Re‐​Authorize or Retire 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 Bereuter for inviting me to testify. In the interest oftransparency, let me point out that neither the Cato Institute norI receive government money of any kind.

President George W. Bush has called for a 25 percent cut in thefunding of the Export Import Bank, which provides loans, guaranteesand insurance that benefit U.S. exporters. The proposed cuts are agood start, but Congress should go much further in recognition thatthe rationales for using Export Import Bank credit do not justifyits current level of authorizations. The Bank's two mainrationales-that it should provide support where the private sectordoes not or where U.S. exporters face subsidized competitionabroad-are specious.

The Export Import Bank and its proponents cite a number ofreasons, ranging from jobs created to maintaining Americancompetitiveness, that the credit agency benefits the United States.Yet because the Bank takes resources from the U.S. economy anddiverts them toward politically determined, less efficient uses,its intervention creates distortions in the national economy andimposes opportunity costs that are surely higher than the addedvalue of the Bank's intervention.

Moreover, subsidized export credits do not create jobs nornoticeably affect the level of trade. Indeed, only about 1.5percent of all U.S. goods and services exports are backed by theEx-Im Bank-far too small to make an impact on trade. For thatreason, those who mistakenly view the U.S. trade deficit as a signof weakness rather than as a sign of strength should not expect theEx-Im Bank to correct the perceived malady. As the GeneralAccounting Office has noted, "Eximbank programs cannot produce asubstantial change in the U.S. trade balance."1 Other factors play a much larger role ininfluencing jobs and trade, as the Congressional Research Servicerecently noted.

Most economists doubt . . . that a nation can improveits welfare over the long run by subsidizing exports. Economicpolicies within individual countries are the prime factors whichdetermine interest rates, capital flows, and exchange rates, which,in turn, largely determine the overall level of a nation's exports.This means that, at the national level, subsidized export financingmerely shifts production among sectors within the economy, ratherthan adding to the overall level of economic activity, andsubsidizes foreign consumption at the expense of the domesticeconomy. This also means that promoting exports through subsidizedfinancing or through government-backed insurance guarantees willnot permanently raise the level of employment in the economy, butit will alter the composition of employment among the varioussectors of the economy.2

Thus, the Bank benefits particular firms and their shareholdersat the expense of taxpayers and the vast majority of U.S. exportersthat do not receive the agency's subsidies. When the "marketfailure" and "level playing field" rationales of Ex-Im Bank financeare also scrutinized, reasons to fund this example of corporatewelfare are difficult to find.

Government Credit and the Market

A principal rationale for use of Ex-Im Bank resources is thatthe agency provides its services when the private sector is unableor unwilling to do so on its own due to perceptions of excessiverisk. Yet the Bank has been providing the bulk of its loans,guarantees and insurance to countries such as China, Mexico, andBrazil that have had little difficulty attracting privateinvestment on their own. As Table 1 shows, 10countries account for 50 percent of the agency's total exposure.Table 2 shows that the pattern did not changein FY 2000.

Table1
Top 10 Countries Benefiting from Ex-Im Bank
(Ex-Im Bank Exposure 9/30/00)
Country Exposure Percentage of Total
1. China $6,197,191,835 10.06
2. Mexico $4,500,777,599 7.31
3. Brazil $3,576,223,094 5.81
4. Turkey $3,523,429,372 5.72
5. Indonesia $2,826,993,322 4.59
6. Saudi Arabia $2,526,989,512 4.10
7. Korea $2,389,778,130 3.88
8. Russia $2,075,983,958 3.37
9. Venezuela $1,833,180,504 2.98
10. Philippines $1,756,985,326 2.85
TOTAL $31,207,532,652 50.67
Total Exposure: $61,595,682,783
Source: Export-Import Bank,2000 Annual Report (Washington, D.C.: Export-Import Bank,2000)
Table2
Top 10 Countries Benefiting from Ex-Im Bank in FY2000
Total Actual Authorizations
Country Total Actual Authorizations Percentage of Total
1. Mexico $1,454,768,716 11.51
2. Turkey $1,247,240,959 9.87
3. Malaysia $837,215,177 6.63
4. Taiwan $607,848,319 4.81
5. Saudi Arabia $551,227,643 4.36
6. Thailand $502,615,844 3.98
7. China $498,339,026 3.94
8. Brazil $487,064,993 3.85
9. Venezuela $371,945,750 2.94
10. Korea $336,629,641 2.66
TOTAL $6,894,896,068 54.56
Total Authorizations: $12,637,061,926
Source: Export-Import Bank,2000 Annual Report (Washington, D.C.: Export-Import Bank,2000)

