The sky wasn’t quite falling, but US exports surely would. Jobs would be lost, small businesses paralyzed, American competitiveness would be dulled, and the Chinese were sure to win the day.
At least, this was our future according to supporters of the US Export-Import Bank during the debate over its reauthorization several years ago. Although many people had not heard of our official export credit agency (ECA), the taxpayer-backed financing that Ex-Im doles out to companies—small and (mostly) large, domestic and (often) foreign—apparently formed the bedrock of our economy.
We can put supporter’s claims to the test thanks to a natural experiment created by Ex-Im’s lack of quorum. Because the Bank’s board has been understaffed, it has been operating at around 10 percent of its normal firepower. We can compare the outcomes from normal Ex-Im operation to its recent standby activities to see whether these warnings were wise or reckless.
Not only the did sky stay firmly put, exports might have been helped by diminished Ex-Im interventions. The data suggest that Ex-Im supporters’ professed objectives were better achieved when the Bank was underpowered. As we’ll discuss, this evidence provides reasons for both sides of the debate to work together to limit the Export-Import Bank indefinitely.
The Ex-Im Debate In a Nutshell
The Ex-Im Bank was founded in 1934 to finance trade with the Soviet Union. Its mission has changed in tandem with geopolitical objectives throughout the years, but today, it is intended to “aid in financing and to facilitate exports of goods and services, imports, and the exchange of commodities and services” and “in so doing, to contribute to the employment of United States workers.”
It has four tools to pursue these goals: loan guarantees, working capital guarantees, direct loans, and export-credit insurance.
When not countering foreign ECA activities, the Bank is supposed to extend this assistance for deals which fall into what is called the “financing gap”—or deals which would otherwise be propitious if not for excessive risk due to things like foreign instability or private sector immaturity.
By filling this so-called “financing gap,” Ex-Im is supposed to greatly improve the posture and competitiveness of US exports, thereby boosting employment. Furthermore, Ex-Im is supposed to generate revenue for the Treasury, thereby making it a good deal for taxpayers.
Ex-Im’s charter has been re-approved by Congress time and time again. Yet as research pointed out in 2014, the Export-Import Bank’s own data contradict the veracity of the arguments it makes to justify its existence.
As de Rugy and I noted at the time, a tiny portion of overall US exports and jobs were backed by Ex-Im activities. Most of the Bank’s largesse went to supporting giant companies, not “small businesses.” This put the vast majority of US unsubsidized businesses and exporters at a competitive disadvantage, weakening our overall trade posture. Furthermore, the Bank’s records show that most of their activities were not even in line with their mission to counter further export credit agency activities. And the risk exposure for taxpayers topped hundreds of billions of dollars, while a federal accounting report found the Bank would cost taxpayers $2 billion over the decade.
Although strong theoretical foundations and empirical evidence supported our position, we did not have a counterfactual at the time. That is, we could not point to what would have happened if the Bank did not exist.
We now have data that shed light on the question of the counterfactual. In 2015, Ex-Im lost what is called a “quorum,” or the minimum number of appointees needed to approve certain transactions. Without quorum, Ex-Im is constrained by a $10 million cap on lending—only 10 percent of its prior authority.
We can compare data for years in which the Bank had its full-fledged quorum (and financing) authority prior to FY2014 to its quorum-less, limited activities from FY2015 to FY2018 to get an idea of what the world would look like without the Bank. As de Rugy and Leventhal point out, the lending cap has had the effect of better aligning the Ex-Im Bank’s performance with its charter.”
Impact On Exports
Bank supporters argue that Ex-Im is a key tool to support US exports. Without its financing activities, they say, many otherwise profitable export deals would go untapped, thereby significantly limiting overall exports.
As we noted in 2012, the share of exports supported by the Export-Import Bank has always been scant. From FY2009-2013, less than two percent of the total value of US exports benefited from Bank financing.
Further, economic theory suggests that export credit financing is unlikely to affect the overall balance of trade. At best, Ex-Im finance merely redistributes export opportunities away from unsubsidized firms and towards those lucky enough to benefit from Ex-Im largesse. Rather, a nation’s exporting output is generally determined by more potent macroeconomic factors, like savings to investment ratios.
Thus, overall exports were unlikely to decline, and could even increase as market capital was allowed to flow to the most profitable (rather than the most politically favored) trade opportunities.
The data appear to bear this out. Bank activities dropped 83 percent between FY2015 and FY2017. Yet exports saw no major change over this same timeframe.
