THE EXPORT–IMPORT BANK SHOULD BE ABOLISHED

The Export–Import Bank of the United States (EXIM or the Bank) is a federal agency that was established in 1934 to provide export subsidies through tax- payer-backed financing to private exporting corporations, as well as to foreign companies buying U.S. exports, with the ostensible purpose of promoting American exports, creating jobs, supporting small businesses, improving U.S. competitive- ness, and protecting U.S. taxpayers.

In 1986, David Stockman, who served as Director of the Office of Management and Budget under President Ronald Reagan, wrote that:

Export subsidies are a mercantilist illusion, based on the illogical proposition that a nation can raise its employment and GNP by giving away its goods for less than what it costs to make them…. Export subsidies subtract from GNP and jobs, not expand them…. Moreover, in 1981, the EXIM’s practice was to bestow about two thirds of its subsidies on a handful of giant manufacturers, including Boeing aircraft, General Electric, and Westinghouse.1

Since then, very little has changed. EXIM operates in effect as a protectionist agency that picks winners and losers in the market by providing political privi- leges to firms that are already well-financed. By doing so, it risks taxpayer funds as it stymies economic growth. This reality is not altered by the argument that the Bank could be a weapon to fight China—an argument that rests on a misguided understanding of what competitiveness is and how it is achieved and maintained.

The Bank should be abolished.

BACKGROUND

The Export–Import Bank was created in 1934 as an export credit agency (ECA) to finance trade with the Soviet Union. It was reorganized as an independent government agency in 1945. President Franklin Roosevelt’s Executive Order 6581 gave it “the power to aid in financing and to facilitate exports and imports and the exchange of commodities between the United States and other Nations or the agencies and nationals thereof” to create jobs in the United States.2 EXIM has four main tools with which to pursue these goals: loan guarantees, working capital guarantees, direct loans, and export-credit insurance. Importantly, for four years starting at the end of 2015, the Bank became incapacitated. Lacking a quorum for its board of directors, it could not extend financing that exceeded $10 million per project. That put an end to about 85 percent of the Bank’s financing obligations. As the numbers below show, the Bank hasn’t yet recovered from that long interruption.

Total Bank authorizations in recent years have gone from $12.6 billion in fiscal year (FY) 20073 to $21.5 billion in FY 20144 to $5.2 billion in FY 2022.5 A better way to understand these numbers is to look at the amount of financial exposure the Bank has—that is, the risk the Bank takes for which taxpayers are ultimately responsible. During this same period, the Bank’s total exposure increased from $57.42 billion in FY 20076 to $112.1 billion in FY 20147 and then fell to $41.3 billion in FY 20218 and $35.4 billion in FY 2022.9

CLAIMS VS. THE FACTS

Supporters of EXIM make many claims about the benefits that our nation and citizens derive from having an Export Credit Agency. These claims, however, are not supported by the facts.

The Bank is an example of government-granted privilege. Traditionally, one of EXIM’s top 10 domestic beneficiaries is Boeing, which at a 40 percent share of total loan authorizations dwarfs the 25 percent share for all small businesses that received EXIM’s services combined.10 On the foreign side, things are not much dif- ferent: The subsidized financing largely benefits very large companies like Mexico’s Pemex, Ireland’s Ryanair, and Emirates Airlines that either collect massive subsi- dies as state-controlled entities or could easily access private financing.11 American businesses that lack political connections are put at a competitive disadvantage by their own government because they are forced to compete against both domestic and foreign businesses that enjoy access to subsidized loans.12

The Bank does not maintain or create jobs. EXIM’s supporters point to the numbers of new jobs that they claim have been created through federal spending, but the unseen effects are ignored. For example, funding for one industry or firm might take more jobs away from other industries and firms, resulting in a net job loss even though jobs are created for the financed firm. At best, it could be said that the Bank redistributes employment from unsubsidized firms to subsidized firms. However, with very rare exceptions, most exports financed by EXIM would have taken place without government support. Many companies have said so themselves;13 the procurement happens before the decision to get government support; and, as noted above, most EXIM deals go to large companies with easy access to capital. Thus, the agency is taking credit for jobs that would have existed in any event.

The Bank does not promote exports.

EXIM presidents commonly claim that the agency’s mission is to support U.S. jobs by facilitating American exports through its export-financing tools. However, trade economists have long known that export credit subsidies merely redistribute exporting opportunities to subsi- dized firms instead of increasing the net number of exports—something that also slows economic growth.14

Even more telling is the performance of the U.S. economy and American exports during the four years when EXIM lacked a board quorum (2015–2019) and was barred from finalizing deals in excess of $10 million. During that time, EXIM autho- rizations fell from $21 billion in FY 2014 to $3.6 billion in FY 2018 (adjusted for inflation).15 However, also during that time, regular big-ticket EXIM beneficiaries continued to benefit from their easy access to capital markets and still had the ability to finance their export activities.

