The Export-Import Bank is a federal agency that subsidizes the financing of U.S. exports. The Bank was created eight decades ago to faciliate trade with the Soviet Union, but the need for such a government agency has always been doubtful. Indeed, the financing of international trade is carried out routinely and efficiently by private sector financial institutions. By inserting a federal agency into the financing of trade, policymakers risk distorting markets and generating political cronyism.
The bank has a dual mandate to finance projects that the private sector deems too risky and lend only when there is a reasonable chance of repayment. Those mandates seem contradictory. If the private sector has reservations about the viability of a project, it is probably too risky and doesn't make economic sense. On the other hand, if a project is sensible and creditworthy, then a private financial firm can be expected to step in.
This essay discusses the shortcomings of the Export-Import Bank, and argues that the agency should be terminated. Any benefits bestowed by the bank on particular businesses are more than outweighed by the broader economic costs and political problems that the bank creates. Besides, only a small share of U.S. exports are supported by the Ex-Im Bank, so overall international trade would not be affected very much either way if the bank were ended.
The Export-Import Bank of the United States was created by executive order in 1934 to "assist in financing U.S. trade with the Soviet Union."1 It was housed in other federal agencies before being established as an independent organization by the Export-Import Bank Act of 1945. A sister bank was also established in 1934 to finance trade with Cuba. The two agencies were merged in 1936.2
Today, the Ex-Im Bank's mission is to "assist in financing the export of U.S. goods and services to international markets."3 The Ex-Im Bank subsidizes a small group of selected companies, but it claims to create broad benefits for the economy. The bank's mission statement says that its activities "help to maintain and create U.S. jobs and contribute to a stronger national economy."4
The Ex-Im Bank argues that it does not crowd out private finance, but instead finances transactions that the private sector will not: "Ex-Im Bank does not compete with private sector lenders but provides export financing products that fill gaps in trade financing. We assume credit and country risks that the private sector is unable or unwilling to accept."5 The bank's products include loans, loan guarantees, and credit insurance.
The Ex-Im Bank promotes the idea that its actions correct market failures by filling gaps supposedly left by private credit markets. However, the bank's activities are not neutral and thus the bank creates its own distortions in markets. For example, the bank puts emphasis on politically favored industries such as renewable energy, and it favors certain industries that it believes have a "high potential for export growth."6
The Ex-Im Bank's goal of boosting exports and improving the U.S. international trade balance smacks of mercantilism. The reality is that the U.S. trade balance has more fundamental causes that aren't changed by government export subsidies. The Government Accountability Office has pointed out that "export promotion programs cannot produce a substantial change in the U.S. trade balance."7 The trade balance is driven largely by macroeconomic factors such as the difference between the level of savings and investment.
It is true that the Ex-Im Bank has not imposed a net burden on taxpayers in recent years. It has used revenues from fees and premiums to fund its activities. Congress allows the Ex-Im Bank access to interest-free funds from the Treasury for program and administrative expenses, with the expectation that offsetting collections will repay the Treasury in full. Still, taxpayers are on the hook if the agency suffers major losses on its portfolio of outstanding loans. And whether or not the bank currently imposes direct costs on taxpayers, its activities still distort markets.
In 2012 Congress voted not only to renew the charter of the Ex-Im Bank, but to increase its lending limit from $100 billion to $140 billion. Despite the usual claims by House Republicans that they favor smaller government, 61 percent of them voted to approve this expansion of corporate welfare.8 Tom McClintock of California was the sole Republican to speak against the legislation on the House floor. He noted that it "dragoons American taxpayers into subsidizing loans to foreign companies by making it cheaper for them to buy products from politically favored American companies . . . Legitimate companies have plenty of access to private capital. They don't need these subsidies."9
The following sections examine the four main arguments that Ex-Im Bank supporters make in favor of the agency. First, supporters say that the Ex-Im Bank creates jobs. Second, supporters say that the bank improves the U.S. trade balance. Third, the bank is said to correct market failures and improve economic efficiency. Fourth, the bank is said to level the playing field for U.S. exporters competing against foreign companies that receive subsidies.