In short, Ex-Im Bank activity has largely mirrored that ofprivate credit markets. This was even so during the Asian financialcrisis that disrupted trade and private credit flows, despiteclaims by the Bank that its lending at the time played a crucialrole in the recovery of the affected countries. Rather, economistWilliam Cline notes that only in Korea did the Bank provide muchshort-term credit, but that policy "was not very successfulelsewhere in the region." Although the merits of such a policy aredubious, Cline adds that the agency's "longer-term operations havenot been used much for systemic stability purposes and, arguably,have been pro-cyclical rather than counter-cyclical."3

At best, then, the Bank provides financing to countries that donot have trouble obtaining credit and in many cases merelydisplaces private investment by funding ventures that wouldotherwise have taken place. At worst, the credit agency underwritesexports that should not be financed and would not otherwise receivesupport. Indeed, the lack of private-sector finance on acceptableterms is not an example of market failure, but rather an importantmarket signal about a project's prospects or a country's investmentregime. In cases where the Bank provides credit into a bad policyenvironment, it discourages host governments from adopting marketreforms necessary to genuinely attract private capital. When thepolicy environment is overlooked by export credit agencies,economic development begins to suffer. In 1969, the PearsonCommission, which assessed international development policies,warned of that danger.

More than one project rejected for financing by theWorld Bank Group on economic grounds has been promptly financed byan export credit. This is the most unfortunate aspect of exportcredit finance: it provides a temporarily painless way of financingprojects conceived by over-optimistic civil servants, bypoliticians more concerned with immediate political advantage thanwith potential future economic problems, and by unscrupuloussalesmen for the manufacturers of capital equipment in developedcountries.4

Of course, the result of such an approach is debt instead ofdevelopment. In the worst of cases, the accumulation of debtbecomes unpayable and its reduction must be financed by Westerntaxpayers who funded the credit agencies to begin with. The currentdebt relief initiative led by the World Bank and the InternationalMonetary Fund has identified 41 highly indebted poor countrieswhose foreign debts cannot be repaid. In many cases, credit fromofficial export agencies accounts for a high proportion of thatexternal debt.5 Since the majority ofthose highly indebted countries are in sub-Saharan Africa, it isespecially worrisome that Ex-Im Bank has significantly expanded itsoperations the region in the past few years and plans to continueexpanding there. Indeed, of the 14 sub-Saharan African countriesthat received Ex-Im Bank credit or guarantees in the past threeyears, all rank poorly in terms of economic freedom and 10 are onthe World Bank's and IMF's highly indebted country list.

The Ex-Im Bank undermines the spread of free markets andeconomic development in other ways. For example, a large portion ofthe agency's credit finances public-sector borrowers. In 1999, 45percent of Ex-Im credit financed the public sector.6 Numerous loan guarantees to Mexico's stateowned oil and electricity monopolies, loans to Korea's DevelopmentBank, and loan guarantees to Air China during the past few yearshave certainly not accelerated the move to the market and theirprovision sends a contradictory message to countries where theUnited States presumably wishes to promote free-market reforms.

Thus, while private credit markets are not perfect, theunintended consequences of subsidized credit loom large and, as mycolleague William Niskanen, former head of President Reagan'sCouncil of Economic Advisors has observed, "Any effects of marketfailure are likely to be small and transient in comparison to theeffects of government failure."7 Thoseeffects include the fact that Ex-Im Bank operations are oftenharmful to economic development, often displace private-sectorfinance, impose "potentially significant" opportunitycosts,8 finance firms abroad thatcompete with U.S. firms, and politicize the market by providing afew large firms with government loans and guarantees. Indeed, asTable 3 shows, the top 10 U.S. companies thatbenefit from Ex-Im Bank loans and long-term guarantees receive 86percent of those Bank services. Boeing alone accounted for 43percent of total Ex-Im Bank loans and long-term guarantees in FY2000. By contrast, small businesses account for only 18 percent ofall Ex-Im lending. Yet even if more lending went to smallbusinesses, the Bank would still not be able to avoid the perverseeffects that have accompanied lending to its larger clients.

