Policy: Economy

The pros and cons of reauthorizing the Export-Import Bank

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Why pick on a senior citizen like the Export-Import Bank? The future of this 80-year-old export financing institution -- which only 1 in 1,000 Americans have even heard of -- is in jeopardy because of opposition from several key Congressional Republicans who would like to pull the plug and let it expire on the Sept. 30 re-authorization deadline.

Depending on who you talk to, the Ex-Im Bank is either a financial support that U.S. exporters need to compete globally — or government interference in the private-sector lending market, primarily helping big companies that don’t need it.

Here to help sort it out is a champion for each side: Nicole Gelinas, the Searle Freedom Trust Fellow at the Manhattan Institute, who opposes reauthorization, and John Murphy, the U.S. Chamber of Commerce senior vice president for international policy, who supports it.

Washington Examiner: Opponents call the Ex-Im Bank a government takeover of loans for exports, predicting that the private market will dry up much like it has for student loans. Supporters say that the Bank only services the 2 percent of loans that no one else wants to touch. Which is it?

Gelinas: The risk isn’t that we’re going to have this huge new presence taking over the private sector. Rather, it’s a question of what would happen if things stay the way they are versus what would happen if the Ex-Im Bank went away. It’s really a question about what is the purpose of this financial industry.

Global banks are supposed to do things like assess risk and cross-border deals. Ex-Im Bank's biggest customer is Boeing, and these are aircraft-asset secured loans to many airline customers in developing countries. Would the private sector make these loans? If not, then why isn't the financial system doing what it is supposed to do, which is to provide export credit? They have to charge a higher interest rate, because it's riskier than lending into a domestic industry, which is something they should be doing.

Of course, Ex-Im customers say we need this because you’d rather have something done cheaply and easily than have to work with the more expensive private sector. Frankly, the loans that wouldn’t be made — maybe they shouldn’t be made. Some of the airlines — Delta in particular — have been complaining that the Export-Import Bank is subsidizing its global competitors by financing their cheap purchases of American airplanes. Should non-American-based airlines use these loans to buy their aircraft using U.S. government-subsidized rates? Should these loans be made at higher rates, or should they not be made at all?

The government presence just distorts the market. So although the problem isn’t a government takeover, these loans are already distorting the marketplace.

Murphy: The vast majority of trade finance is provided by the private sector, but there is a range of circumstances where the Ex-Im Bank is not only helpful, but absolutely necessary. In many emerging markets where commercial credit isn’t available, Ex-Im is the only option.

Particularly for expensive, long-lived capital goods such as aircraft, nuclear reactors, locomotives and earth-moving equipment, U.S. companies are bidding in competition with foreign companies that are backed by very generously funded export credit agencies of their own. Bids from all tenders must come with official export-import credit agency backing, which Ex-Im uniquely provides in the United States. So the bottom line in those cases is that without Ex-Im, U.S. companies aren’t even able to bid.

In projects financed around the world, there are requirements that bids come with official export credit agency support -- or else you don't qualify. For example, I know a firm that sells U.S. medical equipment in the Chinese market. Without the Ex-Im Bank, they would not qualify to bid to do business in the Chinese health care system. Ex-Im offers financing terms to match what foreign competitors are able to offer. Ex-Im isn't just something that's nice to have -- it's absolutely necessary.

Examiner: Is the fate of the Ex-Im Bank truly a divisive issue for the Republicans?

Gelinas: I don't think it's going to be a headline divisive issue because not many voters know what this is. It's not going to be on the level of Obamacare or the stimulus or the other issues that really get people interested, but I think it could be a niche issue.

It's more the Tea Party-type Republicans and the Occupy Wall Street people who don't want the government subsidizing big business. So for the people who are paying attention to the issue of government subsidy of big finance, this is another plank for them to say, ”We have a real problem here.” The government is heavily subsidizing and distorting the financial industry, whether it's Fannie and Freddie for the mortgage industry or the Export-Import Bank for the industrial export sector.

Murphy: In recent weeks, members of Congress having been hearing more from companies of all sizes — particularly from the smaller companies that are their constituents — about how important Ex-Im is to them. So we’re starting to see members of Congress gain a broader understanding of the Bank’s value and how it supports jobs. Our sense is that beneath the turbulence, there is surprisingly broad support for Ex-Im. We’re hearing every day from small companies, medium-sized companies and large companies across the country that are asking how they can get involved and communicate their concern.