1. Does the Bank Create Jobs?
The Export-Import Bank says that creating jobs through exports is a main goal of the agency. The bank's mission statement argues that it "helps to create and maintain U.S. jobs primarily by financing the sales of U.S. exports, to emerging markets throughout the world, providing loan guarantees, export-credit insurance, and direct loans."10
The Ex-Im Bank's president, Fred Hochberg, claims that the bank "supported $34.4 billion worth of American exports and an estimated 227,000 American jobs" in 2010.11 The following headlines were on the bank's homepage one day in 2011: "Ex-Im Bank Supports 600 Jobs with Financing for South Africa," "Infrastructure Growth for the Dominican Republic Means Jobs Growth for the U.S.," and "Using Wind Energy to Promote U.S. Jobs and Exports."12
These claims, in a narrow sense, may be true. Lending money to a foreign purchaser of American products may encourage them to make a purchase that they otherwise may not have made. The American producer may get an order that will increase its revenue. Certain favored U.S. firms may expand their operations and hire more workers.
However, that is only one side of the equation. The bank does not create the resources to provide financing out of thin air: the money comes from taxes or the repayment fees from previous loans, which would otherwise flow to the U.S. Treasury. In that sense, the bank only redistributes resources by taking them from other areas of the economy. It reallocates capital that would otherwise be available for other uses.
When the bank diverts resources to politically selected activities, economic efficiency is lost unless the reallocation corrects a true market failure. But there is no reason to think that the Ex-Im Bank knows how to better deploy resources than consumers, investors, and businesses in private markets. Ex-Im Bank supporters often say that the bank creates jobs without acknowledging any offsetting losses to the rest of the economy. Thus the 227,000 jobs that Hochberg claims to have created are not necessarily "net jobs" that would not exist in a world without the Ex-Im Bank.
The relevant question is whether the Ex-Im Bank's activities create more value—measured in terms of jobs, or exports, or economic growth—than they destroy. At best, the activities of the bank have no discernible net impact on the number of jobs in the U.S. economy. In many cases, Ex-Im–backed sales would have been completed anyway with private financing. The bank says that it tries to avoid displacing private-sector finance, but it can't avoid displacement entirely. Because the Ex-Im Bank is ready to step in with financing, no one can know what terms might have been offered by private lenders had the bank not existed.
Yet assume that the bank successfully increases U.S. exports in a given year. What happens then? Foreign buyers must have U.S. dollars to complete their purchases. They obtain those dollars by buying them in international currency markets, thus bidding up the price of dollars. The stronger dollar does two things. First, it makes exporting more difficult for producers who do not have subsidized financing, which reduces somewhat the total amount of non-subsidized exports. Because there is a set number of dollars available in foreign exchange markets at any given time, when the Ex-Im Bank steers those dollars to certain clients, there are fewer dollars available for other potential buyers or foreign investors. Second, a stronger dollar makes imports more attractive to U.S. consumers. The net effect is that imports rise with exports, with no net impact on the trade balance. Some jobs are created in the export sector, while some are lost to import competition and some to reduced sales among unsubsidized exporters. The cumulative impact on employment is indeterminate and is not likely to be strong in either direction.
