The Export‐​Import Bank

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My name is Ian Vásquez and I direct the Project on GlobalEconomic Liberty at the Cato Institute. I would like to thankChairman Grams for inviting me to testify before the U.S. Senate.In keeping with the truth in testimony requirements, let me notethat the Cato Institute does not receive government money of anykind.

The Export-Import Bank

The Export-Import Bank's main functions of providing loanguarantees, insurance, and direct loans that benefit U.S. exportersare typically justified by Ex-Im Bank's mission of providing thatsupport when there are instances of "market failure"--i.e., whenthe private market does not provide those services on its own--orsubsidized export finance that benefits foreign competitors. I hopeto show that in neither instance is the Ex-Im Bank's support calledfor.

Proponents of continued funding for the Ex-Im Bank often citefigures of export-related jobs created by Ex-Im's finance to claimthat the agency benefits the U.S. economy. The opportunity costs,or costs to the rest of the economy, of funding Ex-Im Bank'sactivities are, however, never cited. By this logic, we are led tobelieve that the government export program is virtually cost-freeor even provides a net economic gain.

The reality is much different, particularly since the market isa far more efficient allocator of resources than government. Whileit may be true that the export agency helps a few businesses--onlyabout 2 percent of all U.S. goods and services exports are backedby the Ex-Im Bank--it is highly doubtful that the agency helps theU.S. economy. Indeed, as one Congressional Research Service studynoted, "Most economists doubt . . . that a nation can improve itswelfare over the long run by subsidizing exports. Internal economicpolicies ultimately determine the overall level of a nation'sexports. . . . By providing financing or insurance for exporters,Ex-Im Bank's activities draw from the financial resources withinthe economy that would be available for other uses. Suchopportunity costs, while impossible to estimate, potentially couldbe significant." [1]

Put another way, the Export-Import Bank is an example ofcorporate welfare. It benefits a small number of private businessesat the expense of other businesses and taxpaying citizens. That istrue even if the agency does not lose money. Unfortunately, thegovernment's exposure to risky Ex-Im Bank investments may beincreasing the possibility that taxpayers pay an even higher priceby bailing out failed ventures--a concern expressed recently bysome observers, including David Kramer of the Carnegie Endowmentfor International Peace. [2]

"Market Failure"

One rationale for Ex-Im Bank's existence is that it provides itsservices where the private market does not due to perceptions ofexcessive political or commercial risk. Yet 44 percent of theBank's guarantees in FY 1996 went to Argentina, Brazil, China,Indonesia, Korea, Mexico, Singapore, and Thailand--all emergingeconomies that have no problem obtaining investment from theprivate markets.

Some countries or projects do indeed have difficulty inattracting foreign investment, but there are usually good reasonswhy the market will not provide loans or guarantees in such cases.The ability to attract capital is determined by the types ofpolicies and institutions a country embraces. Nations that havedone the most to reform have succeeded in attracting voluntary,private money, while those that have been unwilling to change havenot succeeded in doing so. That is not an example of marketfailure; it is instead an example of the market providing importantsignals about a country's investment regime. Under thoseconditions, unfortunately, the Ex-Im Bank's subsidized lending andguarantees present serious moral hazard problems because theyrelieve host governments of the need to adopt an investmentenvironment that would genuinely attract foreign capital.

Moreover, there is simply no reason to believe that officials atthe Export-Import Bank have superior knowledge or superior capacityto judge the prospects of particular ventures or country economicconditions than do private entrepreneurs who have no shortage ofcapital. Nor can the Export-Import Bank make special claims aboutits accumulated experience. Shortage of experience in certainmarkets may initially moderate foreign investment, but technicalexpertise and even specialized knowledge or "information", as mycolleague Dean Stansel has pointed out, is itself an economic goodthat is already traded in private markets. The Ex-Im Bank'ssubsidized activities in those areas merely undermine the privatesector's provision of such goods.

A related area where the market is said to fail pertains to theprovision of political risk insurance. The private sector mayprovide insurance that covers commercial risks, but it often doesnot cover the political kind, thus precluding the export of someU.S. products. The Ex-Im Bank provides that insurance that oftenmakes deals go through. However, there is no reason why insuranceagainst political risk should be necessarily separated fromcommercial risk as a cost of doing business. Again, both servicesrequire a judgement about current and future conditions that isalready provided by the private market and is not something inwhich agency officials have superior capabilities.

