o n a l T r a d e S t a t i s t i c s i n d i c a t e t h a t in 1973 the U n i t e d S t a t e s was the t h i r d l a r g e s t e x p o r t e r of t e l e c o m m u n i c a t i o n s equipment and the w o r l d ' s pr ime e x p o r t e r of r a i l w a y v e h i c l e s ? " ' In 1973 the U.S. e x p o r t e d $1 .1 b i l l i o n of t e l e c o m m u n i c a t i o n s equipment and in the two year p e r i o d end ing June 3 0 , 1 9 7 5 , the Ex im Bank f i n a n c e d a t o t a l of $ 1 0 3 . 1 m i l l i o n of s i m i l a r e x p o r t s . It i s d i f f i c u l t to e x p l a i n t h i s s i t u a t i o n , e s p e c -i a l l y when the World Bank s t a t e s t h a t d e v e l o p i n g n a t i o n s have an i n s a t i a b l e demand f o r such p r o d u c t s . It may be p o s s i b l e t o e x p l a i n t h i s s i t u a t i o n by c a r e f u l l y examin ing the p r o d u c t s wh ich make up SITC 7 2 4 to d e t e r m i n e i f t he se U.S. e x p o r t s are b e i n g f i n a n c e d by o t h e r methods. A c c o r d i n g to the I n t e r n a t i o n a l T r a d e S t a t i s t i c s p u b l i s h e d by the U n i t e d N a t i o n s , t o t a l U-S- e x p o r t s of m a c h i n e r y , t r a n s p o r t a t i o n equipment and o t h e r m a n u f a c t u r e d goods (S ITC r e v i s e d 6 , 7 and 8 ) in 1973 were $ 3 7 . 6 b i l l i o n , o f t h i s amount, $ 2 6 . 8 b i l l i o n or 7 1 . 2 $ was e x p o r t e d to d e v e l o p e d economies . Of the r e m a i n i n g $ 1 0 . 8 b i l l i o n , $ 5 . 9 b i l l i o n was e x p o r t e d to d e v e l o p i n g n a t i o n s in c e n t r a l and South Amer i ca and $ 2 . 8 b i l l i o n was purchased by the LDCS i n S E A s i a . W h i l e t h e s e f i g u r e s a re not comparab le to those p r e s e n t e d in T a b l e s VI and VI I they do p e r m i t one to make some o b s e r v a t i o n s . In d e a l i n g w i t h t o t a l U.S. e x p o r t s of c e r t a i n t y p e s of c a p i t a l goods , the U.N. s t a t i s t i c s i n d i c a t e t h a t n e a r l y t h r e e - q u a r t e r s of the t o t a l i s e x p o r t e d to d e v e l o p e d economies . On the o t h e r hand , when a n a l y z i n g the c a p i t a l 83 equipment e x p o r t s f i n a n c e d by the Ex im Bank, e x a c t l y the o p p o s i t e r e s u l t s a p p e a r — n e a r l y 68$ of t h a t group of e x p o r t s a re imported by the d e v e l o p i n g n a t i o n s . Both s e t s of s t a t i s t i c s do , however, i n d i c a t e t h a t the c o u n t r i e s in C e n t r a l and South A m e r i c a and SE A s i a pu rcha se the bu lk of the U.S. m a n u f a c t u r e d equipment which i s e x p o r t e d to d e v e l o p i n g n a t i o n s . The s t a t i s t i c s suppor t the arguement t h a t the p u b l i c i n s t i t u t i o n s which p r o v i d e e x p o r t c r e d i t must pay more a t t e n t i o n to the needs of the d e v e l o p i n g n a t i o n s . The a t t i t u d e of o f f i c e r s in o r g a n i z a -t i o n s such as the Exim Bank and the EDC who see t h e i r r o l e as be ing s o e l y one of p romot ing e x p o r t s s hou ld be changed in the near f u t u r e . The a n a l y s i s of the Exim B a n k ' s a c t i v i t i e s i n d i c a t e s t h a t one of the l a r g e s t wor ld e x p o r t e r s of c a p i t a l equ ipment , the U n i t e d S t a t e s , e x p o r t e d $ 1 . 4 b i l l i o n of a i r c r a f t and n u c l e a r g e n e r a t i n g p l a n t s to the d e v e l o p i n g n a t i o n s over a two year p e r i o d . On the o t h e r hand, s l i g h t l y more than $0.3 b i l l i o n of t e l e c o m m u n i c a t i o n s and r a i l w a y equipment was e x p o r t e d to t h i s same group of c o u n t r i e s . In t h e o r y , the a c t i v i t i e s of n a t i o n a l c r e d i t g r a n t i n g a g e n c i e s , such as the Exim Bank, shou ld be c l o s e l y c o o r d i n a t e d w i t h the a c t i v i t i e s of deve lopment f i n a n c e a g e n c i e s , such as the Wor ld Bank. T h e r e i s a l i m i t to the amount of debt d e v e l o p i n g c o u n t i r e s can s e r v i c e and the ha rde r the terms the lower the l i m i t . C o n s i d e r f o r example , t h a t in 1969, o n e - h a l f of the t o t a l e x t e r n a l p u b l i c debt of a l l the d e v e l o p i n g n a t i o n s was owed by o n l y e i g h t c o u n t r i e s . These e i g h t c o u n t r i e s , A r g e n t i n a , B r a z i l , I n d i a , I n d o n e s i a , I r a n , M e x i c o , 84 P a k i s t a n and T u r k e y , i n c l u d e many of the best cus tomers of the n a t i o n a l c r e d i t g r a n t i n g a g e n c i e s . These n a t i o n s have depended h e a v i l y on expor t c r e d i t to f i n a n c e t h e i r deve lopment and as a r e s u l t , t hey may be v u l n e r a b l e to debt s e r v i c e prob lems in the not too d i s t a n t f u t u r e . The deve l oped n a t i o n s are c o n s t a n t l y s t r i v i n g to at l e a s t m a i n t a i n the same net annual o u t f l o w of e x p o r t s . The f a c t t h a t e x p o r t c r e d i t i s b e i n g r e p a i d a n n u a l l y must not be o v e r l o o k e d . A s tudy by the IMF p o i n t e d out tha t i f a loan has a m a t u r i t y of ten yea r s and an i n t e r e s t r a t e of then the g ro s s f l ows w i l l have to quadrup Ie in twe lve y e a r s to m a i n t a i n a net annual o u t f l o w . The s tudy goes on to p o i n t out t h a t i f the c r e d i t has a t h i r t y year m a t u r i t y and a ?..5% i n t e r e s t r a t e then the g r o s s f l ows w i l l o n l y have to doub le by the t w e n t y - f i r s t year to I 1 m a i n t a i n the p r e s e n t net o u t f l o w . The Pea r son Commiss ion p o i n t e d out t h a t p r o j e c t s r e j e c t e d by the Wor ld Bank Group on economic grounds have been s u b s e q u e n t l y f i n a n c e d 38 by an expor t c r e d i t agency. T h i s lack of c o o r d i n a t i o n and the ease w i t h which e x p o r t c r e d i t can be o b t a i n e d p o i n t out one of the a rea s where n a t i o n a l c r e d i t a g e n c i e s shou ld adopt more r e s p o n s i b l e a t t i t u d e s . At p r e s e n t the f i n a n c i n g i s u s u a l l y a r r anged by an o v e r l y o p t i m i s t i c c i v i l s e r v a n t , a p o l i t i c i a n c o n c e r n e d w i t h h i s own p o s i t i o n or an a g g r e s s i v e sa lesman who has l i t t l e knowledge of the o v e r a l l needs of the d e v e l o p i n g economy. The Wor ld Bank conduc t s e x t e n s i v e s t u d i e s b e f o r e i t p r o c e e d s w i t h a p r o j e c t and some way of c o o r d i n a t i n g t h e i r a c t i v i t i e s w i t h tho se of the n a t i o n a l c r e d i t g r a n t i n g a g e n c i e s must be d e v e l o p e d . R e c e n t l y the Wor ld Bank, the n a t i o n a l c r e d i t g r a n t i n g a g e n c i e s and v a r i o u s p r i v a t e f i n a n c i a l i n s t i t u t i o n s have formed c o n s o r t i a to u n d e r t a k e 85 major p r o j e c t s . If more of t h i s t ype of i n t e r n a t i o n a l c o o p e r a t i o n i s not f o r t h c o m i n g , then the n a t i o n a l c r e d i t a g e n c i e s must e i t h e r mix i n c r e a s e d f l ows of expor t c r e d i t and deve lopment f i n a n c e to ease the debt s e r v i c i n g burden of the d e v e l o p i n g n a t i o n s , or they must be p r e p a r e d to a c c e p t p r o g r e s s i v e l y more d e f a u l t s in an i n c r e a s i n g number of c o u n t r i e s . IV. CONCLUSIONS Amer i can i n d u s t r y appear s to be w e l l s e r ved by the f a c i l i t i e s o f f e r e d by the E x p o r t Import Bank and the F o r e i g n C r e d i t Insurance A s s o c i a t i o n . The Ex im Bank has taken the i n i t i a t i v e in d e v e l o p i n g new t y p e s of programs such as the c o o p e r a t i v e f i n a n c i n g f a c i l i t y , the d i s c o u n t loan program, the comprehens i ve expor t c r e d i t program and l ea se gua ran tee f a c i l i t y , a l l of which have proved to be most s u c c e s s f u l . The Ex im Bank i s v i t a l l y c o n c e r n e d about the w e l f a r e of the sma l l e x p o r t e r and i s the o n l y n a t i o n a l c r e d i t agency rev i ewed in t h i s s t udy which has a s p e c i a l o f f i c e r charged w i t h the r e s p o n s i b i l i t y f o r e n s u r i n g t h a t the needs of the sma l l bus inessman are a d e q u a t e l y s e r v e d by the Ex im Bank. The s u c c e s s of the Bank in meet ing the needs of the sma l l e x p o r t e r i s p r o b a b l y bes t shown th rough the c o o p e r a t i v e f i n a n c i n g f a c i l i t y . In the f i s c a l year ended June 30, 1975 near Iy 1,000 CFF loans f o r a t o t a l of $177.0 m i l l i o n were a u t h o r i z e d . The average s i z e of the loan was $181,000. The Ex im B a n k ' s a c t i v i t i e s have n o t , however, escaped c r i t i c i s m . A s u r v e y of 36,000 e x p o r t e r s and 170 commerc ia l banks was conduc ted by the Chamber of Commerce of the U.S.A. to look at the B a n k ' s a c t i v i t i e s . 86 The commerc ia l b a n k s ' most f r e q u e n t c r i t i c i s m s of the Ex im Bank were : 1) the d i s c o u n t loan f a c i l i t y shou ld be more f l e x i b l e 2) the FCIA i s not a d e q u a t e l y p r e f o r m i n g i t s f u n c t i o n and s h o u I d ? g t h e r e f o r e , become a s u b s i d i a r y of the Exim Bank. In e a r l y 1975, the FCIA i n c r e a s e d i t s i n s u r a n c e premiums by 50$ to 40 compensate f o r an i n c r e a s e in d e f a u l t s . The s i z e of the r a t e i n c r e a s e may p r o v i d e suppor t f o r the c r i t i c i s m of the FC IA . The Mach ine ry and A l l i e d P r o d u c t s I n s t i t u t e r e p o r t e d t h a t a s u r v e y of i t s members in the I960 ' s i n d i c a t e d t h a t most members were of the o p i n i o n t h a t o t h e r n a t i o n s o f f e r e d more f a v o r a b l e c r e d i t terms 41 f o r f i n a n c i n g e x p o r t s . The members a l s o e x p r e s s e d the b e l i e f t h a t Exim "was not p a r t i c u l a r l y i n t e r e s t e d in making loans under $ 1 0 0 , 0 0 0 " . T h i s c r i t i c i s m was c o r r e c t e d w i t h the i n t r o d u c t i o n of C F F . One of the b i g g e s t c o n t r o v e r s i e s c o n c e r n i n g the Exim Bank e r u p t e d a f t e r the Bank agreed to g r an t the U.S.S.R. a c r e d i t of $289 m i l l i o n to e n a b l e i t to pu r cha se the equipment needed to d e v e l o p a f e r t i l i z e r p l a n t , a t r a d e c e n t r e , and t r u c k f a c t o r y . The a t t a c k on t h i s t ype of loan was lead by S e n a t o r H. J ack son who b e l i e v e d the funds c o u l d be put to b e t t e r use in the U n i t e d S t a t e s to meet the needs of 42 d o m e s t i c b u s i n e s s . He was a l s o c r i t i c a l of the f a c t t h a t funds would be l en t to the U.S.S.R. at a 6 -7$ i n t e r e s t r a t e w h i l e the U.S. f i r m s had to pay l l g $ to borrow funds in the d o m e s t i c marke t . The c r i t i c i s m s e v e n t u a l l y lead to an amendment be ing r e i n t r o d u c e d to the Exim B a n k ' s g o v e r n i n g a c t which once a ga in p r o h i b i t s the Ex im Bank from g r a n t i n g 87 c r e d i t to the S o v i e t U n i o n . At l e a s t one of the l a r ge U.S. a i r l i n e s has a l s o been c r i t i c a l of the B a n k ' s a c t i v i t i e s . O f f i c e r s of Pan Am charged t h a t f o r e i g n a i r l i n e s r e c e i v e d a c o m p e t i t i v e edge by p u r c h a s i n g U.S. made p l a n e s 43 at Exim Bank s u b s i d i z e d i n t e r e s t r a t e s . In t o t a l , the c r i t i c i s m s have not been major and i n d i c a t e t h a t v a r i o u s groups are i n t e r e s t e d in s e e i n g the s e r v i c e s p r o v i d e d by the Exim Bank improved. The a n a l y s i s of the e x p o r t s s u p p o r t e d by the Bank i n d i c a t e s t h a t e x p o r t c r e d i t i s p r i m a r i l y used to suppor t l a r ge s c a l e i n d u s t r y which o c c u p i e s an impor tan t r o l e in the n a t i o n a l economy. The a i r c r a f t m a n u f a c t u r i n g i n d u s t r y r e c e i v e s the bu lk of the b e n e f i t of the B a n k ' s f i n a n c i n g a c t i v i t y . The i n d u s t r y would u n d o u b t e d l y havp d i f f i c u l t y in a r r a n g i n g s a l e s of the new w i d e - b o d i e d a i r c r a f t i f i t were unab le to count on the f i n a n c i n g p r o v i d e d by the Ex im Bank. A slowdown in the a i r c r a f t i n d u s t r y can have d e v a s t a t i n g e f f e c t s on the l o c a l economy, as w i t n e s s e d by the r e d u c t i o n in a c t i v i t y in B o e i n g ' s S e a t t l e p l a n t in the l a t e I 9 6 0 ' s . The a n a l y s i s a l s o i n d i c a t e d t h a t the f i n a n c e d p r o d u c t s were e x p o r t e d to t ho se n a t i o n s where the U.S. a l r e a d y had s t r o n g t r a d e t i e s . — i . e . C e n t r a l and South A m e r i c a and SE A s i a . 88 FOOTNOTES CHAPTER I I I 1. U n i t e d N a t i o n s , Department of Economic s and S o c i a l A f f a i r s , Yearbook o f I n t e r n a t i o n a l T r a d e S t a t i s t i c s 1975, Volume 2, T r a d e by  Commodity, 1975, p. 686-94 2. E x p o r t - I m p o r t Bank, Annua l Repor t 1975, p.26 3. F i n a n c i n g U.S. E x p o r t s and Over sea s I nves tment , W a s h i n g t o n , Mach ine ry and A l l i e d P r o d u c t s I n s t i t u t e and C o u n c i l f o r T e c h n o l o g i c a l Advancement , 1964, p. 27 4. I b i d , p. 24 5. , F i n a n c i n g F o r e i g n O p e r a t i o n s , Second E d i t i o n , New Y o r k , B u s i n e s s I n t e r n a t i o n a l , 1964, p. 38 6. N e h r t , Lee C . , F i n a n c i n g C a p i t a l Equipment E x p o r t s , S c r a n t o n , P a . , I n t e r n a t i o n a l t e x t b o o k Company, 1066, p. II? 7. K e a r n s , Henry J . , " E x i m Bank and the B u d g e t " , Bank i nq Vo I. L X I I I , No. 9, March 1971, p. 50 8. E x p o r t - I m p o r t Bank, Ex im Bank, How i t Works , 1975, p. 8 9. E x p o r t - I m p o r t Bank, Annual R e p o r t , F i s c a l year 1972, p. 13 10. E x p o r t - I m p o r t Bank, Ex im Bank: What i t i s , What i t Does , What i t Can do F o r You , 1976, p. 2 11. The annual r e p o r t s of the E x p o r t - I m p o r t Bank f o r 1971 and 1972 each p r o v i d e a d e s c r i p t i o n o f the C o o p e r a t i v e F i n a n c i n g F a c i l i t y . The i n f o r m a t i o n i s p r o v i d e d on pages 38 and 13 of the r e s p e c t i v e annual r e p o r t s . The E x p o r t - I m p o r t Bank ' s p u b l i c a t i o n Exim Bank, How |t Works , 1975 on pages 7-8 p r o v i d e s a d e t a i l e d d e s c r i p t i o n of CFF . 12. D e t a i l s of a l l CFF loans i n c l u d i n g the name of the b u y e r , the p u r p o s e , r a t e and terms of the l o a n , and the name of the c o o p e r a t i n g i n s t i t u t i o n are p r o v i d e d in the E x p o r t - I m p o r t B a n k ' s p u b l i c a t i o n C u m u l a t i v e R e c o r d s , 1974, on pp. 95-172 13. E x p o r t - I m p o r t Bank, C u m u l a t i v e R e c o r d s , 1974, pp. 127-8 8 9 FOOTNOTES CONTINUED 14. E x p o r t - I m p o r t Bank, Exim Bank-How It Works, 1975, p. 18 15. I b i d , p. 19 16. L o o m i s , John E . , I n t e r n a t i o n a l F i n a n c e ; O f f i c i a l A g e n c i e s and U.S. B u s i n e s s , R e v i s e d E d i t i o n , W a s h i n g t o n , D . C , BNA Books I n c . , 1970, p. 36 17. E x p o r t - I m p o r t : Bank, Exim Bank-How It Works , 1975, p. 25 18. L o o m i s , Op. c i t . p.33 19. V i d e t , P o t e , Government E x p o r t A s s i s t a n c e in the U n i t e d S t a t e s , Re sea r ch N o t e , B o s t o n , Ma s s . , Harvard B u s i n e s s S c h o o l , 1975, p. 13 20. E x p o r t - I m p o r t Bank, Exim Bank-How It Works, 1975, pp. 2-3 21. K e a r n s , Henry J . , " C r e d i t : A Key to E x p o r t S a | e s " , Co lumb ia J o u r n a l of World B u s i n e s s , V o l . V I , No. 2, M a r c h . A p r i l 1971, p.36 22. L o o m i s , Op. c i t . p. 46 23. E x p o r t - I m p o r t Bank, Exim Bank-How It Works, 1975, pp. 22 -3 24. L o o m i s , Op. c i t . p. 24 25. , Wor ld Bank O p e r a t i o n s S e c t o r a l Programs and P o l i c i e s , B a l t i m o r e , The I n t e r n a t i o n a l Bank f o r R e c o n s t r u c t i o n and Deve lopment , 1972, p .147 26. I b i d , p. 151 27. I b i d , p. 161 28. I b i d , pp. 166-79 29. I b i d , p. 221 30. I b i d , p. 224 3|. I b i d , p. 103 32. | b i d , p. 108 33. I b i d , p. 199 90 FOOTNOTES CONTINUED 34. I b i d , p. 204 35. I b i d , p .207 36. U n i t e d N a t i o n s , Department of Economics and S o c i a l A f f a i r s , Yearbook of I n t e r n a t i o n a l T r a d e S t a t i s t i c s 1975, Volume 2, T r a d e by  Commodity, 1975, pp. 686-94 37. Mohammed, A z i z a l , " T h e Use of Commerc ia l C r e d i t s by D e v e l o p i n g C o u n t r i e s f o r F i n a n c i n g Imports o f C a p i t a l G o o d s " , IMF S t a f f  P a p e r s , V o l . XV I I , 1970, p. 69 38. P e a r s o n , L e s t e r B., e t . a l . , P a r t n e r s in Deve lopment -Repor t of the Commiss ion on I n t e r n a t i o n a l Deve lopment , New Y o r k , P r a e g e r Publ i s h e r s , 1969, p. 120 39. , " T h e Ex im Bank and E x p o r t F i n a n c i n g " , B a n k i n g , Oc tobe r 1970, V o l . LXII No. 4, p. 56 40 . V i d e t , P . , Op. c i t . p. 18 41 . As r e p o r t e d in N e h r t , Lee C . , F i n a n c i n g C a p i t a l Equipment E x p o r t s , S c r a n t o n , P a . , I n t e r n a t i o n a l Tex tbook Company, 1966, p. 101 42. see S t e r n , M . , "Low Cos t Ex im Bank Loans to S o v i e t H i t by J a c k s o n " , N.Y. T i m e s , June 4 , 1974, and D a l e , Edwin L . , " S o v i e t C o n t r o v e r s y at the Exim Bank " , N.Y. T i m e s , A p r i l 7, 1974 f o r a d i s c u s s i o n of t h i s s i t u a t i o n . 43. V i d e t , P . , Op. c i t . p. 22 CHAPTER |V EXPORT DEVELOPMENT CORPORATION Canada i s dependent upon i n t e r n a t i o n a l t r a d e to m a i n t a i n the h i gh s t a n d a r d of l i v i n g en joyed by i t s c i t i z e n s . A p p r o x i m a t e l y one q u a r t e r of our economic a c t i v i t y o c c u r s as a r e s u l t of a c t i v i t y in the i n t e r n a t i o n a l market p l a c e . The r e l a t i v e l y sma l l s i z e of our d o m e s t i c market f o r c e s Canad ian p r o d u c e r s to depend on the expor t market to r e a c h economic l e v e l s of p r o d u c t i o n . In the Canad ian m a n u f a c t u r i n g s e c t o r , p r i m a r i l y l o c a t e d in c e n t r a l Canada , p r o d u c e r s of c a p i t a l goods have found the i n t e r n a t i o n a l marke t s to be v e r y c o m p e t i t i v e . A l l of the major t r a d i n g n a t i o n s a re c o n c e r n e d w i t h the p romot i on of e x p o r t s . As o u t l i n e d e l sev/here in t h i s s tudy one of the methods n a t i o n s have d e v e l o p e d to r e a c h t h i s goa l i s by p r o -v i d i n g e x p o r t c r e d i t i n s u r a n c e and e x p o r t f i n a n c e . The s a l e of c a p i t a l goods u s u a l l y r e q u i r e s f i n a n c i n g wh ich i s r e p a y a b l e over a p e r i o d g r e a t e r than f i v e y e a r s . The c h a r t e r e d banks of Canada have been r e l u c t a n t to p r o v i d e such f i n a n c i n g because t h e i r f u n c t i o n , as t h e y v iew i t , i s t o p r o v i d e s h o r t and. mediurn term f i n a n c i n g . The p r i v a t e i n s u r a n c e companies a re r e l u c t a n t to i n s u r e the commerc ia l and p o l i t i c a l r i s k s e n c o u n t e r e d in d e a l i n g in f o r e i g n c o u n t r i e s . The Canad ian e x p o r t e r , t h e r e f o r e , has found i t d i f f i c u l t 91 92 "to compete in the i n t e r n a t i o n a l m a r k e t p l a c e . In an e f f o r t to f a c i l i t a t e and deve l op t r a d e between Canada and o t h e r n a t i o n s the F e d e r a l government in 1944 e s t a b l i s h e d the E x p o r t C r e d i t s In surance C o r p o r a t i o n . The main purpose of t h i s Crown C o r p o r a t i o n was to p r o v i d e i n s u r a n c e f o r Canad ian e x p o r t e r s who wanted "to cove r t hemse l ve s a g a i n s t c e r t a i n r i s k s of non-payment f o r goods s o l d to buyer s in f o r e i g n c o u n t r i e s . In I960 the E C l C ' s g o v e r n i n g Act was amended to a l l o w ECIC to p r o v i d e long term f i n a n c i n g f o r e x p o r t e d Canad ian c a p i t a l goods and r e l a t e d t e c h n i c a l s e r v i c e s . Over the y e a r s the mechanism used by the government and i t s a g e n c i e s to promote e x p o r t s has g r a d u a l l y changed from expor t c r e d i t i n s u r a n c e to the f i n a n c i n g f i e l d . As a r e s u l t of t h i s chang ing emphas i s , the E x p o r t Development C o r p o r a t i o n was e s t a b l i s h e d by an a c t of P a r l i a m e n t on June 27 , 1969. The E x p o r t Development C o r p o r a t i o n was " e s t a b l i s h e d f o r the purpose of f a c i l i t a t i n g and d e v e l o p i n g t r a d e between Canada and o t h e r c o u n t r i e s by means of the f i n a n c i a l and o t h e r powers p r o v i d e d by the E x p o r t Development A c t . " 1 EDC f u l f i l l s i t s f u n c t i o n by p r o v i d i n g : 1) Insurance f o r e x p o r t e r s a g a i n s t non-payment by f o r e i g n b u y e r s , ( e x p o r t c r e d i t i n s u r a n c e ) 2) Insurance f o r Canad ian Investment a g a i n s t l o s s due to non -commerc i a l c r e d i t r i s k , ( f o r e i g n inves tment i n s u r a n c e ) 3) Loans to f o r e i g n buyer s of c a p i t a l goods and major t e c h n i c a l s e r v i c e s f o r which ex tended c r e d i t i s not a v a i l a b l e from r e g u l a r commerc ia l s o u r c e s , ( e x p o r t c r e d i t or expor t f i n a n c e ) . I. EXPORT CREDIT INSURANCE The expor t c r e d i t i n s u r a n c e p r o v i d e d by EDC i n s u r e s the Canad ian e x p o r t e r a g a i n s t the v a r i o u s t y p e s of commerc ia l and p o l i t i c a l 93 r i s k s d e t a i l e d p r e v i o u s l y in t h i s s t u d y . The EDC has adopted an a l l -encompass ing d e f i n i t i o n of r i s k wh ich p r o v i d e s coverage f o r any cause which i s o u t s i d e the c o n t r o l of both the p u r c h a s e r and the s e l l e r and which a r i s e s from e v e n t s o c c u r r i n g o u t s i d e Canada and the c o n -t i n e n t a l U.S.A. T h i s i n t e r p r e t a t i o n of r i s k i s somewhat d i f f e r e n t to t h a t adopted by the FC IA. The Amer i can agency o n l y p r o v i d e s coverage f o r t ho se r i s k s o u t l i n e d in the i n s u r a n c e p o l i c y . The maximum l i a b i l i t y t h a t EDC i s p e r m i t t e d to assume, at any p o i n t in t i m e , under a l l e x p o r t c r e d i t i n s u r a n c e p o l i c i e s i s sued i s $1 .5 b i l l i o n . T h i s amount i s d i v i d e d e q u a l l y between p o l i c i e s a u t h o r i z e d by the Board of D i r e c t o r s of EDC and p o l i c i e s a u t h o r i z e d by the F e d e r a l Government. On December 31 , 1975, EDC ' s maximum c o n t i n g e n t l i a b i l i t y under a l l i s s u e d p o l i c i e s was $816.3 m i l l i o n . S i n c e the C o r p o r a t i o n i n s u r e d $910 .7 mi I I i on of e x p o r t s in the l a s t f i s c a l y e a r , i t appear s t h a t the i n s u r a n c e p o l i c i e s have a r e l a t i v e l y s h o r t t e rm. T a b l e V I I I i n d i c a t e s t h a t l e s s than t h r e e p e r c e n t of t o t a l Canad ian e x p o r t s are be ing i n s u r e d under the f a c i l i t i e s o f f e r e d by the EDC. The f a c t t h a t n e a r l y t w o - t h i r d s of Canad ian e x p o r t s end up in the Amer i can economy u n d o u b t e d l y e x p l a i n s why t h i s i n s u r e d •figure i s so s m a l l . The 3% Canad ian f i g u r e can be compared f o r example w i t h B r i t i s h f i g u r e s wh ich i n d i c a t e t h a t 25$ of a l l .Un i ted Kingdom e x p o r t s a re i n s u r e d by the ECGD. E x p o r t c r e d i t i n s u r a n c e i s p r o v i d e d f o r a broad range of raw m a t e r i a l s and p r o d u c t s p roduced in the Canad i an economy. I n e d i b l e f a b r i c a t e d m a t e r i a l s are the major group of p r o d u c t s i n s u r e d and the l a r g e s t s i n g l e component in t h i s c a t e g o r y i s wood, p u l p , n e w s p r i n t , TABLE VI I I COMMODITIES INSURED BY EXPORT DEVELOPMENT CORPORATION SELECTED YEARS MILLIONS OF DOLLARS COMODITY 1970 1972 1974 TOTAL AMOUNT •* AMOUNT % AMOUNT % AMOUNT % L i VG An ima1s 6.4 1. 