Sunday, August 3, 2014

Support business vs. free enterprise – Should the U.S. Export Import Bank disappear?

On February 2, 1934, Franklin D. Roosevelt signed an executive order forging the U.S. Export Import Bank (Ex-Im). At that time, the U.S. faced “emergency by reason of widespread unemployment and disorganization of industry” (quote from the executive order). Ex-Im should help tackling this problem.

Today, 80 years after its birth, Ex-Im might disappear. Its current charter lapses on September 30, 2014 and some U.S. congressmen advocate not expanding it.

Even though its abolishment would come as a big surprise, it is still worthwhile to follow the debate as it provides compelling insights into why export credit agencies exist or, if you take the opposite view, should disappear.


Ex-Im had, since its origin, the mission “to aid in financing and to facilitate exports and imports and the exchange of commodities between the United States and other nations” (extract from the executive order).

Today, it serves four product types:

  • The bank grants direct loans to foreign buyers of U.S. products.
  • Ex-Im issues working capital guarantees to U.S. exporters to ensure that the latter can finance raw material, labor, etc. to produce goods.
  • It delivers loan guarantees, ensuring foreign buyers’ debt obligations incurred for the purchase of U.S. exports.
  • Finally, Ex-Im offers export credit insurance, covering a credit to a foreign buyer of U.S. merchandise.

Why should Ex-Im disappear?

  • Ex-Im lends if the private market doesn’t do so. The bank, therefore, distorts competition and interferes with free markets. Ex-Im’s opponents say that competition should be based “on quality and price of products rather than quality of any officially-supported financing”.

  • A similar argument is that Ex-Im should not make loans taxpayer-backed that the private sector is unwilling to make. This leads to a form of corporate welfare that involves significant costs for Americans.

“To support business does not necessarily support free enterprise.”

“Washington loves to use the tax code to pick winners and losers.”

  • Ex-Im should retreat because the bank helps competitors of U.S. companies: It may be true that U.S. exporters benefit from Ex-Im’s products; however, foreign importers may benefit even more so and ultimately beat their U.S. competitors through Ex-Im’s support.

“The Main Street competitive economy relies upon hard work, creativity, perseverance and “can do” optimism to create wealth. The Washington insider economy, in contrast, relies on earmarks, regulatory barriers to entry, subsidies, tax preferences and political influence.”

  • Ex-Im lends U.S. taxpayer money to countries such as China, Russia, Saudi Arabia, United Arab Emirates, and Congo which do not respect U.S. economic and human rights principles and sometimes even threaten the security of the country.

  • Ex-Im claims to support U.S. SMEs. However, these companies are no significant part of U.S. Ex-Im’s lending activity, since more than 60 % of the bank’s funds benefit big corporations such as GE, Ford, Caterpillar, and Boeing.

  • Instead of generating jobs, Ex-Im only shifts production from one sector of the economy to another: “At best, Ex-Im Bank creates jobs in export industries by destroying jobs in non-export industries.”

“History teaches us that, sooner or later, every government insurance and guarantee program – almost without fail – will fail.”

  • Ex-Im’s antagonists say there is simply no financing gap that the bank could fill: As a matter of fact, 98 % of American exports are financed without public support.

“Only free enterprise is fair. Only free enterprise is moral.”

Why is Ex-Im important for the U.S. economy?

To a great extend, the arguments in favor of U.S. Ex-Im mirror those against the bank:

  • Ex-Im is a self-sustaining bank and doesn’t cost any taxpayer money. For example, its loans incur low default rates.

  • The bank boosts U.S. exports and helps the U.S. economy recovering. Especially small businesses benefit from Ex-Im’s products.

  • Ex-Im creates jobs in the U.S.

  • Since all developed economies operate ECAs, Ex-Im is necessary to create a level-playing field for American companies operating in the global economy.

“Credit insurance is part of running a responsible business, just like fire or theft insurance.”
Fred Hochberg / U.S. Ex-Im – June 25, 2014

“In this global economy, buyers will make procurement decisions based on the availability and attractiveness of financing.”
Fred Hochberg / U.S. Ex-Im – June 25, 2014

  • Ex-Im implements American development policy in emerging markets.

  • Ex-Im fills private sector lending gaps; it gets only involved where the private sector is unable or unwilling to finance.

How much cost Ex-Im’s credit programs?

In the political debate, the U.S. Congressional Budget Office has produced an interesting estimation of the cost of Ex-Im’s credit programs, based on the bank’s cash flow projections. The study opposes two valuation approaches:

  • The FCRA (Federal Credit Reform Act) approach discounts expected cash flows using U.S. treasury rates with similar terms of maturity. This means, implicitly, that Ex-Im’s credit assistance incurs no market risk or cost for the government.
  • The fair market value approach discounts expected cash flows at rates that private financial institutions would use. Here, you take into account the cost of market risk that Ex-Im’s business is exposed to. As a consequence, the approach measures the costs of federal credit programs more comprehensively.

As you can see above, the FCRA approach shows a profit for the U.S. Government (The costs are actually negative.) whereas the fair value approach results in a cost for the American taxpayer.

Current proposals

Today, the U.S. Congress discusses two main legislative proposals:

  • A 2013 draft law intends to abolish Ex-Im in three years time. The drafts of May 5, 2013 and June 6, 2013 also describe how Ex-Im’s assets and personnel will be transferred and how Ex-Im shall operate until its shutdown.

  • Recent drafts propose to extend Ex-Im’s activities until September 30, 2017 (Proposal dated April 2, 2014) or September 30, 2021 (Proposal dated June 24, 2014) respectively. In addition, they want to increase Ex-Im’s budget as follows:

As I wrote above, nobody really believes U.S. Ex-Im to be shut down. The discussion still remains interesting to follow.