Last summer, a debate over the historically ho-hum Export-Import Bank of the United States (aka Ex-Im Bank) simmered over and went mainstream as a growing chorus of Republicans and many companies demanded its dismantling.
Like many government agencies, the Ex-Im Bank – which provides financing for exports of American goods and services – requires reauthorization every so often. And during the 2014 debate to do just that, some major US businesses petitioned Congress to terminate the bank, while others fought fiercely to preserve it.
Congress kicked the can down the road by offering a one-year reprieve, a stay of execution that expires on June 30. If lawmakers don’t act in the next few days, the bank and its US$140 billion in financing firepower will be lost.
Delta and Boeing are leading the fight in corporate America on both sides of the issue. Delta stands opposed, arguing the bank gives its foreign rivals an unfair advantage. Boeing, whose customers get the lion’s share of Ex-Im loans, says the bank is essential to support American jobs. The bank doesn’t cost taxpayers a dime; indeed, it makes hundreds of millions of dollars a year.
So is the bank a boondoggle that subsidizes risky foreign companies, picking winners and losers at the expense of domestic businesses, or an important (and very profitable) generator of US jobs and exports?
What the Ex-Im Bank does
Franklin Delano Roosevelt established the Ex-Im Bank’s foundations in the 1930s to provide loans and export support to Depression-era American exporters by reducing barriers to trade.
In 2014, the bank supported $27.4 billion in US exports, issued $20.5 billion in loans and sustained 164,000 jobs, while generating $675 million in profit, according to its latest annual report. This support comes in the form of loans to foreign buyers, insurance for American sellers, and loan guarantees for exporters working with private lenders.
Insurance is actually one of its most important functions. When US companies do business abroad, they take on several types of risk unfamiliar to purely domestic operations. Some are easy to manage, such as foreign exchange risk, which can be hedged in financial markets.
Other types, such as political risk, are much more difficult to insure against because of the many uncertainties surrounding it. Political risk includes things like instability, war, regulatory changes, expropriation and other legal and extralegal changes that affect in-country business operations.
The Ex-Im Bank thus steps into this breach, encouraging export sales by reducing the riskiness of selling overseas.
The case for the Ex-Im Bank
Proponents of the bank, such as the US Chamber of Commerce, claim the it supports jobs, small businesses and manufacturing in the United States.
Almost 90% of its loans support small businesses, which generated $10.7 billion in exports from these companies last year, according to the bank. That’s helped it support 1.3 million private sector jobs since 2009.
Without this support, many small businesses wouldn’t be able to compete with foreign competitors in overseas markets. Governments in many countries subsidize local businesses, while potential US customers often have a hard time securing financing to buy American products.
Most of the bank’s loans and guarantees go toward large companies like Boeing and General Electric, ensuring there’s plenty of financing for expensive and infrequently purchased items like airplanes and boats. But even that support trickles down and helps support many small- and medium-sized businesses that supply the likes of Boeing.
The case against
Opponents of the bank claim its more like “crony capitalism,” distorting free markets and picking winners and losers as taxpayers pick up all the risks.
One way they make this case is by taking aim at the Ex-Im Bank’s claimed profitability, citing a Congressional Budget Office report from 2014 that showed the Ex-Im Bank losing $2 billion over the next decade after adjusting the accounting method used, a sharp contrast with the bank’s projected $14 billion profit.
They also note that an independent Government Accountability Office reported concerns in 2013 that the overall risk of the bank’s loan portfolio could be higher than estimated and recommended changes to its forecasting model.
Opponents also suggest that if the government were not propping up these businesses, the market would redeploy resources more usefully in the classic economic sense.
As the Wall Street Journal’s editorial board declared, the fight over the Ex-Im bank is part of a larger battle over economic freedom:
"Commercial activities today are increasingly driven neither by customer wants nor by entrepreneurial judgments but by bureaucratic directives and political preferences."
Another charge is that given the amount of money on the line, its economic contribution is very small. While the 164,000 jobs the bank says it supports seems large, it’s fewer than the number of new unemployment claims filed in the last week of May alone (230,055).
Keeping the bank alive
Like other Washington debates, the reality lies between the competing narratives, and the numbers justify continuing the bank’s charter.
In terms of risk, the Ex-Im Bank has a remarkably low default rate of less 0.2%. Because so few foreign companies have defaulted on their loans, the bank has returned billions of dollars to taxpayers in interest income, $7 billion since 1992 alone. The bank expects to make another $14 billion in the next nine years.
And the CBO report uses a flawed analysis to show the bank will lose money rather than make a tidy profit. It overweights near-term losses while underweighting long-term gains by using a higher discount rate than it should. The “discount” interest rate is used to figure the net present value of future cash flows. The analysis leaves the outflows, or loans, untouched, yet reduces the value of future payments, so that even if a borrower repays in full, it would show up as a loss in the present.
As long as the Ex-Im Bank charges interest rates higher than its own borrowing rate and keeps default rates low, the bank will remain profitable for the government.
In sum, the Ex-Im Bank provides a benefit to the US economy by supporting big businesses and small ones alike and bolstering employment, especially endangered manufacturing jobs. By providing investment guarantees, the bank encourages both foreign buyers and domestic manufacturers to work together when private insurance solutions are unavailable.
Other industrialized nations provide similar services to support their own manufacturers. Cutting off an essential financial security layer will harm American businesses.
This success, at no expense to taxpayers, shows why Congress should keep the bank alive.