1 3.9 0 .8 4 .9 0 .5 15.2 0 .8 F o o d , F e e d , Beverages and Tobacco 122.9 21.9 58.4 11.7 193.9 2 0 . 7 375.2 18.8 Crude M a t e r i a l s , I n e d i b l e 15.3 2.7 8. 1 1.6 19.4 2. 1 42 .8 2. 1 F a b r i c a t e d M a t e r i a l s , I n e d i b l e 239 .7 4 2 . 7 296.5 59.5 486.2 51 . 7 1022.4 51 . 1 Serv i ces 6.5 1.2 4.0 0 .8 20 .5 2.2 31.0 1.6 End P r o d u c t s , I n e d i b l e of Which 170.8 30.4 127.7 25.6 213.8 22.8 512.3 25.6 I n d u s t r i a l Mach ine ry 2 6 . 7 4 .8 23.4 4 . 7 55.2 5.9 105.3 5.3 Communicat ions Equipment 7.3 1.3 7. 1 1 .4 21 .5 2.3 35.9 1.8 A i r c r a f t 78.2 13.9 15.2 3. 1 38. 1 4. 1 131.5 6.6 A u t o m o b i l e s and P a r t s 4 . 7 0 .8 4 .2 0 .8 24.8 2.6 3 3 . 7 1.7 Farm Mach inery 7.6 1 .4 6.6 1.3 9.9 1 . 1 24. 1 1.2 E l e c t r i c a l Equipment 8.4 1.5 9 .7 2.0 • 8.0 0 .9 26. 1 1.3 Other End P r o d u c t s 37.9 6 .7 61.5 12.3 56.3 5.9 155.7 7.8 TOTAL 561 .6 100.0 498.6 100*0 938 .7 100.0 1998.9 100.0 Canad ian E x p o r t s 16820.0 20150.0 32177.0 69147.0 T o t a l i n su red E x p o r t s as a % of T o t a l E x p o r t s 3.33 2.47 2.92 2.89 T o t a l End P r o d u c t s I n e d i b l e as a $ of T o t a l E x p o r t s 1.01 0.63 0.66 0 .74 SOURCE: E x p o r t Development C o r p o r a t i o n , Annual Repo r t s paper and o t h e r paper p r o d u c t s , wh ich in 1974 a ccoun ted f o r $319.6 m i l l i o n or 6 5 . 7 $ of t o t a l i n s u r e d i n e d i b l e f a b r i c a t e d m a t e r i a l s . S t e e l p r o d u c t s were the second l a r g e s t i component in t h i s c a t e g o r y w i t h 19$ of the t o t a l . The i n e d i b l e end p r o d u c t s c a t e g o r y c o n s i s t s of c a p i t a l goods and consumer d u r a b l e s . T a b l e V I I I i n d i c a t e s t h a t c a p i t a l equipment e x p o r t s compr i se about 25$ of t o t a l i n s u r e d e x p o r t s . E x p o r t e d end p r o d u c t s compr i se l e s s than 1$ of t o t a l Canad ian e x p o r t s . E x p o r t c r e d i t i n s u r a n c e , in t h e o r y , can be j u s t i f i e d on the grounds t h a t the e x p o r t e r i s unab le to e v a l u a t e and t h e r e f o r e d i s i n -c l i n e d to assume the commerc ia l and p o l i t i c a l r i s k s of d e a l i n g in the i n t e r n a t i o n a l m a r k e t p l a c e . However, when one c o n s i d e r s t h a t l e s s than t h r e e p e r c e n t of Canad ian e x p o r t s a re be ing a s s i s t e d by t h i s t ype of i n s u r a n c e , the v a l u e of t he s e r v i c e must be q u e s t i o n e d . F u r t h e r , n e a r l y o n e - t h i r d of the i n s u r e d e x p o r t s in 1974 c o n s i s t e d of lumber and pu lp and paper p r o d u c t s . The Canad ian f o r e s t i n d u s t r y c o n s i s t s of a sma l l number of l a r g e s c a l e p r o d u c e r s , such as M a c M i l l a n B l o e d e l L i m i t e d , A b i t i b i Paper Company L i m i t e d , C o n s o I i d a t e d - B a t h u r s t L i m i t e d , Domtar L i m i t e d and B.C. F o r e s t P r o d u c t s L i m i t e d . It does not appear to be l i k e l y t h a t a m u l t i n a t i o n a l c o r p o r a t i o n such as M a c M i l l a n B l o e d e l L t d . , w i t h annual s a l e s volume in exces s of $1 .3 b i l l i o n , i s not c a p a b l e of e v a l u a t i n g and assuming the commerc ia l and p o l i t i c a l r i s k s of d e a l i n g in the wor ld marke t . It i s a l s o u n l i k e l y t h a t the i n s u r a n c e f e a t u r e h e l p s a c o r p o r a t i o n such as M a c M i l l a n B l o e d e l L t d . o b t a i n the n e c e s s a r y f i n a n c i n g f o r i t s r e c e i v a b l e s . In o r d e r to i n c r e a s e i n d u s t r i a l ou tpu t and to d i v e r s i f y i t s d o m e s t i c economy, Canada s h o u l d s t r i v e to produce goods in which 96 she has a c o m p a r a t i v e advan tage . The p r o d u c t s must be f u l l y c o m p e t i t i v e in wor ld m a r k e t s . T a b l e VI I I i n d i c a t e s t h a t l e s s than \% of Canad ian e x p o r t s c o n s i s t of i n e d i b l e end p r o d u c t s s u p p o r t e d by expor t c r e d i t i n s u r a n c e . The E D C ' s i n s u r a n c e f a c i l i t y t h e r e f o r e , appear s to be of l i m i t e d v a l u e in h e l p i n g Canada d e v e l o p a more d i v e r s i f i e d i n d u s t r i a l s e c t o r . II. FOREIGN INVESTMENT INSURANCE In an a t tempt to match the f a c i l i t i e s o f f e r e d to n a t i o n a l s of o t h e r c o u n t r i e s , the EDC d e v e l o p e d the F o r e i g n Investment In surance program. Under t h i s f a c i l i t y Canad ian bus inessmen v/ho i n v e s t abroad can o b t a i n p r o t e c t i o n a g a i n s t the p o s s i b i l i t y of l o s s due to e x p r o p -r i a t i o n , armed c o n f l i c t , or f a c t o r s a f f e c t i n g t h e i r a b i l i t y to r e -p a t r i a t e e a r n i n g s or c a p i t a l . The program i s a l s o d e s i g n e d to encourage Canad ian p a r t i c i p a t i o n in j o i n t v e n t u r e s w i t h f o r e i g n n a t i o n a l s . The p o l i c i e s a re i s s u e d f o r a maximum term of f i f t e e n y e a r s and once i s sued can o n l y be c a n c e l l e d by the i n v e s t o r , and not by EDC, so long as the b a s i c terms and c o n d i t i o n s of the p o l i c y a re adhered t o . The i n s u r a n c e p r o v i d e s coverage f o r v i r t u a l l y any type of f o r e i g n i n v e s t m e n t . E q u i t y , l o a n s , management c o n t r a c t s and r o y a l t y and l i c e n c i n g ag reement s , a re some examples of the type of inves tment t h a t can be i n s u r e d . The co s t of the i n s u r a n c e i s a p p r o x i m a t e l y \% per annum. The Canad ian i n v e s t o r appear s r e l u c t a n t to make use of t h i s t ype of f a c i l i t y . In the f i r s t f o u r y e a r s t h a t the EDC o f f e r e d such i n s u r a n c e , o n l y f o r t y - f i v e p o l i c i e s were i s s u e d . In FY 1975 the t o t a l number of o u t s t a n d i n g p o l i c i e s i n c r e a s e d by e l e v e n to t h i r t y - f i v e w h i l e the v a l u e of i n ve s tmen t s i n s u r e d i n c r e a s e d by 57% t o $68.4 mi I I i on. 97 The f a c i l i t y can p r o v i d e suppor t f o r Canad ian i n v e s t o r s who e n t e r j o i n t v e n t u r e s w i t h the n a t i o n a l s of a d e v e l o p i n g c o u n t r y . The r i s k s of e x p r o p r i a t i o n and c u r r e n c y i n c o n v e r t i b i l i t y a re h i gh when d e a l i n g w i th some LDCs. Such r i s k s can be e l i m i n a t e d th rough the use of f o r e i g n inves tment i n s u r a n c e which w i l l p r o t e c t the t r a n s f e r of t e c h n o l o g y and m a n a g e r i a l know-how. The EDC c l a i m s the f a c i l i t y p r o v i d e s a s t i m u l u s f o r C a n a d a ' s f o r e i g n t r a d e and u n d o u b t e d l y hopes t h a t the i n c r e a s e d a c t i v i t y in 1975 s i g n a l s a major b r e a k t h r o u g h in the use of f o r e i g n inves tment i n s u r a n c e . 3 I l l - EXPORT FI NANCE Under S e c t i o n 29 of the A c t , E .D .C . may p r o v i d e d i r e c t long term loans to f o r e i g n cus tomers to f i n a n c e the p u r c h a s e of Canad ian c a p i t a l goods and t e c h n i c a l s e r v i c e s . The C o r p o r a t i o n may a l s o g u a r a n t e e any such loans made by p r i v a t e f i n a n c i a l i n s t i t u t i o n s . P r i o r to 1973 the C o r p o r a t i o n s ' s board of d i r e c t o r s was a u t h o r i z e d to g r an t loans or g u a r a n t e e s s u b j e c t to the p r o v i s o t h a t the maximum amount o u t s t a n d i n g at any p o i n t in t ime d i d not exceed $850 mi I I i o n . In 1973, t h i s maximum c e i l i n g was i n c r e a s e d to $1500 m i l l i o n , and in 1974 was f u r t h e r i n c r e a s e d to $4250 m i l l i o n . In a d d i t i o n to each of t h e s e c e i l i n g s EDC may a l s o f i n a n c e c a p i t a l e x p o r t s wh ich a re s p e c i a l s i t u a t i o n s c o n s i d e r e d to be in the n a t i o n a l i n t e r e s t by the M i n i s t e r of I n d u s t r y , T r a d e , and Commerce. At p r e s e n t , the maximum a d d i t i o n a l l i a b i l i t y t h a t EDC i s p e r m i t t e d to assume under loans d i r e c t l y a u t h o r i z e d by the F e d e r a l Government i s $850 m i l l i o n . It appears the C o r p o r a t i o n ' s c e i l i n g s a re e s t a b l i s h e d on an ad hoc b a s i s . A r e v i e w of some of the m inu te s and e v i d e n c e of the S t a n d i n g Committee on F i n a n c e , T r a d e and Economic A f f a i r s f o r 1973 98 f a i l e d to d i s c l o s e the method used to d e t e r m i n e the c e i l i n g . The b e l i e f t h a t E D C ' s c e i l i n g s a re e s t a b l i s h e d on an ad hoc b a s i s i s s uppo r ted by n o t i n g t h a t EDC ' s t o t a l of no te s r e c e i v a b l e and u n d i s b u r s e d f i n a n c i n g on December 31 , 1972 was $841.0 m i l l i o n . W i thou t an i n c r e a s e i n t h e i r a u t h o r i z e d c e i l i n g the C o r p o r a t i o n would have s i g n e d v e r y few new agreements in 1973. The c e i l i n g was s u b s e q u e n t l y i n c r e a s e d to $1 .5 b i l l i o n . However, by the end of 1973, the C o r p o r a t i o n was once a ga in v e r y c l o s e to the l e v e l p e r m i t t e d by the new l e g i s l a t i o n . On December 31 , 1973 the t o t a l of n o t e s r e c e i v a b l e and u n d i s b u r s e d f i n a n c i n g was $1240.2 mi I I i o n . In 1974 P a r i i a m e n t was once a g a i n r e q u e s t e d to pass a b i l l i n c r e a s i n g the a u t h o r i z e d l e n d i n g c e i l i n g s of the C o r p o r a t i o n . At t h a t t i m e , in an o b v i o u s move to a l l o w f o r f u t u r e g rowth , the C o r p o r a t i o n ' s f i n a n c e c e i l i n g was i n c r e a s e d to $4 .25 bi I I i o n . To q u a l i f y f o r a long term f i n a n c i n g loan from EDC the t r a n s a c t i o n must be of a t ype and f o r an amount which j u s t i f i e s e x -tended c r e d i t terms ( i . e . beyond f i v e y e a r s ) . The p r o j e c t must be f i n a n c i a l l y and e c o n o m i c a l l y sound and the f o r e i g n bor rower must be c r e d i t w o r t h y . The t r a n s a c t i o n must p r o v i d e employment and i n d u s t r i a l b e n e f i t s to Canada and in a d d i t i o n the t r a n s a c t i o n must have a Canad ian m a t e r i a l and l abour c o n t e n t of not l e s s than 80$. A l l goods 4 and s e r v i c e s must be e x p o r t e d from Canada. Up u n t i l 1974, EDC had an u n w r i t t e n p o l i c y of not c o n s i d e r i n g any long term f i n a n c i n g c o n t r a c t s wh ich had a v a l u e of l e s s than $1 m i l l i o n . T h i s minimum r e q u i r e m e n t was removed in 1974 and now " any c a p i t a l equipment or s e r v i c e e x p o r t t r a n s a c t i o n i s e l i g i b l e f o r EDC suppor t so long as the t r a n s a c t i o n j u s t i f i e s ex tended c r e d i t terms in a c c o r d a n c e w i t h normal i n t e r n a t i o n a l p r a c t i c e . " The C o r p o r a t i o n i s p r i m a r i l y concerned w i t h i n c r e a s i n g Canada ' s e x p o r t s but i s h o p e f u l t h a t the f i n a n c e d p r o j e c t w i l l a l s o be of b e n e f i t to the r e c i p i e n t c o u n t r y . On o c c a s i o n , EDC p r o v i d e s a d v i c e to the r e c i p i e n t c o u n t r y and may even t r y to a s c e r t a i n where the p roposed p r o j e c t r a t e s on the host c o u n t r y ' s s c a l e of p r i o r i t i e s . The former p r e s i d e n t of EDC, H. T . A i t k e n , however, b e l i e v e s EDC ' s main purpose i s to lend money to major c a p i t a l p r o j e c t s abroad which make use of Canad ian c a p i t a l equ ipment . In h i s v iew the main purpose of EDC i s to promote Canad ian t r a d e . 6 By p r o v i d i n g long term f i n a n c i n g EDC hopes to s t i m u l a t e the Canad ian m a n u f a c t u r i n g s e c t o r , t h e r e b y p r o v i d i n g more jobs and more income f o r C a n a d i a n s . EDC commiss ioned S t a t i s t i c s Canada to unde r t ake a s tudy to d e t e r m i n e how many d i r e c t jobs a re c r e a t e d when EDC f i n a n c e s a c a p i t a l goods e x p o r t . S t a t c a n ' s s tudy c o n c l u d e d t h a t a p p r o x i m a t e l y 100 man-year s of d i r e c t employment a re c r e a t e d f o r each $1 m i l l i o n c o n t r a c t f i n a n c e d by E D C . 7 In 1975, EDC s i g n e d f i n a n c i n g agreements t o t a l l i n g $1135 mi I I i o n . T h e r e f o r e , a p p r o x i m a t e l y 114,000 d i r e c t man-year s of employment shou ld have been c r e a t e d in the most r e c e n t f i s c a l y e a r . A Canad ian e x p o r t e r i s r e s p o n s i b l e f o r b r i n g i n g any p roposed e x p o r t s a l e s which r e q u i r e f i n a n c i n g to the a t t e n t i o n of EDC. Once an e x p o r t e r has found a p r o s p e c t i v e p u r c h a s e r f o r h i s p r o d u c t he approaches EDC to a c e r t a i n i f t hey would be w i l l i n g t o f i n a n c e the s a l e . In o r d e r to e v a l u a t e the a p p l i c a t i o n EDC r e q u i r e s the e x p o r t e r to p r o v i d e d e t a i l e d i n f o r m a t i o n about the p r o j e c t . An a p p l i c a t i o n 100 form f o r long term f i n a n c i n g i s i n c l u d e d as Append ix II to t h i s s t u d y . Some of the i n f o r m a t i o n r e q u i r e d in the a p p l i c a t i o n i n c l u d e s : 1) d e t a i l e d f i n a n c i a l i n f o r m a t i o n on the e x p o r t e r ' s company f o r the l a s t f i v e y e a r s 2) d e t a i l e d f i n a n c i a l i n f o r m a t i o n on the bor rower c o v e r i n g the l a s t f i v e y e a r s and i n c l u d i n g f o r e c a s t p r o j e c t i o n s f o r the next f i v e y e a r s 3) d e t a i l e d i n f o r m a t i o n about the p r o j e c t i n c l u d i n g t i m i n g , c o s t s and the amount of f i n a n c i n g r e q u i r e d 4) d e t a i l s of the b e n e f i t s a c c r u i n g bo th t o the i m p o r t i n g c o u n t r y and to the Canad ian economy. It i s u n l i k e l y t h a t t h i s t ype of i n f o r m a t i o n would be r e a d i l y a v a i l a b l e to the e x p o r t e r . It appear s t h a t the e l a p s e d t ime f rom the da te of the o r i g i n a l i n q u i r y u n t i l the f i n a l a p p r o v a l by the E D C ' s Board of D i r e c t o r s c o u l d be in the o r d e r of 3 - 4 months. Once the a p p l i c a t i o n i s a p p r o v e d , EDC s i g n s a f i n a n c i n g agreement w i t h the bo r rower and t h e n , on i n s t r u c t i o n s f rom the b o r r o w e r , EDC pays the funds to the Canad ian e x p o r t e r . A p r o j e c t can i n v o l v e a m u l t i p l i c i t y of s u p p l i e r s . The p u r c h a s e r must ensure t h a t each Canad ian e x p o r t e r i s aware of the f a c t t h a t the c o n t r a c t i s b e i n g f i n a n c e d by EDC. Each e x p o r t e r must submit to the C o r p o r a t i o n c o p i e s of a l l i n v o i c e s f o r goods pu r cha sed from o t h e r major s u p p l i e r s . A minimum purcha se of a p p r o x i m a t e l y \/\0% of the v a l u e of the c o n t r a c t Q i s n e c e s s a r y b e f o r e the i n v o i c e i s pe ru sed by EDC. The T e c h n i c a l and F i n a n c i a l S e r v i c e s D i v i s i o n of EDC then a u t h e n t i c a t e s each i n v o i c e to v e r i f y t he 80% Canad i an c o n t e n t r e g u l a t i o n . The Canad ian c o n t e n t r e q u i r e m e n t r e s t r i c t s the a b i l i t y of the Canad ian e x p o r t e r to s e l l h i s goods in the wor ld marke t . F o r example , I n t e r n a t i o n a l Hydrodynamics Company L t d . (HYCO), a w e s t c o a s t f i r m , has s u c c e s s f u l l y d e v e l o p e d and marketed a t ype of s u b m e r s i b l e v e s s e l which i s used f o r v a r i o u s t y p e s of underwater s u r v e y s and r e c o v e r y work. The p roduc t i s u n i q u e l y Canad ian in d e s i g n , t e c h n o l o g y and m a n u f a c t u r e . In 1975, HYCO f i n a n c e d the s a l e o f a P i s c e s s u b m e r s i b l e th rough the E x p o r t Development C o r p o r a t i o n . A loan of $1.1 m i l l i o n was g r a n t e d the p u r c h a s e r , V i c k e r s O c e a n i c s L i m i t e d o f London , E n g l a n d . P r i o r to t h i s c o n t r a c t , EDC had not f i n a n c e d the s a l e of any s i m i l a r t ype o f p r o d u c t . As a r e s u l t , the c h e c k i n g of the Canad ian c o n t e n t r e q u i r e m e n t was f a i r l y i n v o l v e d . The T e c h n i c a l and F i n a n c i a l S e r v i c e s D i v i s i o n i s l o c a t e d in O t t awa , w h i l e t he m a n u f a c t u r e r i s l o c a t e d i n Nor th V a n c o u v e r , B.C. The d i s t a n c e between the se two g r o u p s , c o u p l e d w i t h the prob lems o f d e a l i n g w i t h a government b u r e a u c r a c y , appear to have c r e a t e d b a r r i e r s r e s t r i c t i n g the a b i l i t y of t h i s Canad ian e x p o r t e r t o compete f o r w o r l d m a r k e t s . The v e s s e l be ing produced by HYCO appear s to be an i d e a l c a n d i d a t e to r e c e i v e EDC s u p p o r t . The s a l e f i n a n c e d i n 1975, however , r e p r e s e n t e d the f i r s t c o n t r a c t wh ich was d i r e c t l y f i n a n c e d by the EDC. HYCO was e s t a b l i s h e d in 1964 by Canad ian I n v e s t o r s . By September 30, 1974, 44.33$ of the f i r m ' s o u t s t a n d i n g s t ock was owned by the P e n i n s u l a r and O r i e n t a l Steam N a v i g a t i o n Company, the l a r g e U.K. based s h i p p i n g l i n e . Perhaps i f Crown C o r p o r a t i o n s l i k e the E x p o r t Development C o r p o r a t i o n and the Canada Development C o r p o r a t i o n were more r e s p o n s i v e to the needs of sma l l Canad ian b u s i n e s s m e n , a l a r g e r p e r c e n t a g e of the ownersh ip of companies l i k e HYCO would be r e t a i n e d by Canad ian i n v e s t o r s . In the pas t f o u r y e a r s E D C ' s l e n d i n g c e i l i n g has been i n -c r e a s e d from $1 . 3 b i l l i o n to $5.1 b i l l i o n . The annual t o t a l of f i n a n c i n g agreements s i g n e d by the EDC has i n c r e a s e d d r a m a t i c a l l y . T a b l e IX shows t h a t the c u m u l a t i v e t o t a l of a l l c o n t r a c t s s i gned up to December 31 , 1970 was $559.0 m i l l i o n . By the way of c o m p a r i s o n , the t o t a l of f i n a n c i n g agreements s i g n e d in the f i s c a l year ended December 31 , 1975 was $1135.0 m i l l i o n . EDC e x p e c t s i t s s i g n i n g s to grow at a 10-15$ annual r a t e . The phenomenal growth in f i n a n c i n g agreements i s m a i n l y a t t r i b u t e d to the a b i l i t y of the Canad ian p r o d u c e r s of c a p i t a l goods and s e r v i c e s to win i n t e r n a t i o n a l b u s i n e s s . ' Some i n t e r e s t i n g q u e s t i o n s have to be asked when one c o n s i d e r s t h i s d r a m a t i c growth r a t e — w h o are t h e s e s u c c e s s f u l e x p o r t e r s , what t ype of p r o d u c t a re they e x p o r t i n g , does Canada appear to have any c o m p a r a t i v e advantages in m a n u f a c t u r i n g t h e s e p r o d u c t s , who are the p u r c h a s e r s of t he se e x p o r t s and how are the funds be ing p r o v i d e d to f i n a n c e t h i s t ype of a c t i v i t y ? IV. ANALYSIS OF LONG TERM FINANCING CONTRACTS In a t t e m p t i n g to f o r m u l a t e some answers to the a f o r e m e n t i o n e d q u e s t i o n s , a l l of the long term f i n a n c i n g agreements of the EDC have been p e r u s e d , the r e l e v a n t academic l i t e r a t u r e has been revi.ewed and d i s c u s s i o n s have been he ld w i t h the l o c a l o f f i c e r s of the E x p o r t Development C o r p o r a t i o n . The f i r s t s tage in the a n a l y s i s i s to i d e n t i f y t h a t group of p r o d u c t s which a re e l i g i b l e f o r suppor t under the EDC ' s f i n a n c i n g f a c i l i t y . C a n a d a ' s wor l d t r a d e p a t t e r n s w i l l be c o n s i d e r e d in o r d e r to e s t a b l i s h a s t a n d a r d a g a i n s t which to compare the t r a d e p a t t e r n s of the f i n a n c e d e x p o r t s . The l a t t e r w i l l then be s u b d i v i d e d i n t o the TABLE IX EXPORT DEVELOPMENT CORPORATION SCHEDULE OF FINANCING AGREEMENTS AND DISBURSEMENTS 1961-1970 1971 1972 1973 1974 1975 Agreements S i gned 559.0 340.0 283.3 462.9 659.4 1135.0 C a n c e l l a t i o n s and D i sbur sement s to Canad ian E x p o r t e r s 4 1 8 . 7 123.9 216.8 224 .7 356.3 637.4 U n d i s b u r s e d F i n a n c i n g f o r P e r i o d 140.3 216.1 66.5 238.2 303.1 497.6 Cumu la t i ve U n d i s b u r s e d F i n a n c i n g 140.3 356.4 422.9 661.1 964 .2 1461.8 SOURCE: E x p o r t Development C o r p o r a t i o n , Annual Repor t s a 104 c a t e g o r i e s used e a r l i e r in t h i s s tudy when d i s c u s s i n g the a c t i v i t i e s of the Exim Bank and the Wor ld Bank. The impor tance of the v a r i o u s groups of e x p o r t s to the Canad ian economy w i l l then be a n a l y z e d . The t r a d e p a t t e r n s of the f i n a n c e d e x p o r t s w i l l a l s o be p r e s e n t e d . T h i s s e c t i o n w i l l c o n c l u d e by a n a l y z i n g the s t r u c t u r e of the Canad ian e x p o r t e r s and the f o r e i g n i m p o r t e r s . T a b l e I of Append ix I i n d i c a t e s t h a t C a n a d a ' s e x p o r t s have i n c r e a s e d by more than 250$ in the s i x year p e r i o d end ing December 31 , 1974. At f i r s t g l a n c e t h i s growth r a t e may appear to be t o t a l l y a c c e p t a b l e . However, i t i s a l s o worth c o n s i d e r i n g t h a t the f o l l o w i n g growth r a t e s were r e c o r d e d in the same s i x year p e r i o d : 1) t o t a l wor l d e x p o r t s i n c r e a s e d by 351$ 2) e x p o r t s of d e v e l o p e d n a t i o n s i n c r e a s e d by 322$ 3) e x p o r t s o f the members o f the EEC i n c r e a s e d by 332$ 4) Japanese e x p o r t s i n c r e a s e d by 428$ 5) Amer i can e x p o r t s i n c r e a s e d by 284$. A l l of t he se f i g u r e s i n d i c a t e t h a t Canada, d e s p i t e the E D C ' s i n c r e a s e d a c t i v i t y , i s l o s i n g i t s s ha re o f w o r l d m a r k e t s . In t h a t s i x year p e r i o d , Japanese e x p o r t s i n c r e a s e d from a p p r o x i m a t e l y the same l e v e l as Canad ian e x p o r t s to a f i g u r e over $20 b i l l i o n g r e a t e r . t h a n C a n a d a ' s . In 1968, the e x p o r t s of a l l of the d e v e l o p i n g n a t i o n s in C e n t r a l and South A m e r i c a were $1 .2 b i l l i o n g r e a t e r than Canad ian e x p o r t s . S i x y e a r s l a t e r t h e y were $15.8 b i l l i o n g r e a t e r . P a r t of t h i s s u b -s t a n t i a l g a i n can be accoun ted f o r by the i n c r e a s e s in the p r i c e of p e t r o l e u m . A l l of t h e s e compar i sons do, however, i n d i c a t e t h a t Canada i s not f u l l y c o m p e t i t i v e in the i n t e r n a t i o n a l m a r k e t s . A p p r o x i m a t e l y 90$ of Canad ian e x p o r t s go to d e v e l o p e d n a t i o n s , w i t h the U n i t e d S t a t e s be ing the major i m p o r t e r of Canad ian goods . 