Ex-Im "Reform" Documents Look Like More of the Same Crony Capitalism
It has been disheartening, though not completely surprising, to watch the Republican party move from being the driving force behind terminating the crony capitalist agency known as the Export-Import Bank to a party that will do anything to not step on the toes of the president. Mr. Trump used to think Ex-Im was corporate welfare too, but he now would like to use the Bank as a national security tool to compete with China.
What has been surprising is just how acquiescent Republican senators have been to the president’s pivot to embrace Ex-Im. Take a look, for instance, at the list of those who voted in favor of the nomination of Kimberley Reed as the new Ex-Im head. That vote effectively brought the agency back to life after a four-year hiatus. You will find the names of senators who supposedly are opposed to Ex-Im.
This recent quote by Senate Banking Chairman Mike Crapo (R-ID) is particularly noteworthy, as he states he is “looking at every angle” to reauthorize Ex-Im and—wait for it!— he will even consider whether to attach a ten-year reauthorization to a short-term funding bill:
“If it is able to be included in the [continuing resolution (CR)], the question becomes whether it’s long-term or a multiyear reauthorization or whether it is simply reauthorized for the term of the CR.”
I guess that sounds better than saying: “I am thinking about extending Ex-Im funding to benefit a handful of politically-connected corporations for ten years while the funding for the rest of the government budget will potentially expire at the end of the short-term CR.” That would be crazy!
More worrisome, however, is this recent comment by Sen. Pat Toomey (R-PA), who has been a fervent opponent of Ex-Im and a rare politician who demanded serious and meaningful agency reform. He said:
"Yesterday, the Export-Import Bank announced that it is accepting public comments regarding the economic impact of certain activities and lending protocols. I remain a skeptic of the Ex-Im Bank, but this is a constructive step that may lead to ensuring that the Bank does not crowd out private financing or harm domestic companies that do not receive Ex-Im support. While other important reforms are essential, Chairman Reed made a commitment to be a reformer at the bank and I commend her for beginning that process. I look forward to continuing to work with her as reform efforts progress."
The senator seems to think that two recent Ex-Im “reform” documents about improving how the agency does economic analysis and approval (called “economic impact procedures” and “additionality standards”) will actually address Ex-Im’s major issues. He also seems to believe that these documents are further evidence that Ms. Reed will be a reformer.
I have looked at the documents, and unfortunately have concluded that these “reforms” will change nothing at Ex-Im. Rather, they could just provide cover for the agency to continue doing what they have always done. No changes means that you can kiss goodbye the idea that Ex-Im could be effectively used against China. Incidentally, this is a goal I don’t agree with, but one that is often used to justify reviving the Bank.
A Bit of Background
During Ms. Reed’s confirmation hearing, Sen. Toomey asked her to confirm the following bolded promises (my commentary follows each promise):
- Improve the transparency at the Bank: The Bank’s data, reporting, and accountability leave much to be desired;
- Improve protection for domestic companies from economic harm that might arise from Ex-Im Bank financing their foreign competitors: Ex-Im gives cheap loans to foreign companies which end up competing against unsubsidized US companies; this includes foreign airlines, and mineral and energy companies;
- Ensure that Ex-Im is not crowding out private financing options that would otherwise be available: Is private funding actually available? The existence of foreign government export financing is no argument to do the same if there is private sector funding available; and
- Work with the committee to meet statutory requirement that the US negotiate a reduction in global export credit authorities: Ex-Im should negotiate with its foreign counterparts to multilaterally disarm.
Reed responded “yes” to all of these questions. But based on the reform documents put out so far, she does not appear serious about points two and three.
Economic Impact Analysis
First, let’s look at the document that is supposed to set economic impact analysis procedures that make sure the agency doesn’t harm US companies by financing their foreign competitors. This is a big concern, since Ex-Im reduces the borrowing costs of the foreign airlines they finance by $20 million per plane, giving them a real advantage over domestic companies.
But there is nothing there, except a call for public comments on what the economic impact analysis should look like. Better yet, the deadline for submitting comments is after the date by which Ex-Im must be reauthorized: September 30th.
What difference would it make if Reed reads those comments after the Bank is reauthorized? After all, the Senate bill on the table right now (that of Sens. Kevin Cramer (R-ND) and Kyrsten Sinema (D-AZ)) makes no reforms, but provides a ten-year reauthorization. Ex-Im would get more funding to serve big companies with no risk of lacking a quorum to proceed.