Examiner: What are the chances that the Ex-Im Bank will be reauthorized?

Murphy: We see many hopeful signs that it will be reauthorized in Congress, but there are a number of ways to advance this legislation, and we’re talking to our allies on Capitol Hill about that. We in the business community think our job isn’t to figure out the exact legislative path — it’s to make the case for why it’s so vital.

Shutting down the Bank would quickly lead to tens and even hundreds of thousands of layoffs at small- and medium-sized companies that depend on the bank directly or that are suppliers to larger companies like Boeing and GE, which have tens of thousands of suppliers — some of whom are not aware that their sales are entirely dependent on exports. Ex-Im would suddenly become a lot less obscure after its shutdown.

Gelinas: I agree that it will be reauthorized. If you go back to the first Bush term, there were some conservative Republicans who were saying we shouldn't reauthorize the Ex-Im Bank and that this should be a place where we save money now that we have a new Republican administration. The public paid even less attention then than they will today because there wasn't the concern about too-big-to-fail banks.

There may be more public debate and awareness this time, which is a good thing, but I think in the end it will get reauthorized. They will have a big enough coalition of pro-subsidized-business Republicans and Democrats in export-dependent states. The coalition will be big enough to get it passed after a little bit of useful debate.

Examiner: Some of the opposition to the Ex-Im Bank is that U.S. taxpayers would have to foot the bill if foreign buyers default. How can we take the risk off the taxpayers’ shoulders?

Murphy: Extensive measures are already in place to guard against such risk. The Ex-Im Bank has a $4 billion loan-loss reserve, which is mandated by Congress; nonetheless, the bank’s prudent lending practices have ensured that it has a default rate at present that is lower than one-quarter of 1 percent of all lending.

The reason is that trade finance is fundamentally less risky than some other kinds of finance. After all, it’s the collateral of the goods being exported that underwrites the loan, and in many cases, these loans are very short term. In 80 years, Ex-Im has had an exemplary record.

Gelinas: It’s very clear that the world’s governments and the Western financial industry believe that the U.S. government stands behind this. U.S. is right in the title — it’s the U.S. Export-Import Bank — and it has to be authorized and reauthorized by Congress, so it’s almost like the Fannie/Freddie situation. Technically, they were not supposed to be bailed out by the government, and they were not supposed to have a government backstop — but in the end, they did.

Ex-Im Bank is a much smaller and less systemic risk. Everybody gets a mortgage, but not everybody is selling airplanes that have to be exported. It benefits from low financing costs because of the expectation that there is a government backstop there. Even if the government guarantee doesn’t have to be used, it has a value. It makes it cheaper for product buyers to borrow money to buy these products; it gives the exporters an advantage because they can connect the customer to this cheap source of financing. That is definitely because the taxpayer is subsidizing this guarantee.

It is politically likely if they were to need recourse to the Treasury to borrow money to make up for defaults and so forth -- just like the FHA, Fannie or Freddie -- they are creatures of Congress and the world expects Congress to protect them when they need protecting.

Examiner: Critics have said Ex-Im Bank is “welfare for big corporations that don’t need it.” To that point, much has been said about research from George Mason University that shows Boeing and its affiliates received $8 billion of the total of $12 billion in Ex-Im loan guarantees during the last fiscal year. Should the Ex-Im Bank be funding risker ventures that the private sector isn’t interested in?

Murphy: The fact is that wide-bodied aircraft are sold around the world today with export credit agency support, and without that support, you won’t make the sale. So if Boeing is not able to rely on Ex-Im in certain circumstances — for instance, in emerging markets where credit markets are underdeveloped or in the very common circumstances where it’s in head-to-head competition with Airbus — without Ex-Im support, the sale would be lost. It’s that simple.

Unilateral disarmament is rarely a good idea, but when it comes to trade finance, it is a very real threat. There are 60 export-import credit agencies around the world today, and in recent years, they’ve issued more than a trillion dollars in trade finance. For the United States to be the one major trading nation that does not have an Ex-Im Bank is to systematically put U.S. exporters at a competitive disadvantage in market after market.

Gelinas: I think it clearly provides a welfare benefit for these large corporations that already, because of their size, have access to cheap private-sector financing. It’s not so much the venture that’s risky — it’s the particular customer. If you’re selling to an upstart airline in a country that the lender is afraid might just abscond with the airplane and not be able to pay back the debt, then Ex-Im might make sense.