105 C a n a d a ' s e x p o r t s to the d e v e l o p i n g n a t i o n s a re l e s s than $3 b i l l i o n per y e a r . The major share of t h i s market, i s o c c u p i e d by the d e v e l o p i n g n a t i o n s of C e n t r a l and South A m e r i c a . T a b l e X i n d i c a t e s t h a t t he se t r a d e p a t t e r n s have not changed d r a m a t i c a l l y in the I 9 7 0 ' s . T a b l e XI o u t l i n e s the t r u e annual volume of Canad ian e x p o r t s which a re e l i g i b l e f o r f i n a n c i n g under the p r o v i s i o n s of the e x p o r t c r e d i t f a c i l i t y of EDC. W h i l e a l l Canad ian c a p i t a l goods a re e l i g i b l e f o r such f i n a n c i n g , c e r t a i n e x p o r t s to the U n i t e d S t a t e s shou ld be deduc ted to a r r i v e at a more m e a n i n g f u l f i g u r e . E x p o r t s of motor v e h i c l e s and p a r t s p roduced under the Canada -U .S . Auto Pact s hou ld be e x c l u d e d because they a re not f i n a n c e d by the EDC. F u r t h e r , in the f o u r t e e n year p e r i o d end ing December 31 , 1974, l e s s than 1$ of f i n a n c i n g agreements and g u a r a n t e e s s i g n e d by the EDC i n v o l v e d p u r c h a s e r s in the U n i t e d S t a t e s . I t , t h e r e f o r e , appear s to be in o r d e r to e x c l u d e i a l l c a p i t a l equipment e x p o r t s to the U n i t e d S t a t e s . T a b l e XI i n d i c a t e s t h a t e l i g i b l e c a p i t a l equipment e x p o r t s have i n c r e a s e d from $779 m i l l i o n in 1968 to $1,848 b i l l i o n in 1974, a 237$ i n c r e a s e . T h i s growth i s comparab le to t h a t r e c o r d e d f o r t o t a l Canad ian e x p o r t s . |n t h a t same s i x year p e r i o d , EDC ' s annual s i g n i n g s of f i n a n c i n g agreements i n c r e a s e d from a p p r o x i m a t e l y $22 m i l l i o n to $659 m i l l i o n . These f i g u r e s i n d i c a t e t h a t an i n c r e a s i n g volume of C a n a d a ' s e l i g i b l e c a p i t a l equipment e x p o r t s a re r e l y i n g on EDC to p r o v i d e the f i n a n c i n g . m 1968, o n l y 2.8$ of e l i g i b l e e x p o r t s were s u p p o r t e d by EDC e x p o r t c r e d i t , w h i l e by 1974 the f i g u r e had i n -c r e a s e d to 3 5 . 7 $ A l l of the s i gned f i n a n c i n g agreements of EDC from 1961-1974 were examined to d e v e l o p a b e t t e r u n d e r s t a n d i n g of the t y p e s 106 TABLE X CANADA' S EXPORT TRADE BY REGION, COUNTRY OR AREA MILLIONS OF U.S. DOLLARS EXPORTED TO 1970 1972 1974 AMOUNT % AMOUNT % AMOUNT THE WORLD 16,184.9 20 ,177 .8 3 2 , 7 8 3 . 4 DEVELOPED ECONOMIES 14,651.3 9 0 . 5 18,182.3 90. 1 2 9 , 2 0 0 . 4 89. 1 U.S.A. 10,578.3 65 .4 14,114.3 70.0 21 , 8 0 2 . 4 66 .5 As i a 777.0 4 .8 996.9 4 .9 2 ,328.0 7. 1 Europe 3 ,025.0 18.7 2 ,905.2 14.4 4 , 8 3 8 . 0 14.8 O c e a n i a 235.2 1.5 197.6 1 .0 379.9 1.2 Rounding 35.8 0. 1 - 3 1 . 7 - 0 . 2 - 1 4 7 . 9 - 0 . 5 DEVELOPING ECONOMIES 1,260.8 7.8 1,373.2 6.8 2 , 9 2 5 . 7 8.9 A f r i ca 108.5 0 . 7 145.0 0 . 7 325.5 1 .0 C. & S. Amer i ca 688 .4 4 .3 756.4 3.8 1,477.5 4 . 5 As i a 395.5 2.4 393.2 2.0 874.3 2 .7 M i d d l e E a s t 65.3 0 . 4 75 .7 0 .3 244.0 0 . 7 O c e a n i a 3. 1 —— 2.9 —— 4 . 4 1 1 CENTRALLY PLANNED ECONOMIES 272.8 1.8 622.3 3.2 657.3 2.0 TOTAL 16,184.9 100.0 20 ,177 .8 100.0 3 2 , 7 8 3 . 4 100.0 SOURCE: U n i t e d N a t i o n s , Yearbook of I n t e r n a t i o n a l T r a d e S t a t i s t i c s 1974, Volume I, T r ade by C o u n t r y , 1975, p. 192. TABLE XI CANADA'S EXPORTS OF OTHER MANUFACTURED GOODS MILLIONS OF DOLLARS 1968 1970 1972 1974 TOTAL TOTAL EXPORTS 4809 6260 8224 10826 30 1 19 LESS EXPORTS TO THE U.S.A. CONSISTING OF: MOTOR VEHICLES AND PARTS 2501 3290 4484 5373 15648 AIRCRAFT AND PARTS 286 239 313 320 1 158 OTHER PRODUCTS 1243 1653 2109 3285 8290 EXPORTS PRIMARILY ELIGIBLE FOR EDC SUPPORT 779 1078 1318 1848 5023 LESS EXPORTS CONSISTING OF: MOTOR VEHICLES AND PARTS 217 247 230 282 976 AIRCRAFT AND PARTS 83 140 155 1 13 491 OTHER PRODUCTS 477 675 934 1432 3518 ROUND 1NG 2 16 (1) 21 38 BALANCE TOTAL EXPORTS ALL COMMODITIES 13624 16185 20178 32783 82770 1. AS A % OF TOTAL EXPORTS 35.3 38.7 40.8 33.0 36.4 2. AS A % OF TOTAL EXPORTS 5.7 6.7 6.5 5.6 6. 1 5 > AS A fo OF 2 2.8 9.3 21.5 35.7 21.2 EDC FINANCING AGREEMENTS SIGNED 22(E) 100 283 659 1064 SOURCE: Bank of Canada Review, October, 1975, p. SI26 (E) = estimate o 108 of p r o d u c t s be ing s u p p o r t e d by the EDC and to d e t e r m i n e i f the same t r a d e p a t t e r n h o l d s f o r t h i s s e l e c t group of e x p o r t s as f o r t o t a l e x p o r t s . The r e s u l t s of t h i s a n a l y s i s , p r e s e n t e d in T a b l e XII and T a b l e X I I I , i n d i c a t e t h a t s h i p s , i n d u s t r i a l p r o j e c t s w i t h a v a l u e of g r e a t e r than $2 m i l l i o n and commerc ia l e l e c t r i c g e n e r a t i n g p l a n t s a re the t h r e e main groups of p r o d u c t s . The a n a l y s i s a l s o i n d i c a t e s t h a t over 75$ of t h i s group of f i n a n c e d c a p i t a l goods a re e x p o r t e d to the d e v e l o p i n g n a t i o n s . T h i s market d i s t r i b u t i o n i s e x a c t l y the o p p o s i t e of t h a t r e c o r d e d f o r t o t a l Canad ian e x p o r t s . The d e v e l o p i n g n a t i o n s in C e n t r a l and South A m e r i c a r e c e i v e d 53$ of a l l the f i n a n c e d goods e x p o r t e d to d e v e l o p i n g n a t i o n s . In the f i n a n c e d goods c a t e g o r y , e x p o r t s to the LDCs in A f r i c a a re n e a r l y t h r e e t imes as l a r ge as the f i n a n c e d e x p o r t s to the LDCs in A s i a . These l a t t e r r a n k i n g s a re once a ga in j u s t the r e v e r s e of the r a n k i n g s f o r t o t a l Canad ian e x p o r t s . The a n a l y s i s shows t h a t e x p o r t s to the d e v e l o p e d n a t i o n s c o n s i s t e d p r i m a r i l y of s h i p s and e l e c t r i c power p l a n t s . The d e v e l o p i n g n a t i o n s , on the o t h e r hand, sought a l l t y p e s of c a p i t a l goods , but were p r i m a r i l y i n t e r e s t e d in c o n v e n t i o n a l power g e n e r a t i n g p l a n t s and l a r ge s c a l e i n d u s t r i a l p r o j e c t s . It i s not r e a l l y a c c u r a t e to make the a s sumpt ion t h a t because t h e s e t y p e s of p r o d u c t s were be ing e x p o r t e d to the d e v e l o p i n g n a t i o n s they r e p r e s e n t the t y p e s of p r o d u c t s d e s i r e d by the LDCs. An eager Canad ian sa lesman may have s o l d a c o u n t r y a p r o j e c t wh ich d i d not rank h i g h on i t s p r i o r i t y l i s t . S h i p s were the o n l y group of p r o d u c t s in wh ich the d e v e l o p i n g n a t i o n s were not the major r e c i p i e n t s . T a b l e X ! l i n d i c a t e s t h a t the a c t i v i t i e s of the EDC f o l l o w TABLE XII EXPORT DEVELOPMENT COROORATION LONG TERM FINANCING AGREEMENTS SIGNEO JANUARY I, 1971-DECEMBER 31, 1974 MILLIONS OF CANADIAN DOLLARS EXPORTED COMODITY / IMPORTER DEVELOPED NATIONS COMMAND ECONOMIES DEVELOPING NATIONS TOTAL AMOUNT i AMOUNT AMOUNT % AMOUNT % TRANSPORTATION EQUIPMENT (201.5) (71.3) (79.9) (62.3) (359.1) (26.9) (640.5) (36.7) A i r c r a f t Rai1 roads Ships 22.3 10.4 168.8 7.9 3.7 59.7 55.9 24.0 43.6 18.7 131.7 72.5 154.9 9.9 5.4 1 1.6 154.0 138.8 347.7 8.8 8.0 19.9 ELECTRIC POWER PROJECTS (44.3) (15.6) — ' — (369.4) (27.7) (413.7) (23.7) Conventional Generating 44.3 15.6 238.4 17.9 Nuclear Generating 282.7 16.2 131.0 9.8 131.0 7.5 INDUSTRIAL PROJECTS (37.2) (13.1) (44.6) (34.8) (295.4) (22.1) (377.2) (21.6) Greater than $2 Mi 11 ion Less than $2 Mi 11 ion 37.2 13. 1 42.5 33.2 1.6 232.9 17.5 312.6 17.9 Mineral Development — — 6.7 55.8 0.5 4. 1 8.8 55.8 0 . 5 3.2 TELECOMMUNICATIONS (125.9) « _ (9:4) (125.9) (7.2) RELENDING FACILITY (185.0) mmmm (13.9) (185.0) (10.6) ALL OTHERS (3.7) (2.9) (0.2) — (3.9) (0.2) TOTAL 283.0 100.0 128.2 100.0 1334.0 100.0 1745.6 100.0 SOURCE: Export Development C o r p o r a t i o n , Annual Reports TABLE XIII EXPORT DEVELOPMENT CORPORATION LONG TERM FINANCING AGREEMENTS SIGNED JANUARY I, 1971-DECEMBER 31, 1974 MILLIONS OF CANADIAN DOLLARS EXPORTED COMODITY / IMPORTER DEVELOPED NATIONS COMMAND ECONOMIES DEVELOPING NATIONS TOTAL AMOUNT • * AMOUNT AMOUNT % AMOUNT % TRANSPORTATION EQUIPMENT (201.5) (31.5) (79.9) (12.5) (359.1) (56.1) (640.5) ( 100.0) A i r c r a f t 22.3 14.5 . — 131.7 85.5 154.0 (100.0) Rai Iroads 10.4 7.5 55.9 40.3 72.5 52.2 138.8 (100.0) Ships 168.8 48.6 24.0 6.9 154.9 44.5 347.7 (100.0) ELECTRIC POWER PROJECTS (44.3) (10.7) — — (369.4) (89.3) (413.7) (100.0) Conventional Generating 44.3 15.7 — 238.4 84.3 282.7 (100.0) Nuclear Generating — — — — 131.0 100.0 131.0 (100.0) INDUSTRIAL PROJECTS (37.2) (9.9) (44.6) (11.8) (295.4) (78.3) (377.2) (100.0) Greater than $2 M i l l i o n 37.2 , 1 1.9 42.5 13.6 232.9 74.5 312.6 (100.0) Less than $2 Mi 11 ion — — 2. 1 23.9 6.7 76.2 8.8 (100.0) Mineral Development — — — 55.8 100.0 55.8 (100.0) TELECOMMUNICATIONS — — . — — (125.9) (100.0) (125.9) (100.0) RELENDING FACILITY — — — — (185.0) (100.0) (185.0) (100.0) ALL OTHERS NOT ELSEWHERE CLASSIFIED — — (3.7) (94.9) (0.2) (5.1) (3.9) (100.0) TOTAL 283.0 16.2 128.2 7.3 1334.0 76.5 1745.6 SOURCE: Export Development C o r p o r a t i o n , Annual Reports 111 the a c t i v i t i e s of the Wor ld Bank more c l o s e l y than do the a c t i v i t e s of the E x p o r t Import Bank. D e s p i t e the f a c t t h a t the EDC c l a i m s not to be i n v o l v e d in a deve lopment f i n a n c e r o l e the s t r u c t u r e o f i t s market i n d i c a t e s t h a t deve lopment f i n a n c e shou ld p l a y a l a r g e r p a r t in i t s t h i n k i n g . The f a c t t h a t EDC s u p p o r t e d a g r e a t e r p r o p o r t i o n of e x p o r t s of r a i l r o a d equipment and t e l e c o m m u n i c a t i o n s equipment than d i d the Exim Bank might suggest t h a t t he o f f i c e r s of t he EDC are more c o g n i z a n t of the needs of the d e v e l o p i n g c o u n t r i e s . It c o u l d a l s o i n d i c a t e t h a t the Canad ian p r o d u c e r s of t h i s t ype of equipment have been more s u c c e s s f u l in s e l l i n g i t than have t h e i r Amer i can c o u n t e r p a r t s . T a b l e XV l a t e r in t h i s c h a p t e r w i l l show t h a t the ma jo r Canad ian e x p o r t e r s of r a i l r o a d and t e l e c o m m u n i c a t i o n s equipment a re e i t h e r s u b s i d i a r i e s of Amer i can c o r p o r a t i o n s or a re c o n t r o I Ied, to some d e g r e e , by Amer i can i n v e s t o r s . I t , t h e r e f o r e , appear s t h a t the Amer i can m a n u f a c t u r e r s of r a i l r o a d and t e l e c o m m u n i c a t i o n equipment s e r v i c e the wor ld market by e x p o r t i n g t h rough t h e i r Canad ian s u b s i d i a r i e s . How impor tant a re t h e s e f i n a n c e d c a p i t a l equipment e x p o r t s to the Canad ian economy? The b e n e f i t s i n c l u d e i n c r e a s e d employment, i n c r e a s e d t axe s f o r a l l l e v e l s of government , t he deve lopment of a more e f f i c i e n t Canad ian i n d u s t r i a l s e c t o r and the o p p o r t u n i t y f o r Canad ian companies to d e v e l o p p r o d u c t s w i t h a h i gh t e c h n o l o g i c a l component. The r e a d i l y i d e n t i f i a b l e c o s t s i n c l u d e a p o s s i b l e misaI I o c a t i o n of Canad ian p r o d u c t i v e r e s o u r c e s , i n c l u d i n g l abour and s c a r c e n a t u r a l r e s o u r c e s , as w e l l as a misa I I o c a t i o n of c a p i t a l r a i s e d in e i t h e r the d o m e s t i c or the o f f s h o r e c a p i t a l m a r k e t s . U s ing S t a t i s t i c s C a n a d a ' s e s t i m a t e t h a t 100 man-year s of I 12 TABLE XIV SELECTED CANADIAN EXPORTS BY COMMODITY FOR YEARS 1972-74 MILLIONS OF DOLLARS COMMODITY / IMPORTER U.S.A. OTHER DEV'D ALL OTHER TOTAL NATIONS NATIONS AIRCRAFT 965.6 171.5 186.3 1323.4 Complete Wi th E n g i n e s 17.5 58.4 I 10.I 186.0 E n g i n e s And P a r t s 948.1 I 13.I 76.2 1137.4 RAILROADS 257.6 120.8 176.7 555.1 Eng i nes and RoI Ii ng S tock 46.8 — 140.3 187.1 T r a c k M a t e r i a l 24 .6 — 23.6 48 .2 SHIPS, BOATS AND PARTS 186.2 120.8 12.8 319.8 TELECOMMUNI CAT IONS EQUIPMENT 442.6 103.3 231.5 777.4 PULP AND PAPER INDUSTRIAL EQUIPMENT 24.6 — 44 .8 69 .4 NAVIGATIONAL EQUIPMENT AND PARTS 96 .4 36 .5 14.4 147.3 SOURCE: S t a t i s t i c s Canada, E x p o r t s - M e r c h a n d i s e T r a d e , 1972-74, 1975, p. 22-34 I 13 d i r e c t employment a re c r e a t e d f o r each $1 m i l l i o n c o n t r a c t f i n a n c e d by the EDC, we can c o n c l u d e t h a t in 1974 when $659 m i l l i o n of c o n t r a c t s were s i g n e d , a p p r o x i m a t e I y 66,000 d i r e c t man-year s of employment were a t t r i b u t a b l e to the EDC. The t o t a l Canad ian employed l abour f o r c e in December 1974 was 9.1 m i l l i o n w o r k e r s . Canad ian m a n u f a c t u r i n g i n d u s t r i e s employed a p p r o x i m a t e l y 1.8 m i l l i o n worker s in 1974. If we assume t h a t each worker was employed f o r the f u l l y e a r , i t f o l l o w s t h a t E D C ' s f i n a n c i n g a c t i v i t y of $659 m i l l i o n c o u l d be s a i d to be r e s p o n s i b l e f o r c r e a t i n g 3.7% of the t o t a l man-year s in the C a n a d i a n m a n u f a c t u r i n g s e c t o r . The v a l u e of EDC in c r e a t i n g employment f o r Canad i an s appears to be o v e r s t a t e d . Over the f o u r t e e n year p e r i o d ended in 1974, l a r g e s c a l e s h i p p i n g v e s s e l s a re ranked f i r s t in the t y p e s of c a p i t a l equipment f i n a n c e d by the E D C In t h a t p e r i o d a t o t a l of $347.7 m i l l i o n of long term f i n a n c i n g agreements i n v o l v i n g the s a l e of v a r i o u s t y p e s of c o n t a i n e r v e s s e l s have been e n t e r e d i n t o by the EDC. La rge i n d u s t r i a l p r o j e c t s t o t a l l i n g $312.6 m i l l i o n were ranked second in t y p e s of p r o d u c t s s u p p o r t e d by EDC expor t c r e d i t . Canada i s not one of the w o r l d ' s p r i m a r y s h i p b u i l d i n g n a t i o n s . A c c o r d i n g to the U n i t e d N a t i o n s I n t e r n a t i o n a l T r a d e S t a t i s t i c s p u b l i c a t i o n , the p r i m a r y p r o d u c e r s and e x p o r t e r s of s h i p s and boa t s in 1973 were J a p a n , Germany, Norway, Sweden and the N e t h e r l a n d s . These f i v e n a t i o n s a c coun te d f o r 72% of t o t a l wor ld e x p o r t s of t h i s t ype of c a p i t a l equ ipment . Canada , w i t h 1.6$ of wor l d e x p o r t s ranked f o u r t e e n t h . ' ' The Canad i an s h i p b u i l d i n g i n d u s t r y c o n s i s t s o f a p p r o x i m a t e l y s i x t y f i r m s . In the f i v e year p e r i o d end ing December 3 1 , 1974, the average annual v a l u e of sh ipments of goods p roduced by t h e s e s i x t y f j r m s was I 14 about $300 mi I I i o n . T h e r e f o r e , a p p r o x i m a t e l y 25$ of Canad ian s h i p -b u i l d i n g c o n s t r u c t i o n i s b e i n g s u p p o r t e d by the e x p o r t c r e d i t o f f e r e d by the E x p o r t Development C o r p o r a t i o n . T h i s f i g u r e appear s s u r p r i s i n g l y h i gh when c o n s i d e r i n g t h a t the government a l s o o f f e r s a 17$ s u b s i d y to a l l Canad ian s h i p b u i l d i n g y a r d s under the S h i p b u i l d i n g Temporary A s s i s t a n c e Program (STAP) . A l l of t h i s government suppor t i s b e i n g d i r e c t e d at an i n d u s t r y wh ich employed o n l y 15,062 worker s in 1 9 7 3 . 1 3 M a c M i l l a n B l o e d e l L t d . , by way of c o m p a r i s o n , employed 24,000 worker s in 1973. The impor tance of e x p o r t c r e d i t in s u p p o r t i n g the Canad ian s h i p b u i l d i n g i n d u s t r y i s a l s o s u b j e c t to q u e s t i o n . W h i l e a g r e a t dea l of the l i t e r a t u r e s t a t e s t h a t each n a t i o n must o f f e r ex tended c r e d i t to compete i n t e r n a t i o n a l l y , one must not o v e r l o o k o t h e r f a c t o r s . F o r i n s t a n c e , in 1971, Dav ie S h i p b u i l d i n g L t d . was s u c c e s s f u l in o b t a i n i n g the c o n t r a c t to m a n u f a c t u r e t h r e e 80,000 DWT t a n k e r s f o r Varn ima S h i p p i n g Agency L i m i t e d , a Greek company. In 1972, the P r e s i d e n t of Dav ie S h i p b u i l d i n g , T a k i s V e l i o t i s , s t a t e d t h a t Dav ie got the c o n t r a c t p a r t l y as a r e s u l t of the v a r i o u s government a s s i s t a n c e programs , but m a i n l y because the customer " a Greek shipowner, was in a h u r r y - the Japanese and European s h i p y a r d s were f u l l y booked and 14 c o u l d not meet the r e q u i r e d d e l i v e r y d a t e s " . In v iew of Mr. V e l i o t i s ' s t a t e m e n t , i t appear s EDC ' s $43.5 m i l l i o n l o a n , g r a n t e d to suppor t t h i s sa le , was of l i m i t e d v a l u e . Canada does not appear to e n j o y a c o m p a r a t i v e advantage in the p r o d u c t i o n of s h i p s . The most impor tan t r e q u i r e m e n t s of the I 15 i n d u s t r y a r c : a c c e s s to a s u p p l y of low cos t i r o n and s t e e l ; the ready a v a i l a b i l i t y of a s p e c i a l i z e d l abour f o r c e ; a good u n d e r s t a n d i n g of the l a t e s t mar ine t e c h n o l o g y ; and a c c e s s to the w o r l d ' s o cean s . Canada, as compared to the w o r l d ' s major s h i p b u i l d i n g n a t i o n s , does not have any s p e c i a l advantages in any of t he se a r e a s . Why then i s the F e d e r a l government t h rough the g ran t program of the Department of I n d u s t r y , T r a d e and Commerce and the f i n a n c i n g f a c i l i t y of the EDC o f f e r i n g such a l a r ge degree of suppor t to t h i s i n d u s t r y ? The answer must l i e in t he b e l i e f t h a t the b e n e f i t s t o the C a n a d i a n economy in terms of employment and n a t i o n a l independence are g r e a t e r than the d i r e c t c o s t s of the F e d e r a l g o v e r n m e n t ' s s u p p o r t . In 1973, Canada was ranked as the e l e v e n t h l a r g e s t e x p o r t e r of t e l e c o m m u n i c a t i o n s equ ipment . The f i v e major e x p o r t e r s , w i t h a t o t a l of 65.8% of t o t a l wor l d e x p o r t s , were J a p a n , Germany, U . S . A . , Sweden and the U n i t e d K ingdom. ' " ' C a n a d a ' s communica t ion equipment m a n u f a c t u r i n g i n d u s t r y c o n s i s t s of a p p r o x i m a t e l y 225 f i r m s l o c a t e d p r i m a r i l y in c e n t r a l Canada. Some s e v e n t e e n f i r m s , however p roduce about 50% of the t o t a l v a l u e of goods p roduced by the i n d u s t r y . In 1973, the i n d u s t r y employed 43,000 worker s and p roduced goods v a l u e d at $899 m i l l i o n . ' 6 In t h a t same year $34.8 m i l l i o n of f i n a n c i n g agreements r e l a t e d to t e l e c o m m u n i c a t i o n s equipment were s i gned by the E D C — l e s s than A%> of annual p r o d u c t i o n was s u p p o r t e d by expor t c r e d i t . However, a p p r o x i m a t e l y 35$ of the annual p r o d u c t i o n i s e x p o r t e d and a p p r o x i m a t e l y t w o - t h i r d s of a l l e x p o r t s go to the U n i t e d S t a t e s . ' 7 T h e r e f o r e a p p r o x i m a t e l y $105 m i l l i o n of the t o t a l p r o d u c t i o n of t h i s i n d u s t r y i s e l i g i b l e f o r suppor t under the e x p o r t c r e d i t g r a n t e d by the EDC. It i s more r e a l i s t i c to s t a t e , t h e r e f o r e , t h a t r o u g h l y I 16 33$ of t o t a l e x p o r t s in t h i s i n d u s t r y a re be ing s u p p o r t e d by the f i n a n c i n g f a c i l i t i e s o f f e r e d by the EDC. Canada ranks as one of the top f i v e n a t i o n s in the e x p o r t s 18 of a i r c r a f t and r a i l w a y v e h i c l e s . The Canad ian a i r c r a f t and a i r c r a f t p a r t s m a n u f a c t u r i n g i n d u s t r y c o n s i s t s of a p p r o x i m a t e l y one hundred f i r m s which in 1973 had an annual v a l u e of p r o d u c t i o n of $538 m i l l i o n . The major p r o d u c e r s in the i n d u s t r y a re p r i m a r i Iy I oca ted in C e n t r a l 19 Canada. E l e v e n f i r m s p roduce 74$i of the t o t a l v a l u e of annual p r o d u c t i o n . 73$ of t h i s t y p e of c a p i t a l equipment i s e x p o r t e d to the U n i t e d S t a t e s market and i s , t h e r e f o r e , r e a l i s t i c a l l y not e l i g i b l e f o r e x p o r t c r e d i t . E D C ' s average annual s i g n i n g s i n v o l v i n g the e x p o r t of a i r c r a f t or a i r c r a f t components a re $38 .5 m i l l i o n , or 27 .5$ of t o t a l e l i g i b l e p r o d u c t i o n . The a i r c r a f t m a n u f a c t u r i n g i n d u s t r y employs about 26,000 Canad ian w o r k e r s . A s i m i I a r ana I y s i s of the Canad ian r a i l w a y r o l l i n g s t ock i n d u s t r y i n d i c a t e s t h a t the i n d u s t r y has an o I i g o p o I o s t i c s t r u c t u r e w i t h the major p r o d u c e r s b e i n g l o c a t e d in c e n t r a l Canada. L e s s than 8,000 worker s a re employed in the i n d u s t r y wh ich has an annual ou tpu t 20 of a p p r o x i m a t e l y $350 m i l l i o n . EDC s u p p o r t s a p p r o x i m a t e l y 35$ of the average annual e l i g i b l e e x p o r t s f o r t h i s group of p r o d u c t s . In summary, t h i s b r i e f a n a l y s i s i n d i c a t e s t h a t between 25 -35$ of the p r o d u c t s , of t he se f o u r g roups of i n d u s t r i e s, wh i ch are e x p o r t e d to n a t i o n s o t h e r than the U . S . A . , a re s u p p o r t e d by loans g r a n t e d by the EDC. These f o u r i n d u s t r i e s employ l e s s than 100,000 worker s or a p p r o x i m a t e l y 5.5$ of a l l workers employed in the m a n u f a c t u r i n g s e c t o r of the Canad ian economy. 4 7 . 