Subsidization of East-West Trade through Credit Insurance and Loan Guarantees

by Daniel F. Kohler, Kip T. Fisher

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This study attempts to measure one very widespread type of export subsidy, the export credit guarantees and insurance policies offered by the exporting governments. Section II of the Note gives an overview of some of the most important features and introduces the necessary terminology. Section III concentrates on estimating the perceived probability of nonpayment and the salvage ratio, which are the major determinants of the risk premium that would be charged in a competitive market. The machinery developed in Secs. II and III is then applied to estimating the subsidies on exports to the Eastern Bloc in Sec. IV. Export subsidies are usually justified on the basis that they increase exports — and therefore production, employment, and income — in the exporting country. Section V develops a simple model of the economy that lets the reader determine for which values of subsidy rates and export price elasticities this is indeed true. Some concluding thoughts follow in Sec. VI.

This report is part of the RAND Corporation note series. The note was a product of the RAND Corporation from 1979 to 1993 that reported other outputs of sponsored research for general distribution.

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