Another indication that it is not market failure, but rather thelack of an appropriate investment environment that makes seeminglyprofitable ventures stall without Ex-Im Bank aid is the presence ofagency support that has gone to oil, diamond, and other of the mostprofitable industries in the world. This year, for example, theBank approved a half-billion dollars worth of financing for gasfield development projects in Qatar that would benefit MobilCorporation and other U.S. contractors. [3] When the wealthiest corporations in the worldare unwilling to commit their own vast resources to ventures thatcould have potentially high returns, the problem cannot be one of alack of resources.

Ex-Im Bank activities have often worked at cross purposes withthe important U.S. policy goal of encouraging the spread of freemarkets. It has done so not only by creating moral hazard problems,but also by directly supporting government-owned andquasi-government enterprises abroad. Mexican economist RobertoSalinas-León, for example, has decried the Bank's approvalof a $5.6 billion loan in the early 1990s to his country'sstate-owned oil monopoly, which the government has been reluctantto privatize. [4] David Kramer haslikewise identified Ex-Im Bank's support of Gazprom, the Russiangas monopoly, and Ukragroprombirzha, a state-run agriculturalenterprise in Ukraine, as examples of dubious companies for a U.S.government agency to support. [5] Onceagain, Ex-Im Bank finance tends to delay, rather than promote,necessary market reforms.

Not all Ex-Im Bank finance supports projects deemed unsuitableby the private sector. In many cases when the Ex-Im Bank does notfund ventures that otherwise would not take place, its financemerely displaces private investment. That reality was implicitlyacknowledged when the Bank decided in 1996 not to support U.S.exports to the Three Gorges Dam project in China based onenvironmental considerations. Martin Kamarck, then-President of theEx-Im Bank, stated that "This decision does not in any way limit orimpede U.S. companies from doing business in the Three Gorgesproject on private terms and with financing from other sources.Already, several U.S. companies have sold between $60 million and$100 million worth of equipment and services to this projectwithout Ex-Im Bank support. And today's decision in no way affectstheir ability to continue to do business in that manner, privately,with this project." [6]

Leveling the Playing Field

The other rationale, one that is superficially appealing, forcontinued support of the Export-Import Bank is that foreigngovernments are subsidizing the competition of U.S. companies. Freetrade, it is said, is the correct policy for an ideal world, butsince "unfair competition" exists, so must the U.S. exportagency.

Again, this argument does not take into account the very realissue of opportunity costs. It is unfortunate that foreigngovernments subsidize their exports, but even under thoseconditions, the Ex-Im Bank still distorts the U.S. economy bypulling resources out of it to benefit its favoredcorporations.

As a matter of U.S. policy, whether or not to maintain theExport-Import Bank should of course be consistent with the goal ofpromoting a prosperous U.S. economy. Measured by that standard, weshould indeed take a lesson from the Europeans, who have longofficially supported their exports at levels higher than that ofthe United States. The Western European countries suffer from anaverage unemployment rate that is more than twice as high as inthis country and are experiencing the structural problems relatedto their regulatory and welfare states, of which their "generous"export-finance programs are a part. Indeed, while the United Stateshas created more jobs in the past decade than have been created inall other major industrial countries combined, the far lower jobgrowth rates in the European Community countries haveoccurred--unlike in the United States--largely in the publicsector. [7] Even Japan, only recentlyemerging from years of stagnation, is reviewing its burdensomeregulatory state. The fact that foreign countries are harmingthemselves with an array of wrong-headed policies, which includeexport-finance programs, does not justify the United States doingthe same by imposing similar policies.

That the bulk of Ex-Im Bank's finance benefits largecorporations with annual sales in the tens of billions of dollarsmakes it difficult to justify taxpayer support even when thosecorporations feel discriminated against in the internationalmarket. Companies like Motorola, with sales of about $28 billion,or the $52 billion AT&T, do not lack resources to export theirproducts even in the face of fierce competition. (For a randomsample of large U.S. corporations assisted by the Export-ImportBank, see the attached table).

Small business, naturally, cannot rely on the same type ofresources as the Boeings or AT&T's of the world. That is one ofthe reasons the Ex-Im Bank cites when claiming that its support iscritical to the small business community. About 80 percent of theBank's transactions support such businesses.