3 $ of EDC ' s s i gned f i n a n c i n g agreements from 1971 to 1974 i n v o l v e d p r o d u c t s m a n u f a c t u r e d by t h i s same group of : 117 i n d u s t r i e s . These f a c t s appear to i n d i c a t e tha t a f a i r l y b i a s e d a l l o c a t i o n of r e s o u r c e s i s r e s u l t i n g from the f i n a n c i n g a c t i v i t e s of the E x p o r t Development C o r p o r a t i o n . However, t h e r e are at l e a s t two d i f f e r e n t methods by which a government can at tempt to d i v e r s i f y i t s i n d u s t r i a l s e c t o r . In C a n a d a ' s case i t may be t h a t a c o n c e n t r a t i o n of e f f o r t in a sma l l number of i n d u s t r i e s may be n e a r e r an o p t i m a l s t r a t e g y than a d i f f u s i o n of the Government ' s e f f o r t t h rough many sma l l i n d u s t r i e s . The EDC t h e r e f o r e , th rough i t s f i n a n c i n g f a c i l i t y , a r e l a t i v e l y new i n n o v a t i o n , may be a t t e m p t i n g to s t i m u l a t e and d e v e l o p c e r t a i n key i n d u s t r i e s . EDC ' s suppor t may be a l l o w i n g the se i n d u s t r i e s to expand t h e i r f a c i l i t i e s in o r d e r to a c h i e v e a more o p t i m a l l e v e l of p r o d u c t i o n . W i thout knowing which s t r a t e g y i s be ing pe r sued by the C o r p o r a t i o n i t i s not p o s s i b l e to d e t e r m i n e i f an op t ima l a l l o c a t i o n of r e s o u r c e s i s r e s u l t i n g f rom the f i n a n c i n g a c t i v i t y of the C o r p o r a t i o n . A l l of the i n d u s t r i e s which appear in T a b l e XII a re c a p i t a l i n t e n s i v e and c h a r a c t e r i z e d by a few l a r g e p r o d u c e r s . T a b l e XV l i s t s the twenty f i r m s which have been most s u c c e s s f u l in u t i l i z i n g the f i n a n c i n g f a c i l i t y of EDC. It i s i n t e r e s t i n g to no te t h a t the seven f i r m s which have had the g r e a t e s t d o l l a r volume o f goods f i n a n c e d by EDC are a l l d o m i c i l e d in Quebec. The C o r p o r a t i o n has f i n a n c e d $746 m i l l i o n of s a l e s f o r these seven f i r m s . Seventeen of the twenty l a r g e s t u s e r s of E D C ' s long term f i n a n c i n g f a c i l i t y a re d o m i c i l e d in O n t a r i o and Quebec , the i n d u s t r i a l i z e d r e g i o n of Canada. E x p o r t s s u p p o r t e d by the EDC ' s f i n a n c i n g must p r o v i d e emp loy -ment and i n d u s t r i a l b e n e f i t s f o r Canada. It c o u l d be argued t h a t TABLE XV RANK EXPORT DEVELOPMENT CORPORATION -FIRMS V/HICH HAVE USED FINANCE FACILITY OF THE EDC JANUARY I, 1 9 6 1 , - DECEMBER 3 1 , 1974 FIRM 1 MAR INE INDUSTR IES L I M I T E D 2 D A V I E S H I P B U I L D I N G L T D . 3 NORTHERN E L E C T R I C CO . LTD-. 4 MLW V'ORTH!NGTON L T D . AND MLW INDUSTR IES L T D . 5 MONTREAL E N G I N E E R I N G L T D . AND ATOMIC ENERGY Or CANADA L T D . 6 . S T A B L E R HLRTER L T D . AND OTHER E X P O R T E R S 7 GTE AUTOMAT IC E L E C T R I C CANADA L T D . 8 D I E S E L D I V I S I O N OF GENERAL MOTORS CANADA L T D . 9 DOMINION S T E E L AND COAL CORP. LTD. /O C E CAHADA L T D . I I S A 9 C 0 C K AND WILCOX CANADA L T D . 12 T H E ds HAV ILLANO A I R C R A F T OF CANADA L T D . 13 FERRCO E N G I N E E R I N G L T D . 14 WRIGHT E N G I N E E R I N G L T D . 15 H .A . SIMONS L T D . 16 CANADIAN GENERAL E L E C T R I C CO. L T D . 17 OCUGLAS A I R C R A F T CO . OF CANADA L T D . 18 C O L L I N S RADIO COMPANY OF CANADA L T D . 19 COMBUSTION ENG INEER ING SUPERHEATER L T D . 2 0 CANADIAN COMMERCIAL CORPORATION ALL OTHERS NOT ELSEWHERE CLASSIFIED PRODUCT LOCAT1 ON OWNERSHIP AMOUNT < ($ MILLION) SHIPS QUEBEC CANADIAN 1 7 5 . 0 • 9 . 3 SHIPS QUEBEC CANADIAN 1 3 7 . 9 7 . 3 TELECOMMUNICATIONS QUEBEC CANADIAN 9 8 . 1 5 . 2 LOCOMOTIVES QUEBEC U . S . A . 8 9 . 2 4 . 7 NUCLEAR POWER PLANT QUEBEC CANADIAN 8 3 . 5 4 . 4 FOREST COMPLEX QUEBEC U . S . A . 8 2 . 5 4 . 4 TELECOMMUNICATIONS QUEBEC U . S . A . 8 0 . 0 4 . 2 LOCOMOTIVES ONTAR10 U . S . A . 6 9 . 1 3 . 7 RAILS AND TIES NOVA SCOTIA CANADIAN 6 6 . 0 3 . 5 GENERATORS QUEBEC U . S . A . 4 4 . 3 2 . 3 STEAM GENERATORS ONTAR10 U . S . A . 4 3 . 5 2 . 3 AIRCRAFT COMPONENTS ONTAR10 CANADIAN 4 1 . 2 2 . 2 STEEL MILL EQUIPMENT ONTAR10 CANADIAN 4 0 . 4 2 . 1 MINING EQUIPMENT B . C . CANADIAN 3 8 . 4 2 . 0 PULP AND PAPER MILL B . C . • CANADIAN 3 7 . 6 2 . 0 NUCLEAR POWER ONTARIO U . S . A . 3 4 . 7 1.8 AIRCRAFT COMPONENTS ONTAR 10 U . S . A . 3 1 . 3 1.7 MICROWAVE SYSTEMS ONTAR 10 U . S . A . 3 0 . 3 1.6 GENERATORS QUEBEC U . S . A . 2 8 . 6 1.5 AIRCRAFT ONTAR10 CANADIAN 2 8 . 5 1.5 ARE NOT DESIGNATED 4 5 4 . 2 2 4 . 1 1 5 1 . 9 8 . 2 T O T A L 1 8 8 6 . 2 1 0 0 . 0 SOURCE: E x p o r t Development C o r p o r a t i o n . Annual R e p o r t s the r e g i o n s wh ich need the s t i m u l u s to deve l op t h e i r i n d u s t r i a l bases are the M a r i t i m e s , the P r a i r i e s and B r i t i s h C o l u m b i a . These r e g i o n s , in t u r n , have r e c e i v e d l i t t l e b e n e f i t f rom EDC ' s f i n a n c i n g f a c i l i t y . D e f e n d e r s of E D C ' s p o l i c i e s would be q u i c k to r e p l y t h a t EDC i s not d i r e c t l y concerned w i t h the p o l i c y i s s u e of d e v e l o p i n g the i n d u s t r i a l base in a l l r e g i o n s of Canada. R a t h e r , t h e y would c l a i m t h a t f u n c t i o n i s one of the Department of R e g i o n a l Economic E x p a n s i o n . They would a l s o use the " t r i c k l e down" argument t h a t w h i l e the v a r i o u s d e p r e s s e d r e g i o n s may be r e c e i v i n g l i t t l e d i r e c t he lp in d e v e l o p i n g t h e i r i n d u s t r i a l s e c t o r s , the r e g i o n s are r e c e i v i n g a g r e a t d e a l of i n d i r e c t h e l p which can be d i f f i c u l t to measure . F o r example , Mr. J . M c A v i t y , P r e s i d e n t of the Canad ian E x p o r t A s s o c i a t i o n , t e s t i f y i n g b e f o r e the s t a n d i n g Committee on F i n a n c e T rade and Economic A f f a i r s on A p r i l 3, 1973, s t a t e d t h a t in one c o n t r a c t f i n a n c e d by EDC, more than 80$ of the g r o s s p r o c e e d s were d i v i d e d amongst 376 companies in Canada sp read a c r o s s 22 f i v e p r o v i n c e s . The M i n i s t e r of I n d u s t r y , T r a d e and Commerce, the Honourab le A. G i l l e s p i e , t e s t i f y i n g b e f o r e the same Committee on November 14, 1974, observed t h a t the e x p o r t of a n u c l e a r power p l a n t i n v o l v e s upwards of 200 Canad ian s u p p l i e r s w i t h the v a l u e of c o n t r a c t s 23 r a n g i n g as low as $500. W h i l e t he se arguments a re d i f f i c u l t to r e f u t e , i t would be i n t e r e s t i n g to know what p e r c e n t a g e of the s u b - . c o n t r a c t o r s i s d o m i c i l e d in C e n t r a l Canada and what p e r c e n t a g e of the t o t a l v a l u e of the c o n t r a c t they a re s u p p l y i n g . O n e - h a l f of the twenty l a r g e s t f i r m s , i . e . t ho se making the g r e a t e s t use of EDC ' s f i n a n c i n g f a c i l i t y , a re owned by Canad i an s w h i l e the rema inder are s u b s i d i a r i e s of Amer i can c o r p o r a t i o n s . The i s s u e of ownersh ip and degree of c o n t r o l must not be o v e r l o o k e d . C o n s i d e r 120 the case of N o r t h e r n E l e c t r i c Company L i m i t e d . As a who l l y -owned s u b s i d i a r y of B e l l Canada, N o r t h e r n E l e c t r i c , i s shown as be ing C a n a d i a n -owned. However, when one c o n s i d e r s who c o n t r o I s - B e I I Canada i t i s easy to see t h a t the degree of i n f l u e n c e Canad i an s have over N o r t h e r n E l e c t r i c ' s p o l i c i e s may be l i m i t e d . A more d e t a i l e d a n a l y s i s of the l a r g e s t u se r f i r m s p r o v i d e s some e n l i g h t e n i n g i n f o r m a t i o n . Ma r i ne i n d u s t r i e s L i m i t e d was e s t a b l i s h e d by J o s e p h S imard in 1937 a f t e r he purchased from the f e d e r a l government , f o r one m i l l i o n d o l l a r s , a s h i p b u i l d i n g yard l o c a t e d in S o r e l , Quebec, and a l a r g e d r e d g i n g f l e e t . Over the y e a r s , the f i r m p r o s p e r e d by o b t a i n i n g s h i p b u i l d i n g c o n t r a c t s from the f e d e r a l government . Jo seph S imard 24 had c l o s e t i e s w i t h the f e d e r a l L i b e r a l p a r t y . E v e n t u a l l y , c o n t r o l of the f i r m was s o l d to the Genera l Investment C o r p o r a t i o n of Quebec, , 25 a w h o l l y owned c o r p o r a t i o n of the government of the P r o v i n c e of Quebec. In mid-1975-, t he Genera l Investment C o r p o r a t i o n i n c r e a s e d i t s ownersh ip in Mar ine I n d u s t r i e s L i m i t e d to 86%. The r e m a i n i n g i n t e r e s t in Mar ine I n d u s t r i e s i s h e l d by C l aude S i m a r d , a M i n i s t e r in the Quebec government , Andree S i m a r d , the w i fe of Quebec p r e m i e r Rober t B o u r a s s a , and the 26 C a i s s e de Depot et P lacement du Quebec. The S imard f a m i l y c o n t i n u e s to r e t a i n an i n t e r e s t in Mar ine I n d u s t r i e s L t d . th rough the Genera l Investment C o r p o r a t i o n (G IC ) . A r t h u r S imard i s the Chairman of GIC and Jean S imard i s a v i c e - p r e s i d e n t of the C o r p o r a t i o n . L a u r e n t P i c a r d , the former P r e s i d e n t of the Canad ian B r o a d c a s t i n g C o r p o r a t i o n , assumed the P r e s i d e n c y of Mar ine 27 I n d u s t r i e s L t d . on August I, 1975. In 1975, Mar ine I n d u s t r i e s L t d . and s e v e r a l o t h e r companies 121 and i n d i v i d u a l s were charged w i t h i r r e g u l a r i t i e s in c o n n e c t i o n w i t h c e r t a i n government d r e d g i n g c o n t r a c t s . It i s a l l e g e d t h a t in 1971 t h r e e compan ies , Mar ine I n d u s t r i e s L t d . , J . P . P o r t e r Co. L t d . , a company c o n t r o l l e d by S imard i n t e r e s t s , and McNamara C o r p . L t d . had agreed to pay a c o m p e t i t o r $400,000 f o r s u b m i t t i n g an a r t i f i c i a l l y 28 h i gh b i d to deepen the S t . Lawrence channe l o f f the M e d ' O r l e a n s . In m i d - 1 9 7 5 , an a t tempt was made to amalgamate Mar ine I n d u s t r i e s L t d . , MLW W o r t h i n g t o n L t d . ( the f o u r t h l a r g e s t u se r of EDC ' s f i n a n c e f a c i l i t y ) and Bombard ier L t d . i n t o a cong l omera te to be c o n t r o l l e d by a h o l d i n g company, Les E n t r e p r i s e s de J . Armand Bombard ier L t e e . The goa l of t h i s cong l omera te was to c r e a t e a s t r o n g heavy equipment 29 m a n u f a c t u r i n g group in Quebec. In e a r l y 1976, the p roposed a m a l -gamat ion was c a l l e d . o f f when Bombard ie r and GIC c o u l d not come to . 3 0 an agreement. The f o l l o w i n g t a b l e i n d i c a t e s t h a t 4 1 . 4 $ of Mar ine I n d u s t r i e s L t d . t o t a l s a l e s from 1971-74 were f i n a n c e d w i t h e x p o r t c r e d i t p r o v i d e d by EDC. If t h e s e s a l e s would not have m a t e r i a l i z e d w i t h o u t t 'h i s c r e d i t , would the f i r m ' s net income have been 40$ l e s s than t h a t r e c o r d e d ? If t h i s a s sumpt ion i s c o r r e c t , the v a l u e of EDC e x p o r t c r e d i t to Mar ine I n d u s t r i e s i s s i g n i f i c a n t because over t h a t f o u r year p e r i o d the f i r m r e c o r d e d a net d e f i c i t of $9.9 m i l l i o n . MARINE INDUSTRIES LIMITED (mi I Ii ons of d o l l a r s ) YEAR SALES NET INCOME EDC CONTRACTS SIGNED IN THAT YEAR 1971 58.3 (3 .3 ) 86.0 1972 137.4 1-9 1973 119.6 (10 .0 ) 65 .0 1974 107.5 1.5 24.0 422.8 (9 .9 ) 175.0 SOURCE: The F i n a n c i a l P o s t , Su rvey of I n d u s t r i a l s 1975, V o l I, p. 94. and The E x p o r t Development C o r p o r a t i o n , Annua I R e p o r t s . The v iew t h a t the r o l e of e x p o r t c r e d i t in s u p p o r t i n g i n -d u s t r i a l p r o d u c t i o n may be o v e r s t a t e d i s f u r t h e r s u p p o r t e d by o f f i c i a l s of Mar ine I n d u s t r i e s L t d . In 1974, the F i n a n c i a l Pos t r e p o r t e d t h a t the f i r m ' s s h i p b u i l d i n g c a p a c i t y was f u l l y booked u n t i l 1979 and in the words of one of the company ' s o f f i c e r s "we a re f i n d i n g cus tomers e x p r e s s i n g i n t e r e s t in 1980 and b e y o n d " . 3 ' W h i l e i t must be a p p r e c i a t e d t h a t the b u i l d i n g of a s h i p i s a l eng thy p r o c e s s , the o f f i c e r ' s s t a t e m e n t s i n d i c a t e t h a t wor ld demand f o r Canad ian s h i p s i s g r e a t e r than Canad ian p r o d u c t i v e c a p a c i t y . Even a l l o w i n g f o r the p r e v a l e n c e of e x p o r t c r e d i t suppor t a r rangements in the i n t e r n a t i o n a l s h i p b u i l d i n g market i t seems q u i t e p o s s i b l e t h a t i f the c r e d i t p r o v i d e d by the EDC to suppor t s a l e s by t h i s f i r m were removed, the f i r m would s t i l l have s u f f i c i e n t o r d e r s to o p e r a t e at near c a p a c i t y . Dav ie S h i p b u i l d i n g L t d . , a major e a s t e r n Canad ian f i r m , has been the second l a r g e s t u se r of the expor t c r e d i t f a c i l i t i e s of the EDC. T h i s f i r m , u n t i l r e c e n t l y , was a w h o l l y owned s u b s i d i a r y of Canada S teamsh ip L i n e s L i m i t e d , which in t u r n i s owned and con t ro I Ied 32 by the Power C o r p o r a t i o n of Canada L t d . The power C o r p o r a t i o n i s one of C a n a d a ' s i n d u s t r i a l g i a n t s t h a t i s both owned and c o n t r o l l e d by a C a n a d i a n , Paul D e s m a r a i s . 3 3 The sphere of i n f l u e n c e of Desmara i s encompasses both the Canad ian p r i v a t e and the p u b l i c s e c t o r s . It i s s a i d t h a t he has t e l e p h o n e c o n v e r s a t i o n s at l e a s t t w i c e a week w i t h 123 P r e m i e r Robert Boura s sa and t h a t he has f r e q u e n t d i s c u s s i o n s w i t h Pr ime M i n i s t e r T r u d e a u . 3 ^ H i s gue s t s on f i s h i n g t r i p s to A n t i c o s t i I s l and have i n c l u d e d Simon R'eisman, the then Deputy M i n i s t e r of F i n a n c e . 3 5 In Newman's words , " t h e c h a n n e l s of i n f l u e n c e t h a t l i n k Power C o r p o r a t i o n and the f e d e r a l L i b e r a l p a r t y c a r r y c o n s i d e r a b l e two-way t r a f f i c " . 3 6 Desmara i s appear s to seek communica t ions l i n k s w i t h the s e n i o r p o l i c y d e c i s i o n making o f f i c i a l s in Ot tawa. One of the ways he a c h i e v e s such a l i n k i s by h i r i n g away from the f e d e r a l government some of t h e i r young o f f i c i a l s who want to o p e r a t e in the p r i v a t e s e c t o r . These " b r i g h t young s h a k e r s " have i n c l u d e d John Rae, the son of Sau l Rae, C a n a d a ' s ambassador to the U n i t e d N a t i o n s , Pau l M a r t i n J r . , the son of Pau l M a r t i n S r . , C a n a d a ' s High Commiss ioner to B r i t a i n , B i l l T e r o n , the p r e s i d e n t of CMHC, Anthony Hampson, the p r e s i d e n t of the CDC, and Maur i ce S t r o n g of P e t r o C a n . B r yce Mackasey , w h i l e out of the C a b i n e t , a c t e d as a c o n s u l t a n t f o r Canada S teamsh ip L i n e s L t d . 3 7 and J e a n - L u c P e p i n , head of the A n t i - i n f I a t i o n Board was on 38 the Board of D i r e c t o r s of Canada S teamsh ip L i n e s L i m i t e d . Dav ie S h i p b u i l d i n g L t d . appear s to have been a c q u i r e d by Canada S teamsh ip L i n e s in the mid I 960 ' s . In 1968, Dav ie pu r cha sed the a s s e t s of Geo. T . Dav ie and Sons L t d . , a s h i p y a r d in L a u z o n , from 39 Canad ian V i c k e r s . Geo. T . n a v i e and Sons L t d . was r e p o r t e d l y l o s i n q money in 1967. F i n a n c i a l r e s u l t s f o r Dav ie S h i p b u i l d i n g a re not a v a i l a b l e , so the c o n s o l i d a t e d f i n a n c i a l s t a t e m e n t s of i t s p a r e n t , 40 Canada S teamsh ip L i n e s L t d . (CSL) have been used as a p roxy . The a n a l y s i s i n d i c a t e s t h a t \8% of C S L ' s g r o s s s a l e s in the f o u r year p e r i o d were f i n a n c e d by the EDC e x p o r t c r e d i t f a c i l i t i e s . If we assume t h a t the c r e d i t f a c i l i t y was the key f a c t o r in g e n e r a t i n g t he se s a l e s , 124 and t h a t t h e y would not have been made w i t h o u t t h i s f a c i l i t y , then we can c o n c l u d e t h a t in t h a t f o u r year p e r i o d $ 1 4 . 7 mi I I ion of C S L ' s net income was d i r e c t l y a t t r i b u t a b l e to the a v a i l a b i l i t y of EDC e x p o r t c r e d i t . YEAR CANADA STEAMSHIP LINES LIMITED (mi I I i ons of d o l l a r s ) GROSS REVENUE NET INCOME EDC CONTRACTS SIGNED IN THAT YEAR 1971 1972 1973 1974 143.2 170.0 242.8 223.5 779.5 10.9 13.7 24 .5 34. I 83 .2 4 3 . 5 30 .4 64 .0 137.9 SOURCE: F i n a n c i a l P o s t , Survey of I n d u s t r i a l s 1975, Volume Two, p. 153 and Annual R e p o r t s of E x p o r t Development C o r p o r a t i o n . It i s a l s o i n t e r e s t i n g to note the Dav ie S h i p b u i l d i n g L t d . was the f i r m t h a t pe r fo rmed the r e f i t of the a i r c r a f t c a r r i e r HMCS B o n a v e n t u r e . The r e f i t t i n g of t h i s v e s s e l was u n d e r t a k e n at a c o s t of m i l l i o n s of d o l l a r s . The v e s s e l was s c rapped s h o r t l y a f t e r the r e f i t t i n g was c o m p l e t e . The e n t i r e e p i s o d e caused a s t i r i n C a n a d a ' s pub l i e s e c t o r . In the e a r l y I 970 ' s The I n t e r n a t i o n a l N i c k e l Company d e c i d e d to deve lop a n i c k e l ore body in Guatema la . The e n t i r e p r o j e c t was to co s t $100 m i l l i o n and $68 .25 m i l l i o n of the co s t was f i n a n c e d by 41 v a r i o u s i n t e r n a t i o n a l p u b l i c f i n a n c i n g a g e n c i e s . Of t h i s $68 .25 m i l l i o n , the EDC agreed to p r o v i d e $17 .25 m i l l i o n f o r the pu rcha se 125 of Canad ian m i n i n g equipment and e n g i n e e r i n g s e r v i c e s . INCO and i t s v a r i o u s s u b s i d i a r i e s , because of t h e i r e x p e r t i s e in i n t e r n a t i o n a l m i n i n g , would appear to be a l o g i c a l Canad ian e x p o r t e r . The i d e n t i t y of the Canad ian e x p o r t e r s f o r the p r o j e c t i s not c l e a r . The d e v e l o p e r o f the p r o j e c t in Guatemala and subsequent i m p o r t e r was E x p l o r a c i o n e s Y E x p l o t a c i o n e s M i n e r a l s I z a b a l , S-A. T h i s f i r m (EEMI) i s owned 70$ by INCO and 30$ by the government of Guatema la . However, the Guatemalan government does not get i t s 30$ share of the e q u i t y u n t i l t en y e a r s a f t e r the s t a r t of o p e r a t i o n s . EEMI a l s o pays no income t a x e s f o r the f i r s t t en y e a r s of o p e r a t i o n , but does pay $23,000 per yea r in roya1 1 i e s . The ore body wi I I be d e v e l o p e d as an open p i t mine and w i l l employ o n l y 771 Guatemalan worker s when i t i s in f u l l o p e r a t i o n in 1977. In e f f e c t , the p r o j e c t w i l l do l i t t l e to d e v e l o p G u a t e m a l a ' s i n d u s t r i a l base . In f a c t , by h e l p i n g to f i n a n c e the p r o j e c t , Canada may w e l l appear to have a p r o f i l e s i m i l a r to t h a t of the " u g l y A m e r i c a n " who a i d s m u I t i n a t i o n a I s in e x p l o i t i n g the n a t u r a l r e s o u r c e s of LDCs. The main b e n e f i t to Canada of f i n a n c i n g INCO's a c t i v i t y i s the 1700 d i r e c t man-year s of employment c r e a t e d . However, t h i s b e n e f i t i s reduced when one c o n s i d e r s t h a t in 1971 INCO reduced i t s Sudbury p l a n t work f o r c e by some 5,000 w o r k e r s . In 1973, a s i m i I a r p r o j e c t of about $75 m i l l i o n was f i n a n c e d by EDC f o r an INCO s u b s i d i a r y in I n d o n e s i a . If INCO c o n t i n u e s to d e v e l o p i t s i n t e r n a t i o n a l ore b o d i e s w h i l e c u r t a i l i n g i t s m i n i n g and o t h e r a c t i v i t i e s in Canada , one would q u e s t i o n the wisdom of p r o v i d i n g Canad ian p u b l i c funds to a i d INCO in d e v e l o p i n g such f o r e i g n o re b o d i e s . Do a l l Canad i an s o r j u s t the s h a r e h o l d e r s of INCO r e c e i v e some b e n e f i t f rom the use of p u b l i c funds 126 in t h i s manner? D i r e c t employment in Canada c e r t a i n l y s u f f e r s . What a re the compensa t ions in terms of g r e a t e r downstream employment induced by p o s s i b l e c o m p a r a t i v e c o s t advantages to Canada t h r o u g h e x p l o i t i n g the f o r e i g n ore b o d i e s ? W i thou t such d a t a , the b e n e f i t s to Canada of such EDC f i n a n c i n g a re not at a l l c l e a r . One can c e r t a i n l y q u e s t i o n whether a c o r p o r a t i o n w i t h a s s e t s of some $2 .8 b i l l i o n r e q u i r e s low co s t f i n a n c i n g from p u b l i c s o u r c e s in o r d e r to make a p r o j e c t v i a b l e . INCO's f i n a n c i a l s t r e n g t h i s e v i d e n c e d by i t s pu rcha se in 1974 of ESB I n c o r p o r a t e d , a l a r g e U.S. based b a t t e r y p r o d u c e r . Of the t o t a l p u r c h a s e p r i c e of $233.8 m i l l i o n INCO found i t n e c e s s a r y to r a i s e o n l y $50 m i l l i o n th rough e x t e r n a l f a c i I i t i e s . A f u r t h e r look at EDC ' s t r a n s a c t i o n s d i s c l o s e s t h a t i n t e r n a t i o n a l s u b s i d i a r i e s of Canad ian c h a r t e r e d banks a re amongst the bo r rower s of the E x p o r t Development C o r p o r a t i o n . One of the most n o t i c e a b l e f e a t u r e s of e x p o r t c r e d i t in Canada has been the r e l u c t a n c e of the banks to p a r t i c i p a t e in such f i n a n c i n g w i t h the EDC. The Canad ian banks do , however, as shown in the l a s t c h a p t e r , p a r t i c i p a t e in the long term f i n a n c i n g of U.S. c a p i t a l equipment e x p o r t s . The i nvo l vement of the Canad ian banks in p r o v i d i n g expor t c r e d i t f o r Canad ian c a p i t a l equipment m a n u f a c t u r e r s i s g r a d u a l l y i n c r e a s i n g and the new P r e s i d e n t of EDC r e p o r t e d t h a t in FY 1975, the c h a r t e r e d banks were i n v o l v e d 42 in twenty long term f i n a n c i n g p r o j e c t s . The bank s ' p a r t i c i p a t i o n however was o n l y $200 m i l l i o n , or l e s s than 18$ of the t o t a l of the s i gned f i n a n c i n g ag reements . The Canad ian bank p a r t i c i p a t i o n l e v e l i s f a r below t h a t of the U.S. banks , in s p i t e of the f a c t t h a t the f i v e l a r g e s t Canad ian banks a re ve ry p o w e r f u l , s t a b l e and a c t i v e in the TABLE XVI EXPORT DEVELOPMENT CORPORATION SELECTED CAPITAL EQUIPMENT EXPORTS FINANCED BY THE EDC MILLIONS OF DOLLARS COUNTRY BORROWER PRODUCTS FINANCED REPAYMENT TERMS AMOUNT F1NANC1 Bahamas Canad ian Imper ia l Bank of Commerce T r u s t Co. (Bahamas) L t d . Components f o r DC-IO-30 A i r c r a f t 20 S.A. from D e c 3 1 , 1974 1.2 Cayman I s l ands Canad ian Imper ia l Bank of Commerce T r u s t Co. (Cayman) L t d . Components f o r DC-IO-30 A i r c r a f t 20 S.A. from Nov. 20 , 1974 1.2 L i b e r i a Ogden Saguenay T r a n s p o r t Inc. and Ogden Ottawa T r a n s p o r t Inc. 2 39,000 DWT O i l T a n k e r s 16 S.A. 6 months A f t e r D e 1 i v e r y 32.0 1ndones i a PT I n t e r n a t i o n a l N i c k e l I ndones ia M i n i n g Equipment and E n g i n e e r i n g S e r v i c e s 20 S.A. from Jan 10, 1977 17.3 Spa i n Bank of Mont rea l (Bahamas and C a r i b b e a n ) L i m i t e d CL -215 A i r c r a f t and Spare P a r t s 16 S.A. from Nov. 2 1 , 1974 18.0 U n i t e d Kingdom The Cunard S team-Sh ip Company L imi ted 2 39,000 DWT P roduc t C a r r i e r V e s s e l s 16 S.A. 6 months A f t e r D e 1 i v e r y 30 .4 Venezue1 a BNS I n t e r n a t i o n a l (Bahamas) L t d . A i r c r a f t Spare P a r t s and R e l a t e d S e r v i c e s 10 S.A. from March 1, 1973 28 .5 Guatema1 a EEMI M i n i n g Equipment 20 S.A. from J u l y 15, 1977 17.3 145.9 SOURCE: E x p o r t Development C o r p o r a t i o n , Annual Repo r t s i n t e r n a t i o n a l a r e a . The d i f f e r e n c e in the a t t i t u d e of the Canad ian banks and the A m e r i c a n banks i s p u z z l i n g when one c o n s i d e r s t h a t the l a s t Canad ian bank f a i l u r e o c c u r e d s o m e . f i f t y y e a r s ago, w h i l e the Amer i can u n i t y - b a n k i n g system had e l e v e n bank f a i l u r e s in 