The Effect of Export Insurance and Guarantees on Export Performance: An Empirical Analysis for Korea

38 Pages Posted: 1 Oct 2020

See all articles by Kyunghun Kim

Kyunghun Kim

Korea Institute for International Economic Policy

Hyelin Choi

Korea Institute for International Economic Policy

Date Written: August 20, 2019

Abstract

There is a series of empirical papers (Kim and Lee 2004; Egger and Url, 2006; Moser, Nestmann, and Wedow, 2008; Baltensperger and Herger, 2009; Auboin and Engemann, 2014; Van der Veer. 2015) which show that trade finance is positively associated with export. Despite its positive impact on export, trade finance has been a contentious issue in international organizations such as the WTO and OECD in terms of implementing related policy measures. This is based on the argument that trade finance hurts fair international trade because it ultimately plays a role just like a subsidy.

Regarding this contentious issue, in this paper we examine whether there is evidence supporting that trade finance is associated with an increase in export. We also investigate the channel through which the effect of the trade finance on export is working. To this end, we focus on a specific part of trade finance: short-term export insurance and export credit guarantee. This is because noble and ample data on these types of trade insurance are available. This confidential data is provided by the Korea Insurance Trade Corporation (henceforth KSURE) exclusively.

We conduct a panel regression using Korean sector-level export data covering from 2010Q1 to 2017Q4. This dataset enables us to control for destination country-, sector-, and time-fixed effects. Our empirical results show that the short-term export insurance and export credit guarantee have a positive impact on exports, and the main channel behind this is related to mitigating financial constraints of exporting firms. The trade finance effectively eliminates the risk of importers' payment, which helps export firms reduce the financial frictions. This ultimately leads to an increase in export.

Since the main mechanism in which the trade insurance affects export is related to alleviating financial frictions, it becomes more definite that the way how trade insurance contributes to an increase in export is somewhat different from that of a subsidy. When we consider the fact that financial friction is an important factor for restraining international trade, which can partly explain the great collapse in international trade during the global financial crisis, the trade insurance policies would rather be a useful policy measure which can dampen negative impact on export during recession.

Suggested Citation

KIim, Kyunghun and Choi, Hyelin, The Effect of Export Insurance and Guarantees on Export Performance: An Empirical Analysis for Korea (August 20, 2019). KIEP No. Working Paper 19-04, Available at SSRN: https://ssrn.com/abstract=3700730 or http://dx.doi.org/10.2139/ssrn.3700730

Kyunghun KIim (Contact Author)

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

Hyelin Choi

Korea Institute for International Economic Policy ( email )

[30147] Building C, Sejong National Research Compl
Seoul, 370
Korea, Republic of (South Korea)

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