An expert from the Government Accountability Office testified to Congress, "Government export finance assistance programs may largely shift production among sectors within the economy rather than raise the overall level of employment in the economy."13 The Congressional Research Service summarized the views of economists who oppose export subsidies:
…there is doubt that a nation can improve its welfare or level of employment over the long run by subsidizing exports. Economists generally maintain that economic policies within individual countries are the prime factors which determine interest rates, capital flow, and exchange rates, and the overall level of a nation's exports. As a result, they hold that subsidizing export financing merely shifts production among sectors within the economy, but does not add to the overall level of economy activity, and subsidizes foreign consumption at the expense of the domestic economy. From this point of view, promoting exports through subsidized financing or through government-backed insurance and guarantees will not permanently raise the level of employment in the economy, but alters the composition of employment among the various sectors of the economy and, therefore performs poorly as a jobs creation mechanism.14
The jobs created by Ex-Im Bank transactions are visible. However, the jobs destroyed or never created in the first place are not visible, and thus are not taken into account in the calculations that the bank uses to measure job creation.
Market-directed international trade also changes the employment mix in the economy. But the U.S. economy benefits because Americans can specialize in producing the products in which they have a comparative advantage in response to market signals about global demands. On the import side, Americans are able to import things made relatively less expensively abroad. That process raises the productivity of American workers and increases living standards.
When exporters are subsidized, however, politics rather than comparative advantage often drives trade flows. By distorting price signals in the export financing market, the Ex-Im Bank draws from financial resources that would have been put to other, more valuable, uses. The result is a less efficient economy and a lower standard of living than would occur in a free market for export finance.
2. Does the Bank Improve the Trade Balance?
The Obama administration has pursued a National Export Initiative (NEI), which is supposed to help double U.S. exports by 2015. Ex-Im Bank supporters cite this as justification for increased funding of the bank and expanded bank authority.15 The Export Promotion Cabinet—which steers the NEI—released a report in 2010 with recommendations related to the Ex-Im Bank. It said, "under the NEI, U.S. exports are expected to double. This expected increase in export activity will translate into increased demand for public sector export credit assistance."16 But that is a circular argument. The NEI justifies the bank's expansion, and the bank's expansion is supposedly necessary to meet the goal of doubling exports.
Unfortunately, business lobby groups help spread some of the false economic theories that the Ex-Im Bank depends on. During a past Ex-Im Bank reauthorization debate, for example, the U.S. Chamber of Commerce said that "last year's record $369.7 billion trade deficit highlights the need for full funding for the U.S. Export-Import Bank in order to advance American products overseas and correct the growing imbalance between imports and exports."17
In reality, subsidized export credit does not noticeably affect the overall level of exports, nor does it change the net balance of imports and exports. A Government Accountability Office expert testified that "Ex-Im Bank programs cannot produce a substantial change in the U.S. trade balance."18 Ex-Im subsidies may indeed stimulate foreign demand for particular U.S. products, but the greater demand for dollars needed in order to purchase those products bids up the U.S. dollar's value. The stronger dollar encourages imports and raises the price of U.S. exports generally. The exchange-rate mechanism, in other words, moderates any price advantage created by Ex-Im loans. The trade deficit is largely driven by macroeconomic factors such as the levels of savings and investment. Again, the real impact of Ex-Im Bank financing is to divert exports from less favored to more favored sectors.
Even if subsidized credit could alter the trade balance in theory, in practice it is too small to make any major impact. The $34 billion of U.S. exports supported by the Ex-Im Bank in 2010, for example, represented less than two percent of the $1.8 trillion worth of all U.S. exports that year. The merchandise trade deficit in 2010 was almost 20 times larger than all the exports supported by the bank that year.19
The trade deficit is not indicative of American economic weakness in any case: it fell dramatically during the recent global downturn and is rising again with renewed growth. Trade deficits neither cause unemployment or reduce growth, nor are they a sign of unfair trade practices abroad or declining industrial competitiveness at home. The current high nominal trade deficit reflects the fact that the United States attracts a high level of foreign investment, including investment in government bonds to finance huge federal deficit spending. The trade deficit enables Americans to maintain a level of investment that would be unattainable if they relied solely on domestic savings. In short, the trade balance says very little about the relative competitiveness of U.S. exporters.20