1975. The p o s i t i o n becomes even more i n t r i g u i n g when one f i n d s t h a t the Canad ian banks a re bo r rower s of low cos t e x p o r t f i n a n c e . T h i s unusua l p r a c t i c e can perhaps be e x p l a i n e d by c o n s i d e r i n g a t r a n s a c t i o n i n v o l v i n g the s a l e of some used a i r c r a f t to V e n e z u e l a in 1972. In the E x p o r t Development C o r p o r a t i o n ' s annual r e p o r t f o r the year ended December 31 , 1972 the A u d i t o r Genera l of Canada i s s u e d a q u a l i f i e d a u d i t o r ' s r e p o r t . D u r i n g t h a t f i s c a l y e a r , t he Department of N a t i o n a l De fence (DND) found a market f o r s u r p l u s used a i r c r a f t in V e n e z u e l a . As might have been e x p e c t e d , the bor rower d i d not have the n e c e s s a r y funds and DND c o u l d not a f f o r d t o c a r r y the r e c e i v a b l e account wh ich would a r i s e s i n c e DND i t s e l f needed to pu r cha se some new a i r c r a f t . N o r m a l l y , when any government depar tment s e l l s s u r p l u s goods the funds earned cannot be used to p u r c h a s e a d d i t i o n a l goods w i t h o u t the a p p r o v a l of the House of Commons. In e f f e c t , t h e r e f o r e , t h a t d e p a r t m e n t s ' s annual budget i s reduced by the amount of the e a r n i n g s from such a s a l e . In t h i s c a s e , however, DND managed to a v o i d the need f o r p a r l i a m e n t a r y a p p r o v a l of the t r a n s a c t i o n . It a r r anged f o r the Canad ian Commercia l C o r p o r a t i o n (CCC) , a f e d e r a l Crown C o r p o r a t i o n , to n e g o t i a t e w i t h C a n a d a i r , EDC and the V e n e z u e l a n s on i t s b e h a l f . C a n a d a i r was g r a n t e d a c o n t r a c t to p roduce new a i r c r a f t f o r the CCC. The s u r p l u s a i r c r a f t were then s o l d by CCC f o r DND. EDC agreed to f i n a n c e V e n e z u e l a ' s pu rcha se of the s u r p l u s a i r c r a f t on the grounds t h a t i f i t d i d not f inance the sale of the used a i r c r a f t , Canadair would not have obtained the contract to produce the $28.5 m i l l i o n worth of new a i r c r a f t purchased by DIMD. Therefore , EDC argued that they were, in e f f e c t , f inanc ing a Canadian export. While the ident i t y of the Venezuelan purchaser of the a i r c r a f t is not c l ea r , the borrower was BNS International (Bahamas) L t d . , a part of the Bank of Nova S c o t i a ' s corporate s t ructure . The Bank's ro le could perhaps be explained by the i r des i re to enter the leasing f i e l d . At present, the Bank Act r e s t r i c t s banks' a b i l i t y to operate in the leasing f i e l d in the domestic market, but of course, Canada's Bank Act does not apply to a bank's a c t i v i t y outside of Canada. The Bank could, there fore , have purchased the used a i r c r a f t from the Department of National Defence and paid for the purchase by borrowing the necessary funds from EDC. The a i r c r a f t could then have been leased out to the Venezuelan f i rm. As the lease payments were made to the Bank, the funds would be used to repay the EDC loan. The Bank of Nova Scot ia would i n d i r e c t l y be in the leasing f i e l d as the re su l t of a very small cap i ta l investment. In both the INCO case and the DND case i t can c l e a r l y be argued that the EDC followed a reasonable i n te rpre ta t i on of the law and avoided d i rec t contravention of the Act . However, such manoeuvers add l i t t l e to EDC's c r e d i b i l i t y in terms of the stated object ives for i t s ex is tence. 130 FOOTNOTES CHAPTER IV 1. S e c t i o n 10 ( I ) , E x p o r t Development A c t . 2. E x p o r t Development C o r p o r a t i o n , 1975 Annual R e p o r t , p. 21. 3. I b i d , pp. 21 -2 4. E x p o r t Development C o r p o r a t i o n , Annual R e p o r t , 1973, p. 9. 5. E x p o r t Development C o r p o r a t i o n , Annual R e p o r t , 1974, p. 13. 6. Canada, P a r l i a m e n t , House of Commons, S t a n d i n g Committee on F i n a n c e , T r a d e and Economic A f f a i r s , M inu te s of P r o c e e d i n g s and E v i d e n c e on November 14, 1974, O t tawa , Queen ' s P r i n t e r , 1974, p. I I :23. 7. I b i d , November 21 , 1974, p. 13:19. 8. Canada, P a r l i a m e n t , House of Commons, S t a n d i n g Committee on F i n a n c e , T r a d e and Economic A f f a i r s , M i n u t e s of P r o c e e d i n g s and E v i d e n c e on A p r i l 17, 1973, p. 11:17. 9. I b i d , November 21 , 1974, p. 16:23. 10. E x p o r t Development C o r p o r a t i o n , Annual R e p o r t , 1973, p. 9. 11. U n i t e d N a t i o n s , Yearbook of I n t e r n a t i o n a l T r a d e S t a t i s t i c s 1974, Volume 2, T r a d e by Commodity, 1975, p .694. 12. S t a t i s t i c s Canada, Annual Census of M a n u f a c t u r e r s , S h i p b u i l d i n g and R e p a i r , P u b l i c a t i o n Number 4 2 - 2 0 6 , A p r i l 1974, p. 4. 13. L o c . c i t . 14. , ' S pu r to S h i p b u i l d i n g U r g e d ' , The P r o v i n c e , August 15, 1972, p. 13. 15. 16. U n i t e d N a t i o n s , Op. c i t , p. 679. S t a t i s t i c s Canada , Annual Census of M a n u f a c t u r e s , Communicat ions  Equipment M a n u f a c t u r e s , P u b l i c a t i o n Number 4 3 - 2 0 6 , August 1975, p. 4. 131 FOOTNOTES CONTINUED 17. S t a t i s t i c s Canada , E x p o r t M e r c h a n d i s e T r a d e , 1970-72, August 1974, p. 32. 18. U n i t e d N a t i o n s , Op. c i t , p .686. 19. S t a t i s t i c s Canada , Annua l Census of M a n u f a c t u r e s , A i r c r a f t and A i r c r a f t P a r t s M a n u f a c t u r e s , Pub I i c a t i o n Number 4 2 - 2 0 3 . A p r i I 1974, p. 4. 20. S t a t i s t i c s Canada , Annual Census of M a n u f a c t u r e s , R a i l r o a d R o l I i n g S tock I n d u s t r y , P u b l i c a t i o n Number 4 2 - 2 1 1 , September 1973, p. 4. 21. E x p o r t Development C o r p o r a t i o n , Annual Repor t 1973, p. 9. 22. Canada, P a r l i a m e n t , House of Commons, S t a n d i n g Committee on F i n a n c e T r a d e and Economic A f f a i r s , M i n u t e s of P r o c e e d i n g s and ' E v i d e n c e on A p r i l 3, 1973, p. 7 :12. 23. I b i d , November 14, 1974, p. 11:6. 24. Newman, P e t e r C , The Canad ian E s t a b l i s h m e n t , T o r o n t o , M c C l e l l a n d and S tewar t L i m i t e d , 1975, pp. 195-6. 25. I b i d , p. 196. 26. , ' Q u e . E y e s I ndus t r y G r o u p i n g ' , The Vancouver Sun, J u l y 29 , 1975, p. 19. and S h e p h e r d , H , 'SGF R a i s e d H o l d i n g s to 86$ of M a r i n e , Buys 40$ of M L W , Globe and Mai I, J u l y 24, 1975, p. B3. 27. _ _ , " P i c a r d Q u i t t i n g C B C " , The Vancouver Sun, May 3 1 , 1975, p. I. 28. Newman, Op. c i t , p. 197. 2 9 . _ } 'Que . Eyes I ndus t r y G r o u p i n g ' , The Vancouver Sun, J u l y 2 9 , 1975, p. 19. " 30. B o o t h , Amy, ' P l a n n e r s ' G lue F a i l s to S t i c k Two G i a n t s T o g e t h e r ' , The F i n a n c i a l P o s t , A p r i l 17, 1976. , p. B-7. 31. , ' S h i p b u i l d i n g Sub s i dy B r i n g s F l o o d of O rde r s to C a n a d a ' , F i n a n c i a l P o s t , Nov. 2, 1974, p. T - 7 . 32. Newman, Op.c i t , c h a r t between pages 6 4 - 5 . 33. Newman, O p . c i t , p. 55. The e n t i r e c h a p t e r from page 49 -86 p r o v i d e s an i n t e r e s t i n g d i s c u s s i o n on Pau l D e s m a r a i s . 132 FOOTNOTES CONTINUED 34. Newman, Op. c i t , P- 57-8. 35. Newman, Op. ^ t , P- 59. 36. Newman, Op. c i t , P- 57. 37. Newman, Op. c i t , P. 57-8. 38. F i n a n c i a l P o s t , Su rvey of I n d u s t r i a l s 1975, V o l . 2, p. 153. 39. R o l f e , J . , 'Quebec S h i p y a r d S a l e U n d e r l i n e s Some F i r m s on E x t i n c t i o n S l i p w a y ' , G lobe and Mai I, May 17, 1968, p. 89. 40. F i n a n c i a l P o s t , Survey of I n d u s t r i a l s 1975, V o l . 2, p. 153. 41. T h i s s e c t i o n r e l i e s upon t e s t i m o n y b e f o r e the S t a n d i n g Committee on F i n a n c e , T r a d e and Economic A f f a i r s on November 14 and November 21, 1974, pp. 11:6-26. 42. E x p o r t Development C o r p o r a t i o n , News R e l e a s e , 76-3, F e b r u a r y 19, 1976. CHAPTER V FINANCING THE CAPITAL NEEDS OF THE EXPORT DEVELOPMENT CORPORATION In o r d e r to f i n a n c e the phenomenal growth r a t e s b e i n g r e c o r d e d in r e c e n t y e a r s , the E x p o r t Development C o r p o r a t i o n has been f o r c e d to i n c r e a s e i t s bo r row ing s from the C o n s o l i d a t e d Revenue Fund (CRF) of the F e d e r a l Government. T o t a l loans p a y a b l e to Canada have i n c r e a s e d from $253.6 m i l l i o n on Dec. 3 1 , 1969 to $74-4.0 m i l l i o n on Dec. 31 , 1974. In t h a t same p e r i o d the C o r p o r a t i o n has r a i s e d a d d i t i o n a l funds by bo r row ing in the Canad ian money marke t . The t o t a l s h o r t term bo r row ing s o u t s t a n d i n g at the end of 1974 amounted to $35.0 m i l l i o n . The Government of Canada i s the s o l e s t o c k h o l d e r in the C o r p o r a t i o n and , as s u c h , has c o n t r i b u t e d $55.0 m i l l i o n in e q u i t y c a p i t a l . In a d d i t i o n , t h e Government, th rough the M i n i s t e r of F i n a n c e , has p a i d in $25.0 m i l l i o n in the form of a c a p i t a l s u r p l u s . The C o r p o r a t i o n ' s r e s e r v e s and r e t a i n e d e a r n i n g s were $53 .5 m i l l i o n on December 3 1 , 1975. The C o r p o r a t i o n ' s annual net income has i n c r e a s e d from $4.8 m i l l i o n in 1970, to $12.8 m i l l i o n in 1975. No d i v i d e n d s have been d e c l a r e d or p a i d d u r i n g the pas t f i v e y e a r s . Be ing a f e d e r a l Crown C o r p o r a t i o n , the E x p o r t Development C o r p o r a t i o n i s p e r m i t t e d to borrow funds from the C o n s o l i d a t e d Revenue Fund at a r a t e m a r g i n a l l y above the r a t e which the f e d e r a l government i s r e q u i r e d to pay to meet i t s c a p i t a l r e q u i r e m e n t s . Through t h i s type 133 134 of f i n a n c i n g arrangement EDC i s a b l e to borrow i n t e r m e d i a t e term funds at a more f a v o r a b l e r a t e than i t c o u l d o b t a i n i f i t were f o r c e d to go d i r e c t l y to the c a p i t a l m a r k e t s . The C o r p o r a t i o n c l a i m s t h a t no p u b l i c s u b s i d y i s i n v o l v e d in i t s f i n a n c i n g a c t i v i t y and t h a t the e x p o r t c r e d i t i n s u r a n c e program i s not a charge on the Canad ian t a x p a y e r . ' In the I960 ' s the C o r p o r a t i o n ' s annual bo r row ing s from the CRF were in the $20-40 m i l l i o n r ange . In the e a r l y yea r s of the p r e s e n t decade annual bo r row ing s had i n c r e a s e d to the $100-125 m i l l i o n r ange . In 1974, the EDC ' s net bo r row ing s were a p p r o x i m a t e l y $150 m i l l i o n . The net bo r row ing s f o r 1975 were $255 m i l l i o n . In a d d i t i o n , in 1975 the F e d e r a l Government c o n t r i b u t e d an a d d i t i o n a l $30 m i l l i o n in the form of equ i t y cap i t a I. The F e d e r a l Government ' s t o t a l f i n a n c i a l r e q u i r e m e n t s were l e s s than $700 m i l l i o n a year from 1963-69 i n c l u s i v e . From 1970 onward the se same f i n a n c i a l r e q u i r e m e n t s have averaged n e a r l y $2 b i I Ii on per annum. In the f i s c a l year ended March 31 , 1976, the f e d e r a l g o v e r n m e n t ' s t o t a l f i n a n c i a l r e q u i r e m e n t s exceeded $5 b i l l i o n . In an a t tempt to reduce i t s cash needs the f e d e r a l government has r ev i ewed i t s v a r i o u s programs and pared some of the l e s s p r o d u c t i v e e n d e a v o u r s . The F e d e r a l Government would p r e f e r t h a t Crown C o r p o r a t i o n s such as the EDC reduce t h e i r r e l i a n c e on bo r row ing s from the C o n s o l i d a t e d Revenue F u n d . John A MacDona ld , the P r e s i d e n t and Chairman of EDC r e c e n t l y announced tha t the C o r p o r a t i o n i s p r e p a r e d to borrow a l o t of money in v a r i o u s o f f s h o r e marke t s i n c l u d i n g the E u r o d o l l a r m a r k e t , the U.S. f o r e i g n bond market and the P e t r o d o l l a r 2 marke t . Mr. MacDonald hopes t h a t such bo r row ing s w i l l " r e d u c e the F i n a n c e D e p a r t m e n t ' s c o n c e r n over our r a t e of g rowth. They w i l l remain 135 s i m p l y as our banker of l a s t r e s o r t . " The C o r p o r a t i o n ' s p r o s p e c t u s i s expec ted to be i s sued s h o r t l y a f t e r i t s 1975 annual r e p o r t i s r e l e a s e d . How g r e a t a re the C o r p o r a t i o n ' s annual cash needs l i k e l y to become? In t h e o r y , the C o r p o r a t i o n shou ld be a b l e to f i n a n c e a r e a s o n a b l e r a t e of growth from the repayment of e x i s t i n g l o a n s , r e t a i n e d e a r n i n g s , r e s e r v e s and from n o n - c a s h expenses such as d e p r e c i a t i o n . The bu lk of the C o r p o r a t i o n ' s cash needs a r i s e from i t s long term f i n a n c i n g a c t i v i t y . I n c rea se s in a c t i v i t y in the expor t c r e d i t i n s u r a n c e f i e l d do not c r e a t e a cash f l o w p r o b l e m . The annual p remia c o l l e c t e d shou ld cover any c l a i m s , the o p e r a t i n g expenses of the department and p r o v i d e a r e a s o n a b l e l e v e l of p r o f i t s . I n c r e a s e s in a c t i v i t y in the long term f i n a n c i n g f i e l d do , however, c r e a t e a d r a i n on the C o r p o r a t i o n ' s cash r e s o u r c e s . The former p r e s i d e n t of the EDC, Hugh T . A i t k e n , f o r e c a s t t h a t f u t u r e s i g n i n g s of long term f i n a n c i n g agreements would c o n t i n u e to i n c r e a s e by 10-15$ a y e a r . 4 The M i n i s t e r r e s p o n s i b l e f o r the E x p o r t Development C o r p o r a t i o n i s the M i n i s t e r of I n d u s t r y , T r a d e and Commerce, the Honourab le Dona ld J a m i e s o n . H i s c o n c e r n about Canada ' s t r a d e p o s i t i o n v i r t u a l l y makes i t i m p e r a t i v e f o r EDC to be v e r y r e s p o n s i v e to a l l a p p l i c a t i o n s f o r long term f i n a n c i n g a s s i s t a n c e . In t r y i n g to d e t e r m i n e how s e r i o u s a cash f l o w prob lem the C o r p o r a t i o n w i l l f a c e in the near f u t u r e , a s i m p l e f o r e c a s t i n g method u t i l i z i n g t o t a l annual s i gned agreements has been d e v e l o p e d . In t h e o r y , a cash f o r e c a s t i n g model f o r the C o r p o r a t i o n would a n a l y z e a l l of the pas t c o n t r a c t s f o r each type of commodity to each market a r e a to d e t e r m i n e a s t a n d a r d cash f l o w . T h i s s t a n d a r d f l o w would then be a p p l i e d to a l l 136 f u t u r e agreements i n v o l v i n g t h a t t ype of p roduc t to t h a t p a r t i c u l a r market a r e a . U n f o r t u n a t e l y , a t t empt s to d e v e l o p such a model have r e s u l t e d in f a i l u r e . The smal l number of c o n t r a c t s s i gned by the EDC was the pr ime cause of f a i l u r e . F o r example , in each of the pas t t h r e e y e a r s , an average of f o r t y - o n e f i n a n c i n g agreements were s i g n e d by the EDC f o r a l l t y p e s of p r o d u c t s in a l l market a r e a s . The f o r e c a s t i n g method d e v e l o p e d in t h i s c h a p t e r , w h i l e not s t a t i s t i c a l l y sound, does p r o v i d e an i n d i c a t i o n of the magn i tude of the net cash f l o w s the C o r p o r a t i o n w i l l f a c e in the next t h r e e y e a r s . The f i n a n c i n g agreements are d i s b u r s e d a c c o r d i n g to the method used by the Exim Bank. A c t u a l s i g n i n g s a re used f o r each of the pas t f i v e y e a r s . The E D C ' s s i g n i n g s a re f o r e c a s t to i n c r e a s e by 10$ per annum in each of the next t h r e e y e a r s . T a b l e XVII i n d i c a t e s t h a t d i s b u r s e m e n t s in each of the pas t t h r e e y e a r s shou ld have been $198, $308 and $487 m i l l i o n r e s p e c t i v e l y . Compar i sons of the se f o r e c a s t d i s b u r s e m e n t s w i t h a c t u a l d i s b u r s e m e n t s a re not m e a n i n g f u l because the f l ows r e s u l t i n g from agreements s i g n e d p r i o r to 1971 are not i n c l u d e d . T a b l e XVII I a n a l y z e s the cash i n f l o w s r e s u l t i n g from the f i n a n c i n g a c t i v i t y . Most of the c a p i t a l equipment e x p o r t s be ing f i n a n c e d have a l e n g t h y a m o r t i z a t i o n p e r i o d . The mean repayment p e r i o d i s 9 .5 y e a r s . The cash f o r e c a s t i n g method ha s , t h e r e f o r e , assumed a n i n e year repayment p e r i o d f o r a l l c o n t r a c t s , w i t h repayment to commence the year a f t e r s i g n i n g . T a b l e XVIII a l s o combines the cash r e c e i p t s and d i s b u r s e m e n t s and o b t a i n s a net cash r e q u i r e m e n t ' p o s i t i o n . Through the use of t h i s method, the net cash o u t f l o w f o r each of the pas t t h r e e yea r s would have TABLE XVII EXPORT DEVELOPMENT CORPORATION PROJECTEO CASH DISBURSEMENTS FOR THE THREE YEARS ENDING DECEMBER 31, 1978 MILLIONS OF DOLLARS DISBURSEMENTS FROM 1971 1972 1973 1974 1975 1976 1977 1978 TOTAL DISBURSED DISBURSED IN FUTURE CANCELLATIONS TOTAL 1971 Signings 34 102 68 51 44 299 f 41.0 340.0 1972 Signings 28 85 57 42 37 249 — 34.3 283.8 1973 Signings 45 134 89 67 58 393 — • 52.4 . 445.4 1974 Signings 66 198 132 99 86 581 — 78.3 659.3 1975 Signings - 1 14 341 227 170 852 148 135.0 1135.0 2 1976 Signings 125 375 250 750 350 150.0 1250.0 1977 Signings 138 413 551 659 165.0 1375.0 1978 Signings 151 151 1 180 181.0 1512.0 TOTAL (34) (130) (198) (308) (487) (702) (897) (1070) (3826) (2337) (837.0) (7000.0] UNDISBURSED FUNDS 631.4 930.3 1500.0 1913.0 2076.0 NOTES: 1) Disbursements are assumed to be made over 5 years [2% of s ignings are assumed to be c a n c e l l e d . as f o l l o w s : 10$, 30$, 20%, 15*, 13*. 2) Signings from 1976 onward are assumed to grow at an annual rate of 1056. TABLE XVI I| EXPORT DEVELOPMENT CORPORATION PROJECTED CASH RECEIPTS AND NET CASH FLOWS FOR THE THREE YEARS ENDING DECEMBER 31, 1978 MILLIONS OF DOLLARS RECEIPTS 1 FROM CONTRACTS 1971 1972 1973 1974 1975 1976 1977 1978 TOTAL REC'D TO BE RECEIVED IN FUTURE TOTAL NET SIGNINGS SIGNED PRIOR TO 1971 55 55 55 55 55 55 55 55 440 1 15 555 SIGNED SIGNED IN IN 1971 1972 30 30 25 30 25 30 25 30 25 30 25 30 25 210 150 89 99 299 249 SIGNED IN 1973 39 39 39 39 39 195 198 393 SIGNED IN 1974 58 58 58 58 232 349 581 S1GNED IN 1975 100 100 100 300 700 1000 SIGNED IN 1976 1 10 1 10 220 880 1100 SIGNED IN 1977 121 121 1089 1210 S1 GNED IN 1978 — 1313 1331 TOTAL RECEIPTS (55) (85) (MO) (149) (207) (307) (417) (538) (1868) (4850) (6718) NET PROJECTED CASH FLOW (Total Disbursements Obtained from Table XVII) 21 (45) (88) (159) (280) (395) , (480) (532) (1958) 2513 (282) NOTES j j Repayment of loans year lag from the is assumed to be date of s i g n i n g . made equa 1 1 y over a nine year p e r i o d , with a one -bJ TABLE XIX EXPORT DEVELOPMENT CORPORATION FINANCING REQUIREMENTS OVER THE PERIOD JAN. I, 1971-DEC. 3 1 , 1978 ITEM 1 PERIOD FROM 1 9 6 1 - 1 9 7 1 -ACTUAL 1972 RESULTS 1973 1974 1. 1975 1 1976 FORECAST 1 9 7 7 1 1978 1. Signed Agreements Corporation's Account Government's Account 7 8 9 . 5 1 0 4 . 0 2 8 3 . 3 4 4 5 . 4 5 0 2 . 2 157. 1 8 8 5 . 0 2 5 0 . 0 1 2 5 0 . 0 1 3 7 5 . 0 1 5 1 2 . 0 8 9 3 . 5 2 8 3 . 3 4 4 5 . 4 6 5 9 . 3 1 1 3 5 . 0 1 2 5 0 . 0 1 3 7 5 . 0 1 5 1 2 . 0 2 . 3 . LESS Cancellations Disbursements to Cdn. Exporters 5 3 7 . 1 4 7 . 5 1 6 9 . 3 6 3 . 3 1 4 3 . 8 8 6 . 7 2 6 9 . 6 1 5 2 . 8 3 4 4 . 8 1 5 0 . 0 7 0 2 . 0 1 6 5 . 0 8 9 7 . 0 1 8 1 . 0 1 0 7 0 . 0 4 . Undisbursed Financing 3 5 6 . 4 6 6 . 5 2 3 8 . 3 3 0 3 . 0 4 9 7 . 6 3 9 8 . 0 3 1 3 . 0 2 6 1 . 0 5 . Cumulative Undisbursed Financing 3 5 6 . 4 4 2 2 . 9 6 6 1 . 2 9 6 4 . 2 1 4 6 1 . 8 1 8 5 9 . 8 2 1 7 2 . 8 2 4 3 3 . 8 6 . Repayments by Foreign Borrowers 1 5 2 . 3 3 1 . 9 4 8 . 6 6 6 . 9 8 1 . 1 3 0 7 . 0 4 1 7 . 0 5 3 8 . 0 7 . Net Annual Cash Flow ( 6 - 3 ) ( 3 8 4 . 8 ) ( 1 3 7 . 4 ) ( 9 5 . 2 ) ( 2 0 2 . 7 ) ( 2 6 3 . 7 ) ( 3 9 5 . 0 ) ( 4 8 0 . 0 ) ( 5 3 2 . 0 ) 8 . Net Annual Borrowing from Gov't 3 8 2 . 7 9 6 . 6 1 2 1 . 9 1 4 3 . 4 2 6 4 . 5 1 0 0 . 0 1 0 0 . 0 1 0 0 . 0 9 . Net Borrowing from Private Sector . - 4 5 . 0 ( 2 9 . 1 ) 1 9 . 5 ( 1 9 . 9 ) 3 0 0 . 0 4 0 0 . 0 4 5 0 . 0 1 0 . Net Increase in Equity 4 0 . 0 - 1 0 . 0 - 3 0 . 0 - -II. Total Loans Outstanding from Gov't 3 8 2 . 7 4 7 9 . 3 6 0 1 . 2 7 4 4 . 6 1 0 0 9 . 1 1 1 0 9 . 1 1 2 0 9 . 1 1 3 0 9 . 1 12. Total Loans o / s from Private Sector - 4 5 . 0 1 5 . 9 3 5 . 4 1 5 . 5 3 1 5 . 5 7 1 5 . 5 1 1 6 5 . 5 SOURCE:'Export Development Corporation, Annual Reports 140 been $88, 159 and 280 m i l l i o n r e s p e c t i v e l y . The a c t u a l cash r e q u i r e m e n t s , as shown on T a b l e XIX ( the t o t a l of i tems 8, 9 and 10), were $92.8 m i l l i o n in 1973; $162.9 m i l l i o n in 1974; and $264.6 m i l l i o n in 1975. The t e c h n i q u e , t h e r e f o r e , appear s to be u s e f u l in f o r e c a s t i n g the net cash f l ows of the EOC. A c c o r d i n g to T a b l e XVII u n d i s b u r s e d f i n a n c i n g c o n t r a c t s shou ld have equal led $631.4 mi I I ion in 1973, $930.3 mi I I ion in 1974 and $ 1 , 5 0 0 . 0 m i l l i o n in 1975. The a c t u a l f i g u r e s were , $ 6 6 1 . 2 , $964.2 and $1 ,461 .8 m i l l i o n r e s p e c t i v e l y . The t e c h n i q u e a l s o appear s to be u s e f u l in f o r e c a s t i n g the l e v e l s of u n d i s b u r s e d f i n a n c i n g . T a b l e XIX o u t l i n e s the c a p i t a l r e q u i r e m e n t s of the C o r p o r a t i o n f o r the past f i f t e e n y e a r s . The r e s u l t s o b t a i n e d in T a b l e s XVII and XVII I are used to f o r e c a s t the c a p i t a l needs of the EDC f o r the next t h r e e y e a r s . The r e s u l t s i n d i c a t e t h a t the cash needs of the C o r p o r a t i o n w i l l i n c r e a s e s t e a d i l y over the next t h r e e y e a r s , as w i l l the t o t a l of u n d i s b u r s e d f i n a n c i n g . By the end of 1978, the EDC wiI I have a t o t a l o u t s t a n d i n g debt of $2 .5 b i I Ii on. F o u r yea r s e a r l i e r the C o r p o r a t i o n had l e s s than $800 m i l l i o n in o u t s t a n d i n g d e b t . F u r t h e r , by the end of 1978, EDC w i l l have a c o n t i n g e n t l i a b i l i t y w i t h r e g a r d to u n d i s b u r s e d f i n a n c i n g c o n t r a c t s of n e a r l y $2 .5 b i l l i o n . These f i g u r e s suppor t the views e x p r e s s e d by the EDC ' s cha i rman t h a t the C o r p o r a t i o n w i l l need to borrow a " l o t of money" in the not too d i s t a n t f u t u r e . 