In the previous article, American Action Forum scholars Ike Brannon and Elizabeth Lowell argue that free-market advocates are much too critical of the Export-Import Bank of the United States. They claim that it fills an important role in counterbalancing the trade subsidies that many other nations give to their exporting industries. I disagree. Ex-Im exposes American taxpayers to billions of dollars of risk, introduces distortions to the economy, and inserts politics into what should be commercial decisions. The federal government should divest itself of this risky and distorting attempt at managed trade.

The fact that China and Europe extend subsidized credit to their exporters is irrelevant at best, and a counterexample at worst, for economic policy decisions in the United States. Reforming Ex-Im by changing some of its mandates or lending practices would not address the fundamental problem with the bank: that as a government entity it is inherently driven by political considerations. The best solution is to close it down altogether and leave export financing decisions to private actors putting their own money at risk.

Path to statism | Brannon and Lowell point to the relatively small share of Ex-Im financing as a proportion of U.S. GDP compared to other countries’ efforts as a reason to ratchet up U.S. export finance. It should not be a surprise that China—which, despite great strides, remains to a large extent a state-controlled economy—provides 17 times more financing as a share of GDP to its exporters. But following China’s lead by “escalating our own export financing in response” would indeed be very costly.

And how far should we go in response? What if China decides to finance every export? Does that mean the United States should do the same? Far from being a “necessary evil,” it would be nonsense for the United States to respond to distorting and economy-weakening policies abroad by imposing the same policies on our own economy. Doing so may well be different from a tariff war, but it is still very damaging.

The ‘costless’ myth | Brannon and Lowell assert that closing the Ex-Im Bank would “save virtually no taxpayer money.” The fact that the bank is “self-sustaining” and, since 2005, has returned $3.4 billion to the U.S. Treasury are common talking points of bank supporters such as the U.S. Chamber of Commerce.

Suggesting that the bank is costless ignores the very real distortions introduced into the economy whenever the government intervenes. In this way the bank is analogous to regulations, which impose costs on businesses and consumers even if they do not show up as a line item in the federal budget. So we should first acknowledge that a lack of fiscal outlay does not mean a policy decision or government action is “free.” Official export credit and other subsidies promote exports only by removing resources from the productive, more efficient sectors of the economy, thereby distorting and weakening them. Efficient economic activities that have met market tests will contract so that resources can be moved to less efficient politically directed activities.

A recent analysis by Jason Delisle and Christopher Papagianis, researchers at the economic policy group e21, exposes claims about the bank’s financial position as “almost surely an accounting illusion” based on official federal government accounting rules that discount or exclude altogether the cost of market risk. (See “Critics of the Export-Import Bank Have a New Weapon at Their Disposal: Fair-Value Accounting,” eco​nom​ic​s21​.com, March 29, 2012.) They estimate that if fair-value accounting rules are applied to Ex-Im Bank figures, then the bank’s long-term loan guarantee program is operating at a loss, not a profit. The subsidy to borrowers, according to Delisle and Papagianis, amounts to about 1 percent of the amount borrowed, which translates to a loss for taxpayers of about $200 million in 2012. If you include the losses on smaller Ex-Im loan programs, which even government accounting rules show are subsidized, then the subsidies provided by the bank are even higher.

There are also the potential losses should Ex-Im loans fail. If we have learned one thing from the enormous losses and subsequent bailouts of Fannie Mae, Freddie Mac, and other government-backed entities, it is that claims to be “self-financing” or even “profit-making” are to be treated with a great deal of suspicion.

Misguided notions of trade | Brannon and Lowell acknowledge that the bank’s activities are hindered by “skewed financing, political interference, and a host of management issues.” As a government entity, all of those bugs should be expected and will not be fixed by tinkering with the bank’s mandates as Brannon and Lowell propose.

Moreover, the authors display an apparent, unjustifiable bias by placing emphasis on the bank’s ability to support manufacturing jobs. There is nothing special about a dollar earned in manufacturing compared to a dollar earned in, say, services. Even the Obama administration’s former economic adviser, Christina Romer, says that politicians’ manufacturing fetish is largely baseless. The first step in preventing the sorts of proposals to “fill the political need” to promote manufacturing exports that Brannon and Lowell suggest will inevitably arise is surely to refrain from perpetuating myths about manufacturing’s supposed superiority.

The arguments advanced by Brannon and Lowell in support of their proposals for Ex-Im are unconvincing. Rhetorically opening the door to matching the Chinese (or any other) government policy-for-policy in a misguided attempt to level the trade playing field is a recipe for disaster.