In sum, if the private sector is not already providing exportcredit or insurance to a project, there are probably good reasonsfor that outcome and little reason for the Ex-Im Bank to step in.Nor should the Bank have a role if the private sector is willing toprovide finance or is contemplating it.

Table3
Top 10 U.S Beneficiaries of Ex-Im Bank Loans and Long-termGuarantees FY2000
U.S Company Revenues* Total (Loans &Guarantees) Percentage of Total
1. Boeing Co. $51,321 $3,384 43.1
2. Bechtel International $14,300 $1,475 18.8
3. Varian Associates Inc. $704 $674 8.6
4. United Technologies (1) $26,583 $334 4.3
5. Willbros Engineers $314 $200 2.5
6. Halliburton Co. (2) $11,944 $172 2.2
7. Raytheon Engineers & Constructors $16,895 $150 1.9
8. Enron Development Corp. $100,789 $132 1.7
9. General Electric Co. $129,853 $127 1.6
10. Schlumberger Technology Corp. $10,034 $87 1.1
TOTAL $6,735 85.9
GRAND TOTAL $7,844
* In millions of U.Sdollars
Sources: Export-Import Bank, 2000 AnnualReport (Washington, D.C.: Export-Import Bank, 2000); and the2000 annual reports from each of the listed companies.
Notes:
(1) The figure for United Technologies includes loans andguarantees for Sikorsky Aircraft Corp., which is a wholly ownedsubsidiary of United Technologies.
(2) The figure for Halliburton Co. includes loans and guaranteesfor Brown and Root International, Inc., which is a wholly ownedsubsidiary of Halliburton Co.

Using Government Credit to Level the PlayingField

The other principal rationale for Ex-Im Bank finance is tocounter the subsidized competition that U.S. firms sometimes face.Although U.S. companies should not have to compete in a world wheretheir competitors receive support from their governments, U.S.policy should be consistent with the goal of maintaining aprosperous national economy as opposed to promoting the welfare ofparticular groups. Fortunately, Europe and Japan are alreadyre-appraising the utility of their export programs in light offiscal constraints and as a reaction to each other's subsidizedexport policies.9 The consistentlypoorer economic performances of Western European countries and ofJapan in comparison to that of the United States argues against theUnited States adopting the types of policies-including moreexpensive export-finance programs-that have hindered growth inEurope and Japan.

It is important to recognize, moreover, that much Ex-Im Bankcredit helps U.S. firms that do not face competition subsidized byforeign governments. In FY 1999, for example, only 18 percent ofmedium and long-term loan and guarantee transactions went tocounter government-backed export credit competition, representing$6.3 billion of the Bank's activity. In the same year, only 15percent of the Bank's total dollar amount of medium-term insurance,or $89 million, went to counter officially supported foreigncompetition.10 Those figures suggestthat the Bank could significantly reduce its activities withoutundermining its mission to counter foreign-subsidized competition.Because Ex-Im Bank credit to companies that do not face this typeof unfair competition cannot be justified on economic grounds, theBush administration's proposal to cut the Bank's funding by 25percent should be viewed as a starting point even by those whobelieve that the agency has a legitimate role in counteringsubsidized foreign exports. At the very least then, theExport-Import Bank should be limited to financing exports that meetthis criteria.

But the idea that the United States suffers from a playing fieldthat is not level is questionable. The United States exports about$1 trillion of goods and services per year. The Ex-Im Bank backsonly about $15.5 of that amount, or 1.5 percent of total exports,only some of which face government-subsidized competition. Whenonly a fraction of 1 percent of U.S. exports faces competitionsupported by foreign export credit agencies, it is difficult toconclude that the U.S. economy is threatened by a playing fieldtilted against it.

Retiring the Ex-Im Bank entirely might reduce the profits of thefew large corporations that have received the bulk of the agency'sfinance over the years. But surely firms such as Raytheon andEnron-with annual sales of more than $16 billion and $100 billionrespectively-can cope in a world without Ex-Im Bank subsidies.Likewise, small business that do not have recourse to the vastfinancial resources of large corporations, already seem to be doingwell without the Bank's help. The agency supports only 2000 smallbusinesses, or about 1 percent of all small and medium exportingfirms.

