Congress will soon debate the fate
of the U.S. Export–Import Bank (Ex–Im), which doles out financing to favored
corporations and credit to foreign governments. Proponents claim that such
taxpayer bankrolling creates jobs and fills “gaps” in private financing.[1] In fact, the bank is a conduit for
corporate welfare beset by unreliable risk management, inefficiency, and
cronyism.
Terminating the bank’s charter
should be an easy call for lawmakers. Even Barack Obama, as a presidential
candidate, endorsed its end.[2] With strong growth in privately financed
exports, there is no justification for maintaining this Depression-era relic.
The New Deal
Ex–Im was incorporated in 1934 by
President Franklin D. Roosevelt to finance trade with the Soviet Union.
Congress later constituted the bank as an independent agency under the
Export–Import Bank Act of 1945. Its authorization, last extended in 2012, will
expire on September 30 unless reauthorized.
The bank provides loans and loan
guarantees as well as capital and credit insurance to “facilitate” U.S.
exports. The financing is backed by the “full faith and credit” of the U.S.
government, which means taxpayers are on the hook for losses that bank reserves
fail to cover.
Weaknesses in Governance
Supporters say the bank carefully
manages risk; its charter allows loans only to enterprises that demonstrate “a
reasonable assurance of repayment.” However, the latest report to Congress by
Ex–Im’s inspector general (IG) hardly inspires confidence, noting insufficient
policies to prevent waste, fraud, and abuse. According to the IG, the bank also
exhibits “weaknesses in governance and internal controls for business operations.”[3]
In another review, the Government
Accountability Office reported that the bank appears to be relying on inappropriate
risk modeling that could produce inaccurate estimates of both subsidy costs and
potential losses.[4]
These findings are not surprising.
Ex–Im officials are not putting their own money at risk and thus have less of a
stake in the outcome. It is an inevitable aspect of government intrusion into
the finances of private enterprise.
Such operational shortcomings have
worsened as the number and value of bank transactions have increased.[5] In FY 2013, the bank authorized financing
totaling $27.3 billion—a 28 percent increase from 2009—including $636 million
for China and $630 million for Russia.
Taxpayers’ exposure now totals
nearly $134 billion. However, the IG suggests that sloppy record-keeping has
obscured the actual amount of outstanding commitments, which likely exceed the
$140 billion cap set by Congress.
Working the Numbers
Bank officials and advocates
emphasize that Ex–Im financing creates jobs. In fact, the bank does not count
actual jobs related to its projects but simply extrapolates numbers based on
national data. This formula does not distinguish among full-time, part-time,
and seasonal jobs. It also assumes that average employment trends apply to
Ex–Im clients (who may not be typical).
Most important, the bank does not
account for what would occur in the absence of the subsidies. Ex–Im officials
assume that the economic activity they subsidize would not occur absent bank
financing. That is an absurd notion, but it is prevalent among bureaucrats who
cannot fathom that business actually functions without them.
In some cases, Ex–Im financing
actually puts U.S. workers at a disadvantage by providing overseas companies
with billions of dollars in financing at favorable rates. Delta Airlines and
the Airline Pilots Association, for example, filed a legal challenge last year
against the bank for providing financing to five foreign airlines[6] for the purchase of Boeing aircraft.
According to the lawsuit:
The bank’s aggressive approach to aircraft financing allows
foreign airlines to borrow at much cheaper rates than they could in the private
market. Cheaper financing, in turn, leads to competitive advantages for foreign
airlines…shifts industry growth abroad, and puts downward pressure on American
production and employment.[7]
Whether well-intentioned or
otherwise, government interference distorts the competitive landscape, with
winners and losers determined by political considerations rather than the merit
of their products and services.
On Automatic Pilot
Multinational corporations attract
the largest proportion of Ex–Im financing, including the construction and
engineering firm of Bechtel, ranked by Forbes as the fourth-largest
privately held company by revenue, and Lockheed Martin, valued in excess of $50
billion. But the bank’s foremost beneficiary is Boeing, the world’s largest
aerospace company (with a market capitalization exceeding $91 billion). In the
past five years, the company has profited from 197 Ex–Im deals totaling $48
billion. Last year alone, Boeing-related financing comprised 30 percent of all
Ex–Im activity.