The timing of the comment period means that reform-minded policymakers and the public they serve have no leverage to make sure that business as usual doesn’t continue at the Bank. That does not seem like a “constructive step” to me.
For real change, policymakers should insist that true reforms are put on the books before any reauthorization. If not, nothing will change. The Bank will continue to extend loans to large and successful foreign competitors of domestic firms, mostly in higher-income countries. It will continue subsidizing state-owned enterprises in China, like Air China, which data from the last four years prove would keep buying these planes without Ex-Im support anyway.
For now, one of Ex-Im’s top priorities is to compete with the EU-based Airbus. (After all, Boeing benefitted from 40 percent of Ex-Im activities, and in normal times, Ex-Im backed one out of nine Boeing planes.) But it’s unclear how this helps the US compete with the Chinese government in strategically important regions like sub-Saharan Africa. For now, Ex-Im largesse mostly seems to prop up Boeing’s stock price rather than being a foreign strategy tool against China.
Now let’s take a look at the additionality standards. This is a way to try to estimate the value added by Ex-Im intervention in a market in comparison to what would happen without any Ex-Im finance.
One major criticism of Ex-Im financing is that the loans mostly go to companies in high income countries that should have plenty of access to capital. These companies, of course, love Ex-Im handouts because it reduces their borrowing costs. But these companies would have made their purchases anyway, as the research shows.
In spite of what Ex-Im tries to argue, the government financing itself is not the reason for the transaction. In fact, what we see over and over again is that a foreign company first makes the decision to buy an American export and then makes the financing decision.
The same is true of the foreign companies in supply chains of US exporters like Boeing. In spite of what foreign ECAs are saying, and what Ex-Im likes to repeat to justify the need to countervail foreign subsidies (see page 35 in Ex-Im’s Competitiveness Report for 2018), Boeing makes the decision to buy some of its parts from, say, an Italian supplier, and then it secures the government financing with SACE, which is the Italian Ex-Im.
In other words, whether at home or abroad, the procurement comes first and the financing comes later. If financing was the factor that drives these multimillion-dollar investments, we would have seen Boeing move its US suppliers away from the US when Ex-Im financing was reduced so dramatically over the last four years. It didn’t. Nor did companies like Emirates Air change their purchasing patterns amidst this drought in ECA incentives. They didn’t because ECA financing is just gravy; not a precondition for viability. That reality should make legislators suspicious of the vague quotes in Ex-Im competitiveness report arguing the opposite.
So there are major conceptual problems with Ex-Im’s stated reasons for being. But the problem is even deeper than that. Until now, Ex-Im made almost no effort to check the value added by its activities. It didn’t even try to verify that companies applying for Ex-Im financing actually needed financing due to lack of private financing available. All it did was ask applicants to tell Ex-Im why they wanted the financing without asking them to provide evidence or supporting documents.
Ex-Im’s Inspector General (IG) makes this problem very clear in this report. The IG reports that Ex-Im’s “additionality policy” is basically a box that applicants check to say they had to compete with ECA-funded exporters abroad, or they couldn’t get credit themselves, or they faced some business risk (see the application here on page seven).
This is an incredibly light requirement that means that pretty much anyone who wants to get financing can get it by lying on this document. The IG goes on to explain that of the 29 transactions they studied, only “three of the transactions reviewed contained underlying support for the determination of additionality provided evidence of their claims (check page 12 here).
The report goes on that “for the remaining 26 transactions, Bank staff explained that in most cases confirmation of additionality was done verbally over the phone.” But then the IG reports notes that “we did not find documentation in the credit files to support discussions between Bank staff and the applicants for the transactions.”
Think about it for a minute. Would your bank let you take out a big loan without any verification just because you check the “I need it box” on the application? This does not show good stewardship of the taxpayer dollars on the line should the Bank’s portfolio go south.
A “Reform” That Reforms Nothing
Clearly, the lack of economic impact analysis and incredibly lax additionality procedures reflect poorly on the Bank. In response to the IG report, Ms. Reed put out revised guidelines for Ex-Im procedures. But these new guidelines looks more like a PR effort than a real step towards real reform.
