The Export-Import Bank Returns: A Q&A with Mercatus Scholars
In a political climate characterized by trade concerns, the Export-Import Bank’s mission—promoting US exports by financing deals between foreign buyers and domestic suppliers—has rarely been more relevant. President Trump has recently nominated Kimberly Reed, a long-time presence in the DC finance world, to head the Bank. The controversial federal corporation handles billions of dollars every year, but Mercatus scholars have found that the majority of this financing goes to a small but politically powerful group of companies. Other Mercatus studies have examined the economic impacts of the Export-Import bank. To learn more, we sat down with two Mercatus experts, Veronique de Rugy and Matthew Mitchell, to chat about the Bank and the future of its policy.
The Export-Import Bank has been out of the news since former Representative Scott Garrett failed to receive Senate confirmation to the post of bank president back in December. What, if anything, has changed in its policy since then?
Veronique de Rugy: Nothing has changed since the Ex-Im Bank's charter was reauthorized at the end of 2015. While the Bank is back in business, it has only operated at sixteen percent capacity. That's because the Ex-Im Bank's board has been without a quorum and that has meant that it cannot make loans or loan guarantees in excess of $10 million—the vast majority of its business. That situation hasn't changed since the failed attempt to nominate Scott Garrett as the president of the Bank.
For some time now, the Export-Import Bank has lacked the three board members necessary to approve large financial deals. How has that constraint on the Bank's activities impacted its beneficiaries, as well as the market as a whole?
VD: The main effect of the Bank's lack of quorum is that Ex-Im has had to focus on smaller deals, mostly benefiting smaller businesses. As a reminder, sixty five percent of the Bank's activities benefited ten giant manufacturers. That means that for all the attempts to justify Ex-Im as an agency serving small businesses, the reality is that before it lost its quorum, it was very much in the big business business. Worth noting too is the fact that foreign buyers resembled their US sellers in that they were big companies with plenty of access to the capital market. They are also often state-owned.
Matthew Mitchell: We shouldn't be surprised that even without buyer financing aircraft manufacturers are experiencing record sales. For the first time ever, Boeing—the beneficiary of forty percent of all ExIm's activities—is poised to deliver more than 800 planes in one year and the aircraft maker's stock is trading at two and half times its value in 2015—when the Ex-Im Bank was last able to make large loans. Exporters are doing fine without Ex-Im.
The US has recently imposed tariffs on a number of countries, most notably China, because of concerns that the US trade deficit is too wide. Could the Export-Import Bank help narrow the trade deficit? Is that something that it should do?
VD: If Ex-Im Bank were to back a loan to a Chinese firm so that it could buy more Caterpillar tractors then, at least in the short run, it would narrow our bilateral trade deficit with China (assuming that China would not have bought the same amount of US products anyway). But it wouldn't necessarily change the overall balance of trade. The academic literature has shown repeatedly that export subsidies like Ex-Im do not affect the balance of trade. As Sallie James explained in a paper called Time To X-Out The ExIm Bank, "A country’s trade balance is driven largely by underlying macroeconomic factors, such as the ratio of savings to investment. Export promotion programs for certain goods—marketing programs for certain commodities, say—may have beneficial effects for that industry but cannot affect the trade balance overall."
MM: That's right. What Ex-Im does is subsidize foreign consumers and domestic producers at the expense of American consumers (who would pay higher prices for their own Caterpillars), American borrowers (who would miss out on credit), American taxpayers (who would foot the bill if the Chinese firm were to default), and any American company that competes with the Chinese firm. By shifting resources away from non-subsidized actors toward subsidized ones, Ex-Im—like all other export subsidies—reduces economic activity.
Moreover, it would do all of this for the sake of nothing because a bilateral trade deficit is not, by itself, a bad thing. With the exception of our employers, each of us has a bilateral trade deficit with just about every company with which we deal. And it is no different with countries.
VD: It is worth noting a significant contradiction in the Trump Administration's simultaneous support for Ex-Im export subsidies and tariffs on Chinese imports. When Ex-Im was operating at full capacity, China was the top foreign beneficiary of Ex-Im deals. While the administration may think that tariffs and Ex-Im export subsidies would promote US exports and penalize Chinese imports, what this policy combination really does is subsidize Chinese consumers and penalize US consumers (which include US manufacturers importing inputs and raw material to run their businesses). It is counter-productive at best and self-destructive at worst.
The recent trade disputes have been partially motivated by the perception that other countries engage in unfair, anticompetitive behaviors. Do the Export-Import Bank's counterparts in other nations fit this stereotype? Does the Export-Import Bank help bring parity to trade by counteracting foreign influence?
MM: Yes; the Export-Import Bank's counterparts do fit this stereotype because all export subsidies are unfair and anticompetitive. But notice: all export subsidies are also self-destructive. When China chooses to subsidize its exports through the Export-Import Bank of China, it is choosing to favor a few of its domestic producers at the expense of many more of its domestic consumers, taxpayers, borrowers, and other firms. The costs outweigh the benefits for China and yet they continue to do it.
China could set fire to millions of Yuans worth of assets. It wouldn't be wise for us to start own fire just to mimic them.
Critics of the Bank often allege that it acts as a taxpayer-funded subsidy of large corporations, but the Bank's deals usually generate a surplus. If it is bringing in money, why the calls for reform?
MM: Well, for one, the surpluses aren't guaranteed. In the past, the Bank has had to get infusions of cash from American taxpayers. And if Bank executives think that future surpluses are guaranteed, then the US government should sell off the Bank's assets for a profit, shielding taxpayers from this risk once and for all.
But taxpayer risk is really just a small fraction of the costs that the bank imposes. As we've already mentioned, it also imposes costs on domestic borrowers, competitors, and consumers. It may even harm the beneficiaries of its largess if it shields them from market discipline, causing them to lose their competitive edge. And it has subtle but discernably negative effects on our culture: it encourages the perception that economic favoritism is legitimate, that it is just and fair for the US government to tilt the economic playing field in favor of some and against others. This not only tarnishes the reputation of government, in tarnishes the reputation of American free enterprise.
In recent months, Congress seems to have taken a backseat to the executive branch when it comes to trade issues. What reforms can and should Congress enact as it concerns the Export-Import Bank?
VD: Congress could order the executive branch to sell off the Bank and all of its assets.
What changes in the Bank can be made by the Bank's President or the executive branch without legislation?
MM: If it were legally permissible, I'd recommend following the lead of Alfred Kahn. In 1977 he was appointed the head of a federal agency, the Civil Aeronautics Board. Like the Export-Import Bank, the CAB imposed costs on broad segments of the population in order to benefit a narrow set of special interests (the airline industry). Kahn immediately set about dismantling his own agency.
Fill in the blank: Whether it's Reed or someone else, the next leader of the Bank should focus on _______."
VD: Developing legal and sound proposals to privatize the bank and its operations.
MM: I couldn't agree more.
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