3. Does the Bank Correct Market Failures?
Another rationale for funding the Ex-Im Bank is that the agency provides its services when the private sector is unwilling to do so. In response to those who doubt that private lenders would ignore good opportunities, the bank claims that they have special insights and access to information that private lenders do not. Bank officials have said that "Export-Import Bank personnel can go into a minister of finance or the president of a company and ask for accounting records that are audited under [International Accounting Standards Board] rules, and we can push for reforms and the kind of structures that are needed."21
However, the Ex-Im Bank does not explain why they could not simply share with the markets any information to which they supposedly have privileged access. Presumably foreign businesses or government officials would not prevent successful transactions by withholding important records and data. The Ex-Im Bank's attitude reflects a misguided assumption in Washington that a small group of government experts are better able to price risk and manage economic activities than many thousands of private-sector investors and analysts who have their own money at stake.
The Ex-Im Bank views itself as being crucial to international commerce. But the vast majority of trade finance is sourced from the private sector: 65 to 90 percent if the transaction is internal (i.e., extended between firms in a supply chain, or as an intra-company transfer), and 80 percent of trade financed externally.22 About 90 percent of short-term export credit insurance is provided by private firms.23
It is true that in the midst of the recent financial crisis, global credit markets froze, partly contributing to a drop in international trade in 2009. But research has shown that while trade finance and exports mirror each other, the declines in trade finance did not have a major effect on trade flows. Economists Jesse Mora and William Powers have found that declining international demand was the most important factor in explaining the drop in world trade, with trade finance a secondary factor. Trade finance, they conclude, "had at most a moderate role in reducing global trade," and while the decline in trade financing did contribute to the fall in global trade, it simply reflected broader macroeconomic and credit market conditions during the crisis.24
Another factor to consider is that the Ex-Im Bank typically has made its loans, guarantees, and insurance to countries such as South Korea, China, Mexico, and Brazil that have had little difficulty in attracting private investment.25 Indeed, the bank's relatively low default rate (less than two percent in 2010) suggests that it is making loans to creditworthy countries. That raises the question of why we need a government agency to finance safe transactions that could be left to the private sector.26
On the other hand, when loans and other benefits are extended to uncreditworthy countries, they are in effect foreign aid rather than export promotion. If foreign debts become unpayable, they must ultimately be financed by U.S. taxpayers. Another problem is that when the Ex-Im Bank finances public-sector borrowers, it may have the effect of delaying privatization and other reforms that would aid development.27
The Ex-Im Bank mainly subsidizes a small group of large businesses. In 2010, for example, the top 10 beneficiaries of Ex-Im Bank loans and long-term guarantees received move than 92 percent of those bank services.28 Boeing Company alone accounted for 44 percent of total Ex-Im Bank loans and long-term guarantees in 2010. It is difficult to see why large multinational companies such as Boeing shouldn't finance their own export sales.