Further, U.S. exports were utterly unaffected by the reductions in the Bank’s activities.16 U.S. unemployment fell to a level not seen in half a century, but exports soared with financing provided by commercial lenders. The only negative eco- nomic impact from EXIM’s lack of a board quorum was its effect on the Bank itself. This contradicts EXIM’s claim that its activities are crucial for the success of U.S. exporters and economic growth. Instead, it shows that economic growth is the best booster of U.S. exports and job creation and that it does not depend on EXIM subsidies.

Subsidy-boosted exports do not boost economic growth. EXIM’s primary reason for existing is to increase exports, as if more exports themselves represent more jobs and economic growth. Recent expressions of this fallacious belief can be found in a book by former EXIM President Fred Hochberg. According to Hochberg, “We know that trade, and exports in particular, can have a big impact on jobs.”17 While this is a common misconception about exports, it is one worth correcting. As trade economists know, exports are a cost to the economy: They subtract from GDP. Imports, on the other hand, add to GDP. If the U.S. could acquire all of the imports that it currently gets without exporting anything in exchange, that would be the best of all worlds. Unfortunately, one reason that foreigners are so eager

to sell us their goods is that they want our dollars to buy our debt, invest in the country, and buy our exports. That is why exports drop when overall imports drop. Exports promote U.S. economic growth only if the value of the resources used to produce them is less than the value of what we receive as imports in exchange for those exports. By subsidizing American exports, EXIM causes too many resources to be devoted to producing exports. As a result, the total value of our exports is made larger than it would otherwise be to obtain any given amount of imports. In other words, EXIM thus compels American taxpayers to subsidize foreigners’ standards of living at no appreciable benefit to the U.S.

Unfortunately, this misunderstanding and the constant glamorization of exports and their impact on jobs and growth are used to justify government sup- port for some exports (on average, 98 percent of exports are not backed by EXIM financing). It also is extremely unfair. Because capital will tend to shift from unsub- sidized companies to subsidized companies (taxpayers foot the bill if companies backed by the Bank default), unsubsidized export companies face higher borrowing costs, which could translate into fewer jobs in unsubsidized companies or lower pay for their workers.

The Bank does not promote growth by leveling the playing field. EXIM’s charter stipulates that one of its missions is to support U.S. exports with the goal of creating jobs and promoting economic growth through the provision of export financing via its loan-guarantee and insurance programs. In particular, EXIM is to intervene in cases “where such support is necessary to level the competitive playing field for U.S. exporters due to financing provided by foreign governments to their exporters.”18

As a result, EXIM for years has been focused primarily on what other countries’ ECAs are doing and how much financing they are providing.19 A reading of any of EXIM’s Competitiveness Reports shows that the Bank frames the “competitive- ness” of the U.S. economy and exporters in extremely narrow terms—specifically, as the amount of business that foreign ECAs are doing relative to EXIM. The report for 2020 features striking evidence of this mindset. For instance, lamenting the “nearly four-year hiatus” during which the Bank lacked a board quorum to approve large deals, EXIM’s leadership maintains that these years “severely hindered EXIM’s ability to support the competitiveness of U.S. export- ers.” During that time, foreign ECAs “fundamentally evolved their philosophy and substantively expanded their roles,” and “the United States must work hard to keep pace.” The Bank goes on to promise that it will “re-emerge from the years of being out of the long-term export finance business and restore its standing as one of the world’s most competitive ECAs.”20

In other words, EXIM bureaucrats appear to believe that economic growth and jobs result not from a favorable tax and regulatory environment, but from a victory in hand-to-hand subsidy combat between government banks. The Bank’s

Competitiveness Reports include a table that ranks countries by ECA financing volume. An adjacent map displays the most “competitive” ECAs around the world, implying that the U.S., which ranked eighth in terms of volume in 2019 (the year before the pandemic), is losing ground compared to more “hyperactive” (ranked higher) ECAs.21 The implication is that ECA export financing improves the overall health of the export market and thereby fuels economic and job growth—which it does not do.

Germany was the second-highest ranked OECD country on this list in 2019. While Germany had respectable economic growth at the time of the report, only 0.7 percent of its exports were backed by ECA financing. These data provide little support for the argument that Germany’s strong economic performance has much, if anything, to do with the German ECA. China by all accounts had a hyperactive ECA: It ranked first on the list in 2019. ECA-backed exports in China represented 2.1 percent of exports backed by government financing. Whatever one perceives as China’s economic successes, it is hard to argue that the main driver of China’s exports is its ECA.

The report highlights the eighth-ranked U.S. for its unusually low level of EXIM-backed exports. At the time of the report, the U.S. economy was thriving, wages and employment were up, and the country still had flourishing trade—but it was also striving when EXIM was mostly dormant. In other words, one cannot argue that the bustling economy was the result of EXIM support.

Even in countries touted as leaders in relying on ECA financing, ECA-backed exports are never more than 4.7 percent of total exports. Moreover, even that is an outlier. For 23 of the 28 countries on this list (including both China and the U.S.), the share of exports backed by ECA financing is less than 2 percent. This fact suggests that—contrary to the claims of EXIM’s advocates—ECA financing is irrelevant to the overall health of the export market as well as to economic growth. This is consistent with what economists know about the impact of subsidies on economic growth.