But normally, if Delta gets an airplane, they lease it and it’s an asset-backed security; if they don’t pay for it, the lender can seize the aircraft and sell it to somebody else. The Ex-Im means there’s a little less risk than if you’re selling your airline in a country where you can’t go there and get your asset back.

Ironically, the risk of a glut of airplanes is probably bigger with the Ex-Im Bank financing. When the government subsidizes something, you get more of it. When you subsidize exports in certain industries that lend themselves to this type of business, you eventually subsidize too much of it and help cause a market decline.

Examiner: Nicole, what about this statement that the aircraft industry must have an Ex-Im Bank just to be allowed to compete on a global playing field?

Gelinas: Well, it’s a valid concern for the aircraft producers, but not so much the airlines. A lot of airlines would rather have Ex-Im go away because if you’re Delta and you buy an American plane, you don’t get export-import subsidy. So you’re competing with a Virgin or an Emirates or another global airline that does get access because they are buying it in the export market.

In a world of scarce government resources, shouldn’t we devote those resources to more public sector infrastructure investment, to more educational spending, to lower taxes? There are things we could do with our government resources rather than subsidize large industries to sell to large foreign airlines.

Examiner: If dozens of other countries have government-subsidized exports loans, can U.S. exporters complete globally without the Ex-Im Bank?

Murphy: This is really one of the most important arguments. Often, critics who are suggesting that the Ex-Im Bank not be reauthorized are looking at this debate as some kind of domestic policy litmus test. We’re constantly urging Congress to look at the wider world in which American business has to compete. It’s a tough world where margins are slim. It’s also a world where every major trading nation has its own export-import bank, and other countries are not shy about using them.

Even though Canada has an economy that's one-tenth the size of the United States', its export-import bank provides three times as much financing for Canadian exporters. China, of course, is on a completely different scale. So if the United States wants to continue to be a manufacturing nation where we're able to make goods here and sell them around the globe, we're going to need the Export-Import Bank -- or else the financial disadvantage that American companies face will be absolutely devastating.

Gelinas: It’s hard to unilaterally disarm. It should be a matter of global trade negotiations that really nobody should be doing this. But it’s very difficult, like a lot of issues.

You need global cooperation because otherwise, small aircraft manufacturers and upstart companies in China are going to clients and saying, “Look, we’re going to offer you a plane and we’ll also offer you very cheap financing that you don’t have to worry about.” It’s hard for us to change things by ourselves.

If you are a large export-based industry, your best friend is the government, no matter where you are. It’s hard for us to compete on different terms.

Examiner: If the Ex-Im Bank is re-authorized — but with significant reforms — what should those reforms look like?

Murphy: There are quiet discussions underway to think about measures that might strengthen the bank, including some transparency measures and strengthening the board. Unfortunately, many of the proposals are really just attempts to limit the bank from activities that are essential to American industry. So a reform that the bank should not provide support for U.S. aircraft exports would only benefit foreign competitors to our own aircraft manufacturers. That’s not reform — it’s a poison pill.

Gelinas: The issue that the domestic airlines have brought up about the Ex-Im Bank effectively subsidizing competitors on lucrative long-haul routes is something that should be key. The bank should not lend money to these global competitors on more favorable terms than to our own domestic airlines. If United and Delta cannot borrow for a long-haul aircraft at the price the Export-Import Bank is giving out, that’s a real problem because it’s unfair competition, and we’re the ones making it unfair for our own companies.

This really should be a matter of long-term trade talks. The general bias should be toward less interference and intervention — even if we have to do it very gradually by cutting the government subsidy by 10 percent a year.

Examiner: If Ex-Im is not re-authorized, what advice would you have for companies that have been depending on it?

Murphy: I don’t know what advice I’d have for them. Clearly, we would need to redouble our efforts to make the case to Congress for why the Ex-Im Bank is indispensable for American exporters today. The result of failure to reauthorize is likely to be the off-shoring of American jobs as foreign companies win new markets that American industry is forced to concede because we can’t compete on a level financial playing field.

Gelinas: I think they would survive and find alternative financing for a majority of these loans. It may not be as cheap or as straightforward, but the financing industry is supposed to be in the business of assessing and pricing risk. In a lot of markets, the lenders just won’t bother because they know the government is there. I think people would find a way to do deals that are economical — and if they aren’t economical, then they really shouldn’t be done in the first place.

Carla Kalogeridis is special reports editor for the Washington Examiner.

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