On May 19, I testified at a hearing titled “Trade Promotion Agencies and U.S. Foreign Policy,” which was held by the House Foreign Affairs Subcommitee on Terrorism, Nonproliferation, and Trade. The subject agencies were the Export-Import Bank (Ex-Im), the Overseas Private Investment Corporation (OPIC), and the U.S. Trade and Development Agency (USTDA). The focus of my remarks, which follow, was on Ex-Im and the myth that exports are the benefits of trade.
Good morning, Chairman Poe, Ranking Member Keating, and members of the subcommittee. I am Dan Ikenson, director of the Herbert A. Stiefel Center for Trade Policy Studies at the Cato Institute. Thank you for the invitation to share my views with you today concerning “Trade Promotion Agencies and U.S. Foreign Policy.” The views I express are my own and should not be construed as representing any official positions of the Cato Institute.
To the extent that today’s hearing will help clarify some of these issues and prompt a serious effort to reform and retire some of the redundant, distortionary, and, frankly, scandal-prone agencies among the panoply of federal offerings, I am pleased to be of assistance.
U.S. trade promotion agencies are in the business of promoting exports, not trade in the more inclusive sense. That is worth noting because despite some of the wrongheaded mercantilist assumptions undergirding U.S. trade policy—that exports are good and imports are bad—the fact is that the real benefits of trade are transmitted through imports, not through exports.
In keeping with the conventional wisdom, in January 2010 President Obama set a national goal of doubling U.S. exports in five years. Prominent in the plan was a larger role for government in promoting exports, including expanded nonmarket lending programs to finance export activity, an increase in the number of the Commerce Department’s foreign outposts to promote U.S. business, and an increase in federal agency-chaperoned marketing trips.
But the NEI neglected a broad swath of worthy reforms by ignoring the domestic laws, regulations, taxes, and other policies that handicap U.S. businesses in their competition for sales in the U.S. market and abroad. For example, nearly 60 percent of the value of U.S. imports in 2014 consisted of intermediate goods, capital goods, and other raw materials—the purchases of U.S. businesses, not consumers. Yet, many of those imports are subject to customs duties, which raise the cost of production for the U.S.-based companies that need them, making them less competitive at home and abroad. U.S. duties on products like sugar, steel, magnesium, polyvinyl chloride, and other crucial manufacturing inputs have chased companies to foreign shores—where those inputs are less expensive—and deterred foreign companies from setting up shop stateside.
Policymakers should stop conflating the interests of exporters with the national interest and commit to policies that reduce frictions throughout the supply chain—from product conception to consumption. Why should U.S. taxpayers underwrite—and U.S. policymakers promote—the interests of exporters, anyway, when the benefits of those efforts accrue, primarily, to the shareholders of the companies enjoying the subsidized marketing or matchmaking? There is no national ownership of private export revenues.
If policymakers seek a more appropriate target for economic policy, it should be to attract and retain direct investment, which is the seed of all economic activity, including exporting.
Given the exalted status of exports in Washington’s economic policy narrative, it is understandable why agencies would want to portray themselves as indispensable to U.S. export success. But on that metric, none of the subject agencies is scarcely relevant: Ex-Im supported $27.4 billion in exports in 2014; USTDA supported approximately $2.5 billion annually; and, OPIC supports less than $2 billion. In aggregate, these three agencies “support” less than 2 percent of all U.S. exports.
But the relevant economic question concerns the costs and benefits of these agencies to the U.S. economy. Let me focus now on Ex-Im.
Ex-Im financing helps two sets of companies: U.S. firms whose exports are subsidized through direct loans or loan guarantees and the foreign firms who purchase those subsidized exports.
But those same transactions impose costs on two different sets of companies: competing U.S. firms in the same industry who do not get Ex-Im backing, and U.S. firms in downstream industries, whose foreign competition is now benefitting from reduced capital costs courtesy of U.S. government subsidies.
Ex-Im financing reduces the cost of doing business for the lucky U.S. exporter and reduces the cost of capital for his foreign customer, but it hurts U.S. competitors of the U.S. exporter (what I call intra-industry costs), as well as U.S. competitors of his foreign customer (what I call downstream industry costs) by putting them at relative cost disadvantages. According to the findings in a recent Cato Institute study, the downstream costs alone amount to a tax of approximately $2.8 billion every year and the victims include companies in each of the 21 broad U.S. manufacturing sectors.
The notion that because Beijing, Brasilia, and Brussels subsidize their exporters, Washington must, too, sweeps under the rug the fact that the United States is a major export credit subsidizer that has been engaged in doling out such largesse since 1934, well before the founding of the People’s Republic of China. To say that U.S. exporters need assistance with financing to “level the playing field” suggests that they lack advantages among the multitude of considerations that inform the purchasing decision. Moreover, the fact that less than 2 percent of U.S. export value goes through export promotion agencies suggests this rationale for Ex-Im is bogus.
Congress should allow Ex-Im to expire at the end of next month and the administration should announce plans to bring cases to the World Trade Organization against governments operating their export credit agencies in violation of agreed-upon limits under the Agreement on Subsidies and Countervailing Measures. The combination of the carrot of U.S. withdrawal from the business of export credit financing and the stick of WTO litigation would likely incent other governments to reduce, and possibly eliminate, their own subsidy programs.
For better or worse, at different times and for different purposes over the years, U.S. trade policy has been a tool of U.S. foreign policy. Trade preference programs, trade agreements, the Trans-Pacific Partnership, investment treaties, trade sanctions, infrastructure funding, and trade financing have all been pursued or deployed for reasons not entirely economic in nature. Pursuing strategic objectives through trade policy has a long history.
The State Department’s mission is “to shape and sustain a peaceful, prosperous, just, and democratic world and foster conditions for stability and progress for the benefit of the American people and people everywhere.” That broad mission may justify one or two export promotion agencies. But according to the Congressional Research Service, there are at least 20 such agencies within the U.S. government with overlapping responsibilities and, in some cases, working at cross purposes.
Ex-Im’s inspector general is currently investigating 31 cases of fraud and abuse and last year the House Oversight and Government Reform Committee held a hearing with a former bank employee who was subsequently indicted on charges of fraud. It would be difficult to argue that this is the kind of behavior we encourage foreign governments to emulate.
Despite the rhetoric of U.S. decline, the United States maintains enormous commercial advantages over other countries. We have the world’s largest market; strong institutions, including respect for private property and the rule of law; relatively free markets; a highly educated and productive workforce; the world’s best research institutions; a society that encourages innovation and produces deep and broad capital markets to fund it. From these commercial advantages comes security and strength, so it is important that we maintain and build on those advantages. They underlie the strength of the U.S. economy, which is crucial to reaching U.S. security and foreign policy goals going forward.