Consider Italy’s hyperactive ECA. In 2019, Italy was ranked first among Organisation for Economic Co-operation and Development (OECD) countries in terms of volume and was highlighted in the report as an example for other countries to follow. Yet the Italian ECA’s hyperactivity appears to have had little impact on that country’s economic growth or employment.

The Bank does not support small businesses. Most of the Bank’s funding goes to large corporations such as Boeing—a recipient of 68 percent of EXIM’s loan guarantees and 30 percent of EXIM’s overall activities.22 Over the years, 10 large domestic corporations have received roughly 65 percent of the Bank’s total assistance (it is closer to 70 percent today). More than 99.9 percent of U.S. small businesses receive no benefits from EXIM and are often placed at a competitive disadvantage by the subsidies doled out to larger competitors. In fact, the Bank’s support for small businesses has declined from $2.3 billion in FY 201923 to “more than $2.0 billion” in FY 202024 to only $1.6 billion in FY 2021.25 This decline occurred amid a pandemic that hit small businesses especially hard, and it con- tinues today.

The Bank is not a good deal for taxpayers. The Bank’s accounting practices are deficient, and the Bank miscalculates its budget savings. While it claims that its operations will save taxpayers $14 billion over the next decade, the Congres- sional Budget Office has found that EXIM programs will actually cost taxpayers $2 billion.26 Numerous audits done by the Bank’s internal inspector general also show that the Bank’s risk analyses, default assumptions, internal reporting procedures, and financial reporting practices are not reliable enough to ensure the safe stewardship of taxpayer funds and responsible management of EXIM’s vast portfolio.27

FAILING TO MEET THE CHINA CHALLENGE

These days, to get whatever expansion of government one wants or to jus- tify a new government activity, one has only to declare that more government intervention is needed to help fight China. President Trump used this argument to secure reauthorization of EXIM in 2019. Today, President Biden argues that the Bank could be a powerful weapon in the government’s geoeconomic arsenal against China.

The rationale is that this will prevent China from dominating the global market with its subsidies and will boost American jobs and manufacturing. The problem is that cynics who support such policies make no effort to adopt a serious strategic plan to achieve this goal. For instance, how can EXIM help us to fight China while state-owned Chinese companies like China Air have been some of the companies most subsidized by EXIM?28

Furthermore, it has now been four years since Congress instructed EXIM to focus on China, but there has been no funda- mental change in the way EXIM operates or the companies to which it extends taxpayer-backed financing: Deals related to the aircraft industry still dominate the Bank’s portfolio.

In addition, there is no evidence that EXIM has altered its intense focus on competing with other governments’ ECAs. If the Bank were serious about com- peting against China, it would be targeting the low-income markets where China

Top [Chinese] officials are discussing ways to move away from costly subsidies that have so far borne little fruit and encouraged both graft and American sanctions, people familiar with the matter said. While some continue to push for incentives of as much as 1 trillion yuan ($US145 billion), other policymakers have lost their taste for an investment-led approach that’s not yielded the results anticipated, the people said.33

This development is not surprising to those who understand basic economics. The goal of using EXIM as a weapon against China was a bad idea in the first place. Even if it were a good idea, for it to succeed would have required that EXIM stop serving the clients it has been serving for decades. That has not happened, and it will not happen.

CONCLUSION

The Export–Import Bank should be abolished because it wastes taxpayer money, adversely affects American businesses, and does not promote economic growth has been making its most important investments. Instead, its obsession with other ECAs has caused EXIM to direct the vast majority of its funding to large foreign companies in higher-income nations. Data available on the OECD website show that the level of ECA financing in high-income countries in 2019 was more than double the amount in low-income countries.29 The same was true for previous years. In other words, EXIM and the ECAs of the OECD are competing in markets where commercial lending is abundant—a trend that continues today.

The failure to deliver on its congressionally imposed obligation—however mis- guided that obligation may be—is also noticeable in the fact that EXIM’s China and Transformation Exports Program (CTEP) extended only $141.3 million in financing in FY 2022—a fraction of the $27 billion it is supposed to deliver by the end of 2026.30 The Bank’s efforts have also included a misplaced focus on emerging technologies such as quantum computing and artificial intelligence, which do not need EXIM financing because their foreign sales attract commercial financing without government support. The lack of demand for EXIM products could also be reflected in the Bank’s authorization of $5.2 billion in loan guarantees and sup- port in FY 2022,31 down from its FY 2012 peak of “over $35.7 billion” during the Obama Administration.32

This lack of activity also extends to the semiconductor industry, which has been picked as a focal point for a governmentwide industrial policy effort to counter China’s ambition to dominate that industry. Ironically, at the same time that some want to become more like China to fight China, China’s leaders are realizing that their heavy-handed semiconductor subsidies are weakening the Chinese economy.

According to Bloomberg News:

effectively. Furthermore, any attempts to reorient the agency and make it a weapon with which to fight against China are going to fail. Economic fights and national security fights are not won with subsidies.