6 To m a i n t a i n an a c c e p t a b l e c a p i t a l s t r u c t u r e the C o r p o r a t i o n ' s e q u i t y base w i l l a l s o have to be s u b s t a n t i a l l y i n c r e a s e d in the near f u t u r e . D e s p i t e the i n t e n t i o n of the C o r p o r a t i o n to r e l y more h e a v i l y 14! on the private capital markets in the future, i t appears as i f more public funds w i l l have to be invested in EDC to at least enable i t to raise some of the debt c a p i t a l i t w i l l require. At present, a large interest d i f f e r e n t i a l e x i s t s between the Canadian capi t a l market and the U.S. and Eurodollar markets. It w i l l undoubtedly be possible for the EDC to borrow funds in the offshore markets at a more favorable rate than could be obtained in the domestic market. This s i t u a t i o n w i l l enable EDC to lend i t s funds at an i n t e r n a t i o n a l l y competitive rate — i . e . the Corporation's operating margin on i t s p o r t f o l i o w i l l be maintained. The large interest d i f f e r e n t i a l can not, however, be expected to continue i n d e f i n i t e l y and the EDC may have to o f f e r a higher interest rate to a t t r a c t future c a p i t a l . If that event transpires, w i l l the operating margin on EDC's p o r t f o l i o be reduced, or w i l l the interest rate at which EDC is prepared to o f f e r export credit be higher than the i n t e r n a t i o n a l l y competitive rate? Ei t h e r s i t u a t i o n creates problems for the Corporation and/or the Canadian capi t a l equipment manufacturer. The solution to the problem of t r y i n g to locate a large low cost supply of capital which could be used to support Canadian capital equipment exports l i e s in introducing a rediscount f a c i l i t y for the Canadian banks. In the past, the Canadian banks have been reluctant to grant export credit which had a term of greater than f i v e years. They are slowly being encouraged to increase t h e i r p a r t i c i p a t i o n in t h i s type of investment. In 1975, the banks' share of t o t a l signed financing agreements was approximately 20$. The entire problem of getting a greater degree of bank p a r t i c i p a t i o n . i n export credit could be given a 142 s u b s t a n t i a l boost th rough the i n t r o d u c t i o n of a r e d i s c o u n t f a c i l i t y . At p r e s e n t the banks are r e q u i r e d to ho ld 5.5% of t h e i r Canad ian d o l l a r s t a t u t o r y d e p o s i t s in the form of s econda ry r e s e r v e s . T r e a s u r y b i l l s , day to day loans and exce s s p r i m a r y r e s e r v e s are the o n l y i nve s tment s which q u a l i f y as seconday r e s e r v e s . The s e c o n d a r y r e s e r v e f a c i l i t y i s p r i m a r i l y used by the Bank of Canada to implement i t s monetary p o l i c y . The c h a r t e r e d banks ' T r e a s u r y B i l l h o l d i n g s exceed $3 b i l l i o n , w h i l e the t o t a l of t h e i r day loan p o r t f o l i o i s u s u a l l y about $0.2 b i l l i o n . T r e a s u r y b i l l s are a un ique i n s t r u m e n t . They are e x t r e m e l y l i q u i d , u s u a l l y be ing i s s u e d f o r a term of 91 or 182 days . The s t r e n g t h of the i s s u e r c o u p l e d w i t h the l i q u i d i t y f e a t u r e e n s u r e s t h a t T r e a s u r y B i l l s have a low y i e l d . The p r i n c i p a l i n v e s t o r s in T r e a s u r y B i l l s are the c h a r t e r e d banks and the Bank of Canada. The t o t a l amount of T r e a s u r y B i l l s he l d by each of t he se i n v e s t o r s u s u a l l y v a r i e s w i t h changes in t he s e c o n d a r y r e s e r v e r e q u i r e m e n t . F o r example , the seconda ry r e s e r v e r a t i o was reduced by 2% between December I, 1974 and J a n u a r y I, 1975. The c h a r t e r e d banks ' h o l d i n g s of T r e a s u r y B i l l s from November 1974 to J a n u a r y 1975 d e c r e a s e d by $626 mi I I i o n . In t h i s same p e r i o d the Bank of C a n a d a ' s h o l d i n g s i n c r e a s e d by $459 mi I Ii on. At p r e s e n t the t o t a l of T r e a s u r y B i l l s o u t s t a n d i n g i s a p p r o x i m a t e l y $6 b iI Ii on. In v iew of the f a c t t h a t a s u b s t a n t i a l p o r t i o n of the T r e a s u r y B i l l market i s r e a l l y long term F e d e r a l Government bo r row ing which i s r o l l e d over 2-4 t imes a y e a r , i t appear s r e a s o n a b l e to sugges t t h a t a p o r t i o n of t h i s debt be s h i f t e d to a more s u i t a b l e m a t u r i t y . It i s a p p r e c i a t e d t h a t a T r e a s u r y B i l l market of say $ 3 - 4 b i l l i o n must be m a i n t a i n e d in 143 o r d e r f o r the Bank of Canada to implement the d e s i r e d monetary p o l i c y . Assume t h a t the T r e a s u r y B i l l market i s reduced by $2 b i l l i o n . The p roposed r e d i s c o u n t f a c i l i t y would a l l o w c e r t a i n t y p e s o f e x p o r t c r e d i t to be d e s i g n a t e d as e l i g i b l e seconda ry r e s e r v e i n v e s t m e n t s . E l i g i b l e e x p o r t c r e d i t would o n l y i n c l u d e long term debt o b l i g a t i o n s of the E x p o r t Development C o r p o r a t i o n or a p o r t i o n of any expor t c r e d i t w i t h a term of g r e a t e r than t h r e e y e a r s . To c o n t r o l the terms be ing o f f e r e d e x p o r t e r s , the Bank of Canada would r e q u i r e t h a t a l l such c r e d i t s be i n s u r e d by the EDC. A r e q u i r e m e n t s i m i l a r to t h a t of the Bank of E n g l a n d c o u l d be c o n s i d e r e d . E l i g i b l e s e c o n d a r y r e s e r v e i nve s tment s as r e l a t e d to expor t c r e d i t would be t h a t p o r t i o n of any loans f a l l i n g due w i t h i n 18 months f o r a l l c r e d i t s w i t h a t h r e e - f i v e year t e r m . F o r loans w i t h a m a t u r i t y beyond f i v e y e a r s , o n e - h a l f of the amount of the loan would be c l a s s i f i e d as an e l i g i b l e seconda ry r e s e r v e . E x p o r t s to the U.S.A. would not be e l i g i b l e f o r suppor t under t h i s program. The i n t r o d u c t i o n of the p roposed r e d i s c o u n t f a c i l i t y c o u l d be a c c o m p l i s h e d th rough the upcoming r e v i s i o n of the Bank A c t . The r e d i s c o u n t f a c i l i t y would o f f e r advantages f o r a l l g roups concerned w i t h the p romot i on of Canad ian e x p o r t s . The b e n e f i t s would i n c l u d e : I) Canad ian e x p o r t e r s would be a b l e to a r r a n g e expor t c r e d i t t h rough t h e i r l o c a l banks. The sma l l Canad ian e x p o r t e r , as w e l l as the p r o d u c e r l o c a t e d o u t s i d e of C e n t r a l Canada would have g r e a t e r a c c e s s t o e x p o r t c r e d i t . The i n t e r e s t r a t e o f f e r e d f o r c r e d i t to suppor t Canad ian e x p o r t s would be c o m p e t i t i v e w i t h t h a t o f f e r e d by o t h e r n a t i o n s the Export Development Corporation would have an assured low cost source of cap i t a l funds to finance i t s a c t i v i t i e s over the next three years at least. The Corporation would not have to be as concerned about i t s c a p i t a l structure. The increased bank p a r t i c i p a t i o n in export credit would be welcomed. A portion of the routine attached to processing the credit a p p l i c a t i o n could be assigned to the banks as is the case in the U.S.A. and the U.K. the chartered banks would merely be s h i f t i n g from one class of r i s k l e s s asset to another type of the same asset. The f a c i l i t y would enable the banks to become more active in the f i e l d of export credit without being overly concerned about the term. This exogenous stimulus could well have the indirect m u l t i p l i e r e f f e c t of pushing the banks into greater p a r t i c i p a t i o n in export financing. No matter what t h e i r i n i t i a l conservative aversion to such business, i t s a t t r a c t i o n as a substitute reserve veh i c l e would force them to gear up with the necessary evaluative and processing c a p a b i l i t i e s . The a v a i l a b i l i t y of such internal resources, the tatter's probable commitment to increasing t h e i r own raison d'etre, coupled with a reasonable level of success in rediscounting business would a l l tend to stimulate the banks to become involved in further foreign credit business on t h e i r own account-presuma-bly to the greater benefit of Canadian exports and investors abroad the Canadian public would benefit by the reduced need to increase t h e i r investment in EDC. As discussed previously, the public would also benefit from the encouragement of the development of more e f f i c i e n t financing for export markets the Federal Government's primary benefit would be in the elimination of i t s need to concern i t s e l f about providing the necessary funds to support the EDC's a c t i v i t i e s . The cost of financing the $2 b i l l i o n removed from the Treasury B i l l market would be a once and 145 f o r a l l i n c r e a s e of 1-2$.' T h i s co s t c o u l d a l s o be reduced by a p a r t i a l and p o s s i b l y s h o r t term i n c r e a s e in r e s e r v e r e q u i r e m e n t s to " e n c o u r a g e " banks to p a r t i c i p a t e in the new sys tem. The s h i f t i n g . o f the s t r u c t u r e of the g o v e r n m e n t ' s debt c o u l d have an e f f e c t on the term s t r u c t u r e of i n t e r e s t r a t e s in Canada. The F e d e r a l Government ' s a t t empt s to r a i s e an a d d i t i o n a l ;$2 b i l l i o n in the c a p i t a l market may cause upward p r e s s u r e on long term i n t e r e s t r a t e s . A d e t a i l e d d i s c u s s i o n of t h i s p o i n t , however, i s beyond the scope of t h i s s t u d y . In summary, t h i s c h a p t e r has shown t h a t the ca sh r e q u i r e m e n t s of the E x p o r t Development C o r p o r a t i o n w i l l c o n t i n u e to i n c r e a s e in each of the next t h r e e y e a r s . The l e v e l of u n d i s b u r s e d f i n a n c i n g w i l l a l s o c o n t i n u e to i n c r e a s e . A s i m p l e f o r e c a s t i n g t e c h n i q u e was d e s i g n e d to f o r e c a s t the cash needs of the C o r p o r a t i o n and a p r o p o s a l to e s t a b l i s h a r e d i s c o u n t f a c i l i t y was d e v e l o p e d . Soch a r e l e n d i n g f a c i l i t y which would g r e a t l y b e n e f i t a l l market p a r t i c i p a n t s . 146 FOOTNOTES CHAPTER V Canada , P a r l i a m e n t , House of Commons, S t a n d i n g Committee on F i n a n c e . T r a d e and Economic A f f a i r s , MinUtgg OT Proceefl I ings and E v i d e n c e on A p r i I I J , i Q / J , p. I 1:14 and E x p o r t Development C o r p o r a t i o n , Annual Repor t 1974, p. 4 , " G o v ' t E x p o r t Company P l a n s to Borrow Funds From A b r o a d " , The Vancouver Sun, J a n u a r y 15, 1976. p. 33 3. L o c . c i t . 4. Canada , P a r l i a m e n t , House of Commons, S t a n d i n g Committee on F i n a n c e , T r a d e and Economic A f f a i r s . M i n u t e s of P r o c e e d i n g s and E v i d e n c e on December 10, 1974, p. 16:23 5. E x p o r t - I m p o r t Bank, Annua l Repor t 1975, p. 23 6. , " G o v ' t E x p o r t Company P l a n s to Borrow Funds From A b r o a d " , The Vancouver Sun, J a n u a r y 15, 1976, p. 33 CHAPTER VI CONCLUSIONS T h i s s tudy has been conce rned w i t h examin ing how e f f e c t i v e l y the E x p o r t Development C o r p o r a t i o n a c h i e v e s i t s p r i m a r y f u n c t i o n of f a c i l i t a t i n g and d e v e l o p i n g t r a d e between Canada and the r e s t of t he w o r l d . In the f i r s t f i v e c h a p t e r s of t h i s s tudy a c o n s i d e r a b l e number of f a c t s and f i g u r e s have been p r e s e n t e d . In t h i s c o n c l u d i n g c h a p t e r , the major f i n d i n g s of the s tudy w i l l be summarized in an a t tempt to c o n s t r u c t i v e l y c r i t i c i z e the o p e r a t i o n s of C a n a d a ' s n a t i o n a l e x p o r t c r e d i t g r a n t i n g a gency , the E x p o r t Development C o r p o r a t i o n . S e c t i o n I w i l l summarize the s i m i l a r i t i e s and d i f f e r e n c e s i n the p o l i c i e s and mechanisms used by the U n i t e d Kingdom, the U n i t e d S t a t e s and Canada to promote e x p o r t s th rough the use of e x p o r t c r e d i t . S e c t i o n II w i l l examine the e f f e c t i v e n e s s of the mechanisms used by the t h r e e n a t i o n a l a g e n c i e s to a c h i e v e t h e i r p o l i c y g o a l s . S e c t i o n III w i l l o f f e r some recommendat ions f o r chang ing the mechani sms used by Canada and more s p e c i f i c a l l y t he EDC to promote and f i n a n c e Canad ian t r a d e . The f i n a l s e c t i o n w i l l once a ga in look at e x p o r t c r e d i t in the wor I d e n v i r b n m e n t . I. POLICY GOALS OF EXPORT CREDIT GRANTING AGENCIES A l l t h r e e of the n a t i o n a l e x p o r t c r e d i t g r a n t i n g a g e n c i e s , the 147 148 ECGD, the Exim Bank and the EDC, rev iewed in t h i s s tudy have the same b a s i c g o a l , name ly , to promote the e x p o r t s of t h e i r p a r t i c u l a r n a t i o n . They each s t r i v e to ensure t h a t c r e d i t i s not a l i m i t i n g f a c t o r in the s a l e of c a p i t a l equ ipment . The a g e n c i e s t r y to ensure t h a t an e x p o r t e r who i s c o m p e t i t i v e in the w o r l d market in terms of p r i c e , q u a l i t y and s e r v i c e i s a l s o a b l e to compete in terms of the f i n a n c i n g package o f f e r e d the p u r c h a s e r . A s u b s t a n t i a l volume of the c a p i t a l equipment p roduced by the i n d u s t r i a l i z e d n a t i o n s and f i n a n c e d th rough e x p o r t c r e d i t i s pu rcha sed by the d e v e l o p i n g n a t i o n s . T h i s f a c t i s c l e a r l y shown in T a b l e VI and T a b l e XI I . However, a l l t h r e e a g e n c i e s a re not o v e r l y concerned w i t h the development f i n a n c e prob lems f a c i n g the LDCs. T h i s l ack of c o n c e r n f o r deve lopment f i n a n c e i s p r o b a b l y be s t shown in- a s t a t e m e n t b y the fo rmer P r e s i d e n t of the EDC. Hugh T . A i t k e n , g i v i n g e v i d e n c e b e f o r e the S t a n d i n g Committee on F i n a n c e , T r a d e and Economic A f f a i r s on A p r i l 17, 1973 s t a t e d , "Our aim i s o r i e n t e d to p romot ing Canad ian e x p o r t s though h o p e f u l l y a v i a b l e p r o j e c t in a d e v e l o p i n g c o u n t r y which we f i n a n c e w i l l be of b e n e f i t to t h a t c o u n t r y . " ' Wh i l e a l l t h r e e a g e n c i e s have the same b a s i c g o a l , each one uses a s l i g h t l y d i f f e r e n t approach in t r y i n g to suppor t the e x p o r t s of t h e i r m a n u f a c t u r i n g i n d u s t r i e s . A l l of the a g e n c i e s in t h i s s t udy a re w i l l i n g to u n d e r w r i t e the commerc ia l and p o l i t i c a l r i s k s of d o i n g b u s i n e s s in the wor ld market p l a c e . The approach towards e x p o r t c r e d i t i n s u r a n c e in the U n i t e d S t a t e s v a r i e s s l i g h t l y from t h a t t aken in Canada and the U n i t e d Kingdom. The U.S. system p e r m i t s independent i n s u r a n c e b r o k e r s l o c a t e d th roughou t the c o u n t r y to 149 take a p p l i c a t i o n s f o r e x p o r t c r e d i t i n s u r a n c e on b e h a l f of the FCIA and Exim Bank. In the o t h e r two n a t i o n s , a l l a p p l i c a t i o n s must be s u b m i t t e d d i r e c t l y to e i t h e r the ECGD or the EDC. The U.S. approach a l s o d i f f e r s in t h a t the i n s u r e r , the F o r e i g n C r e d i t I n surance A s s o c i a t i o n (FCIA) i s a p a r t n e r s h i p c o n s i s t i n g of a group of p r i v a t e i n s u r a n c e companies and the Exim Bank. Both the B r i t i s h and Amer i can a g e n c i e s o f f e r a s p e c i f i c t ype of p o l i c y d e s i g n e d to meet the needs of the r e l a t i v e l y sma l l e x p o r t e r . Wh i l e t h e r e are minor d i f f e r e n c e s in the t y p e s of i n s u r a n c e p o l i c i e s o f f e r e d , i n t e r n a t i o n a l c o m p e t i t i o n and what c o u l d be termed the^ " o l i g o p o l i s t i c s t r u c t u r e of the i n d u s t r y " ensure the f a c i l i t i e s p r o v i d e d are ve ry s i m i I a r . In the f i e l d of e x p o r t c r e d i t a l l t h r e e n a t i o n s t a k e a some-what d i f f e r e n t a p p r o a c h . The B r i t i s h sys tem r e l i e s a lmost e x c l u s i v e l y on the p r i v a t e f i n a n c i a l i n s t i t u t i o n s , s u p p o r t e d by the ECGD ' s g u a r a n t e e s , to p r o v i d e any c r e d i t needed to suppor t B r i t i s h e x p o r t s . In o r d e r to ensure t h a t B r i t i s h e x p o r t c r e d i t i s comparab le to t h a t o f f e r e d by o t h e r n a t i o n s , the Bank of Eng l and o f f e r s a r e d i s c o u n t f a c i l i t y f o r c e r t a i n t y p e s of e x p o r t c r e d i t . T h i s r e d i s c o u n t f a c i l i t y not o n l y a l l o w s the B r i t i s h banks to o f f e r terms beyond f i v e y e a r s , the normal cut o f f p o i n t f o r bank c r e d i t , but i t a l s o h e l p s i n s u l a t e the c o s t of expor t f i n a n c e from chang ing d o m e s t i c c r e d i t c o n d i t i o n s . The Amer i can system i s d e s i g n e d not to compete w i t h p r i v a t e c a p i t a l which i s w i l l i n g to p r o v i d e e x p o r t c r e d i t . The Ex im Bank t r i e s to encourage and supplement the p r i v a t e c a p i t a l f l o w s . Through the 150 p a r t i c i p a t i o n f i n a n c i n g p rogram, the c o - o p e r a t i v e f i n a n c i n g f a c i l i t y and the commerc ia l bank e x p o r t e r gua ran tee program, the Ex im Bank has been v e r y s u c c e s s f u l in a t t r a c t i n g p r i v a t e c a p i t a l f l o w s to f i n a n c e U.S. e x p o r t s . Under a l l of i t s l e n d i n g programs the Exim Bank t r i e s to l i m i t i t s p a r t i c i p a t i o n to l e s s than 50% of the v a l u e of the c o n t r a c t . Both the p u r c h a s e r and the s u p p l i e r of A m e r i c a n c a p i t a l equipment e x p o r t s , wh ich are f i n a n c e d th rough one of the Exim B a n k ' s f a c i l i t i e s , o f t e n do not have any d i r e c t d e a l i n g s w i t h the Ex im Bank. The a p p l i c a t i o n s a re t aken and p r o c e s s e d by the l o c a l f i n a n c i a l i n s t i t u t i o n which then communicates d i r e c t l y w i t h the Ex im Bank. In some ca se s the l o c a l f i n a n c i a l i n s t i t u t i o n may approve the c r e d i t , under the d i s c r e t i o n a r y l i m i t of a p p r o v a l g r a n t e d i t by the Bank. The U.S. agency o f f e r s a r e d i s c o u n t f a c i l i t y wh ich i s not as complete as t h a t o f f e r e d by the B r i t i s h . In the A m e r i c a n s y s tem, the e l i g i b l e expor t c r e d i t of the commerc ia l banks can not be used to improve the l i q u i d i t y p o s i t i o n of the bank ing sy s tem. F u r t h e r , the A m e r i c a n system r e q u i r e s the commerc ia l bank to o b t a i n Exim B a n k ' s i n d i c a t i o n t h a t the loan i s e l i g i b l e f o r the d i s c o u n t loan program p r i o r t o i t ( the commerc ia l bank) g r a n t i n g the l o a n . The Amer i can approach a l s o d i f f e r s from both B r i t i s h and Canad ian systems in t h a t the Exim Bank i s p r e p a r e d to suppor t the l e a s i n g of U.S. made c a p i t a l equipment as w e l l as the pu rcha se of used U.S. c a p i t a l equ ipment . The p r e l i m i n a r y commitment p r o c e d u r e i s a l s o a un ique f e a t u r e of the Amer i can sys tem. The Canad ian system has , u n t i l r e c e n t l y , f o c u s e d n e a r l y a l l of i t s a t t e n t i o n on the f i e l d of d i r e c t l e n d i n g . Up u n t i l 1974, EDC ' s f i n a n c i n g f a c i l i t y was used to suppor t r e l a t i v e l y l a r g e s c a l e p r o j e c t s . The Board of D i r e c t o r s has now removed the n o t i o n a l $1 m i l l i o n e l i g i b i l i t y c r i t e r i o n f o r EDC f i n a n c i n g . Any c a p i t a l equipment t r a n s a c t i o n t h a t r e q u i r e s extended t e r m s , a c c o r d i n g to i n t e r n a t i o n a l s t a n d a r d s , i s now 2 e l i g i b l e f o r EDC ' s s u p p o r t . |t s t i l l rema ins to be seen however, whether t h i s formal r e l a x a t i o n v/iI I r e s u l t in a g r e a t e r p r o p o r t i o n of EDC f i n a n c i n g b e i n g d i r e c t e d to s m a l l e r p r o j e c t s . The EDC i s a l s o g r a d u a l l y moving towards the p a r t i c i p a t i o n p r i n c i p l e so s u c c e s s f u l l y adopted by the Exim Bank. The Canad ian system does not o f f e r any type of r e d i s c o u n t f a c i l i t y ; a p p I i c a t i o n s may o n l y be s u b m i t t e d d i r e c t l y to the c o r p o r a t i o n ; the EDC does not g r an t any l e n d i n g l i m i t s to commerc ia l banks and the Canad ian d i r e c t l e n d i n g system does not have any programs d e s i g n e d s p e c i f i c a l l y f o r the smal l Canad ian e x p o r t e r . A compar i son of the t h r e e n a t i o n a l e x p o r t c r e d i t g r a n t i n g a g e n c i e s would be i n c o m p l e t e w i t h o u t a b r i e f comment on the type of commodi t ie s be ing s u p p o r t e d by the se programs. The l ack of r e l e v a n t da ta on the B r i t i s h sys tem n e c e s s i t a t e s i t s e x c l u s i o n from t h i s c o m p a r i s o n . However, both the Amer i can and Canad ian systems i n d i c a t e t h a t c e r t a i n i n d u s t r i e s a re r e c e i v i n g the b u l k o f the s u p p o r t f rom t h e i r n a t i o n a l a g e n c i e s , in p a r t i c u l a r the a i r c r a f t i n d u s t r y in the U.S.A. and s h i p -b u i l d i n g in Canada. T a b l e s VI I and XII I i n d i c a t e t h a t f o r both Canada and the U n i t e d S t a t e s the m a j o r i t y of the f i n a n c e d e x p o r t s a re be ing pu rcha sed by the d e v e l o p i n g n a t i o n s . In both ca ses the LDCs of C e n t r a l and South A m e r i c a are the main p u r c h a s e r s of t h i s t ype of e x p o r t . 