The Corner

What’s Wrong with Larry Summers’s Defense of Ex-Im

In an op-ed in the Financial Times, former Obama-administration Larry Summers argues that the US must “avoid ceding ground to mercantilists” . . . by reauthorizing the mercantilist Export-Import Bank.

Summers writes that the Ex-Im Bank provides much needed government assistance to U.S. exporters to help them compete with other nations’ exporters, all of whom have their own export subsidies. Riffing on familiar hawkish arguments in the foreign-policy realm, he repeats the position that if other countries do not end their own protectionist policies, then allowing the Ex-Im Bank’s charter to expire would be the economic equivalent of “unilateral disarmament.” He writes:

At a time when authoritarian mercantilism has emerged as the principal alternative to democratic capitalism, the US Congress is flirting with eliminating the Export Import Bank that, at no cost to the government, enables US exporters to compete on a more level playing field with those of competitor nations, all of whom have similar vehicles. Only by maintaining a capacity to counter foreign subsidies can we hope to maintain a level global trading system and to avoid ceding ground to mercantilists. Eliminating the Export Import Bank without extracting any concessions from foreign governments would be the economic equivalent of unilateral disarmament.

Reading the paragraph above you may get the impression that Ex-Im helps all exporters, and that all of Ex-Im Bank activities are dedicated to fighting off foreign subsidies. But that’s very far from the case. The following chart shows how:

Only a few companies are getting help from the bank since roughly 98 percent of the value of U.S. exports receive no Ex-Im Bank assistance at all. In other words, if we eliminated the subsidies, most U.S. exports wouldn’t be hurt at all. And the data shows that less than one-third of the Bank’s FY 2013 portfolio goes toward the stated goal of “meet[ing] competition from a foreign, officially sponsored export credit agency.” In other words, some 70 percent of what the bank does has nothing to do with competing with foreigners and their government subsidies. Even before engaging with the logic of Summers’s argument, we can see that the bank doesn’t even primarily function in the role that Summers pretends it does.

Those who support escalating the “arms race” of export credit subsidies to counter foreign subsidies, like Summers, should therefore not argue in favor of a blanket reauthorization. Summers would have better served his cause to scrutinize the other 70 percent of the bank’s activity and consider curtailing it in favor of focusing on activities where foreign export finance presents competition. But to my knowledge, no Ex-Im defender has suggested such a course of action.

But what about the other 30 percent — would eliminating Ex-Im wholesale mean “unilateral disarmament”? As I mentioned mentioned last week, economists have long maintained that the case for protectionism is weak, at best, and self-destructive at worst. In fact, it is in every country’s self-interest to engage in free trade by ending export subsidies — even if other countries don’t do the same.

Unfortunately, a nation’s policies can only be as good as the incentives that face its policymakers. The sober lessons of public-choice economics remind us that politicians rarely make the right decisions. They would rather wait for other countries to make the first move. The argument for maintaining harmful subsidies is akin to me waiting for all of you to have a healthy diet before I start eating properly. It simply doesn’t make any sense.

More importantly, there is evidence that reducing our subsidies unilaterally may have a healthy impact on the behavior of other countries. In an article called “Should Ex-Im Be Retired?,” for instance, economist William Niskanen explained that the first-best move in an infinitely repeated prisoner’s dilemma is a cooperative move, in hopes of eliciting cooperative moves from the others; i.e., unilateral reduction in export subsidies (thanks to Matt Mitchell for the pointer). He based his recommendation on the 1984 book by Robert Axelrod, The Evolution of Collaboration.

Interestingly, over at Vox, Matt Yglesias touches on this issue. He writes:

This is a great example of how economics underdetermines public policy. Suppose you think the best world is one in which no major government is running a targeted program to subsidize politically favored exporters. Is the quickest route to that endpoint for the United States to unilaterally abolish its own export-subsidy program? Or is to maintain our export-subsidy program until such programs can be phased out on a multi-lateral basis?

Summers’ argument has some plausibility. On the other hand, consider this. To Summers, the existence of foreign export-subsidy programs is a key reason to keep the Export-Import Bank. So if the European Union were to unilaterally abolish its export-subsidy programs, Summers would be more favorable to abolishing ours. In other words, “unilateral disarmament” by the EU might make US disarmament more likely. So maybe unilateral disarmament by the USA would make EU disarmament more likely? 

You won’t hear it in this space much, but: Yglesias hits the nail on the head.

Here’s a final question: Let’s say the U.S. does away with its subsidies but the EU fails to do the same. What do we do? As I have noted before, the first-best solution is to continue our free-trade path and allow other countries to hurt their own economies with short-sighted export credit subsidies if they insist. If this option is not available, an alternative route is retaliation. How? Niskanen, again, offers a solution: Rather than retaliate by jacking our subsidies back up (only a few foreign companies would complain about it and it is unlikely to put any pressure on the protectionist countries), we could start penalizing all exports from the countries that failed to lower its subsidies with an uniform 10 percent incremental tariff. This way, all foreign companies exporting to the U.S. would complain to their own government that they are being penalized because of mercantilist behaviors of their governments. That increases the chance to bring everyone in line and get rid of all subsidies once and for all.

Summers’s argument is wrong in theory and in practice. Improving the U.S.’s position in international trade is a goal that we all share; however, it is imperative that we don’t do more harm than good in pursuing this goal. So let’s give disarmament a chance. 

Here is the Niskanen piece. Also, you can read this article by George Mason University’s Don Boudreaux about the cost of protectionism.

Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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