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Congress' Latest Death Match Involves A Bank You've Never Heard Of

It sits in an imposing building just across Lafayette Square from the White House. Yet the Export-Import Bank, which has been offering credit to foreign purchasers of U.S. goods for 80 years, could start shutting down operations within a matter of weeks.

"There's about a 50-50 chance," says Dan Ikenson, who directs a trade policy center at the Cato Institute.

The bank has become a prime target of the Tea Party movement and other conservatives who view it as practicing the worst kind of government interference in the marketplace.

"There is probably no better poster child of the Washington insider economy and corporate welfare than the Export-Import Bank," Jeb Hensarling, the Texas Republican who is chairman of the House Financial Services Committee, said in a speech at the Heritage Foundation — itself among the groups pushing for the bank's demise.

With Hensarling and other top House Republican leaders ready to kill the bank, it may be difficult for the bank to get the votes it needs to stay in business.

Virginia Republican Eric Cantor, the recently ousted House majority leader, was a major backer of the bank. His successor, Kevin McCarthy of California, says it's time for the bank to go.

This has set up a confrontation between the Tea Party and the GOP's business backers. The U.S. Chamber of Commerce and the National Association of Manufacturers are putting on a full-court press, calling on small-business owners around the country to convince their members of Congress of the bank's continuing importance.

"The business community is pushing this very hard right now," says Christopher Wenk, senior director of international policy for the Chamber of Commerce. "What really matters is members of Congress hearing from their constituents."

What The Bank Does

Since 1934, the Export-Import Bank has been doling out loans and guarantees to foreign entities that want to buy American products. If a Russian car company wants to buy steel from the U.S., say, the bank might step in to help with credit when private lenders won't.

"Banks do not want to lend for Caterpillar to sell tractors to Nigeria," says Gary Hufbauer, a senior fellow at the Peterson Institute for International Economics, which supports the Ex-Im Bank, as it's sometimes called. "You don't have to Google very much about Nigeria to know how unstable that country is."

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The Ex-Im Bank does a tiny amount of the lending involved in exporting U.S. goods — maybe 2 percent. But Hufbauer says it helps fill crucial gaps, aiding in sales of heavy equipment such as power turbines and MRI machines.

Such goods last a long time, and private banks are sometimes dubious they'll be paid back through the 30-year life of a tractor.

"If you look most recently, $37 billion worth of U.S. exports in 2013 were supported by Ex-Im," says Wenk, the Chamber official. "That may not be a whole lot in an economy with $2.3 trillion worth of exports, but at the end of the day, that's $37 billion worth of exports that wouldn't have happened if it weren't for the Ex-Im Bank."

Shifting Resources

If the bank's boosters consider it an important tool for keeping U.S. companies competitive in the global marketplace, critics say it's an example of the government playing favorites in ways it shouldn't.

"You can't allocate resources to certain firms and industries without diverting resources from other firms and industries," says Daniel Boudreaux, an economist at George Mason University.

Helping foreign competitors buy U.S. goods at a discounted rate gives them an unfair advantage over U.S. companies that might use the same products or raw materials, Boudreaux says.

The example critics often site is Delta Air Lines, which competes with Air India on certain routes and is angry that Air India gets favorable terms through the Export-Import Bank when it buys Boeing aircraft.

The fact that Boeing itself accounts for an outsized share of Ex-Im lending is also seen by critics as an unwarranted subsidy. Boeing says Ex-Im help will support $10 billion worth of sales this year.

"In my camp, the Export-Import Bank has always been a prime example of unjustified, inefficient corporate welfare," Boudreaux says. "The fact that there's a Tea Party movement now, that's what gives opposition to the Export-Import Bank some legs to stand on now."

Political Opportunity

Supporters of the bank have one big advantage. They have been arranging news conferences all across the country with restaurant equipment-makers and medical office designers and other small companies whose owners can talk about specific numbers of workers they've hired thanks to help from the bank.

The idea that some companies worry that foreign competitors might be gaining a slight advantage through financing help is a bit more abstract.

The fact that the Export-Import Bank has been self-supporting since 2008 — taking in more through fees from borrowers than it costs to run — has also led most editorial writers to call for its continuation.

But opponents of the bank have an ace up their sleeve. Killing the bank isn't like trying to abolish the Affordable Care Act, say, or funding highway construction — decisions that would require all the political branches to agree and then take action. The bank's authorization will simply expire on Sept. 30, unless Congress takes an affirmative vote to keep it going.

It's not like its building would then be padlocked on Oct. 1. It would continue to service existing loans, without issuing any new ones. It would be like a single-agency shutdown, with a skeleton crew hanging around to oversee the bank's slow death.

