Sallie James of the Cato Institute has published a new policy brief, "Time to X Out the Ex-Im Bank."1 As her title suggests, James sharply questions the Ex-Im Bank’s effectiveness at promoting US exports or creating jobs. We take a differing view. Our own policy brief, "Revitalizing the Ex-Im Bank," identified several Congressionally-imposed and self-imposed policies that hamstring the Ex-Im Bank, but we believe it can contribute to President Obama’s goal of doubling US exports between 2009 and 2014. In particular, we disagree with James on four major points.
Cato places too much faith in the ability of financial markets to accurately evaluate risk, especially for big-ticket exports sold to developing countries, and particularly in times of economic distress.
James argues, "If…the private sector wouldn’t finance a transaction, it is a signal that taxpayers should not be exposed to the risk, either." By contrast, we find evidence that private banks are too risk averse when it comes to long-term credits in developing countries, particularly during financial crises.
James states that "the bank typically has made its loans, guarantees, and insurance to countries such as South Korea, China, Mexico, and Brazil—countries that have had little difficulty in attracting private investment on their own." It is true that the Bank finances large exports to these countries, and it’s also true that these countries attract large amounts of foreign direct investment (FDI). But a survey of political risks tells why private banks don’t want to commit export credits for five or ten years. What are the dangers? South Korea—North Korea; China—instability; Mexico—drug wars; Brazil—memories of hyperinflation. Moreover, Ex-Im offers export finance to countries that don’t rank as well as these stars. The Ex-Im Bank’s 2010 Annual Report shows that small developing economies make up a significant portion of its portfolio. Of the $18.4 billion of export finance authorized, $3.0 billion went to Papua New Guinea, $0.4 billion to the Dominican Republic, $0.6 billion to Ethiopia, $0.2 billion to Honduras, and $0.3 billion to Costa Rica—all countries that might have trouble attracting credit through market means alone. Costa Rica places seventy-third in Euromoney’s March 2011 risk rankings (number one is the safest ranking), and Honduras places eightieth; the rest of these countries rank below one hundred.2
Even so, the Ex-Im Bank’s lending does not appear to have shifted undue risk to American taxpayers. While the Ex-Im Bank lent $4.8 billion in 2010 to countries that placed below sixtieth in Euromoney's rankings,3 as James recognizes, Ex-Im’s default rate is less than 2 percent. These figures suggest that the Ex-Im Bank plays a large role in facilitating exports to countries that encounter reluctance from private banks but nevertheless are not "bad risks." Judging by its low default rate, the Ex-Im Bank's risk assessment seems more correct than the private market.
James downplays the importance of official export finance during economic troubles. According to Mora and Powers (2009), the world experienced a 12 percent drop in new trade finance between the second quarter of 2008 and the second quarter of 2009. In fact, trade finance was the second worst calamity to depress global trade performance according to the business survey cited by the authors. The worst calamity, according to the survey, was "falling international demand"—another way of saying the Great Recession. The recession itself was not amenable to an instant fix, which left a boost in trade finance as the single most rapid policy step that could be taken to revive exports. In fact, Mora and Powers declare that additional official trade finance, announced at the April 2009 G-20 meeting, was an "important reason for the recovery of trade financing."
James discounts the "War Chest" argument for official export finance. We disagree.
The "War Chest" argument posits that Ex-Im’s capability should be strengthened so that the United States can respond when official finance offered by other countries violates the principles of fair competition. James argues that the share of Ex-Im's portfolio devoted to countering unfair subsidies abroad is relatively small; that other OECD countries have already sharply reduced their official export credits as a share of total exports; and that multilateral negotiations to curtail export finance competition may succeed even without the leverage of a war chest.
Successful multilateral negotiations that include the BICs (Brazil, India, and China) are certainly a superior option to tit-for-tat retaliation. Without sufficient leverage, however, it is difficult to see what will bring China and India to the negotiating table. (Brazil may be more amenable.) Countries outside the OECD Arrangement for Official Export Credits currently enjoy an advantage: They reap the benefits of OECD self-discipline without adhering to the code themselves. While joining the OECD Arrangement would put a floor under their official export finance terms, the BICs cannot see much to gain for themselves. OECD countries can alter this calculus by using their own "war chests" to match offers from non-OECD countries that violate OECD guidelines.
We disagree with James’s reasoning that, since the Ex-Im Bank finances a small share of US exports, it should be dismantled.
While the Ex-Im Bank funds only a small portion of US exports (around 2 percent), the right response is not to X-out the Ex-Im Bank, but to increase its scope to cover around 5 percent of US exports, emphasizing goods and services that the United States makes best (heavy and sophisticated equipment, power plants, aircraft, and business services) and fast-growing markets where the United States is underrepresented. Gianturco (2001) argues that official export credit agencies can signal to other lenders the merits of lending on certain products and to certain countries, correcting for market failures discussed above. We have recommended that Congress should raise the Ex-Im Bank’s authorization cap from $100 billion to $200 billion; moreover, to speed up transactions, Congress should lift the statutory threshold for Congressional notification of Ex-Im Bank deals from $100 million to $400 million.
Finally, we do not agree that dollar appreciation induced by Ex-Im Bank finance essentially nets out job gains attributable to supported exports.
Echoing orthodox free-market reasoning, James declares that, on account of induced dollar appreciation, "Some jobs are created in the export sector, while some are lost to import competition and some to reduced sales among unsubsidized exporters. The cumulative impact on employment is indeterminate, but is not likely to be strong in either direction."
This line of reasoning opens up a long debate, well beyond the purview of our short note. Suffice it to observe that we do not agree that the dollar exchange rate alone determines the volume of US exports or the size of the US trade deficit, nor do we agree that free markets are sufficiently self-regulating to ensure a constant and low rate of unemployment. If these propositions described the American economy, the United States would not be under-exporting compared to Germany and Japan, nor would US employment be stuck at 9 percent-plus. Experience reveals that markets alone do not move exchange rates in the elegant equilibrating fashion beloved in textbooks and the Cato Institute. If that were so, the United States would not be approaching its eleventh year of trade deficits exceeding 3 percent of GDP.
Export-Import Bank of the United States. 2010. Annual Report 2010. Washington, DC: Ex-Im Bank.
Gianturco, Delio E. 2001. Export Credit Agencies: The Unsung Giants of International Trade and Finance. Westport, CT: Quorum Books.
Hufbauer, Gary, Meera Fickling, and Woan Foong Wong. 2011. Revitalizing the Ex-Im Bank. Policy Brief 11-6. Washington, DC: Peterson Institute for International Economics.
James, Sallie. 2011. Time to X Out the Ex-Im Bank. Cato Trade Policy Analysis No. 47. Washington, DC: Cato Institute.
Mora, Jesse, and William M. Powers. 2009. Did Trade Credit Problems Deepen the Great Trade Collapse? In The Great Trade Collapse: Causes, Consequences and Prospects, ed. Richard Baldwin. London: Centre for Economic Policy Research.
1. Cato Trade Policy Analysis no. 47