The Corner

Economy & Business

The Ex-Im Bank Won’t Help Fight China as It Is

Police officers in front of a cargo container ship at a port in Qingdao, China, in 2018. (Stringer/Reuters)

Over at Politico Pro, Zachary Warmbrodt reports that House majority leader Steny Hoyer would like to attach the Export-Import Bank reauthorization bill to an upcoming stopgap funding bill.

Meanwhile in the Senate, legislators are also trying to push through a Senate bill that would reauthorization the agency before its charter expires in September. The bill under consideration has no reforms, and yet it reauthorizes Ex-Im for ten years, which means its cronyism in the service of large corporations can go on.

Worse yet, Senate Banking chairman Mike Crapo (R., Idaho) is considering attaching this long-term reauthorization bill to a short-term funding bill. Think about what this would mean: It would protect the funding benefiting a handful of politically connected corporations for ten years while the funding for the rest of the government budget could potentially expire at the end of the short-term CR.

With that in mind, a few days ago, I wrote a longish piece over at The Bridge of the Mercatus Center about why members of Congress shouldn’t be fooled by the proposed reforms put out by Kimberley Reed, the new president of the U.S.’s export credit agency (ECA), called the Export-Import Bank. The reforms won’t solve any of the problems highlighted by conservatives and free-market advocates in the last few years. These are just pretend reforms, which will change nothing about the way the Bank does business.

Think I’m being too harsh? I would love to be proven wrong. I invite Ms. Reed to submit exactly which past Ex-Im deals would not be approved under her new standards. Unfortunately, I’m pretty sure that I’m right, and that these “reforms” are little more than window dressing that would not substantially change Ex-Im’s dodgy portfolio.

But the more I think about it, the more it occurred to me that the question of reforms at the Ex-Im Bank should matter to President Trump the most. I am going to set aside the fact that Mr. Trump opposed Ex-Im during his campaign for a moment and take seriously his newfound support for the Bank. Let’s grant that he truly thinks it could become a tool to fight Chinese expansionist desires. This idea was echoed by White House chief economic adviser Larry Kudlow, who characterized Ex-Im as “a national security weapon.”

Here, the idea is that China subsidizes its exports, in part to boost its economy through trade (let’s ignore for now that subsidized trade is unlikely to deliver what China hopes), but also to expand its geopolitical influence. The president wants to use Ex-Im to hinder China’s plan by competing with its investments in Africa and other nations China has its sight on. This way, these foreign companies will use U.S. capital instead of being beholden to China.

But here is the thing: Even if China were able to achieve its goals through export financing (that’s a big “if”), Ex-Im as it is structured isn’t doing anything about it. Nor are other non-Chinese ECAs. There are two main reasons for this:

First, vast majority of what the ECAs do, and what Ex-Im does, is to subsidize companies in higher-income countries, where there is plenty of capital available. Ex-Im likes to pretend that without its financing, foreign airlines would buy Airbus planes rather than Boeing planes.

However, the last four years (when Ex-Im was virtually shut down) clearly demonstrate that this is not the case, and that financing follows the decision to buy a particular plane rather than the reverse. The same is true for other American products that Ex-Im claims would lose out to foreign competition without its financing (as I wrote about here).

China, on the other hand, is not expanding its reach by attempting to grab markets in higher-income nations, but mostly in lower-income ones. So as long as Ex-Im continues to do business the same way it always did, it will continue being a useless tool to compete with China.

Second, in FY2014, China was the top foreign destination for Ex-Im deals. Air China was also the biggest state-owned recipient of Ex-Im deals (see chart). U.S. subsidies of Chinese companies dropped dramatically in the last four years when Ex-Im couldn’t operate fully. Without proper reforms, we will resume our subsidies to state-owned Chinese companies.

I totally fail to see how “helping” Boeing compete with Airbus in China helps achieve the president’s geopolitical goals in any way, shape, or form. In fact, I will say that by extending this cheap capital to China Air to buy Boeing planes, the U.S. government gives a leg up to the Chinese airline when it competes with American Airlines. It also, and this is important, saves the Chinese government from a big chunk of the financing for its national airline, allowing it to better pursue its expansionary goals abroad.

I will add that the idea that Ex-Im loans to Boeing doesn’t even really help the company compete with Airbus. If the last four years have demonstrated anything, it’s that there is an abundance of private financing ready to fill the government’s gap. As the Heritage Foundation’s Diane Katz notes, “Boeing relies on private capital for 96% of its commercial deliveries,” and its business has expanded a lot during the last four years without Ex-Im. The demise of Ex-Im and other ECAs in the last four years has also demonstrated that when governments step back, the private sector steps in and innovates.

Now, I don’t share the president’s goal of using Ex-Im as a national security tool, but I would urge anyone who does believe this is a goal worth pursuing to look into this issue. I can promise you that without reform, Ex-Im will do what Ex-Im has always done, and that isn’t to help compete with the Chinese government in strategic places.

As economists say, by pushing the reauthorization of Ex-Im, the president thinks he is getting a great, cheap secondhand car that will help him get where he wants to go. But the reality is that without reforms, the president is buying a lemon that will leave him stranded on the side of the road. Only a dramatic makeover could turn this lemon into what the president hopes for, and what Ms. Reed has offered so far is little more than a cheap paint job.


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