152 II. EFFECTIVENESS OF THE THREE SYSTEMS Now t h a t a b r i e f compar i son of the t h r e e systems has been c o m p l e t e d , the r e s u l t s of the s tudy w i l l be condensed in an e f f o r t to de te rm ine how e f f e c t i v e l y each system meets i t s p o l i c y g o a l s . T h r e e b a s i c c r i t e r i a f o r j udg ing the e f f e c t i v e n e s s of the s y s tem, have been i d e n t i f i e d , — t h e a b i l i t y of a l l market p a r t i c i p a n t s to have a c c e s s to expor t c r e d i t ; the r e l a t i v e co s t of the c r e d i t ; and t i m e l i n e s s or the speed w i t h which a p p l i c a t i o n s a re p r o c e s s e d . In an e f f i c i e n t m a r k e t , a l l of the p o t e n t i a l p a r t i c i p a n t s , f rom the v e r y sma l l to the v e r y l a r g e , shou ld t h e o r e t i c a l l y have an equal o p p o r t u n i t y to g e n e r a t e a c t i v i t y . The B r i t i s h s y s tem, on the b a s i s of t he se t h r e e c r i t e r i a , can be s a i d to be e f f e c t i v e in p romot ing B r i t i s h e x p o r t s . The ECGD makes e x t e n s i v e use of the B r i t i s h bank ing system and thus a l l t y p e s of e x p o r t e r s can g a i n a c c e s s to e x p o r t c r e d i t . Most f i r m s u s u a l l y have an e s t a b l i s h e d work ing r e l a t i o n s h i p w i t h a commerc ia l bank. The f i r m , t h e r e f o r e , f i n d s a p p l y i n g f o r e x p o r t c r e d i t l i t t l e d i f f e r e n t from a p p l y i n g f o r a normal t ype term l o a n . The t ime r e q u i r e d to p r o c e s s an a p p l i c a t i o n f o r expor t c r e d i t i s not s i g n i f i c a n t l y d i f f e r e n t from t h a t needed to p r o c e s s a normal c r e d i t a p p l i c a t i o n . The speed w i t h which the ECGD p r o c e s s e s i n s u r a n c e a p p l i c a t i o n s shou ld i n d i c a t e t h a t a p p I i c a t i o n s f o r ECGD's gua ran tee would a l s o be p rompt l y a t t e n d e d t o . The r e d i s c o u n t f a c i l i t y of the Bank of Eng l and i s e f f e c t i v e in both i n c r e a s i n g the s u p p l y of e x p o r t c r e d i t and keep ing the i n t e r e s t r a t e down. The a b i l i t y of the banks to r e c l a s s i f y e l i g i b l e e x p o r t c r e d i t 153 f o r l i q u i d i t y purposes i s u n d o u b t e d l y more impor tant to the bank ing system than the a b i l i t y to a c t u a l l y r e d i s c o u n t n o t e s . The major c r i t i c i s m of the B r i t i s h system i s t h a t i t can s u f f e r f rom the c o n s e r v a t i v e a t t i t u d e of b a n k e r s . The banker s may not be as a g g r e s s i v e as the B r i t i s h e x p o r t e r s , and the p romot i on of B r i t i s h e x p o r t s may s u f f e r as a r e s u l t . J u d g i n g by the t h r e e a f o r e m e n t i o n e d c r i t e r i a , the Amer i can system i s v e r y e f f e c t i v e in p romot ing e x p o r t s . The CFF a l o n g w i t h the concept of p a r t i c i p a t i o n f i n a n c i n g as d i s c u s s e d in Chap te r III, i n d i c a t e s tha t a l l Amer i can e x p o r t e r s of c a p i t a l equipment have equa l a c c e s s to e x p o r t c r e d i t . The f a c t t h a t over 1500 a p p l i c a t i o n s were p r o c e s s e d and approved by one of 300 banks l o c a t e d th roughou t the w o r l d i n d i c a t e s t h a t the program i s e f f e c t i v e in bo th p romot i ng A m e r i c a n e x p o r t s and a t t r a c t i n g more p r i v a t e c a p i t a l i n t o the f i e l d of e x p o r t c r e d i t . The co s t of Amer i can e x p o r t c r e d i t i s kept to an i n t e r n a t i o n a l l y c o m p e t i t i v e l e v e l th rough the use of the " b l e n d i n g p r i n c i p l e " . The concept of p a r t i c i p a t i o n f i n a n c i n g a l l o w s f o r the m i x i n g o f p r i v a t e and p u b l i c funds to g e n e r a t e the n e c e s s a r y e x p o r t c r e d i t . The Ex im Bank, be ing a p u b l i c body not o v e r l y conce rned w i t h the p r o f i t m a x i m i z a t i o n p r i n c i p l e , i s p r e p a r e d to lend i t s funds at a r a t e below t h a t charged by the p r i v a t e i n s t i t u t i o n s . The " b l e n d i n g " of t h e s e two i n t e r e s t r a t e s h e l p s t o ensure t h a t an i n t e r n a t i o n a l l y c o m p e t i t i v e r a t e iS o f f e r e d to suppor t Amer i can e x p o r t s . The Amer i can r e d i s c o u n t f a c i l i t y appear s to be of l i m i t e d v a l u e both in terms of i n c r e a s i n g the s u p p l y of funds and in r e d u c i n g the 154 co s t of e x p o r t c r e d i t . If the f a c i l i t y were more f l e x i b l e and perhaps d i d not r e q u i r e the banks to d e s i g n a t e such loans p r i o r to g r a n t i n g them, i t might be of g r e a t e r v a l u e . A s u b s t a n t i a l p a r t of the p r o c e s s i n g of a p p l i c a t i o n s in the Amer i can system i s done by the p a r t i c i p a t i n g bank. T h i s f e a t u r e a Iong w i t h the p r e l i m i n a r y commitment p r o c e d u r e , e n s u r e s t h a t the t u r n a r o u n d t ime in p r o c e s s i n g a p p l i c a t i o n s f o r e x p o r t c r e d i t i s kept to a minimum. It appears as i f the Amer i can system s u p p o r t s p r o d u c t s in wh ich the U n i t e d S t a t e s e n j o y s some t ype o f c o m p a r a t i v e advan tage . However, w h i l e the U.S. e n j o y s a t e c h n o l o g i c a l advantage in m a n u f a c t u r i n g a i r c r a f t , the Exim Bank may be s u p p o r t i n g the i n d u s t r y f o r o t h e r r e a s o n s . One such r e a s o n , the i n a b i l i t y o f t he i n d u s t r y to o b t a i n p r i v a t e f i n a n c i n g , was o u t l i n e d in Chap te r II I. W h i l e the U n i t e d S t a t e s appear s to e n j o y some advantages in the p r o d u c t i o n of heavy equ ipment , such as r a i l r o a d r o l l i n g s t o c k , the Ex im Bank f a c i l i t i e s a re not used to any l a r g e deg ree to suppor t such e x p o r t s . On the o t h e r hand, Canad ian s u b s i d i a r i e s of U.S. c o r p o r a t i o n s which produce r a i l r o a d equ ipment , make a g r e a t dea l of use of the f i n a n c i n g f a c i l i t y of the EDC. T h i s f a c t appear s to i n d i c a t e t h a t c o r p o r a t e s t r a t e g y , r a t h e r than the c o m p a r a t i v e advantage t h e o r i e s , m a y p r o v i d e more of an i n s i g h t i n t o why c e r t a i n g roups of p r o d u c t s a re f i n a n c e d . The c a p i t a l goods s u p p o r t e d by the Ex im Bank do not f o l l o w normal U.S. t r a d e p a t t e r n s , as n e a r l y t w o - t h i r d s of such e x p o r t s are purchased by LDCs. The Canad ian s y s tem, as judged by the c r i t e r i a o u t l i n e d in t h i s s t u d y , i s the l e a s t e f f e c t i v e of the t h r e e systems in mee t i n g i t s p o l i c y 155 g o a l s . The EDC f i n a n c i n g f a c i l i t i e s a re not r e a d i l y a v a i l a b l e to the sma l l e x p o r t e r . In FY 1975, out of a t o t a l of 41 loan agreements s i g n e d , o n l y two were f o r l e s s than $1 m i l l i o n . These s m a l l e r agreements i n v o l v e d the e x p o r t of a i r c r a f t components f o r the Doug la s A i r c r a f t Company of Canada L t d . The Canad ian system does not p r o v i d e f o r the e f f i c i e n t p r o c e s s i n g of loan a p p l i c a t i o n s . A l l such a p p l i c a t i o n s must be s u b m i t t e d d i r e c t l y to the EDC. Once the se a p p l i c a t i o n s have been p r o c e s s e d by EDC ' s c e n t r a l o f f i c e in Ot tawa, they must be approved by EDC ' s Board of D i r e c t o r s , which o n l y meets once a month. The f a c t t h a t the c h e c k i n g of the Canad ian c o n t e n t r e q u i r e m e n t i s a d m i n i s t e r e d from E D C ' s Ottawa o f f i c e a l s o adds to the p r o c e s s i n g t i m e . The Canad ian s y s t e m , th rough the use of p u b l i c f u n d s , has been e f f e c t i v e in keep ing the co s t of e x p o r t c r e d i t down. In f a c t , the EDC may have been o v e r l y e f f e c t i v e in t h i s r e g a r d when one c o n s i d e r s t h a t f o r e i g n s u b s i d i a r i e s of Canad ian c o r p o r a t i o n s as w e l l as some of Canada ' s l a r g e s t banks a re among the bo r rower s of the C o r p o r a t i o n . The E D C ' s i n c r e a s e d l e v e l s of a c t i v i t y have c r e a t e d a cash f l o w p r o b l e m . C h a p t e r V showed t h a t the c o r p o r a t i o n w i l l r e q u i r e s u b s t a n t i a l amounts of new c a p i t a l in the near f u t u r e . If t h i s c a p i t a l i s r a i s e d in the p r i v a t e m a r k e t , a p r a c t i c e not used e x t e n s i v e l y by the EDC in the p a s t , the a b i l i t y of t he c o r p o r a t i o n to c o n t i n u e to o f f e r a c o m p e t i t i v e i n t e r e s t r a t e , w i t h o u t e r o d i n g i t s o p e r a t i n g m a r g i n , may be s u b j e c t to q u e s t i o n . The a n a l y s i s of the e x p o r t e d commod i t ie s s u p p o r t e d by EDC shows t h a t t h r e e - q u a r t e r s of such e x p o r t s a re pu rcha sed by the LDCs. 156 T h i s p a t t e r n i s j u s t the r e v e r s e of Canada ' s t r a d e p a t t e r n f o r t o t a l e x p o r t s , but i s s i m i l a r to the c o u n t e r - p a t t e r n of U.S. t r a d e s u p p o r t e d by the Exim Bank. The a n a l y s i s p r e s e n t e d in Chap te r IV shows t h a t the s h i p b u i l d i n g i n d u s t r y , which has r e c e i v e d the g r e a t e s t amount of suppor t from the EDC, i s one in which Canada has few advantages as compared to o t h e r n a t i o n s . A f t e r a n a l y z i n g the c o r p o r a t e s t r u c t u r e of two of C a n a d a ' s l a r g e s t s h i p b u i l d i n g f i r m s , both of which a re major u s e r s of EDC ' s f i n a n c i n g , one beg in s to have some doubt s about the e f f i c i e n c y of C a n a d a ' s expor t c r e d i t marke t . I I I. RECOMMENDATIONS The g e n e r a l tone of the s tudy has i n d i c a t e d t h a t the net v a l u e to the Canad ian economy of the EDC ' s a c t i v i t y may not be as l a r g e as at f i r s t b e l i e v e d . D e s p i t e the f a c t t h a t r e c o r d l e v e l s of e x p o r t s a re be ing suppo r ted by the EDC ' s a c t i v i t i e s , C a n a d a ' s t r a d e p o s i t i o n d e t e r i o r a t e d in 1975. Chap te r IV showed t h a t C a n a d a ' s p o s i t i o n in the wor ld market p l a c e i s d e t e r i o r a t i n g . The a b i l i t y of the f r e e market system to e f f e c t i v e l y o p e r a t e in Canada has r e c e n t l y been q u e s t i o n e d by Pr ime M i n s t e r T r u d e a u . T h i s s tudy has shown tha t a p u b l i c agency , the E x p o r t Development C o r p o r a t i o n , d e s i g n e d to f a c i l i t a t e and f i n a n c e C a n a d a ' s t r a d e , does not p e r f o r m i t s f u n c t i o n as e f f e c t i v e l y as s i m i l a r a g e n c i e s in two o t h e r i n d u s t r i a l i z e d n a t i o n s . The s tudy w i l l now c o n c e n t r a t e on o u t l i n i n g v a r i o u s mechan i s ims 157 w h i c h , i f a d o p t e d , would pe rm i t the EDC to promote Canad ian t r a d e more e f f e c t i v e l y . The recommendat ions shou ld lead to the deve lopment of a more e f f i c i e n t e x p o r t c r e d i t market in Canada. The F e d e r a l Government s h o u l d adopt two new measures w i t h r e g a r d to the f i e l d of expor t c r e d i t and deve lopment f i n a n c e . F i r s t the o b j e c t i v e s of EDC shou ld be rev i ewed and c l a r i f i e d . Wh i l e the C o r p o r a t i o n c l a i m s not to be in the f i e l d of development f i n a n c e , the r e s u l t s of t h i s s tudy show t h a t i t d e f i n i t e l y i s in t h a t f i e l d . The C o r p o r a t i o n s h o u l d , t h e r e f o r e , c o n s i d e r the needs of the LDCs and the debt s e r v i c i n g p rob lem f a c i n g t he se n a t i o n s . Perhaps one l a r ge government agency c o n s i s t i n g of e lements from both CIDA and EDC c o u l d be formed to c o o r d i n a t e C a n a d a ' s e f f o r t s in deve lopment f i n a n c e l e a v i n g EDC to c o n c e n t r a t e on Canad ian s e l l e r s ' need f o r e x p o r t c r e d i t . Second , the i n t r o d u c t i o n of a r e d i s c o u n t -s e c o n d a r y r e s e r v e f a c i l i t y , f o r e l i g i b l e e x p o r t c r e d i t , s i m i l a r t o the one o u t l i n e d in Chap te r V shou ld be g i v e n a h i gh p r i o r i t y . The advantages of such a f a c i l i t y to a l l s e c t o r s of the Canad ian economy were c l e a r l y o u t l i n e d in the l a s t c h a p t e r . Armed w i t h t h i s new mandate and a new sou rce of f i n a n c i n g , the o f f i c e r s o f the EDC shou ld r e v i e w the f a c i l i t i e s b e i n g o f f e r e d , bo th in the f i e l d s of expor t c r e d i t i n s u r a n c e and e x p o r t f i n a n c e . In the f i e l d of expor t c r e d i t i n s u r a n c e , the EDC shou ld adopt two new measure s . F i r s t , in o r d e r to ensure t h a t a l l Canad ian e x p o r t s , whether they a re l o c a t e d in Pugwash, Nova S c o t i a or S a n d s p i t , B . C . , can r e a d i l y pu r cha se expor t c r e d i t i n s u r a n c e , the EDC s h o u l d p e r m i t independent Canad ian i n s u r a n c e agen t s t o i s sue such p o l i c i e s on EDC ' s b e h a l f . If t h i s s t r a t e g y was imp lemented, a s u b s t a n t i a l p a r t of the p r o c e s s i n g of the a p p l i c a t i o n s would be per fo rmed by the i n s u r a n c e a g e n t s . The c o s t s of i n t r o d u c i n g 158 t h i s measure i n c l u d e p a y i n g the agents a commiss ion f n r t h e i r s e r v i c e s and EDC would have to unde r t ake a mas s i ve t r a i n i n g program to ensure t h a t a l l r e g i s t e r e d agent s were aware of the advantages of e x p o r t c r e d i t i n s u r a n c e . S e c o n d , t he c o r p o r a t i o n s h o u l d i n t r o d u c e a sma l l b u s i n e s s t ype of p o l i c y s i m i l a r to the p o l i c i e s o f f e r e d by the ECGD and the Exim Bank. W h i l e the c o r p o r a t i o n ' s p r e s e n t p o l i c i e s may be f l e x i b l e enough to s e r v e the needs of the sma l l e x p o r t e r , a new and s p e c i f i c p o l i c y might encourage more C a n a d i a n e x p o r t e r s to s e l l t h e i r p r o d u c t s in the i n t e r n a t i o n a l market p l a c e . W i th the i n t r o d u c t i o n of a r e d i s c o u n t - s e c o n d a r y r e s e r v e f a c i l i t y by the Bank of Canada , the c h a r t e r e d banks w i l l u n d o u b t e d l y be much more r e c e p t i v e to f i n a n c i n g e x p o r t s of Canad ian c a p i t a l equ ipment . To meet the demand f o r e l i g i b l e e x p o r t c r e d i t the EDC would adopt the p r i n c i p l e of p a r t i c i p a t i o n f i n a n c e and would s t r i v e to keep the l e v e l of p u b l i c funds below 50% of the v a l u e of any c o n t r a c t . EDC ' s new " f a c i l i t y would be s i m i l a r to the one o p e r a t e d so s u c c e s s f u l l y by the Exim Bank. E v e r y b ranch of every c h a r t e r e d bank l o c a t e d in Canada would be g r a n t e d a d i s c r e t i o n a r y l i m i t of a p p r o v a l wh ich c o u l d be t i e d in w i t h the b r a n c h ' s d i s c r e t i o n a r y l e n d i n g l i m i t g r a n t e d by i t s Head O f f i c e . T h i s new f i n a n c i n g f a c i l i t y would a l l o w a l l e x p o r t e r s much b e t t e r a c c e s s to expor t c r e d i t . The Canad ian p u b l i c would no l onger have to c o n c e r n i t s e l f w i t h the i s s u e of p o l i t i c a l pa t ronage and e x p o r t c r e d i t . W i t h the i n t r o d u c t i o n of the new f a c i l i t y the EDC shou ld adopt a more d e c e n t r a l i z e d c o r p o r a t e s t r u c t u r e . Canada i s s i m p l y too l a r g e a n a t i o n to be se rved by o n l y f o u r o f f i c e s . F u n c t i o n a l r e g i o n a l o f f i c e s w i t h a u t h o r i t y to i s s u e s p e c i a l t y p e s of i n s u r a n c e p o l i c i e s and approve 159 expor t c r e d i t a p p l i c a t i o n s would make the m a r k e t p l a c e more e f f i c i e n t . The r e g i o n a l o f f i c e s would be g r a n t e d d i s c r e t i o n a r y l i m i t s of a p p r o v a l . The c h e c k i n g of the Canad ian c o n t e n t r e q u i r e m e n t c o u l d a l s o be per fo rmed by the r e g i o n a l o f f i c e s . In v iew of the c h a r t e r e d b a n k s ' d e s i r e to e n t e r the l e a s i n g f i e l d the EDC shou ld a l s o i n t r o d u c e a l ea se gua ran tee f a c i l i t y s i m i l a r to the one o f f e r e d by the Ex im Bank. A f i r m s t r a t e g y w i t h r e g a r d to f i n a n c i n g the e x p o r t of used Canad ian c a p i t a l equipment shou ld be a d o p t e d . T h i s new s t r a t e g y would p r o v i d e the C o r p o r a t i o n ' s o f f i c e r s w i t h some gu i dance in s i t u a t i o n s such as the s a l e of used a i r c r a f t by the Department of N a t i o n a l D e f e n c e . Wi th the i n t r o d u c t i o n of a l l t he se measures the C o r p o r a t i o n would be w e l l on i t s way to making the e x p o r t c r e d i t market in Canada more e f f i c i e n t . The EDC would be b e t t e r equ ipped to f a c i l i t a t e and f i n a n c e C a n a d a ' s t r a d e . The prob lems of the LDCs would be d e a l t w i t h more s p e c i f i c a l l y in terms o f t h e i r needs by a s p e c i a l i z e d e x p o r t c r e d i t g r a n t i n g agency w i t h terms of r e f e r e n c e c o n c e n t r a t i n g upon deve lopment f i n a n c i n g . Armed w i t h t h i s new f a c i l i t y the Canad ian bus inessman would have the o p p o r t u n i t y to become more a g g r e s s i v e in wor ld m a r k e t s . At p r e s e n t , Canad ian m a n u f a c t u r e r s are c o n t e n t to s e r v e the l a r g e U.S. m a r k e t , the B r i t i s h and Japanese m a r k e t s , and the d o m e s t i c marke t . They seem to f a i l to r e a l i z e t h a t by the I980 ' s B r a z i l c o u l d be a l a r g e r economic power than B r a t a i n 3 and t h a t by 1985, Japan i s f o r e c a s t to be one of the w o r l d ' s 4 major s u p p l i e r s of f o r e i g n inves tment c a p i t a l . One has o n l y to pe ru se any Canad ian f i n a n c i a l paper to f i n d 160 e v i d e n c e of the r e l u c t a n c e of Canad ian m a n u f a c t u r e r s to compete a b r o a d . An a r t i c l e in the September 27 , 1975 e d i t i o n of the F i n a n c i a l Pos t s t a t e s , f o r example, " t h e r e are few Canad ian companies d i s p l a y i n g t h e i r wares at t r a d e f a i r s — a major method of s e l l i n g the German m a r k e t — o r making c o n t a c t w i t h i m p o r t e r s or the Chambers of C o m m e r c e " . 5 S i m i l a r v iews a re e x p r e s s e d by C z e c h o s I o v a k i a n o f f i c i a l s who s t a t e t h a t " C z e c h s w i l l even go so f a r as t o buy Canad ian goods in Europe because t h e y a re unab le to ge t a Canad ian m a n u f a c t u r e r to s e l l d i r e c t l y to C z e c h o s l o v a k i a " . 6 In one i n t e r n a t i o n a l t r a d e f a i r in E u r o p e , e l e v e n Canad ian f i r m s took a t o t a l of 90 square meter s of s pace . At t h a t same German f a i r , Swiss s u p p l i e r s r e n t e d 4,193 square meter s of s p a c e . 7 In the pas t a c o m b i n a t i o n of f a c t o r s has led to the d e t e r i o r a t i o n of Canada ' s wor l d t r a d e p o s i t i o n . F o r example , in the e a r l y I 970 ' s Canad ian r e s e a r c h was i n v o l v e d in the deve lopment of STOL A i r c r a f t . Canada, however, f o r a v a r i e t y of r e a s o n s , f a i l e d to e x p l o i t her p o s i t i o n . Foremost I n t e r n a t i o n a l I n d u s t r i e s L t d . i s a r e l a t i v e l y smal l A l b e r t a n m a n u f a c t u r e r s p e c i a l i z i n g in o f f - t h e - r o a d t r a n s p o r t a t i o n equ ipment . The v e h i c l e s are i d e a l l y s u i t e d to the expor t m a r k e t , but in pa s t f i f t e e n y e a r s EDC has extended o n l y one d i r e c t loan to suppor t the expor t of F o r e m o s t ' s v e h i c l e s . The case of I n t e r n a t i o n a l Hydrodynamics and the P i s c e s s u b m e r s i b l e s c o u l d be added to t h i s l i s t . It i s to be hoped t h a t in the f u t u r e , a more a g g r e s s i v e Canad ian b u s i n e s s community s u p p o r t e d by a more e f f i c i e n t e x p o r t f i n a n c i n g agency shou ld be a b l e to a v o i d the r e c u r r e n c e of s i t u a t i o n s s i m i l a r to those c i t e d in the l a s t p a r a g r a p h . Canada would then be on 161 her way to regaining a stronger position in world trade. IV. EXPORT CREDIT IN THE WORLD ENVIRONMENT The d i s t i n c t i o n between export c r e d i t and development finance is very fine and a l l national export credit granting agencies are l i k e l y to address themselves to the coordination of both these areas in order to foster the development of i n d u s t r i a l sectors in nations of the Third World. The r i s i n g cost of energy over the last two years has i n t e n s i f i e d the debt s e r v i c i n g problem of the LDCs. The twenty-four non-o i l producing developing nations are forecast to have a combined current 8 account d e f i c i t of $30 b i l l i o n in 1976. Funds to finance t h i s d e f i c i t w i l l have to be obtained from some source, and the options available to t h i s group of nations is gradually being reduced. In early 1976, the Republic of Zaire had to suspend payment on a $500 m i l l i o n Eurocurrency loan. Other nations reportedly facing repayment problems or f i n a n c i a l 9 d i f f i c u l t i e s include Zambia, Ghana, Argentina, B r a z i l and Mexico. Some of these nations are the " b e t t e r " customers of the developed nations. One would hope that the l a t t e r , if only for t h e i r own s e l f -i n t e r e s t , would take the necessary steps to help the developing nations play a more meaningful r o l e in world a f f a i r s . Among the more expensive projects that the i n d u s t r i a l i z e d nations have been exporting are nuclear power plants. Up u n t i l recently the U.S. had a v i r t u a l monopoly in t h i s f i e l d , but now nations such as Canada, West Germany and Japan a l l export nuclear power f a c i I i t i e s . 