Why Killing Ex-Im Bank Would Be Bad For America

On March 24, Loren Thompson addressed a meeting of the Aerospace Industries Association Supplier Management Council in Washington, D.C. concerning the importance of reauthorizing the U.S. Export-Import Bank.  Ex-Im Bank, as it is often called, is the official export credit agency of the U.S. government and plays a crucial role in leveling the competitive playing field for U.S. exporters with loans, guarantees and insurance programs.

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I figure you folks are going to be hearing a fair amount about planes today, so I thought I would start by talking about ships.

America is one of the biggest trading nations in history, and much of its trade moves on oceangoing commercial vessels.

So maybe you are wondering why there are plenty of stories about the role Ex-Im Bank plays in supporting exports of planes and locomotives and earthmovers, but no stories about it supporting overseas sales of U.S. ships.

The reason why is that the United States doesn’t build commercial vessels for use by other nations.

In fact, it doesn’t even build vessels for use by American shippers engaged in international trade.

We’ve been out of that business for 30 years, thanks to a mistake here in Washington that has direct bearing on the Ex-Im Bank debate.

Back when I was a kid, America was a major producer of oceangoing commercial vessels.

It was a big part of the manufacturing sector, and like other countries engaged in shipbuilding, the U.S. subsidized its builders to assure they could compete on a level playing field.

But in 1981, newly-elected President Ronald Reagan decided to accept a proposal from his budget office to eliminate subsidies for shipbuilders.

The budget office said the subsidies distorted market forces and were a waste of taxpayer money.

So Reagan abolished them.

As a result the commercial shipbuilding industry collapsed, 40,000 jobs were lost, and today all of America’s oceangoing trade with other nations is carried on vessels made in those nations, not here.

Reagan’s mistake wasn’t that he opposed subsidies, it was that he acted unilaterally — without securing reciprocal action by other shipbuilding nations.

So when U.S. shipbuilders lost subsidies and their foreign competitors did not, the Americans were wiped out.

I mean really wiped out — by the end of Reagan’s presidency, production of oceangoing commercial vessels for use in international trade had completely ceased in America.

Ex-Im Bank doesn’t hand out subsidies the way the U.S. Maritime Administration used to, but the lesson for today is pretty obvious.

If you are going to stop giving support to American companies to assist them in competing with other nations, you need to secure similar action by those other nations.

Otherwise, you are sure to hurt America.

Ronald Reagan learned that lesson the hard way.

By the time Ex-Im Bank came up for reauthorization during his second term, he supported it because it would “give the United States needed leverage for use in negotiations to eliminate predatory financing practices.”

Just as he opposed unilateral disarmament in dealing with military powers like Russia, so Reagan came to oppose unilateral disarmament in dealing with other trading nations.

This is the same logic that leads many conservatives to warn that if guns are outlawed, only outlaws will have guns.

For some reason, though, Ex-Im’s critics can’t seem to grasp that this basic principle of human behavior applies to trade as well as defense and law enforcement.

So the fact that China has increased its export credit activity by a thousand percent over the past ten years doesn’t faze these folks.

They are on a jihad to get rid of Ex-Im Bank, and they don’t much care about the consequences for U.S. workers.

They also don’t much care about the facts, because virtually everything they say concerning Ex-Im is untrue.

Let me give you an example of what I mean.

Last June, one of the organizations leading the attack against Ex-Im put out a point paper about the bank that began with this gem…

Multinational corporations don’t need taxpayer subsidies.

The implication of this statement is that Ex-Im shovels taxpayer money to big companies that don’t really need it and have no sense of national loyalty.

So let’s look at what the truth is.

First, every cent of financing that Ex-Im provides has to be paid back with interest — so much interest that the bank actually generates a profit for taxpayers each year, meaning it is not handing out subsidies.

Second, the biggest user of Ex-Im credit facilities, Boeing, exports 80% of its planes but sources 80% of their content in America, meaning that Boeing doesn’t even fit the definition of a multinational corporation.

When you make a hundred percent of your finished products in one country, you are not a multinational corporation in the sense that the critics are alleging.

Third, most of the ultimate beneficiaries of Ex-Im financing aren’t big companies at all — they are small and medium-size enterprises.

Last year, 25 percent of the funding that Ex-Im provided and 39 percent of the trade value that it supported was for small businesses.

And that’s just the tip of the iceberg, because much of the revenue generated by Boeing or Caterpillar or GE from Ex-Im supported trade passes through their hands to small and medium-size suppliers.

Anybody who understands how industrial supply chains for complex manufactured items work realizes that most of the credit Ex-Im provides for U.S. exports eventually benefits small and medium-sized enterprises.

Over a thousand of them in Texas alone.

So the contention that “multinational corporations don’t need taxpayer subsidies” is completely misleading — although it is worth noting the World Trade Organization has found Boeing’s main rival in the jetliner business wouldn’t even exist were it not for a 40-year pattern of illegal subsidies from European governments.

The perversity of the attack against Ex-Im is that critics accuse the U.S. builder of jetliners of getting government subsidies when it doesn’t, while ignoring the fact that the only reason its main rival exists is huge subsidies that have thoroughly distorted the global market for commercial transports.

Let me give you another example of how Ex-Im’s critics twist the truth.

It demonstrates how the critics reflexively translate the bank’s virtues into vices, and then use their distorted rendering of reality to try and destroy it.

The argument has to do with risk.

The reason no private-sector lender has ever complained about competition from Ex-Im is that the bank only extends credit or guarantees in circumstances where commercial lenders are reluctant to act.

For instance, a lender may be unwilling to provide a company with working capital unless it gets an Ex-Im guarantee that its loan will be repaid.

So Ex-Im steps in, provides the guarantee, charges a fee, and the transaction can then go forward.

Everybody benefits, including the private lender.

But Ex-Im’s critics say this means the bank is accumulating a portfolio of risky loans and other obligations that expose the government to potential liability.

Well, we’ve just been through a major global downturn, so let’s see how much risk Ex-Im is actually carrying.

It turns out the bank’s default rate was 0.194 percent as of June 30th last year — a much lower default rate than is typical at big commercial banks.

And in the case of jetliners, which comprise 45 percent of Ex-Im’s loan portfolio, the default rate was a miniscule 0.007 percent.

A grand total of one aircraft has been subject to default.

You know what Ex-Im does when a foreign debtor defaults on credit payments for a jetliner?

It repossesses the aircraft and sells it to somebody else.

Thus there is little danger of money being lost, even if the customer is the national airline of a country skirting bankruptcy, like Greece or Ukraine.

The point being that Ex-Im has exposed the government to minimal risk while facilitating a quarter-trillion dollars in exports in recent years.

By any reasonable measure, it is one of the best-run, most successful agencies in the federal government.

So if you run into anybody while you are here in D.C. who is out to get Ex-Im Bank, tell them they should be focusing on countries that aren’t playing by the rules like China — and let them know how much Ex-Im’s efforts to level the playing field matter to your company.