NEED TO KNOW: ECONOMY

Fringe Benefit

The Export-Import Bank isn’t the boon the White House insists. But it could still help thwart competitors like China.

March 22, 2012, noon

COR­REC­TION: An earli­er ver­sion of this story mis­stated the chain of com­mand for the Ex­port-Im­port Bank and the Com­merce De­part­ment. While closely re­lated and in­ter­act­ive, the bank does not re­port to the de­part­ment but to the pres­id­ent.

The Ex­port-Im­port Bank is fight­ing for its life. The tiny arm of the gov­ern­ment’s in­ter­na­tion­al trade sys­tem that fin­ances big and risky trade is un­der at­tack in Con­gress, where the Sen­ate last week de­feated a meas­ure to reau­thor­ize its fund­ing. The Obama ad­min­is­tra­tion de­fends the bank as a ne­ces­sary tool in its quest to double ex­ports by the end of 2014. But in truth, the bank is not as es­sen­tial as the White House as­sumes. And if it’s worth sav­ing, it’s not for the reas­on the White House sug­gests.

Ex­port cred­it agen­cies such as Ex-Im, which provide gov­ern­ment guar­an­tees to re­duce the risk of in­ter­na­tion­al com­merce, are a staple of glob­al trade. Amer­ica’s De­pres­sion-era in­sti­tu­tion steps in when busi­nesses want to make deals abroad but in­vestors are too skit­tish to bet on them — or when com­pet­i­tion for a for­eign con­tract is so in­tense (or so risky) that the U.S. bid­der needs some ex­tra in­cent­ive to prove that it is a bet­ter or more stable sup­pli­er than its rivals. All of this costs the gov­ern­ment noth­ing, be­cause Ex-Im backs in­ter­na­tion­al trade deals through a self-fin­an­cing sys­tem: Fees and in­terest re­coup more than 100 per­cent of every loan.

It’s a kind of trade sub­sidy, but sup­port­ers say that without it, the United States would fall be­hind. Every ma­jor ex­port­ing na­tion has an agency that does the same work — and they of­ten do it big­ger and bet­ter. Of­fi­cial U.S. sup­port can be the key to con­vin­cing skep­tic­al buy­ers that an Amer­ic­an com­pany is the best choice. Even in coun­tries where the United States is not held in great es­teem, a stamp of ap­prov­al from the world’s only su­per­power can turn even a small deal in­to a sure thing. That’s why power­ful busi­ness groups such as the Na­tion­al As­so­ci­ation of Man­u­fac­tur­ers and the U.S. Cham­ber of Com­merce blitzed Cap­it­ol Hill in re­cent weeks with ex­horta­tions to save the Ex-Im Bank.

But op­pon­ents (de­fi­cit hawks, lais­sez-faire types) point out that neither its mis­sion nor its track re­cord mer­its re­new­al. Ex-Im was re­spons­ible for back­ing just $40 bil­lion (2 per­cent) of the nearly $2 tril­lion U.S. ex­port mar­ket last year, ac­cord­ing to bank Chair­man Fred Hoch­berg. What’s more, about 80 per­cent of its funds went to gi­ant mul­tina­tion­als that hardly need in­cent­ives to stay act­ive in glob­al mar­kets. After all, big U.S. cor­por­a­tions wouldn’t sud­denly stop trad­ing in some iffy mar­kets if fed­er­al fin­an­cing dried up. Boe­ing would keep selling planes across Africa. Cater­pil­lar would keep send­ing back­hoes to dig ditches in Costa Rica. Gen­er­al Elec­tric would keep selling com­pon­ents across the globe.

In the end, the Ex­port-Im­port Bank is noth­ing but a pro­vider of cor­por­ate wel­fare, ar­gue Grover Nor­quist and his aco­lytes in think tanks and on the Hill. They say that Wash­ing­ton has no busi­nesses dol­ing out huge loans to help fin­ance in­ter­na­tion­al trade. The fed­er­al gov­ern­ment shouldn’t pick win­ners and losers — let alone put the win­ners on an ex­press train to big con­tracts abroad.

Yet the bank does serve one cru­cial pur­pose that no oth­er or­gan­iz­a­tion can ful­fill: It helps to deny China a hold on the world’s de­vel­op­ing mar­kets. Ex-Im’s top ex­port tar­gets in­clude Brazil, Colom­bia, In­dia, In­done­sia, Mex­ico, Ni­ger­ia, South Africa, Tur­key, and Vi­et­nam. Today, none of those coun­tries ranks among the top 10 mar­kets for U.S. ex­ports, but the Ex­port-Im­port Bank de­voted 40 per­cent of its loans to them. It fun­ded 34 per­cent of all U.S. ex­ports to Colom­bia in the months be­fore the United States ap­proved a free-trade agree­ment with that coun­try. In an in­ter­view, Hoch­berg said that the bank fo­cuses on pump­ing aid and at­ten­tion to places with the hot­test eco­nom­ic activ­ity.

The bank can also help Amer­ic­an com­pan­ies beat com­pet­it­ors that don’t fol­low the same trade rules. In 2011, for in­stance, it stepped in­to a bid­ding war for a Pakistani lo­co­mot­ive con­tract between Gen­er­al Elec­tric and a com­pany in China, which does not abide by the rules against be­low-mar­ket pri­cing set by the Or­gan­iz­a­tion for Eco­nom­ic Co­oper­a­tion and De­vel­op­ment. Ex-Im ponied up $477 mil­lion to dis­count the Amer­ic­an trains, put­ting them on the same play­ing field as the Chinese ones. The deal re­quired an OECD waiver that only Ex-Im — or some oth­er U.S. gov­ern­ment en­tity — could get.

And al­though huge cor­por­a­tions won’t quit their glob­al busi­nesses, smal­ler com­pan­ies might face real trouble without Ex-Im. The bank can be cru­cial to get­ting new trade star­ted for cash-strapped small busi­nesses. It is of­ten the only lender for com­pan­ies that want to make deals where Wall Street-style fin­an­cing doesn’t ex­ist — growth mar­kets, such as the boom­ing met­ro­pol­ises in South Asia, that aren’t con­sidered safe or aren’t mem­bers of the World Trade Or­gan­iz­a­tion. These are the spots where China is set­ting up shop.

Hoch­berg and Com­merce Un­der­sec­ret­ary Fran­cisco Sanc­hez tell Na­tion­al Journ­al that help­ing small com­pan­ies to do busi­ness in small coun­tries is part of an over­all strategy. Those con­tracts can mean a foothold for Amer­ic­an busi­nesses. If the fu­ture of the U.S. eco­nomy de­pends on ex­ports and the fu­ture of Amer­ica’s stra­tegic ad­vant­age is in ex­tend­ing its eco­nom­ic might, then Con­gress will need to en­sure that the Amer­ic­an com­pan­ies that truly need help get it.

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