In sum, while private credit markets are not perfect, the unintended consequences of subsidized public credit are more problematic. Ex-Im Bank operations can harm economic development, displace private-sector credit, and finance foreign firms that compete with U.S. firms. It makes no sense for the bank to finance sensible projects that the private sector is willing to finance. Nor does it make sense for the bank to finance dubious projects that are excessively risky. Former Cato chairman William Niskanen noted:
The fact that private credit is sometimes not available on terms that a potential foreign buyer and U.S. exporter would prefer … is not sufficient evidence of a market failure. The terms on which credit is available from a private lender reflect the costs, taxes, and regulations to which that lender is subject; its assessment of the commercial and political risks of a specific loan; and the expected return on alternative loans. In a competitive credit markets among lenders that face the same costs and alternatives, the best terms will be offered by the potential lender that is most optimistic about the commercial and political risks of a specific loan.29
The Ex-Im Bank's activities introduce distortions to the marketplace. For one thing, the bank picks and chooses which industries to subsidize, and it may be biased toward investments in politically trendy activities such as renewable energy.30 As an example, the Ex-Im Bank provided a $10 million loan guarantee to the failed solar company Solyndra.31
Another problem is that the Ex-Im Bank's subsidies can encourage investment in very dubious projects. That is the story of Enron's international investments, which played an important role in the implosion of the firm. By one estimate, Enron received $2.4 billion in federal aid for overseas energy projects through the Export-Import Bank and the Overseas Private Investment Company between 1992 and 2000.32 Another study puts total federal government subsidies to Enron for its foreign schemes at $3.7 billion.33 All these subsidies made possible Enron's excessively risky foreign investments, which came crashing down at the same time that the firm's accounting frauds were being revealed.34
Another source of distortion is the complex rules and regulations that Congress imposes on the Ex-Im Bank. For example, there are limits on the amount of foreign content allowed in bank-supported exports. Also, any bank–supported transaction worth more than $20 million must be transported on a U.S.-flagged ship, which is a hidden subsidy to protected shippers. This rule has a substantial negative effect: "Today, an extremely limited number of U.S.-flag ‘break bulk' carriers remain in operation, yielding transportation costs so high as to nullify the benefits of Ex-Im Bank financing."35
4. Does the Bank Level the Playing Field?
The Ex-Im Bank's supporters argue that its services are needed to counter the subsidized competition that U.S. firms sometimes face abroad. Ideally, U.S. exporters should not have to compete in a world where their competitors are receiving government support. However, U.S. policy should aim at maintaining a prosperous economy overall, not at promoting the private interests of particular companies. And even if the latter were an appropriate goal, it's not clear that the Ex-Im Bank has much of an impact.
The evidence is mixed regarding whether state-provided export subsidies enhance a country's export performance. First note that other high-income countries generally don't subsidize their exporters any more than does the United States. In 2009, out of seven high-income countries, the United States was the third-largest in the use of medium and long-term export credits.36 Furthermore, the use of export subsidies has waned in recent years in numerous countries.
The members of the Organization for Economic Cooperation and Development (OECD) are bound by a 1978 agreement ("OECD Arrangement") that limits subsidies for export finance and obliges countries to inform other OECD members when they violate its terms. The existence of the OECD Arrangement partly accounts for the drop in the use of export credits in recent years.
Non-OECD countries, however, are not bound by these rules. China, for example, is a major user of "tied aid," which is development aid that obliges the recipient to buy products from the donor country. On average, China, Brazil, and India have supported more than three percent of their total exports in recent years, and export credit volumes are growing.37
However, there is no clear relationship between a country's export performance and the amount of government export subsidies. A cross-country analysis by this author shows no significant relationship between a country's rank as an exporter or the growth in exports, and its level of export credit subsidies.38
The extent to which the Ex-Im Bank actually counters foreign export credits is unclear. While the bank previously was forthcoming about the share of its activities devoted to countering subsidized foreign competition, recent reports contain little information about this activity. Given the fall in export credit subsidies in the OECD, the need for countervailing activities likely has not increased since the late 1990s, when less than 20 percent of Ex-Im guarantees and insurance were for the purpose of countering officially supported foreign competition.39
The idea that the United States suffers from a prohibitively tilted playing field is dubious. The Ex-Im Bank backs only about two percent of total U.S. exports, and likely only a portion of those exports compete against products that receive government export subsidies. Thus, it is unlikely that the U.S. economy is seriously threatened by a tilted international playing field or that the Ex-Im Bank does much to level it out.
Interestingly, the Ex-Im Bank has occasionally stacked the deck against U.S. companies by subsidizing foreign companies. For example, Mexico's state-owned oil monopoly, Pemex, has been one of the Ex-Im Bank's top beneficiaries, which is a questionable use of U.S. taxpayer dollars given that U.S. oil companies compete against Pemex.
