What Congress Needs to Know About Export Finance

One of the encouraging developments under the Obama administration has been its willingness to use export credit financing more aggressively to ensure that U.S. companies, where they are otherwise competitive, do not lose out on export contracts abroad. The expansion of lending by the U.S. Export-Import Bank has been part of the administration’s push to double exports under the National Export Strategy. But inaction by the Congress could undermine even the modest role that it currently plays.

The Ex-Im Bank is one of those government agencies that is hard to love. It is periodically denounced, with some justification, as “corporate welfare,” and is colloquially known as “Boeing’s bank” because the aircraft manufacturer is the single largest beneficiary of Ex-Im support. In an ideal world, it would not exist: export contracts would be won solely on the basis of low-cost, high quality products and commercially available financing.

But in the real world, there are many countries, as well as companies with close ties to governments, that are able and willing to offer cut-rate financing in order to win big contracts. The gain from these deals is not just jobs and revenue, but often a “first-mover” advantage as well. A company that wins the first contract to build planes for a foreign airline or rail cars for a foreign rail network, for example, is often assured a reliable stream of future orders.

One of the misunderstandings about export credits is that they are a drain on taxpayer dollars. In fact, the bank has been self-financing for years, relying on the good credit of the federal government to offer financing support that is below commercial terms but still profitable.

The Government Accountability Office (GAO), the superb oversight arm of Congress, delivered a major report on the bank this week, and the conclusions are generally encouraging. Like most foreign export credit agencies, Ex-Im only supports a tiny volume of overall exports, roughly one percent. But it played a significant role in propping up U.S. exports during the global financial crisis, when trade volumes plummeted in part due to the drying up of commercial financing. Ex-Im’s direct loans jumped from just $350 million in FY2008 to $6.3 billion in FY2011. In 2010, the bank’s medium and long-term assistance to exporters was behind only France and Germany.

But a number of challenges loom. The biggest is that large developing countries like China, India, and Brazil are getting into the game. China is now thought to be the largest provider of export credits in the world. Unlike Europe, Canada, and the United States, however, these countries are not party to a two-decade old arrangement in the OECD that prevents export credit agencies in these countries from offering overly generous terms. As a result, U.S. exports are facing increasingly subsidized competition.

A senior Ex-Im Bank official recently signaled that the United States will start aggressively matching financing from these countries, which is permitted under the OECD arrangement.  The bank is currently backing GE in its effort to secure a sale of 150 locomotives to Pakistan in competition with China; the railcars would be made in Erie, Pennsylvania. The goal should be to fight fire with fire and persuade these countries that there is nothing to be gained by remaining outside the OECD pact.

To match its competitors, however, Congress urgently needs to pass a new authorization bill for the agency, which failed to pass last year. The bank’s current loan exposure is capped by Congress at $100 billion, and nearly $90 billion of that is already exhausted. The issue ought to be an easy one in a still-weak economy, but the conservative Club for Growth has come out strongly against reauthorization, and is including the vote in its influential congressional scorecard. “The Export-Import Bank's actions are nothing more than market-distorting subsidies that pick winners and losers in the private sector,” the Club says. “Market forces should dictate trade flows, not bureaucrats and politicians.”

Indeed, they should. But does it make sense for the United States to be the only country pretending they do?