Our political parties remain locked in fierce debate over whether the U.S. economic recovery should be financed by increased tax revenues or cuts in government spending. With the presidential campaign in high gear, there is little reason for optimism that this ideological logjam will be broken soon. The United States should use this time wisely to implement noncontroversial measures that would create jobs at no cost to anyone. One highly effective move would be ratification of the United Nations Convention on the Assignment of Receivables in International Trade.
In our increasingly globalized economy, exports by U.S. companies play a huge role in creating and supporting U.S. jobs. According to the U.S. Department of Commerce, 1 in 3 manufacturing jobs and almost 1 in 5 agricultural jobs are tied to exporting in some way.
Exports are not the exclusive province of large U.S. corporations. The Department of Commerce also tells us that, in 2009, 97.6 percent of all U.S. exporters were small- and medium-sized enterprises (SMEs) with less than 500 workers. According to a November 2010 report of the U.S. International Trade Commission, direct and indirect exports by SMEs supported about 4 million jobs in 2007 - approximately 40 percent of the 10 million jobs supported by all U.S. exports of goods and services that year.
Helping U.S. SMEs to increase their exports would unquestionably create more U.S. jobs. Unfortunately, many of these businesses are unable to grow their exports because the financing that would allow their exports to flourish is not available from U.S. banks and other lenders.
Here's why: U.S. SMEs often obtain necessary financing by offering their receivables as collateral for loans and other forms of credit. In the United States, modern laws make it uncomplicated and cost-efficient for companies to use their receivables owed by customers located in the United States as collateral for loans.
The current laws in many other countries, however, make it difficult or cost-prohibitive to use receivables as collateral. As a result, U.S. lenders often understandably refuse to extend credit to companies seeking to borrow against their foreign receivables. Deprived of vital working capital, these companies are unable to grow their customer base and produce more U.S. jobs.
That's where the U.N. Convention on the Assignment of Receivables comes in.
There has been a growing worldwide recognition of the value of receivables financing as a potent way to stimulate the growth of SMEs. The convention, the culmination of a six-year project by the United Nations Commission on International Trade Law, codifies modern legal principles already widely accepted in the United States and other countries where receivables financing flourishes. By adopting the convention, countries can make their laws much more conducive to receivables financing. In turn, lenders in the U.S. and elsewhere would be much more likely to lend against receivables owing by customers located in those countries.
Unfortunately, the Receivables Convention has languished since its adoption by the United Nations in 2001, despite the absence of any plausible reason to oppose it. Ratification by at least five countries is required before the convention can become effective in any country. So far only Liberia has adopted it. The United States, Luxembourg and Madagascar have signed it but have not yet ratified it.
Ratification of the convention by the United States would not significantly change U.S. law, which already reflects the modern legal principles envisioned by the convention. It is, however, widely believed that U.S. ratification would be the catalyst that prompts ratification by other countries. As more countries ratify the convention, it will become easier for U.S. lenders to accommodate the increasingly globalized financing needs of U.S. middle-market companies, thereby fostering the growth of export revenues and jobs that our country so desperately needs.
The time has come for the United States to adopt the U.N. Receivables Convention. While it will not solve all of our economic woes, ratification is a simple, cost-free and practical way for the U.S. to stimulate our economy and create jobs, and it would be a strong signal to small- and medium-sized companies that our federal government has their back.
Richard M. Kohn is the co-general counsel of the Commercial Finance Association, is a principal in the Chicago law firm of Goldberg Kohn Ltd., and has been involved in the development of the U.N. Convention on the Assignment of Receivables.
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