Similarly, the billions of dollars in financing that the Ex-Im Bank authorizes each year to foreign airlines to buy Boeing aircraft helps foreign airlines compete against U.S airlines. In 2012, for example, "Delta Airlines claim[ed] that loan guarantees the Ex-Im Bank offered to Air India to buy 30 planes from U.S. manufacturer Boeing would create more competition for U.S. carriers and could force them to cancel certain routes."40
The Ex-Im Bank's financing activities are highly concentrated, with roughly 80 percent in four sectors: air transportation, oil and gas exploration, manufacturing, and power projects. Air transportation alone accounts for almost half of the bank's total financial exposure, and the largest user of the Ex-Im Bank is Boeing.41 Thus, terminating the Ex-Im Bank may reduce the profits of the relatively few companies and industries that receive the bulk of the agency's aid. But those losses would be temporary as companies adjusted their finances and learned how to compete without subsidies.
The best way for U.S. policymakers to help U.S. businesses and exporters would be to pursue major regulatory and fiscal reforms. For example, policymakers should reduce tariffs on imported business inputs, such as steel, to lower the U.S. costs of production.42 And they should slash the U.S. corporate income tax rate, which is now the highest in the world.43 The U.S. statutory corporate tax rate of 40 percent is far higher than the 23 percent global average in 2012.44 The U.S. effective corporate tax rate is also one of the highest in the world.45
Policymakers should terminate the Export-Import Bank. The agency does not play a crucial role in international trade, and there is no reason why U.S. exporters deserve favored treatment over U.S. businesses with domestic sales. Rather than fixing market failures, the bank creates economic distortions of its own. U.S. exports have grown impressively over the years, despite only a very small proportion of them being supported by Ex-Im financing.
The federal government should urge other nations to cut their own export subsidies. It may be beneficial to move negotiations on export subsidies from the OECD to the WTO, which has a broader membership and a better system for resolving disputes and enforcing rulings. But U.S. policymakers should not retain the Ex-Im Bank merely because other nations are following misguided subsidy policies.
There are successful trade liberalization episodes that demonstrate the benefits of U.S. reform leadership. The Information Technology Agreement and the agreements on telecommunications and financial services, for example, were all negotiated through the World Trade Organization at the urging of the United States, even though it already had a zero tariff rate for semiconductors and offered only to lock in current levels of openness for telecommunications and financial services. For export credits, too, other countries may follow the United States in repeal because adopting sound policies is in their best interests and because American promises to lock in current practices are considered valuable.
In sum, none of the reasons offered for the Ex-Im Bank's continued existence are convincing. Private credit markets are far deeper and are more accessible today than when the bank was created in the 1930s. The Ex-Im Bank's resources are mainly used to assist large corporations that have little trouble obtaining their own private financing. Export subsidies do not increase employment overall, nor do they have any substantial impact on the trade balance. Finally, it is simply not fair for the government to pick and choose certain businesses to subsidize at the expense of other businesses and the broader economy.
13 Jay Etta Hecker, "Export-Import Bank: Key Factors in Considering Eximbanks Reauthorization," testimony before the Senate Subcommittee on International Finance of the Committee on Banking, Housing, and Urban Affairs, July 17, 1997, p. 5.
18 Jay Etta Hecker, "Export-Import Bank: Key Factors in Considering Eximbanks Reauthorization," testimony before the Senate Subcommittee on International Finance of the Committee on Banking, Housing, and Urban Affairs, July 17, 1997, p. 6.
24 Jesse Mora and William M. Powers, "Decline and Gradual Recovery of Global Trade Financing: U.S. and Global Perspectives," VoxEU, November 27, 2009. See also, Jonathan Eaton, Samuel S. Kortum, Brett Neiman, and John Romalis, "Trade and the Global Recession," National Bank of Belgium Working Paper no. 196, November 10, 2010.
37 Export-Import Bank of the United States, "Report to the U.S. Congress On Export Credit Competition and the Export-Import Bank of the United States For the Period January 1, 2009, through December 31, 2009," June 2010.