The business lobby is pushing hard to prevent that. A Senate bill to keep the bank in business is expected to be introduced any day and should have enough support to pass.

A group of 41 House Republicans last month signed a letter calling for the bank's reauthorization. But many members of their caucus are bound to resist holding a vote to extend the bank, which would likely pass with largely Democratic support.

"I believe it is a defining issue for our party and our movement," Hensarling said in his Heritage speech.

And, if Congress has shown itself capable of anything lately, it's not voting on something.

"It's action through inaction," says Ikenson, the Cato scholar.
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Ex-Im Bank Pays the U.S. Back

By Noah Smith
When I was a teenager, a conservative group called the Eagle Forum started focusing its attention on my hometown. One of the things they demanded was that children be taught to read using a system called phonics, i.e. sounding out words. To everyone but the Eagle Forum, phonics seemed like an odd thing to focus on. No one besides them cared in the slightest. The push eventually fizzled out when it was discovered that our schools already used phonics, but I’m sure that had that not been the case, the Eagle Forum -- which, with its squawking ambushes, is more blue jay than eagle -- would have succeeded in getting us to switch, just to make them stop bothering us.

The Tea Party’s assault on the Export-Import Bank reminds me a little of the Eagle Forum’s push for phonics. A right-wing group convinces itself that some peripheral issue is really, really important, launches a crusade against it, and charges to victory before anyone else can even bring themselves to believe that anyone would possibly care. In the case of Ex-Im, the defenders -- who include Republicans such as Rick Perry -- may scramble in time to repel the blindside. But some damage will already be done, since firms that count on the Ex-Im Bank will now have to worry that the Tea Party hordes will eventually succeed in killing it. Even if Ex-Im survives, using it will now entail greater political risk.

But wait -- is the Export-Import Bank really a good thing? Basically, what it does is lend money to U.S. exporters. The bank is specifically mandated only to lend money for deals in which the private sector is unwilling to participate:

It is also the policy of the United States that the Bank in the exercise of its functions should supplement and encourage, and not compete with, private capital.
Now obviously, it’s impossible to know exactly which deals the private sector would or wouldn’t finance if there were no Ex-Im Bank. But since Ex-Im only finances about 2 percent of U.S. export deals, there’s definitely not a lot of competition between Ex-Im and the private sector.

Why on Earth would we want the government to finance trade deals that the public sector won’t touch? If the private sector won’t finance something, doesn’t that mean it isn’t worth financing?

Well, yes…if you believe that financial markets work perfectly in the absence of any government intervention. Do you believe that? I don’t.

In our finance system, investment decisions are (theoretically) made according to a corporation’s internal rate of return (how much money it will make off of the investment), and its cost of capital (how much it costs to finance the investment). If the prices of a company’s stocks and bonds fluctuate too much – and there is evidence they do – then the cost of capital will be wrong. And if company managers make decisions to maximize the short-term value of their own stock options, then the effect of financial markets on business investment decisions will be even farther from optimal.

In fact, a number of people claim that a malfunctioning finance industry is causing big problems with U.S. corporate governance. If that’s true, there’s a chance that the Export-Import Bank might not distort the economy very much after all.

So we should be very careful about swallowing the high-school-textbook case that Ex-Im distorts the economy by “picking winners.” The other case is that Ex-Im just isn’t fair – that it creates losers as well as winners. But that’s also true of free trade! The case for free trade is that it boosts the overall economy; if the Ex-Im Bank does the same, we should keep it.

Now I don’t actually know if the Ex-Im Bank is good for efficiency. The U.S.’s large and persistent trade deficits are a hint that perhaps not all is right with our market system. As a country we seem to be especially bad at exporting manufactured goods – exactly the thing that Ex-Im helps with. If we kill Ex-Im, there seems to be a real possibility that whatever is causing our trade deficit might get worse.

The crusade against Ex-Im appeals to the Tea Party, because it combines traditional anti-government fervor with the rage against large corporations that has developed in the wake of the financial crisis. And it appeals to many center-left types, who are also anticorporatist. The Ex-Im Bank certainly creates losers, certainly helps politically connected large corporations, and is certainly a corporatist institution. That does not mean it should die. Since Ex-Im doesn’t actually cost the taxpayer any money, it’s not like it’s a pressing issue. We should think carefully and deliberate calmly, and not simply give in to the squawking blitzkrieg campaign.
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Beggar-thy-neighbour banking

FOR most of its 80 years, America’s Export-Import Bank has laboured in obscurity, providing loans, loan guarantees and credit insurance to foreign buyers of American products from jumbo jets to quiche. All of a sudden, it is in the spotlight: Tea Party conservatives have declared it to be the embodiment of corporate welfare. Republicans are threatening to block reauthorisation of the bank when its mandate expires on September 30th.

