PIIE Blog | RealTime Economic Issues Watch
The Peterson Institute for International Economics is a private, nonprofit, nonpartisan
research institution devoted to the study of international economic policy. More › ›
Subscribe to RealTime Economic Issues Watch Search
RealTime Economic Issues Watch

The Ex-Im Bank’s Shortsighted “Double Loss” Policies

by | November 29th, 2012 | 03:05 pm
|

Despite its remarkable success in promoting US exports, the US Export-Import Bank (Ex-Im) is never far from controversy. Earlier this year, its authorization was renewed by Congress, but only after lawmakers overrode a barrage of criticism from the Tea Party and others opposed to government involvement in the economy. The reauthorization was a wise and important move. This year, Ex-Im supported $35 billion in export financing, at no cost to American taxpayers. Its loans and loan guarantees generated $50 billion in exports and 255,000 American jobs—helping the Obama administration achieve its goal of doubling exports in its first term.

Nevertheless, the Ex-Im Bank remains burdened by a staggering array of legislative mandates. Many of these are driven by the misplaced concerns of a few American companies. The concern is that in helping firms export goods and services overseas, the bank inadvertently hurts some industries at home. This issue came to a head earlier in the year when Delta Airlines objected to Ex-Im support of a Boeing aircraft sale to Air India on the grounds that Air India competes with Delta on the Mumbai–New York route. Delta is appealing a court judgment which threw out its objection on the grounds that it was without legal merit.

The Ex-Im Bank—responding to the criticism even as it won reauthorization last spring—has refined the procedures for determining potential harm to an American company when deciding whether to block financing support for an exporter. At issue are cases when, for example, the Ex-Im Bank helps an American firm export machinery to a foreign firm, which then exports back to the United States and undercuts American firms making the same product. The board of the Ex-Im Bank adopted these new procedures for undertaking an economic analysis of such cases at a meeting on November 19.

Blocking export financing of one manufacturer on the grounds of protecting other American manufacturers has an alluring appeal, but it is a short-sighted policy. For one thing, even though the Ex-Im Bank only rarely bars export loans (or more typically loan guarantees), the threat of such actions spooks exporters, creates confusion, and imposes cumbersome requirements on businesses and the agency itself.

Even worse, blocking loans and loan guarantees on these grounds leads to even more losses to American jobs than would otherwise be the case. Often a US exporter that seeks Ex-Im Bank help is competing with an exporter based in Germany, Japan, or some other industrial nation. That exporter gladly gets supported by its country’s export credit agency (ECA)—i.e., its equivalent of the Ex-Im Bank.  If the US firm loses the business—whether it is an aircraft sale, a refinery, a semiconductor chip factory,  a steel plant, or something else—the project will inevitably go ahead, creating good jobs abroad, but not in the United States.  That manufacturer receiving support from its home country then continues to be able to export back to the United States. American companies thus face the same difficulties competing that would occur if the Ex-Im Bank financing had gone ahead.

Put starkly, if Ex-Im does not support the US exporter, the United States will lose the export.  In addition, the United States will inevitably face increased competition, either at home or abroad, when the project gets foreign-government help and is completed.  The result is a “double loss.” There is no way, in other words, for US airlines to avoid  competition on select routes from  foreign carriers flying Airbus rather than Boeing; US coal mines will still have to compete with coal produced abroad; US chip firms will confront competition from factories located abroad; US steel firms will face new foreign steel mills; and so on.  All of this will happen with or without export support from the Ex-Im Bank to American exporters as foreign manufacturers get help from their government ECAs.  

Under Ex-Im Bank rules adopted in November, the bank must perform an Economic Impact (EI) assessment. If the EI reveals that the output of the foreign project stands a likelihood of being in direct competition with a “significant” portion of US output (just 1 percent), either in the United States or in third markets, Ex-Im is advised to withhold financial support. If, however, the Board of the Ex-Im Bank finds that the benefits of support outweigh whatever adverse impact costs are identified, it can authorize the export financing to go ahead.

But the fact is that the benefits of support outweigh adverse impacts in almost all cases. The objections by Delta to helping Air India buy American aircraft, for example, overlooked the fact that Air India could easily get Airbus aircraft with eager support from European ECAs.  In an earlier case, US firms lost a petrochemical project called Etileno in Mexico, and several hundred million dollars of procurement went to Europe (mostly to Italy) when the order deadline passed before Ex-Im responded.

There is a better way to compete in export markets. Whenever the Ex-Im staff determines that the probability of a “double loss” is highly likely, the Ex-Im Board should quickly approve the loan.  The Board, in other words, should approach these cases with a strong presumption in favor of support and US firms that oppose Ex-Im finance should carry the burden of persuading the Board otherwise. The EI assessment should focus primarily on any conflict between Ex-Im support and the likelihood that it would encourage dumping or other violations of US trade laws.

“Double loss” cases are hardly the only burdens that confront Ex-Im as the bank works to support US exports while observing all its legislative mandates.  But they are perhaps the easiest burdens to avoid and should be totally avoided in the future.