The “reforms” (Ex-Im uses scare quotes in the report for some reason) can be found on page five. There are more checkboxes, and a few lines to provide details, but still no requirements for things like “hard evidence.” The list of some of the entities eligible for financing is bolded below and my commentary follows each item:
- Exporters facing competition from one or more companies from OECD countries: So, any company that has competitors abroad;
- Exporters whose competitors get ECAs financing: This doesn’t tell you anything about whether private financing is available and necessary;
- Exporters whose foreign buyer faces a regulatory burden that may hinder the availability of credit: There are many such regulations everywhere, so everyone faces similar constraints. Also, to the extent that it affects lending, there is still massive amounts of private credit available, as we can tell from the expansion of lending after Ex-Im went dormant;
- Exporters for whom ECA support is a pre-requisite requirement: There is no evidence that this is a major problem, as most exports, including exports similar in all dimensions to the ones back by Ex-Im, get by without export credit financing. Plus, the last four years without Ex-Im had no impact on exports what so ever. (The Ex-Im report is an unbelievable read for those who want a better idea of how misleading the process can be. On page 34, they have a picture of request for proposal that says that export credit financing is required for the procurement to go through. We have no idea from looking at these how representative these requests are. The insinuation here is that everyone asks for ECA financing before granting the procurement, but how can we know? The report gives no context and no indication of how statistically representative these three examples are.)
But this one has to be my favorite:
- The reason why the purpose of Ex-Im Bank support is not, or cannot be identified: All right then, so everything goes! I am not even sure what this means.
What I would like to know is this: If the goal is to reform Ex-Im, which current deals would have been rejected with this new list? My guess is none. All stays exactly the same, and Ex-Im continues to do what Ex-Im had always done.
If that’s the case, how will the president transform an agency that was never design to compete with China—its business model is to serve all commerce mostly in higher-income countries—into one that does? Instead, it will be reauthorized, members of Congress and the president will pat themselves in the back for a job well done, and in ten years we will find out that nothing has changed.
A Tactical Error?
Many Ex-Im supporters, the president included, believe the Bank can be a tool to compete with China. Again, I don’t personally agree with this goal, but I will point out that if that is why Republicans have suddenly put their support behind the Bank, the current structure of Ex-Im is wholly unsuited to that purpose.
If Ex-Im is to challenge Chinese trade, it should be used to help exporters compete where China is investing: mostly in relatively lower-income countries. Yet as I mentioned, Ex-Im financing mostly goes to higher-income nations. And there is nothing in Ms. Reed’s list of “reforms” that indicates the destination of Ex-Im funding will change.
If Ms. Reed and Ex-Im are serious about fulfilling promises to reformers like Sen. Toomey, the Bank should institute real changes that will bring its activities closer in line with strategic objectives. Specifically, the Bank should:
- Demand evidence that there isn’t private sector financing available;
- Demand evidence that the existence of foreign ECA financing means no private financing is available;
- In keeping with the transparency commitment that Reed made to Sen. Toomey, demand that that Ex-Im actually make its additionality determinations public so taxpayers can assess whether Ex-Im approaches good policy outcomes;
- Demand that Ex-Im addresses the issue of sector concentration. Right now, 40 percent of the funding benefits Boeing. Nothing in what Reed has put forward will change that. It means that Ex-Im won’t be helping exporters compete in Africa or the Bahamas against Chinese companies. Ex-Im will continue to lower the borrowing cost for rich airlines in higher-income countries. Ryan Young at CEI proposes a ten percent cap, which sounds reasonable. If firms that do not need the support face such constraints, then Ex-Im will be forced to seek out firms that may have a harder time finding private financing. If the last four years proved anything, it is that Boeing and others do not need Ex-Im to surive; and
- Demand that the economic impact analysis that shows that each Ex-Im deal is not hurting domestic businesses be made public and be circulated to those domestic businesses affected by the decision. That too helps with Reed’s transparency commitment.
Real Reform: Empower Ex-Im to Deescalate ECA Financing
As I mentioned earlier, the last four years have seen a real decrease in the use of ECA financing for the aircraft sector because Ex-Im and some of its European counterparts were out of the market. As a result, the private sector stepped in in a big way to fill in the gap.
There were some new entrants into the market, some innovation, and plenty of credit available. One requirement for the reauthorization should be that the Ex-Im president, with the Secretary of Treasury, within 30 days of reauthorization notify the other ECAs that the US will renegotiate the use of ECA credits down to account for all the progress made in the private sector. The statutory requirement to negotiate a reduction in the reliance of ECAs globally has been in the Bank’s charter for years. But nothing has been done on that front. It is time that changes.
This would meet the promise Ms. Reed made to Sen. Toomey that she will work with him and the committee to achieve that goal.
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