These and the other deals with
titans of industry belie claims that the bank is necessary to fill “gaps” in
financing—that is, bankrolling deals that supposedly pose too much political or
economic risk to garner private capital. In fact, U.S. exports hit a
record-high $2.2 trillion in 2013, up from $1.4 trillion five years ago, reflecting
no shortage of private export capital.[8]
In decades past, political and
economic turmoil around the world did present export risks, but global trade is
now firmly entrenched. If the bank were stepping in where private investors
fear to tread, a larger proportion of its financing would be directed to Africa
and Latin America, where risks are greatest. Instead, bank authorizations last
year were concentrated in Asia ($9.7 billion), followed by Europe ($5.7
billion) and North America ($3.4 billion). In contrast, Latin America has
received $2.9 billion and Africa a measly $600 million.[9]
To the extent Ex–Im does finance
deals that the private sector supposedly snubs, taxpayers are justified in
questioning whether they should be saddled with risk that private investors
deem unacceptable. It is also difficult to reconcile bank officials’ assertions
that they alone assist higher-risk exporters but still manage to offer
competitive rates and generate profits.
On the Level?
Advocates also claim that the bank
is necessary to create a “level playing field” vis-à-vis government subsidies
to foreign firms, but only 2.2 percent of all U.S. exports last year received
Ex–Im financing, which means that 98 percent of American exporters are competing
without the bank’s intervention. Nor is the playing field leveled for the
domestic firms that do not receive special treatment.
Rather than recommit to the
government’s risky and inefficient finance scheme, lawmakers should focus on
reducing tax and regulatory barriers to exports. For example, the flood of
Dodd–Frank regulations is likely to constrain private-sector credit, while the
costs of Obamacare weigh heavily on U.S. firms. In fact, regulatory costs have
increased by nearly $73 billion a year under the Obama Administration.[10]
An Easy Call
Ex–Im advocates offer myriad excuses
for maintaining government interference in export financing, including job
creation, gaps in private investment, and government subsidies lavished on
foreign firms. Such justifications do not stand up to the facts, and the
purported benefits, if any, are not commensurate with the risk to taxpayers.
Congress must decide whether to
extend billions of dollars in corporate welfare on the backs of taxpayers or
allow private investors to finance U.S. exports—as it does for the vast
majority of them. Policymaking could not get any easier.
—Diane
Katz is Research Fellow for Regulatory
Policy in the Thomas A. Roe Institute for Economic Policy Studies at The
Heritage Foundation.
[1] Export–Import Bank of the United States, “Who We Are,” http://www.exim.gov/about/whoweare/ (accessed April 9, 2014).
[2]
Ashe Schow, “President Obama Was Against Ex–Im, Before
He Was for It,” Heritage Action for
America, The Forge, March 28, 2012, http://heritageaction.com/2012/03/pres-obama-was-against-exim-before-he-was-for-it/.
[3] Export-Import Bank, Office of the Inspector General, Semiannual
Report to Congress: April 1, 2013 to September 30, 2013, http://www.exim.gov/oig/upload/OIG_Report_FA13_508.pdf (accessed April 9, 2014).
[4] Mathew J. Scire, U.S. Government Accountability Office,
“Recent Growth Underscores Need for Improved Risk Management and Reporting,”
testimony before the Committee on Financial Services, U.S. House of
Representatives, June 13, 2013.
[6] Korean Air, Dubai’s Emirates Airline, Abu Dhabi-based
Etihad Airways, Latam Airlines Group SA, and LOT Polish Airlines.
[7] Delta Air Lines v. Export–Import Bank of the U.S.,
Case No. 13-00424, U.S. District Court, District of Columbia.
[8] Export–Import Bank of the United States, Annual Report
2013, http://www.exim.gov/about/library/reports/annualreports/2013/ (accessed April 9, 2014).
[10] See James L. Gattuso and Diane Katz, “Red Tape Rising: Five
Years of Regulatory Expansion,” Heritage Foundation Backgrounder No.
2895, March 26, 2014, http://www.heritage.org/research/reports/2014/03/red-tape-rising-five-years-of-regulatory-expansion.
http://www.heritage.org/research/reports/2014/04/us-exportimport-bank-corporate-welfare-on-the-backs-of-taxpayers
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