The fight over ExIm has drawn rare attention to one of the most pervasive and enduring instruments of mercantilism in the world trading system. Export-credit agencies got their start early last century. Britain’s, established in 1919, was part of an effort to improve its balance of payments and thus return to the gold standard. America’s ExIm Bank was originally conceived as an instrument of foreign policy, to provide leverage over the Soviet Union and support for Cuba.


The global financial crisis gave such banks a new lease of life. When banks pulled back from trade finance after Lehman Brothers collapsed in 2008, governments prodded their export agencies to fill the gap to prevent a bigger fall in trade volumes. Official export credit extended by the G7 alone soared from $35 billion in 2007 to $64 billion in 2009, and has remained around those levels since (see chart below).

Subsidised loans for exports have long been recognised as a form of mercantilism, which is why rich countries struck a gentlemen’s agreement in 1978 to curb them. Signatories to the “OECD arrangement” agree to maximum loan maturities, commercially-based interest rates and minimum risk premiums for insurance. When one signatory strikes a financing deal, it notifies the others, giving them the opportunity to match the terms.

Given these safeguards, many advocates say official export credit is not really a subsidy at all but simply compensation for a market failure. Banks are reluctant to provide long-term export financing, to lend to countries with shaky political or legal regimes, or to small businesses, even more so since new capital standards have made such loans costlier. Export-credit agencies simply fill an unmet need—and their profits prove it.

These arguments are suspect. The scarcity of private financing for certain exports reflects genuine risks that taxpayers are forced to assume. The profit earned by lenders may simply reflect the advantages that come with being part of the government. The Congressional Budget Office reckons that if ExIm’s future revenue were discounted using the interest rate paid by the Treasury (the bank’s main source of funding), it would make a profit of $14 billion over the next decade. But discounting at market rates would turn that into a loss of $2 billion. This is far less than the implicit cost of federal student and mortgage loan guarantees. But it does not suggest ExIm has found lucrative untapped opportunities.


Even if export credit is a subsidy, advocates say it is unavoidable. Any high-minded country that refuses to subsidise exports simply surrenders sales, jobs and income to countries with no such qualms. If ExIm stopped financing sales of Boeing aircraft, the argument runs, either Airbus would grab market share, or Boeing would move production to another country that did finance those sales. This line has been trotted out in recent years as a growing share of export finance takes place outside the OECD arrangement. Two factors are at work. First, many OECD members are using instruments not covered by the arrangement, such as floating-rate loans linked to Libor, and “untied” development aid that implicitly, but not explicitly, pays for the donor country’s exports, as is common with Japan’s lending.

The China syndrome
The second factor is the surge in lending by countries outside the OECD, above all China. ExIm reckons that China’s official export credit last year amounted to $45.5 billion. Adding in untied aid, project finance and other surreptitious forms of export credit boosts the total to $111 billion, more than a third of the global total. China regularly offers easier terms than the OECD arrangement would allow. Other countries feel obliged to match them, as ExIm Bank did in 2012 for a Pakistani purchase of locomotives.

Ordinarily, export subsidies are a bad bet even if used to match another country’s handouts. The resources used to provide the support must either come from distortionary taxes or borrowing, which in normal times would raise interest rates and crowd out private investment. Industries receiving the boost would also absorb capital and labour that might be more productively used elsewhere. Unless foreign subsidies create some market failure (by threatening to destabilise an industrial cluster, for instance) the least harmful course of action may be to accept the foreign government’s largesse.

At present, with the world awash in savings and interest rates stuck near zero, the case against subsidies is a little murkier. Subsidising exports may boost demand for domestic production, leaving the country better off—unless, of course, every country does the same, in which case no one gets an advantage.

The World Trade Organisation discourages protectionism by permitting a country hurt by another’s subsidies to raise tariffs in retaliation. But this is of limited use with export credits because the victim is neither the importer nor the exporter, but a third country whose exports are artificially suppressed. That country would accomplish nothing by raising tariffs.

The world would be better off without subsidised export credits. Failing that, the best solution would be for the OECD arrangement to cover more types of lending and more countries (OECD membership is not required to be a party to the agreement). Though America had hoped that by this year that China would agree to “international guidelines” on export credits, there is no sign yet. In the meantime, American companies will fight hard to keep ExIm Bank alive. They will likely succeed.
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