“At a time when our Republican conference is divided, this will divide it even further,” argues Representative Jeb Hensarling of Texas, one of the chief opponents of the Export-Import Bank of the United States. Relatively unknown until the recent political battle, the Bank had its authorization lapse earlier this year when Congress failed to renew its charter. Meanwhile, an unusual coalition is trying to revive the bank. Many Democrats and some Republicans have allied with powerful pro-business groups like the Chamber of Commerce in a belated attempt to push through a reauthorization bill to keep the bank alive. Opposing them are small-government Republicans, intent on dismantling the bank.
The Ex-Im Bank, as policy wonks call it, was established in 1934 by President Franklin Roosevelt as part of the New Deal. Its stated mission is to provide financing, loans, insurance and similar services to foreign buyers of American goods. As a “lender of last resort”, the Ex-Im bank was designed to fill a gap in private financing to promote the export of American products—Bank transactions should be able to demonstrate that they would not go forward without Bank financing. The Bank has been reauthorized with little fanfare for decades, but has recently become a tempting target, primarily of Tea Party Republicans in Congress who have gained traction in recent years advocating for smaller government.
Opponents describe the bank as little more than corporate welfare run amok, pointing to distortions in economic activity caused by Bank activities. For example, they argue that financing sales of Boeing aircraft overseas makes foreign airlines more competitive with American airlines. In essence, the bank lends money to foreign airlines that are unable or unwilling to obtain private sector financing. Richard B. Hirst, general counsel for Delta Airlines, argues that if Delta had been eligible for such subsidies, “it could have saved approximately $100 million a year in financing costs.” Opponents further argue that government should not be attempting to pick winners in the business world by intervening in private capital markets, and that such a process inevitably leads to a corrupt process that privileges big firms over smaller competitors.
These costs are overstated, and opponents understate the Bank’s benefits. The economic data simply does not bear out the harm opponents espouse. The Bank can claim some fairly extraordinary economic benefits. In fiscal year 2014, the Bank claimed to support $27.4 billion dollars in American exports involving some 164,000 domestic jobs. Such statistics are solid, but become truly impressive when considering that the Bank did all this at no cost to the taxpayer. In fact, the Ex-Im Bank returned a $675 million surplus to the U.S. treasury.
The Bank’s argument that it is a lender of last resort, and therefore does relatively little to crowd out private investment, seems to be supported by a number of cancelled or potentially cancelled orders of American goods since the Ex-Im Bank’s mandate has lapsed. If Ex-Im financing were superfluous, then such transactions should have gone forward with private financing. Their cancellation indicates that Bank transactions likely had little effect on private capital. Edward Alden of the Council on Foreign Relations furthers that, “These are transactions that private sector banks are reluctant to finance completely because of the risks involved.” The Chairman of the Ex-Im Bank, Fred Hochberg, argues that, “As commercial banks oscillate in their willingness to extend credit, as they did most recently in the wake of the global financial crisis, the Export-Import Bank provides a dependable backstop for U.S. exporters. The reluctance of private banks to hold long-term debt for large export projects—such as the solar installations, nuclear power plants, and bridges that soon will be in high demand throughout the developing world—has created a gap that the Export-Import Bank was designed to fill.” While the Ex-Im Bank often takes on projects commercial banks are hesitant to take on, it is also critical in reducing risk enough for private finance to step in. As such, 98% of Ex-Im transactions also involve commercial banks.
But even ignoring the economic argument, there is a very easy reason to claim the Ex-Im Bank is necessary: other countries are doing it. Since the establishment of the Ex-Im Bank, dozens of countries have established their own banks, including strategic and economic rivals like China. Phillip Lee of Société Générale SA argues, “If Ex-Im is not re-chartered, it’s a question of when these second and third [water supply project] deals will go to the Chinese.” GE Vice Chairman John Rice said, “If you’re an export credit agency outside the U.S., you are now in the process of rolling out the red carpet to U.S. manufacturers,” after announcing plans to move 500 jobs overseas. The Ex-Im Bank has provided $590 billion in financing since its founding in 1934; Chinese state lenders have extended about $670 billion in credit in the last two years alone. The U.S. is effectively shooting its export industry in the foot by handing its rivals, including 59 export-credit agencies in other countries, an easy advantage.
This doesn’t mean that there aren’t improvements to be made to the Bank that could be included in the reauthorization. For example, the Ex-Im Bank has historically been constrained by the OECD Arrangement on Officially Supported Export Credits, an agreement with eight other OECD countries which lays out the most favorable financial terms that can be provided for official export credits. The Arrangement is regularly reviewed in the context of changes in the market. Law Professor Janet Kovet Levit of the University of Tulsa College of Law notes that, “ECAs [Export Credit Agencies] deliver official export credits, which bring benefits but also carry some economic risks. With the specter of a competitive spiral in official export subsidies looms the potential for skyrocketing government costs and increasing market distortions. The industrialized ECAs poignantly confronted these risks in the 1970s and thereby began coordinating efforts to curtail export subsidies…The Arrangement has eliminated most interest-rate subsidy from official export credit.” This fundamentally means that ECAs governed by the Arrangement do not compete with each other, and therefore that potential customers can determine who to award a contract to based on the product, not the quality of government financing. Since the amount and interest rate of ECA financing could unnaturally determine economic decisions, ECAs under the Arrangement go out of their way not to compete with each other. Therefore, expanding the Arrangement beyond the current eight abiding nations would reduce the likelihood of economic distortions by the Bank, promote freer trade, and ensure that Ex-Im is not handicapped by rules that the rest of the world does not abide by.
Further, the Bank could do more to support small and medium enterprises (SMEs), which typically have a harder time getting financing. While the bank says that 90% of its transactions benefit small businesses, 80% of the total cash value of Ex-Im loans goes to large companies, with 30% going to Boeing alone. Such an outcome is not entirely unexpected given that Boeing is America’s biggest exporter, and looking only at where the money directly goes ignores the many small businesses that supply companies like Boeing. Still, big companies like Boeing have a much easier time securing financing from institutional investors than do small businesses, who often struggle to convince banks to take a risk on them. The Bank’s (now expired) mandate already includes a requirement that at least 20% of its “aggregate loan, guarantee, and insurance authority to finance exports directly” be made available to small businesses. Increasing financing in this area would help ensure that Ex-Im Bank lending is going to an area where private markets are lacking.
With renewal bills already passed in the House and Senate with bipartisan support, it looks like the Bank’s allies will succeed after all. This is a good thing: the bank is an important part of US foreign-economic policy. Its financing supports thousands of jobs and helps American companies remain competitive in the face of other nations’ state-funded financing. Still, there are always potential improvements. Congress still has the opportunity to tweak the Bank’s mandate. And the State Department or US Trade Representative can work to expand the Arrangement before or after the Bank is reauthorized. Whatever changes are made, American exporters will be relieved to have the bank back.
Source: Wikimedia Foundation