A newly released report from a pair of economists highlights the need for a government-sponsored reinforcement for trade credit insurance (TCI) as American businesses attempt to climb out of the COVID-19-shaped hole left in their supply chains.
A report published Thursday by Dr. Robert Litan and Dr. Yong Xu on behalf of insurance providers Atradius, Coface and Euler Hermes asserted that companies need a TCI backstop to bolster their recoveries from the coronavirus crisis, and to avoid prolonging adverse economic effects.
This specific form of insurance, which covers the risk that firms may not be paid by buyers, currently provides aid to businesses employing over two million American workers and protects at least $600 billion in annual U.S. sales, the economists wrote. “Without this safety net, these firms, 60 percent of which have revenues of $20 million of less, would be unable to sustain their current production levels, let alone expand their sales, which would disrupt supply chains and cause significant damage to our economy.”
According to Litan and Xu, economic uncertainty spurred by the pandemic has kicked off a recession, and U.S.-based trade credit insurers have already cut back their coverage by nearly 14 percent since the end of 2019. Those coverage cuts could continue, they warned, due to the spikes in COVID-19 infections across the country.
Less coverage means that companies will struggle to fulfill rising consumer demands, and they will also face reduced credit lines from banks that rely on companies having TCI policies. “We estimate that the cutback in TCI coverage so far, in the absence of countervailing policy intervention, will inhibit gross supplier output conservatively by $46 billion and the hiring of approximately 155,000 workers by supplier firms,” Litan and Xu wrote.
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Output and job creation would both be inhibited should cutbacks in TCI coverage continue, they argued, ultimately weakening the country’s ability to recover from a recession.
The adverse impacts of TCI coverage cutbacks could be avoided if the U.S. government were to step in and share in the non-payment risk of TCI customers, however. The federal government could institute a temporary reinsurance program, backed by three private insurers that have already expressed interest, they wrote, adding, “Such a program draws on best practices from similar approaches that have already been adopted or are being considered in other G7 countries.”
Following the report’s release, the American Apparel and Footwear Association (AAFA) expressed support for the proposed plan. “For weeks we have been ringing the alarm bells about the looming credit crisis that slows down our economic recovery, and this report echoes this conclusion,” Steve Lamar, AAFA president and CEO, said in a statement.
According to Lamar, access to credit insurance is essential for apparel and footwear businesses given the current economic landscape. TCI plans support manufacturing and limit risk, helping companies maneuver around the lowered liquidity and cash-flow uncertainty they’ve been contending with in recent months.
“Without TCI, businesses will need to take on smaller orders or even pass on business opportunities, stalling our safe economic recovery,” he warned.
While summer is just heating up, American brands and retailers are laser-focused on recouping this year’s lost sales over the winter holidays, which are typically the busiest time of the year. “The federal government must take action today to make sure credit markets are fully functioning throughout the crucially important holiday season,” Lamar said, adding, “Credit means we can take orders and ship goods, which allows us to keep our store shelves stocked and our workers employed.”
In a statement Friday, NRF senior vice president for government relations David French similarly welcomed the economists’ report.
“With retailers already ordering merchandise for the holiday season, vendors need guarantees that they’re going to be paid regardless of the volatility of the current economy,” French said. “Trade credit insurance normally provides that guarantee, but it has become increasingly difficult to obtain. This proposal would solve that problem and help retailers make sure they have the inventory they need for a successful holiday season.”
French said the industry requires a “swift response” to the TCI backstop imperative, citing a congressional calendar that is “already strained.”
“While Congress considers this proposal, we have asked the Treasury Department and Federal Reserve to move forward with a short-term, federally backed loan facility that could be enacted almost overnight,” he added. “Doing so would provide the immediate cash flow retailers need right now and would support a return to normal trade terms and normal business operations.”
Additional reporting by Jessica Binns.