Congress has an opportunity to end a little bit of corporate welfare when the authorization for the Export-Import Bank expires on September 30. If Congress does nothing, the Export-Import Bank ceases to exist.
The Export-Import Bank is a government agency that exists to make and guarantee loans to foreign companies and governments so that they can then buy stuff from American companies. That is supposed to increase U.S. exports and create American jobs. In theory, the bank is supposed to finance that dubious category of transactions that are worthwhile but cannot obtain financing from private lenders. That is to say, this government bank is supposed to make loans that commercial banks judge to be a bad deal. That is to say, bank bureaucrats use other people’s money to make loans that people investing their own money won’t touch.
If that isn’t enough to make you skeptical, here are a few more problems:
The Bank claims to earn a $1 billion return per year on its investments. As Ryan Young explains, the Bank actually loses money:
In estimating the present value of its portfolio, Ex-Im uses Federal Credit Reporting Act standards, which use a discount rate equal to the yield of U.S. Treasury bonds. Treasury bonds are backed by the full faith and credit of the U.S. government, so markets treat them as essentially riskless. As a result, they have a very low interest rate. Other investments, whether stocks, bonds, or Ex-Im’s own financial products, tend to have higher yields than Treasury bonds. Because its portfolio outperforms Treasury bonds as an investment opportunity, Ex-Im claims to make money for the government. What this really tells us is that the Bank succeeds in jumping over the lowest of all possible hurdles.
Ex-Im’s portfolio does not perform nearly as well under more widely used fair-value accounting standards, the dominant standard for both the private sector and many government agencies. Fair-value accounting, which uses discount rates set by market values to account for risk, gives a more accurate picture of how risky Ex-Im’s portfolio truly is, and how it performs compared to similar alternative investments. By this standard, CBO estimates that Ex-Im will lose the government about $2 billion over the period 2015-2024, instead of gaining it $14 billion. [“Ten Reasons to Abolish the Export-Import Bank,” by Ryan Young, Competitive Enterprise Institute, July 15]
Bank supporters talk as if the Bank’s loans only add to the economy. But among the hard-to-see costs of the Bank’s lending is the loss in market share suffered by unsubsidized companies that must compete with firms who have been given a financing advantage. Firms that cannot get a loan on the same terms as a competitor are not able to expand their services or production as much as they otherwise could. The economy loses those products and services, even though they might have been superior to the products and services offered by subsidized companies. Diane Katz notes a few examples of how Export-Import Bank financing has put U.S. firms at a competitive disadvantage:
• Mongolia’s Oyu Tolgoi copper mine ($500 million). The copper from this open-pit and underground mine competes with excavations in Arizona, Utah, New Mexico, Nevada, and Montana just as global refined copper production is expected to exceed demand by more than 390,000 metric tons this year.
• Papua New Guinea’s Liquid Natural Gas Project ($3 billion). Despite regulatory challenges faced by U.S. producers of liquid natural gas, Ex-Im approved $3 billion in financing for development of gas fields, onshore and offshore pipelines extending 400 miles, a gas liquefaction plant, and marine export facilities.
• Air India ($3.4 billion). The financing will guarantee the purchase of 27 Boeing aircraft intended for international service, including U.S. destinations. According to the Air Line Pilots Association, Air India will enjoy rates and terms that are not available to U.S. airlines, giving it a cost advantage of about $2 million per airplane. Surplus seat capacity resulting from Ex-Im airline subsidies—totaling about $50 billion between 2005 and 2011—has resulted in the loss of approximately 7,500 U.S. jobs. [Internal citations omitted.] [Testimony before the House Committee on Oversight and Reform Subcommittee on Economic Growth, Job Creation and Regulatory Affairs, Diane Katz, July 29]
Another problem is that while the bank is supposed to finance projects that cannot obtain financing from commercial banks, in practice it finances the sales of big companies who don’t really need help like Boeing, General Electric, and Bechtel. Veronique de Rugy breaks down which companies benefit from the Bank’s loans:
[Mercatus Center, April 29]
Supporters of the Export-Import Bank also claim that ending export subsidies would amount to unilateral disarmament in trade policy. Other countries subsidize their exports, so U.S. firms need them to compete, they say. Aside from the fact that only 2 percent of U.S. exports are supported by Export-Import Bank loans, export subsidies are a bad way of promoting free trade, as Brian Riley explains:
Arguments over export credit subsidies bring to mind debates over U.S. tariff policy in the 20th century. There was no legitimate economic argument for the United States to maintain protective tariffs, which impose costs on consumers and transfer their resources to politically powerful or well-connected firms—a classic case of cronyism. Yet proponents often argued that the United States should impose self-destructive tariffs to counter high tariffs in other countries, just as some people now argue that the United States should impose self-destructive export subsidies in response to foreign export subsidies.
U.S. and foreign tariffs were dramatically reduced through the General Agreement on Tariffs and Trade (GATT) and WTO negotiations. In 1947, the average tariff rate in industrial countries was about 40 percent. Today, the average worldwide tariff rate is less than 3 percent. This huge reduction would not have occurred if the United States had decided to raise its tariffs after World War II to match high tariffs in other countries—the type of approach many supporters of the Ex–Im Bank advocate with respect to export subsidies. [Internal citations omitted.] [“Foreign Export Credit Subsidies: Kill Them, Don’t Copy Them,” by Brian Riley, The Heritage Foundation, September 12]