The International Trade Administration reports $1.6 trillion in goods exports in 2014 and $1.5 trillion in exports in 2015—both of them roughly equivalent to the post-recession average annual exports of $1.5 trillion.
Data from the Federal Reserve Bank of St. Louis are even more positive, reporting $2.4 trillion in real exports of goods and services in 2014 and $2.5 trillion in 2017. In these projections, exports may have even been slightly boosted.
Either way, a sharp reduction in Ex-Im activities is not associated with a sharp drop in exports. The data show little change in either direction. This provides evidence that the Export-Import Bank is not a critical determinant of US exporting outcomes.
Why have exports been so stable? One explanation is that private markets have taken over from Ex-Im.
Take Boeing, one of the Bank’s primary beneficiaries, for example. In FY2014, the value of Ex-Im aid to the aerospace giant was over $8 billion. By FY2017, this fell to $19 million. Yet the loss of several billions in Ex-Im financing value did not mean that Boeing hurt for trade opportunities. Rather, the company focused on “attracting new capital and innovative ways to access new financial markets.”
In other words, the company became more competitive and its financing more efficient. Because of this, “airlines and lessors are expected to have some of their lowest historical costs of financing.”
Impact On Allocations
The optics of a taxpayer-funded institution doling out benefits to some of the world’s largest companies are not great. It is not surprising that the Export-Import Bank highlights its small business support to the public. Its annual reports regularly extol small business engagement measured by portion of the total number of deals granted to small businesses.
In FY2013, for instance, the Bank reports that 89 percent of total transactions were granted to small businesses. But only 19 percent of the total value of financing went to small businesses. Not to mention that Ex-Im’s definition of “small” is not really that small: this number includes firms that can earn $7 million in annual revenues.
The vast majority of pre-quorum financing was granted to a few major corporations: companies like John Deere, Caterpillar, and Boeing. Until FY2015, 65 percent of the Bank’s activities benefited just 10 large companies.
The Bank earned its nickname—“Boeing’s Bank”—fairly. From FY2007-2014, 70 percent of all loan guarantees and 35 percent of total authorizations went to Boeing.
Because the quorum has capped the size of deals that the Bank can approve, it has necessarily limited the number of deals that usually go to large corporations. Ironically, restraining the Bank has made it look more like the entity that primarily deals with small firms that its reports would suggest.
In FY2014, only 25 percent of Ex-Im’s financial commitments went to small businesses. Boeing alone constituted 40 percent, and all other non-small businesses comprised the remaining 35 percent.
By 2018, small businesses constituted 66 percent of Ex-Im’s financial commitments—not quite at the misleading 89 percent measurement by transaction, but still closer to how the Bank represents itself. Other big businesses made up 34 percent, and Boeing received no support from Ex-Im at all.
One Caveat: Transparency
There is one area in which Ex-Im has degraded since the loss of quorum: transparency.
We have criticized the Bank for its inconsistent or unclear data policies for years. Ex-Im Bank datasets routinely contain hundreds of critical fields—things like assistance recipients and countries—that simply say “N/A” or “multiple.” This does not give the public a good idea of what their tax dollars are being put towards. Nor does it allow us to ensure that the Bank is following its own rules and avoiding corruption.
Reporting has gotten worse since 2015.
In FY2014, the Bank reported that 24 percent of all financing benefited exports directed to “Multiple — Countries” or a “Private Export Funding Corp.” By FY2017, this proportion rose to 65 percent of financing.
Another odd quirk of Ex-Im datasets: their spreadsheets often report that exports are being sent to the United States. Obviously, if something is purchased and sent within the US, that is not an import. It is just a domestic transaction. So it is confusing that the Bank would list “exports” to the United States in its data. Is this a mistake? A technicality? The public does not know.
In FY2014, the portion of export aid to “exports” to the US was 12 percent. By FY2017, that number had doubled to 25 percent.
It’s Time to Wind Down the Export-Import Bank
The Export-Import Bank and its supporters argue that its financing is critical to support US exports, jobs, and small businesses. Yet as we have seen, when the Bank is operating well below capacity, those objectives may actually be better met.
It can be hard to make the case for reform when a government program is operating. Even the best-grounded economic theory lacks the immediacy of existing anecdotes.
The Export-Import Bank’s lack of quorum provides a rare and welcome glimpse at a world without its interventions. Exports are stable, private financing becomes more innovative and makes exporters more competitive, and fairness is restored to the playing field.
As de Rugy and Leventhal conclude, the Export-Import Bank is far preferable at this diminished level of activity. To maintain these improved outcomes, “it would seem prudent to make it standard policy should the bank be reauthorized.”