“Crony capitalism is alive and well...”
“[American] manufacturers can’t afford to be defenseless in the global marketplace”
“The federal government shouldn’t be involved in picking winners and losers”
If these quotes sound familiar to you, you might think that these were phrases uttered during the 2008 debates over federal bailouts of large banks and General Motors. While longstanding disputes over the relationship between government and business were at the heart of the 2008 controversies, these quotes actually refer to a new debate over the same issue.
This time, the debate concerns an agency that even some veteran Hill staffers acknowledge they’ve never heard of: the Export-Import Bank (Ex-Im) of the United States, which must be reauthorized by September 30th. It’s hard to blame them: with a staff of just 402 employees and an operating budget of $90 million, Ex-Im is one of the smallest federal agencies and as such often escapes the public eye.
So what’s the fuss? To understand the controversy, let’s use a hypothetical to demonstrate how Ex-Im works. Suppose that a small Serbian copper mining company wants to buy Caterpillar dump trucks to work at its mine. Let’s suppose that, for the sake of argument, the company can’t secure an affordable loan from a private bank. What might the company do? If it can’t get financing, it won’t be able to purchase the U.S. trucks, and might instead purchase cheaper models from Russia or China.
Ex-Im’s existence can prevent the company from having to make that choice. By offering low-interest loans to companies looking to purchase U.S. products, Ex-Im can therefore offer our hypothetical company low-cost financing that would allow it to purchase American trucks instead of those of foreign competitors. Everyone wins: the company can purchase the trucks it wants, and Caterpillar’s production line is humming with orders for new equipment.
In 2013, Ex-Im financed more than $27.3 billion in new loans to foreign corporations, a total which the bank says supported more than 205,000 export related American jobs. Ex-Im had particular success with financing new exports in manufactured goods, financing more than $8.5 billion worth of sales last year. Ex-Im’s efforts helped companies large and small: whether selling fire trucks to Nigeria, pickles to China, leather laces to Indonesia, or honey to Bahrain, the bank supported 3,842 distinct transactions in 2012, 90% of which were with small businesses. And, to top it all off, Ex-Im did so without adding a single penny to the deficit- it actually returned more than $1 billion to Treasury’s coffers.
So what’s the controversy? Some lawmakers have expressed opposition to the bank on the grounds that it “picks winners and losers” and disproportionately favors large companies over smaller businesses. Among the most vocal opponents of the bank is new House Majority Leader Kevin McCarthy (R-CA). Speaking on Fox News Sunday in June, McCarthy claimed that Ex-Im performed functions that “government does not have to be involved in. The private sector can do it”. The Majority Leader went on to say that he thought the bank was symptomatic of one of the bigger faults of modern government, in which “hard-earned [taxpayer] money” went to enterprises that produced little, if any public benefit. McCarthy’s personal opposition means an uncertain future for the bank, as witnessed by his omission of the reauthorization bill from a list of legislative priorities for September.
Mr. McCarthy makes a good point. In an ideal economy, there would be no need for institutions such as the Export-Import Bank. Ideally, companies would rise and fall on their own merits and be able to freely market their goods across the world without significant obstacles.
That said, we don’t live in an ideal economy. In reality, global trade is still limited by national barriers to cross-border investment as well as various protection mechanisms. As such, it can be difficult for firms- U.S. or non-U.S.- to sell their products abroad. That’s why most major developed countries have institutions similar to Ex-Im, and support them to a far greater degree than the U.S. supports Ex-Im.
Indeed, most countries spend more than the U.S. on export credit authorizations, according to a recent report from the National Association of Manufacturers. Canada, with a GDP just 1/8th of our own, authorizes its Ex-Im equivalent to lend 338% more than Ex-Im. South Korea’s bank, with a GDP 1/10th of that of the U.S., lends 232% more than Ex-Im. Examining credit authorizations as a percentage of GDP paints an even more dire picture. The U.S. spends just 0.16% of its GDP on export credit authorizations- dead last among the countries surveyed, and even behind developing economies such as Brazil and Mexico.
Failing to reauthorize Ex-Im would needlessly handicap U.S. companies in their ability to market their products abroad, while not addressing the fact that most nations will continue to support their firms’ exports. Our future economic competitiveness depends on our firms having access to a full policy toolbox- and that toolbox, for good or ill, contains Ex-Im.