The Corner

Protectionist Arguments Shouldn’t Save Ex-Im

The idea that there is something profoundly problematic about the Ex-Im Bank is not only popular with the tea party activists. Group across the political spectrum are speaking out against the Bank’s bad habit of picking winners and losers. It is hard to ignore when most of the winners that the Bank picks are among the most connected and powerful corporations and private lenders in the US. 

There appears to be one last argument standing. Some Bank supporters still claim that the US must continue subsidizing a few choice exporters because other countries do it, too. Why should the US adopt free market policies when France and China and Germany continue to engage in self-destructive mercantilism, they ask. They conclude that the US must jump off the bridge of protectionism just like the other kids. For instance, this morning, the Wall Street Journal published an interesting piece by Bill Galston that touches on this idea:

The relationship between Ex-Im and big business raises murkier issues. Of the roughly $12 billion in long-term loan guarantees the bank extended in fiscal 2013, the top 10 beneficiaries received 97% of the total. Boeing BA -0.49% alone received nearly $8 billion—about two-thirds of the total.

At first glance, this looks indefensible. But the manufacture and sale of commercial aircraft is far from a free market. Boeing’s major competitor—Airbus—receives massive export subsidies from a European consortium. In the best case, Europe and the U.S. would negotiate the mutual elimination of subsidies. But until that happens, say Ex-Im’s supporters, it would be self-destructive for the U.S. to stand down unilaterally.

They have a point.

While he goes on to explains that ”large corporate beneficiaries of Ex-Im financing should be required to prove that they could not compete profitably in overseas markets without this assistance,” the underlying assumption is that under certain conditions, foreign export subsidies provide justification for ours. Unfortunately, Galston repeats the typical error made by modern mercantilists: He fails to mention to unseen costs of this policy, even in its limited form. In the rushing to protect or prop up Boeing sales, we forget that the other side of the market can also be hurt by these policies. Consumers, non-subsidized producers, and their employees are all harmed by trade intervention.

This perspective also fails to mention that economists have had serious disagreement with this mercantilist view. In fact, many economists believe that there are genuine benefits from ending export supports. Others even believe that we should do it even if other countries don’t end theirs. Milton Friedman, of course, was a fervent advocate of tearing down all protectionist policies. He wasn’t alone.

In that context this is an interesting paper by Paul Krugman published in the Journal of Economic Literature in 1997 that argues that “the case for free-trade is essentially a unilateral case.” This quote is particularly interesting:

If economists ruled the world, there would be no need for a World Trade Organization. The economist’s case for free trade is essentially a unilateral case — that is, it says that a country serves its own interests by pursuing free trade regardless of what other countries may do. Or as Frederic Bastiat put it, it makes no more sense to be protectionist because other countries have tariffs than it would to block up our harbors because other countries have rocky coasts. So if our theories really held sway, there would be no need for trade treaties: global free trade would emerge spontaneously from the unrestricted pursuit of national interest. (Students of international trade theory know that there is actually a theoretical caveat to this statement: large countries have an incentive to limit imports – and exports – to improve their terms of trade, even if it is in their collective interest to refrain from doing so. This “optimal tariff” argument, however, plays almost no role in real-world disputes over trade policy.)

Fortunately or unfortunately, however, the world is not ruled by economists. The compelling economic case for unilateral free trade carries hardly any weight among people who really matter. If we nonetheless have a fairly liberal world trading system, it is only because countries have been persuaded to open their markets in return for comparable market-opening on the part of their trading partners. Never mind that the “concessions” trade negotiators are so proud of wresting from other nations are almost always actions these nations should have taken in their own interest anyway; in practice countries seem willing to do themselves good only if others promise to do the same.

There are three important points here: 

1. 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,

2. the incentives are such that countries tend to adopt policies that are not in their best interest, and

3. countries tend to only agree to reduce their export subsidies it if other countries do it as well.

The result of this self-defeating protectionism is tragic. It would be like an unhealthy person only agreeing to watch his cholesterol if everyone else did it, too. In the meantime, that person gets sicker and sicker. But it doesn’t make it okay. In fact, this is an argument for ending the Bank right now since its existence exacerbates lawmakers’ tendencies to do the wrong thing; the Ex-Im Bank is the bad incentive. 

Yesterday, Former director of the National Economic Council in president George W. Bush’s White House, Keith Hennessey, came out swinging with a fantastic and devastating piece that describes remarkably well how we get stuck with such bad policies.  The piece is evidence that he understands the bad incentives introduced by the existence of the Ex-Im Bank as well as its political economy. But more important, he exposes in one sentence the underlying problem we face here: “There’s a difference between what’s good for America and what’s good for one firm in America.” Protectionists continue to fail to see this point apparently. 

The whole thing is here



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