162 The t o t a l c o s t of a n u c l e a r power system i s v e r y l a r g e . The annual r e p o r t of the Exim Bank f o r FY 1971, i n d i c a t e s t h a t s i x such p r o j e c t s were a u t h o r i z e d f o r a t o t a l of $259.3 m i l l i o n . In the pa s t two y e a r s Canada has announced the s a l e of two CANDU r e a c t o r s . The t o t a l v a l u e of t h e s e two c o n t r a c t s i s more than $800 m i l l i o n . Canad ian c r e d i t to the p u r c h a s e r s w i l l amount to $459.5 mi I Ii on . The Canad ian n u c l e a r system has co s t the Canad ian t a x p a y e r m i l l i o n s of d o l l a r s to d e v e l o p and now the b e n e f i t s are s l o w l y b e g i n n i n g to be r e c e i v e d — o r are t h e y ? How do c o u n t r i e s s u p p l y i n g n u c l e a r knowledge ensure t h a t i t w i l l not be used f o r o t h e r p u r p o s e s ? C a n a d a ' s p roposed s a l e of a CANDU R e a c t o r t o A r g e n t i n a i s a good case in p o i n t . A r g e n t i n a ' s i n t e n t i o n s a re pe rhaps q u e s t i o n a b l e when one n o t e s t h a t w i t h i n 10 days o f t he Ind ian n u c l e a r b l a s t in May 1974, the Ind ian f o r e i g n m i n i s t e r v i s i t e d Buenos A i r e s . ' 0 The s a f e t y of n u c l e a r power i s a l s o b e i n g q u e s t i o n e d in the i n d u s t r i a l i z e d n a t i o n s . In the e a r l y I 960 ' s a n u c l e a r power f a c i l i t y was c o n s t r u c t e d in New J e r s e y over the o b j e c t i o n s of s c i e n t i s t s who c l a i m e d t h a t the mar ine l i f e in the a r e a would be damaged. S i n c e then m i l l i o n s of d o l l a r s have been spent t r y i n g to r e p a i r the damage caused to the e c o l o g i c a l s y s t e m s . ' ' C a l i f o r n i a i s c o n s i d e r i n g a r e fe rendum 12 to s top c o n s t r u c t i o n of more n u c l e a r p l a n t s . T h i s t ype of c r i t i c i s m i n d i c a t e s t h a t perhaps the s u p p l i e r s of n u c l e a r power g e n e r a t i n g f a c i l i t i e s s hou ld c a r e f u l l y r e v i e w the c o s t s and b e n e f i t s to s o c i e t y as a whole b e f o r e f u t u r e u n i t s a re s o l d to the d e v e l o p i n g n a t i o n s . C a n a d a ' s r e c e n t s a l e of a CANDU r e a c t o r to Korea d o e s , however, i n d i c a t e a new t r e n d in e x p o r t c r e d i t . The e x p o r t i n g n a t i o n s a re s l o w l y b e g i n n i n g to show s i g n s of more c o o p e r a t i o n . The t o t a l v a l u e of the Korean 163 s a l e i s e s t i m a t e d to be in exces s of $700 m i l l i o n and the f i n a n c i n g i s be ing p r o v i d e d by the EDC, a c o n s o r t i u m of Canad ian banks headed by the Roya l Bank and a group of B r i t i s h banks headed by Hambros Bank L t d . EDC wiI I p r o v i d e $300 mi I I ion and the Canad ian banks wi I I p r o v i d e an a d d i t i o n a l $30 m i l l i o n to suppor t Canad ian e x p o r t s . The B r i t i s h banks , s ecu red by the ECGD's g u a r a n t e e , w i l l p r o v i d e $50 m i l l i o n to suppor t B r i t i s h e x p o r t s . The b a l a n c e of the co s t of the p r o j e c t w i l l be p r o v i d e d by the R e p u b l i c of Ko rea . The i n t e n s e i n t e r n a t i o n a l c o m p e t i t i o n in the f i e l d of e x p o r t c r e d i t has r e s u l t e d in each of the v a r i o u s a g e n c i e s s t r i v i n g to d e v e l o p new t e c h n i q u e s and methods of f i n a n c i n g c a p i t a l equipment e x p o r t s . The Exim 8ank, f o r example, i s now p r e p a r e d to o f f e r up to 15$ of the v a l u e of the expor t components to f i n a n c e " l o c a l c o s t s " wh ich a re n e c e s s a r y to comple te the p r o j e c t . The Japanese and the Eu ropeans a re a l s o p r e p a r e d to p r o v i d e l o c a l co s t f i n a n c i n g . In e f f e c t , the p r a c t i c e of p r o v i d i n g l o c a l co s t f i n a n c i n g i s r e a l l y a means of r e d u c i n g the p u r c h a s e r ' s down payment. F r a n c e and I t a l y a l r e a d y have a system of g u a r a n t e e s to p r o t e c t the e x p o r t e r a g a i n s t i n c r e a s e d c o s t s , w h i l e F r a n c e , Germany and the N e t h e r l a n d s a re a l s o p r e p a r e d to p r o v i d e g u a r a n t e e s a g a i n s t c e r t a i n l o s s e s o c c u r i n g as a r e s u l t of changes in the v a l u e of f o r e i g n c u r r e n c i e s . If g u a r a n t e e s a g a i n s t f o r e i g n c u r r e n c y exchange l o s s e s a re o f f e r e d by a g e n c i e s , the e x p o r t e r w i l l e a s i l y be a b l e to extend h i s a c t i v i t i e s i n t o the w o r l d m a r k e t i n g s p h e r e . The Wor ld Bank has a l s o been s u c c e s s f u l in i n t r o d u c i n g a j o i n t 164 f i n a n c i n g t e c h n i q u e to mix e x p o r t c r e d i t and deve lopment f i n a n c e . The Wor ld Bank in c o n j u n c t i o n w i t h the d e v e l o p i n g n a t i o n s r e v i e w s the needs of the c o u n t r y and p r e p a r e s an a p p l i c a t i o n f o r c r e d i t . I n t e r e s t e d d e v e l o p e d n a t i o n s then agree to p r o v i d e a c e r t a i n amount of long term e x p o r t c r e d i t t o t h e i r c a p i t a l equipment s u p p l i e r s who are s u c c e s s f u l in o b t a i n i n g p o r t i o n s of the l a r g e r c o n t r a c t s . A l l of the n a t i o n a l c r e d i t g r a n t i n g a g e n c i e s must agree in advance as to the terms and c o n d i t i o n s of the expor t c r e d i t . T h e r e can be no c o m p e t i t i o n in the c r e d i t f i e l d . T h i s t y p e of i n t e r n a t i o n a l c o o p e r a t i o n i s c e r t a i n l y a s t e p in the r i g h t d i r e c t i o n . However, a f t e r t h i s t e c h n i q u e had been used f i v e t imes to f i n a n c e p r o j e c t s in B r a z i l , Mex ico and C o l o m b i a , a l l a r e a s where the U.S. i s the dominant s u p p l i e r , the Exim Bank began to r e g i s t e r o p p o s i t i o n to the p r o c e s s . The U.S. e x p o r t e r s a re in g e n e r a l r e l u c t a n t to b i d on Wor ld Bank c o n t r a c t s and as a r e s u l t , the Ex im Bank c l a i m e d the p r o j e c t t e c h n i q u e was d i s r u p t i n g h i s t o r i c a l U.S. t r a d e p a t t e r n s . In c o n c l u d i n g t h i s s tudy i t appear s t h a t the d e v e l o p e d n a t i o n s can suppor t the economic growth o f LDCs by one of t h r e e methods . By the f i r s t method, the d e v e l o p e d n a t i o n s would i n c r e a s e t h e i r f l ows of " a i d " to the \% f i g u r e recommended by the Pea r son Commiss ion . By the second method , they would e s t a b l i s h an i n t e r n a t i o n a l body, such as the Wor ld Bank, to c o o r d i n a t e funds and r e v i e w the c r e d i t needs of each L D C Each of the l a t t e r would be a s s i g n e d a maximum amount of e x t e r n a l debt t h a t i t c o u l d have o u t s t a n d i n g at any p o i n t in t i m e . Each deve l oped n a t i o n would in t u r n assume some r e s p o n s i b i l i t y f o r e n s u r i n g t h a t i t s c a p i t a l equipment e x p o r t s were mee t i n g the LDCs h i g h e r p r i o r i t y needs . By the l a s t method, and the one most l i k e l y t o e v o l v e , the e x i s t i n g sys tem w i t h a l l i t s i n h e r e n t danger s w i l l be m a i n t a i n e d . 165 FOOTNOTES CHAPTER VI !• Canada , P a r l i a m e n t , House of Commons, S t a n d i n g Committee on F i n a n c e , T r a d e and Economic A f f a i r s , M i n u t e s of P r o c e e d i n g s and E v i d e n c e , A p r i I 13, 1973. P. I 1:16 2. E x p o r t Development C o r p o r a t i o n , Annua l Repor t 1974. p. 13 3. C r a i g , A l e x a n d e r , " N u c l e a r Agreements Must be A l r i g h t " , The F i n a n c i a l P o s t , J a n . 10, 1976. p.6 4. Z e n o f f , Dav id B. , ' T h e F u t u r e of the M u l t i n a t i o n a l C o r p o r a t i o n " , Euromoney, September 1975. p. 150 5. , " T h e y Want to Buy Canad ian G o o d s " , F i n a n c i a l P o s t , S e p t . 27 , 1975. p. 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Mohammed, A z i z a l , " T h e Use of Commerc ia l C r e d i t s by D e v e l o p i n g C o u n t r i e s f o r F i n a n c i n g Imports of C a p i t a l G o o d s " , I n t e r n a t i o n a l Monetary  Fund S t a f f P a p e r s , V o l . XV I I I , 1970, p. 29 -109 . , " N u c l e a r Agreements Must be A i r t i g h t " , F i n a n c i a l P o s t , J a n u a r y 10, 1976, p. 6. , " N u c l e a r Power I n d u s t r y H i t by S a f e t y C o n c e r n " , The Vancouver " Sun , A p r i I 19, 1976, p. 12. 168 BIBLIOGRAPHY CONT'D , "$180 M i l l i o n Loan to S o v i e t Union i s Made by U . S . " , N.Y. T i m e s , May 22 , 1974, p. I. , " P i c a r d Q u i t t i n g C B C " , The Vancouve r Sun , May 3 1 , 1975, p. I. , " P l a y i n g the E x p o r t Game", The Banker vol. 124, September 1974, p. 1162-3. P r o u d f o o t , Doug la s M.,, " E x p o r t i n g Made E a s i e r " , Canad ian B u s i n e s s , V o l . 4 7 , J u l y 1974, p. 4 0 - 4 . , "Que . Eyes I ndus t r y G r o u p i n g " , The Vancouver Sun, J u l y 2 9 , 1975, p. 19. R o l f e , J . , "Quebec S h i p y a r d S a l e U n d e r l i n e s Some F i r m s on E x t i n c t i o n S l i p w a y " , G lobe and Mai I, May 17, 1968, p. B9. S a u e r , W a l t e r C . , " E x i m Bank C r e d i t s Back E a s t - W e s t T r a d e " , Co lumb ia  J o u r n a l of Wor ld B u s i n e s s , W i n t e r 1973, p. 57 -60 . S c h r e i n e r , J o h n , " F o r e m o s t ' s V e h i c l e s a re on the T r a c k " , F i n a n c i a l P o s t , Oc tobe r 18, 1975, p. 36. S h e p h e r d , H . , "SGF R a i s e s H o l d i n g s to 86$ of M a r i n e , Buys 40$ of MLW", G lobe and Mai I, J u l y 24 , 1975, p. B3. , " S h i p b u i l d i n g S u b s i d y B r i n g s F l o o d o f O r d e r s to C a n a d a " , F i n a n c i a l P o s t , Nov. 2, 1974, p. T - 7 . So lomon, Hyman, " P r o s p e c t s S l i p f o r Poor N a t i o n s " , F i n a n c i a l P o s t , F e b . 2 1 , 1976, p. 34. , " S p u r ^ S h i p b u i l d i n g U r g e d " , P r o v i n c e , August 15, 1972, p. 13. S t e r n , M . , " L o w - C o s t Ex im Bank Loans to S o v i e t H i t by J a c k s o n " , N.Y. T i m e s , June 4 , 1974, p. 61. T e r r e l l , H a r r y , " H a r m o n i z a t i o n of E x p o r t C r e d i t in the E E C " , The Banke r , V o l . 122, December 1972, p.. 1591-5. T e r r e l l , H a r r y , " T h r e e I n i t i a t i v e s in E x p o r t C r e d i t " , The B a n k e r , V o l . 124, December 1974, p. 1497-1500. T o u c h i e , R., " E x p o r t Management Companies -A New Breed of Cat F o r C a n a d a " , Canad ian B u s i n e s s , V o l . 4 7 , No. 9 , September 1974, p. 6 6 - 8 . 169 BIBLIOGRAPHY CONT'D V i d e t , P o t e , Government E x p o r t A s s i s t a n c e of the U n i t e d S t a t e s , B o s t o n , Note P u b l i s h e d by Harva rd C o l l e g e , 1975. 3. P u b l i c a t i o n s of N a t i o n a l C r e d i t G r a n t i n g A g e n c i e s Exim Bank A s s i s t a n c e to Smal l B u s i n e s s , W a s h i n g t o n , E x p o r t - I m p o r t Bank of the U n i t e d S t a t e s , 1975. Exim Bank-How i t Works, W a s h i n g t o n , D . C , E x p o r t - I m p o r t Bank of the U n i t e d S t a t e s , 1975. Exim Bank; What i t i s , What i t Does , What i t Can Do F o r You , W a s h i n g t o n , E x p o r t - I m p o r t Bank of the U n i t e d S t a t e s , 1975. Expb r t Development C o r p o r a t i o n , Annual R e p o r t s f o r 1970-1975 i n c l u s i v e . E x p o r t - i m p o r t Bank of the U n i t e d S t a t e s , Annual R e p o r t s f o r 1971, 1972, 1974, 1975. E x p o r t - I m p o r t Bank, C u m u l a t i v e R e c o r d s , W a s h i n g t o n , D . C , U.S. Government P r i n t i n g O f f i c e , 1974. 4. U n p u b l i s h e d M a t e r i a l T o m l i n s o n , J . W i l l i a m C , E . C . G . D . R i s k G r a d i n g , U n p u b l i s h e d R e s e a r c h P a p e r , J u l y 1969. 5. Books B a x t e r , Ian F . G . , and Ivan R. F e l t h a m ( e d i t o r s ) , E x p o r t P r a c t i c e , T o r o n t o , Osgoode H a l l Law S c h o o l , 1963. B r a d f o r d , C o l i n I. J r . , et a l . , New D i r e c t i o n s in Deve lopment , L a t i n A m e r i c a , E x p o r t C r e d i t , P o p u l a t i o n Growth and U.S. A t t i t u d e s , New Y o r k , P r a e g e r , 1974. Brown, J . G . , The E x p o r t Development C o r p o r a t i o n , V a n c o u v e r , U n i v e r s i t y o f B r i t i s h Co lumbia M a s t e r ' s T h e s i s , 1971. 170 BIBLIOGRAPHY CONT'D , E x t e r n a l F i n a n c i n g f o r L a t i n A m e r i c a n Deve lopment , B a l t i m o r e , O r g a n i z a t i o n of A m e r i c a n S t a t e s , 1971. , The F i n a n c i a l Po s t Su rvey of I n d u s t r u a l s 1975, Volumes One and Two, T o r o n t o , MacLean Hunter L i m i t e d , 1975. _ F i n a n c i n g F o r e i g n O p e r a t i o n s 1964, Second E d i t i o n , New Y o r k , B u s i n e s s I n t e r n a t i o n a l , 1964. $ F i n a n c i n g U.S. E x p o r t s and O v e r s e a s I nves tment , W a s h i n g t o n , D . C , Mach ine ry and A l l i e d P r o d u c t s I n s t i t u t e and C o u n c i l f o r T e c h n o l o g i c a l Advancement , 1964. G r a y , C l i v e S . , Re source F l ows to Le s s Deve loped C o u n t r i e s , New Y o r k , P r a e g e r , 1969. H i r s c h , Seev , The E x p o r t Pe r f o rmance of S i x M a n u f a c t u r i n g I n d u s t r i e s , New Y o r k , P r a e g e r , 1971. Kernaghan , W.D.K. and Am WiIIms ( e d s ) , Pub I i c A d m i n i s t r a t i o n in Canada: S e l e c t e d R e a d i n g s , Second E d i t i o n , T o r o n t o , Methuen, 1971. L o o m i s , John E . , I n t e r n a t i o n a l F i n a n c e : O f f i c i a l A g e n c i e s and U.S. B u s i n e s s , R e v i s e d E d i t i o n , Wash ington D . C , BNA Books , 1970. N e h r t , Lee C , F i n a n c i n g C a p i t a l Equipment E x p o r t s , S c r a n t o n , P a . , I n t e r n a t i o n a l Tex tbook C o . , 1966. N e h r t , Lee C . , ( e d i t o r ) , I n t e r n a t i o n a l F i n a n c e f o r M u l t i n a t i o n a l B u s i n e s s , Second E d i t i o n , S c r a n t o n , P a . , I n tex t E d u c a t i o n a l P u b l i s h e r s , 1972. Newman, P e t e r C , The Canad ian E s t a b l i s h m e n t , Volume One, T o r o n t o , M c C l e l l a n d and S tewar t L i m i t e d , 1975. P e a r s o n , L e s t e r B., et a l . , P a r t n e r s in D e v e l o p m e n t - R e p o r t of the Commiss ion  on I n t e r n a t i o n a l Deve lopment , New Y o r k , P r a e g e r , 1969. Pugh, Of in S. The E x p o r t - I m p o r t Bank of W a s h i n g t o n , C o l u m b i a , S. C a r o l i n a , U n i v e r s i t y of South C a r o l i n a , 1957. Reuber , Grant L . , Canada ' s I n t e r e s t in the T r a d e Prob lems of L e s s - D e v e l o p e d  Count r i e s , T o r o n t o , The Canad ian T r a d e Commit tee , 1964. S i n g e r , P a u l , E x p o r t i n g - O v e r s e a s , S c a r b o r o u g h , O n t a r i o , Pau l S i n g e r , E x p o r t M a r k e t i n g and Management C o n s u l t a n t , 1970. S y r e t t , W.W., F i n a n c e o f Ove r sea s T r a d e , F i f t h E d i t i o n , London , P i tman P r e s s , 1971. 171 BIBLIOGRAPHY CONT'D V e r g h e s e , S .K . , E x p o r t C r e d i t and C r e d i t I n surance F a c i l i t i e s in I nd ia and A b r o a d , New D e l h i , Ind ian I n s t i t u t e of F o r e i g n T r a d e , 1970. , Wor ld Bank O p e r a t i o n s , B a l t i m o r e , John Hopkin U n i v e r s i t y P r e s s , 1972. 172 APPENDIX I TABLE I WORLD TRADE BY REGION, COUNTRY OR AREA VALUE IN MILLIONS OF U . S . DOLLARS EXPORTS F . O . B . 1948 1958 1968 1974 WORLD 57500 108600 239700 842500 DEVELOPED NATIONS LESS DEVELOPED COUNTRIES CENTRALLY PLANNED ECONOMIES 36600 17200 3700 71400 24900 12300 168700 43700 27300 542800 228800 70900 U . S . A . CANADA 12545 3109 17755 5045 34191 12602 97144 32784 LDCs-AMERICA 7460 9600 13850 48610 EUROPE EEC EFTA LDCs 13740 3270 770 34380 6430 1 170 82830 15330 3350 274620 49360 13270 CENTRALLY PLANNED ECONOMIES 3200 10320 25230 64960 SOUTH AFRICA 557 1096 2109 4977 LDCs-AFRICA 3030 4650 9690 38810 JAPAN 258 2877 12972 55536 DEVELOPING MARKET ECONOMIES-ASIA ISREAL MIDDLE EAST OTHER 1410 5200 139 4070 6420 602 8630 1 1 180 1737 93840 46180 CENTRALLY PLANNED ECONOMIES-ASIA • 520 1970 2080 5950 DEVELOPED MARKET ECONOMIES OCEANIA 2130 2320 4320 12940 LDCs-OCEANIA 70 140 340 1340 : U n i t e d N a t i o n s , Yearbook of I n t e r n a t i o n a l T r a d e S t a t i s t i c s . 1974.  Volume I, T r a d e By C o u n t r y . 1975. p . 17. ~~~ ' 1 APPEND IX II EXPORT DEVELOPMENT CORPORATION INFORMATION REQUIRED IN AN APPLICATION FOR SECTION 29 OR 31 FINANCING TO B E S U B M I T T E D I N T R I P L I C A T E T O : E X P O R T F I N A N C E D I V I S I O N , E X P O R T D E V E L O P M E N T C O R P O R A T I O N , P . O . Box 6 5 5 , O T T A W A 4 . Commitments of long term export financing under Sections 29 or 31 of the Export Development Act are given only on the basis of an application submitted by the Canadian prime exporter requiring long term financing to obtain a major order of capital equipment, and/or engineering services for a sound transaction or project abroad. No commitment of any kind can be given by the Export Development Corporation until full particulars of the transaction or project have been submitted. The Canadian exporter applies for the credit on behalf of the foreign borrower; therefore the application must include complete and detailed information which may be obtained only from the borrower. This form is to be regarded as a guide to the information required and not as a question-naire to be completed with brief answers. A n y additional relevant information not specifically called for under the listed headings should definitely be included in the application. 1 It is essential that satisfactory feasibility studies, tender specifications and/or other reports be presented with the application to establish the technical and economic soundness of the transaction requiring financing. Detailed answers to the questions asked hereunder do not preclude E D C from requesting further information relating to the transaction at a later date. GENERAL SUMMARY 1. Name of Exporter: (a) Head Office address (b) Plant address 2. Name and address of prospective foreign buyer. 3. Outline of the project indicating the total cost, total foreign exchange cost and the amount of E D C financing requested. List the major equipment, materials and services to be supplied from Canada showing their dollar value. INFORMATION CONCERNING EXPORTER 4 . Describe exporter's corporate history and operations, including subsidiaries, affiliates, major shareholders and parent company (if any.) 5 . If the exporter is a subsidiary, does it have complete freedom to initiate export business? If not ivliat manufacturing and/or selling limitations are placed on its. operations by the parent company? 6 . Attach audited financial and ancillary statements of exporter for the past five years. For each of the past five years list exporter's total domestic and export sales, domestic and export sales of equipment of the type requiring present financing. 7. On the basis of existing plant capacity state in dollar value: a) maximum output, b) optimum output, c) normal output, d) present output, e) level of output if proposed project undertaken. 174 8. S h o w the n u m b e r of e m p l o y e e s of exporter as of the latest a v a i l a b l e date a n d as of a t least one y e a r ago. G i v e exporter 's average a n n u a l e m p l o y m e n t o v e r the past five years. 9. D e s c r i b e the e m p l o y m e n t s i t u a t i o n i n the a r e a where p r o d u c t i o n facilities are l o c a t e d , g i v i n g the latest n u m b e r a n d percentage of u n e m p l o y e d , a n d for the last three years. 10. INFORMATION CONCERNING BORROWER (IF IN PRIVATE SECTOR) (a) D e s c r i b e borrower's c o r p o r a t e h i s t o r y a n d operations, i n c l u d i n g subsidiaries, affiliates, major shareholders a n d p a r e n t c o m p a n y (if a n y ) . (b) A t t a c h a u d i t e d f inancial a n d a n c i l l a r y s t a t e m e n t s of b o r r o w e r for the past five years, i n c l u d i n g details of p a y m e n t terms a n d interest rates of borrower's present o u t s t a n d i n g debts. (c) A t t a c h b o r r o w e r ' s forecast: (i) balance sheet (ii) i n c o m e s t a t e m e n t (iii) s t a t e m e n t of source a n d a p p l i c a t i o n of funds i n c l u d i n g w o r k i n g c a p i t a l (iv) c a p i t a l e x p e n d i t u r e schedule ( N . B . : forecast s h o u l d cover the period of c o n s t r u c t i o n a n d extend for a further p e r i o d of a t least five years) (d) P r o v i d e details of a d d i t i o n a l e q u i t y a n d d e b t financing c o n t e m p l a t e d b y the b o r r o w e r d u r i n g the a b o v e forecast p e r i o d . (e) If b o r r o w e r is u n d e r t a k i n g a new v e n t u r e , o r e n t e r i n g a new field of a c t i v i t y , s u p p l y i n c o m p l e t e d e t a i l p r o v i s i o n s w h i c h wi l l be m a d e for s u p p l y of experienced m a n a g e -m e n t d u r i n g the first five years of borrowers p r o p o s e d o p e r a t i o n s . o 11. INFORMATION CONCERNING BORROWER (IF IN PUBLIC SECTOR) (a) P r o v i d e the exact n a m e of g o v e r n m e n t d e p a r t m e n t , a g e n c y o r e n t i t y t h a t wi l l be a c t i n g as borrower. (b) If b o r r o w e r is a g o v e r n m e n t o w n e d or c o n t r o l l e d a g e n c y or e n t i t y , s u p p l y a c o p y o f the statute or decree etc. establ ishing the o r g a n i z a t i o n . (c) D o e s the central g o v e r n m e n t guarantee the p a y m e n t of all the borrower's c a p i t a l debts? If not p r o v i d e the i n f o r m a t i o n requested in S e c t i o n 10(a) to (d) inclusive. 12. INFORMATION CONCERNING PROJECT D e s c r i b e the project fully, g i v i n g detai led i n f o r m a t i o n o n the fol lowing: (a) n a t u r e of project (b) l o c a t i o n (c) e c o n o m i c a n d technical soundness (d) v i a b i l i t y (e) n a t i o n a l a n d regional i m p o r t a n c e in the i m p o r t i n g c o u n t r y (f) further engineering before c o n s t r u c t i o n c o m m e n c e s (g) whether sale wi l l be o n a f.a.s. or c.i.f. basis — if f.a.s., will insurance c l a i m s be p a i d in C a n a d i a n or U . S . dollars? 175 ( A ) T I M I N G State the a n t i c i p a t e d periods a n d / o r dates for the fol lowing w i t h reference to the project: (a) c o m p l e t i o n a n d / o r start u p (b) c o n s t r u c t i o n p e r i o d (c) d e l i v e r y p e r i o d of the e q u i p m e n t / m a t e r i a l at site (d) p l a c i n g of orders (e) s i g n i n g of a c o m m e r c i a l agreement. (B) C O S T S P r o v i d e details of project costs as follows: (a) t o t a l cost of project (b) local costs a n d h o w financed (c) foreign exchange costs ( C a n a d i a n ) (d) foreign exchange costs ( N o n - C a n a d i a n ) a n d how financed (e) foreign agents c o m m i s s i o n , other c o m m i s s i o n s , fees a n d royalt ies (if a n y ) a n d h o w financed (f) exporter 's a n t i c i p a t e d net profit after i n c o m e taxes. ( C ) C A N A D I A N C O N T E N T S t a t e the o v e r a l l percentage of C a n a d i a n c o n t e n t of the project c a l c u l a t e d a c c o r d i n g to E D C criteria. Indicate the e q u i p m e n t , m a t e r i a l a n d / o r services to be s u p p l i e d b y the exporter a n d b y his m a i n suppliers, g i v i n g n a m e s of suppliers, a n d d o l l a r values. F o r e q u i p m e n t o r m a t e r i a l s p u r c h a s e d in C a n a d a it s h o u l d be recognized t h a t most i tems h a v e n o n - C a n a d i a n c o n t e n t w h i c h s h o u l d be considered w h e n c o m p u t i n g the o v e r a l l C a n a d i a n c o n t e n t of the project. ( D ) T E R M S O F F I N A N C I N G R E Q U E S T E D (a) state financing terms r e q u i r e d for project (b) s u p p l y detai led a n d verified i n f o r m a t i o n j u s t i f y i n g the financing t e r m s requested (i.e. w h a t is foreign c o m p e t i t i o n offering?) (c) state n a m e of a g e n c y or d e p a r t m e n t of g o v e r n m e n t w h i c h will p r o v i d e guarantee of p r i n c i p a l a n d interest (d) state n a m e of central b a n k , etc., w h i c h will p r o v i d e guarantee of foreign exchange a v a i l a b i l i t y . 13. BENEFITS OF THE PROJECT TO THE ECONOMY OF THE IMPORTING COUNTRY (a) A s a result of this project c o m i n g into p r o d u c t i o n w h a t e c o n o m i c benefits will the i m p o r t i n g c o u n t r y derive, i n c l u d i n g e m p l o y m e n t , use of d o m e s t i c raw materials , a d d i t i o n a l revenue to the g o v e r n m e n t a n d foreign exchange savings? (b) If the i m p o r t i n g c o u n t r y has a N a t i o n a l D e v e l o p m e n t P l a n , a t t a c h a c o p y of the P l a n a n d give the p r i o r i t y of this project u n d e r the P l a n . 176 14. BENEFITS OF THE TRANSACTION'TO THE CANADIAN ECONOMY (a) D e s c r i b e a n y special i n d u s t r i a l a d v a n t a g e s to be d e r i v e d from this transact ion in terms of u t i l i z a t i o n of l a b o u r force a n d plant c a p a c i t y , of assistance or e n c o u r a g e m e n t in d e v e l o p i n g new designs or lines of p r o d u c t i o n , a n d of increasing C a n a d i a n m a n u f a c t u r e of e q u i p m e n t or c o m p o n e n t parts. (b) Specify the e x p o r t trade p r o m o t i o n benefits that m a y be expected to result f r o m this t r a n s a c t i o n w i t h regard t o : (i) d i r e c t m a r k e t d e v e l o p m e n t prospects in the c o u n t r y of p u r c h a s e a n d i n the general a r e a ; a n d (ii) c o n t i n u i n g m a r k e t for r e p l a c e m e n t parts of C a n a d i a n o r i g i n . (c) W h a t wi l l be the d i r e c t a n d i n d i r e c t l a b o u r effects in C a n a d a : (i) for the a p p l i c a n t c o m p a n y (ii) for each of the m a i n associated firms a n d s u b - c o n t r a c t o r s ; a n d (iii) for the total t r a n s a c t i o n 15. CERTIFICATION Please certify as follows: W e certify t h a t the representations m a d e a n d facts stated b y us are true, a n d that we h a v e h a v e n o t misrepresented or o m i t t e d a n y m a t e r i a l fact w h i c h m i g h t h a v e a b e a r i n g o n this a p p l i c a t i o n , a n d further certify t h a t no fees, c o m m i s s i o n s , grants, gifts or p a y m e n t s of a n y k i n d other t h a n those listed in this a p p l i c a t i o n h a v e been p a i d o r wi l l be p a i d to a n y o n e in C a n a d a or a b r o a d in c o n n e c t i o n w i t h this t r a n s a c t i o n or a p p l i c a t i o n for f i n a n c i n g . Name of Company Signature 6 (TITLE) Address Date 19 FIN—01—8-69 

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