If the goal is to help U.S. exporters, there are other,preferable ways in which to do so, namely by making the UnitedStates a more competitive economy. U.S. tax levels, regulations,and the complexity of the tax code are routinely cited as factorsthat hinder the competitiveness of U.S. firms. As one report byPrice Waterhouse found, "The U.S. system has also diverged in anumber of respects from the policies and practices of other majorindustrial countries-often to the detriment of U.S. businessesstriving to compete in foreign markets."11 Thus, there is much Congress can do to helpthe business sector. I suggest it begin by eliminating the $65billion dollars worth of corporate welfare that exists in thefederal budget-of which Ex-Im Bank is a part-a move that wouldgenerate savings sufficient to eliminate the capital gains andfederal estate taxes.

Conclusion

It is time Congress retire the Export Import Bank in recognitionthat the Great Depression-era agency has no relevance in anincreasingly liberal world economy. The Bank benefits a smallnumber of firms at the expense of the rest of us. It does notcorrect for so-called market failures, but does create perverseeffects at home and abroad, including by imposing opportunity costsand discouraging the spread of market reforms. The tiny percentageof exports that the Ex-Im Bank helps to counter subsidizedcompetition overseas, moreover, demonstrates that the U.S. economydoes not suffer from the lack of a level playing field. Mostimportant, Congress should not finance this negative sum gamebecause it is nowhere authorized in the Constitution to usetaxpayer funds to benefit politically favored groups.


Notes

1. Jay Etta Hecker, "Export-Import Bank: KeyFactors in Considering Eximbank Reauthorization," Testimony beforethe Subcommittee on International Finance of the Committee onBanking, Housing, and Urban Affairs of the U.S. Senate, July 17,1999, p. 6. For a review of the current trade deficit, see DanielT. Griswold, "America's Record Trade Deficit: A Symbol of EconomicStrength," Cato Institute Trade Policy Analysis no. 12, February 9,2001.

2. James K. Jackson, "Export-Import Bank:Background and Legislative Issues," Congressional Research ServiceReport for Congress 98-568E, January 19, 2001, p. 5.

3. William R. Cline, "Ex-Im, Exports, andPrivate Capital: Will Financial Markets Squeeze the Bank?" in GaryClyde Hufbauer and Rita Rodriguez, eds., The Ex-Im Bank in the21st Century: A New Approach? (Washington: Institute forInternational Economics, 2001), p. 102.

4. Lester B. Pearson, Partners inDevelopment: Report of the Commission on InternationalDevelopment (New York: Praeger, 1969), quoted in PatriciaAdams, Odious Debts (Toronto: Earthscan, 1991), pp.84-5.

5. See Friends of the Earth et al., "A Race tothe Bottom: Creating Risk, Generating Debt, and GuaranteeingEnvironmental Destruction," March 1999, p. 35.

6. John Lipsky, "Can Trade Finance AttractCommercial Banks?" in The Ex-Im Bank in the 21st Century, p.207.

7. William A. Niskanen, "Should Ex-Im Bank beRetired?" in The Ex-Im Bank in the 21st Century, p.193.

8. "Export-Import Bank: Background andLegislative Issues," p. 5.

9. Peter C. Evans and Kenneth A. Oye,"International Competition: Conflict and Cooperation in GovernmentExport Financing," in The Ex-Im Bank in the 21st Century,pp. 154-55.

10. Export-Import Bank, 2000 AnnualPerformance Report, chapter 1, pp. 2-3, available at: http://www.exim.gov/annperf00.html.

11. Price Waterhouse, "Taxation of U.S.Corporations Doing Business Abroad: U.S. Rules and CompetitivenessIssues." See also National Foreign Trade Council, "The NFTC ForeignIncome Project: International Tax Policy for the 21st Century,"NFTC, March 25, 1999 and testimony of Bob Perlman (IntelCorporation) before the Senate Finance Committee, March 11, 1999.Perlman states that "If I had known at Intel's founding . . . whatI know today about the international tax rules, I would haveadvised that the parent company be established outside the U.S.This reflects the reality that our Tax Code competitivelydisadvantages multinationals simply because the parent company is aU.S. corporation."

Ian Vásquez

Subcommittee on International Monetary Policy and Trade
Committee on Financial Services
United States House of Representatives