Sample of Companies Assisted by the U.S.Export-Import Bank [1]

1996 Company
Revenues
Level of Support in
Loans and/or Guarantees
Argentina
Gulfstream Aerospace Corporation $1,220 $48
Brazil
Philips 57,188 29
China
Boeing Company, Inc. [2] 22,681 763
Westinghouse Electric [3] 8,449 36
Siemens Corporation 8,500 47
McDonnell Douglas Corporation 13,834 101
Ecuador
General Electric [4] 79,179 30
India
Raytheon 12,300 74
Indonesia
Motorola, Inc. [5] 27,973 44
Kazakstan
Deere & Company [6] 11,229 98
Uzbekistan
Case Corporation 5,400 80
Various Countries Unallocable
AT&T 52,184 49
Source: 1996 Annual Report of the Export-ImportBank of the United States

[1] All table figuresin millions of 1996 US$.Footnote figures are in 1996 US$.
[2] Boeing also assistedby support of $392,213,675 for exports to the Republic of Korea,Poland, and the Philippines.
[3] Westinghouse alsoassisted by support totaling $108,927,260 to Ecuador, Ghana, andPeru.
[4] General Electric alsoassisted by support totaling $538,575,041 to India, Pakistan,andTunisia.
[5] Motorola alsoassisted by support totaling $118,614,888 to the Philippines andThailand.
[6] Deere & Companyexports also assisted by support of $171,341,877 toUkraine.

Yet while a small number of small businesses benefit from theEx-Im Bank, the vast majority do not. Nor do they appear toconsider exporting their products a major problem or priority. Infact, the National Federation of Independent Business recentlysurveyed 3,471 small businesses and asked them to rank 75 potentialproblems. The category of "Exporting My Goods/Services" rankedlast, with the majority of the respondents indicating that that wasnot a problem for them. Only 2 percent considered exporting acritical problem. The exporting category has ranked in last placein repeated surveys since 1986.

The NFIB concluded that "The reason exporting appears at thebottom of the list of small business priorities seems obvious.Interest in exporting is modest; the American market has not beenfully exploited in most instances." The business group went on toconsider that "The counter-argument is future sales and the growthof markets around the world. But if the American market has not yetbeen fully exploited, why is new market development abroad moreattractive than new market development at home?" [8]

If the goal is to help small businesses in the United States,then the Ex-Im Bank is not an appropriate vehicle. Other issues,such as taxation levels and regulation, appear to be top prioritiesfor small businesses. In that regard, there is much Congress can doto help that business sector. The elimination of corporate welfareprograms, of which the Export-Import Bank is a part, would go along way to providing such relief. My colleagues Stephen Moore andDean Stansel recently identified $65 billion worth of corporatewelfare spending and found that elimination of those subsidies"would generate enough savings to entirely eliminate the capitalgains tax and the federal estate tax." [9] I suggest Congress begin helping in that wayby ending its support of the Export-Import Bank.

Conclusion

The Export-Import Bank is a New Deal era agency with norelevance in a liberal global economy. It has not helped cause U.S.prosperity, but has certainly imposed opportunity costs larger thanany alleged benefits; it has not corrected so-called marketfailures, but has rewarded foreign countries for failing to adoptmarket-oriented policies and institutions; and it affects such asmall percentage of U.S. exports that even in the face of foreignnations' wrong-headed, export-finance programs, the "playing field"already seems to favor U.S. businesses. The most important reason,however, that the Export-Import Bank's charter should not bereauthorized is that it is neither morally correct norconstitutional for the federal government to use general taxpayermoney to promote the economic welfare of specific groups.


Notes

[1]. Cited in"Targeting Eximbank Subsidies," Foreign Policy In Focus,Interhemispheric Resource Center, vol. 1, no. 2, October 1996, p.3.

[2]. David Kramer, "TheRisks of Risk-Free Loans," Washington Post, May 25, 1997.

[3]. "Ex-Im BankFinances Half-Billion-Dollar U.S. Export to Qatar," Ex-Im BankPress Release, January 17, 1997. See also "Ex-Im Bank Finances $60Million in U.S. Exports to Russian Oil Sector," Ex-Im Bank PressRelease, June 4, 1996.

[4]. RobertoSalinas-León, "Mexico, Markets, and Multilateral Aid," inDoug Bandow and Ian Vásquez, eds. Perpetuating Poverty: TheWorld Bank, the IMF, and the Developing World (Washington: CatoInstitute, 1994), p. 173.

[5]. "The Risks ofRisk-Free Loans."

[6]. Export-Import BankPress Conference Transcript, May 30, 1996.

[7]. Edward L. Hudgins,"The Myth of the Race to the Bottom," in Edward L. Hudgins, ed.,Freedom to Trade: Refuting the New Protectionism (Washington: CatoInstitute, forthcoming), p. 24.

[8]. William J. Dennis,Jr., Small Business Problems and Priorities (Washington: NationalFederation of Independent Business, 1996), pp. 11-12.

[9]. Dean Stansel andStephen Moore, "Federal Aid to Dependent Corporations: Clinton andCongress Fail To Eliminate Business Subsidies," Cato PolicyBriefing no. 28, May 1, 1997, p. 1.

Ian Vásquez

Subcommittee on International Finance
Committee on Banking, Housing and Urban Affairs
United States Senate