The arguments supporting Ex-Im reauthorization continue to quickly deteriorate: Now they’re claiming that ending Ex-Im would just eliminate all the exports it currently finances.
In a recent blog post, Tony Fratto throws centuries of economic wisdom out the window and argues that ending Ex-Im would cut U.S. exports by 2 percent, because that’s the share of U.S. exports the bank currently supports. This would be one of the biggest drops in American export volumes in history. Sounds pretty scary, huh? The good news: This claim is nonsense.
Over at the Washington Examiner, Tim Carney responds:
[Fratto’s] premise is that killing Ex-Im would reduce U.S. exports by 2 percent. Where does he get that idea? From the fact that Ex-Im supports about 2 percent.
The hidden logic here: Every single export subsidized by Ex-Im is an export that wouldn’t happen without Ex-Im. Further — these Ex-Im-subsidized exports don’t displace any other U.S. exports.
There’s no way this is true. The academic literature on this suggests that a large majority of exports that receive government-backed financing would happen anyway without the financing. This study found that Hermes, Germany’s version of Ex-Im, financed “about 3 percent of exports” and that “trade creation due to Hermes therefore amounts to at most 0.52 percent of total German exports.”
Let’s assume that the study Carney cites is accurate, even though economic theory tells us that it is missing most of the actual cost of export subsidization (as I’ll explain). Carney applies the same coefficient to the U.S. and estimates that only around 0.33 percent of U.S. exports would be vulnerable if Ex-Im winded down. But in addition, as a recent report from the Cato Institute’s Dan Ikenson estimates, the $2.8 billion in annual costs imposed on manufacturing victims of Ex-Im subsidies would disappear too.
The biggest error in Fratto’s argument lies in simple economics. A must-read report by Heritage macroeconomist Salim Furth reviews the lengthy literature on export credit subsidies and finds a consensus in economics that:
Export subsidies such as those provided by the Ex-Im Bank have broad costs and narrow benefits. The benefits accrue only to those who are directly involved in the subsidized corporations. The benefits disappear as the industry becomes more competitive or as the number of industries grows.
In other words, Ex-Im subsidies do not meaningfully increase the overall level of exports, but do redistribute prosperity away from unsubsidized firms and toward subsidized firms. This is not new information.
A 1981 CBO report states that “[No] economic gain to the United States follow[s] directly from the subsidized rise in exports” and that the temporary increase in exports “occurs at the expense of domestic investment.” In normal economic times, the report concludes, “there are no obvious advantages to U.S. citizens as a group.” Another 1984 economic study of Ex-Im concludes that export credit subsidies “redistribute income away from nonsubsidized citizens and toward domestic exporters or citizens of a borrowing country.”
Even the studies that Ex-Im advocates cite to bolster their case come with big qualifications. The canonical study they reference is James A. Brander and Barbara J. Spencer’s 1984 paper “Export Subsidies and International Market Share Rivalry,” which finds that export credit subsidies can “work” (meaning, the benefits to the subsidized corporation outweigh the costs to taxpayers) — but only if one company is subsidized, that company is a monopoly, and each taxpayer in the U.S. owns equal shares in that corporation. This is, needless to say, not how Ex-Im works.
What’s more, the world economy as a whole would still be worse off in this model. Furth notes that export credit subsidies are so inefficient that they “fail even to improve corporate profits by the amount of the subsidy plus the terms-of-trade loss.”
The theoretical literature is clear: Study after study after study concludes that as the number of competitive firms in the economy increases, export credit subsidies yield smaller benefits to fewer firms and impose more costs on more domestic groups. A robust market system like the United States, then, is particularly ill-suited for the pie-in-the-sky schemes of the Ex-Im Bank.
The evidence is consistent with these models’ predictions. Paul Krugman himself writes that export credit subsidies schemes have yielded “no stunning empirical successes.” Indeed, even his own research foray into protectionist export promotion was later contradicted.
One economist’s simulation found that the European version of the Export-Import Bank harmed European consumers by subsidizing Airbus. Another simulation of British trade produced “incredibly large” losses in six of nine British industries. The three industries that were not penalized only exhibited “extremely modest” gains.
It is true that some of the exports that Ex-Im currently underwrites cease to exist without Ex-Im funding. This is a feature, not a bug. Much of the assistance that Ex-Im provides is unnecessary and politically motivated.
Ex-Im pays companies to serve foreign customers instead of Americans. Take the roughly $3.4 billion in Ex-Im authorizations issued over the past seven years to Emirates Airlines, a state-owned outfit that competes against U.S. airlines. By artificially (and unnecessarily) lowering Emirates’ financing costs, the Export-Import Bank actually places domestic airlines at a considerable disadvantage.
In his testimony before the House Financial Services Committee hearing on the Export-Import Bank, Delta CEO Richard Anderson explained how these kind of Ex-Im deals harm U.S. airlines. Referencing an industry analysis estimated that the bank’s loan guarantees to Emirates saved the foreign airline around $20 million in financing costs per plane, Anderson pointed out that:
Although the bank’s and Emirates’s lack of transparency makes it impossible to know the full magnitude of the Bank’s subsidy to Emirates, that $20 million per-plane advantage alone suggests that Emirates is essentially getting a free additional widebody plane for every eight new planes it buys. That kind of deal is simply not available to airlines that must rely on market financing.
As I’ve written before, it is noteworthy that Ex-Im financing did not prevent Emirates from purchasing a greater number of Airbus planes — and on the open market, at that. Ex-Im boosters routinely tell us that these subsidies are necessary to counteract competition from Airbus, which allegedly receives even more foreign export subsidies that Boeing gets from its own bank. In this case, Ex-Im finance may have lowered Emirates’ costs so much that they were able to purchase more Airbus planes. So much for that.
Ex-Im subsidies violate similar commitments made by the US. Our own Airline Deregulation Act of 1978 — a revolutionary reform that shifted control of air travel from the government to the market and fostered the development of today’s competitive, robust air travel system — prioritized:
maximum reliance on competitive market forces and on actual and potential competition (A) to provide the needed air transportation system, and (B) to encourage efficient and well-managed carriers to earn adequate profits and to attract capital.
Similarly, the Department of Transportation’s Open Skies Agreements aim to “promote an international aviation system based on competition among airlines in the marketplace with minimum government interference and regulation” and “make it possible for airlines to offer the traveling and shipping public a variety of service options, and wishing to encourage individual airlines to develop and implement innovative and competitive prices.”
The Department of Transporation’s Statement of International Air Transportation Policy says that government subsidies introduce distortions in the marketplace, are unfair, and create an uneven playing field. The DOT also says that government subsidies to airlines “deprive the aviation system of the benefits that greater cost efficiency and lower prices would encourage.”
Ex-Im is guilty on all counts.