There is no economic reason for the Export-Import Bank of the United States to exist; there is a political reason to be sensitive about how we wind it down.
The Export-Import Bank provides no net benefit to the U.S. economy. Rather, it subsidizes the operations of some firms, domestic and foreign, at the expense of their competitors and the public. It does this by offering financing at below-market rates to companies that buy U.S. firms’ exports, and by offering domestic firms insurance against nonpayment by their overseas clients, also at below-market rates. Like every other loan-guarantee and risk-subsidy program the federal government has created, from Fannie Mae to student loans, the Ex-Im Bank is an exercise in camouflage, a way to give money to a politically favored group without the embarrassing spectacle of Uncle Sam handing over a check.
In its simplest form, the process looks like this: If the prevailing interest rate in the market is 5 percent and I lend you $10 million at the lower rate of 3 percent for one year, I have effectively given you $200,000 — but, for the purposes of my balance sheet, it looks like I made $300,000 rather than giving away $200,000. It is a deceit that obscures both opportunity cost (the additional $300,000 I could have made lending out the money at market rates) and, more important, the price of risk, which the federal government effectively ignores for these sorts of programs. And as the Fannie Mae and Freddie Mac bailouts show, the cost of risk is not zero.
We subsidize exports for much the same reason that we subsidize mortgages and college loans: bias. Just as we seem to believe that wealth held in the form of owner-occupied-real-estate equity is somehow socially preferable to wealth held in other forms, such as stocks, there is an enduring belief that export sales are somehow economically superior to other sorts of sales because they result in inflows of money — people fail to take into account the associated outflow of goods. There is basically no evidence justifying this bias; it’s mainly emotional. We treat exports like we’re getting one over on those damned dirty foreigners, but, strangely, we ourselves do not feel victimized by the French when we buy a bottle of Bordeaux or by the villains in Stuttgart when we buy a Mercedes-Benz.
Consulting World Bank figures, we find that there are rich countries that have high levels of exports as a share of their economies (Switzerland, Singapore) and rich countries that have relatively scanty exports (the United States, Australia), just as there are poor countries with high exports (Democratic Republic of the Congo) and poor countries with low exports (Haiti). What a country produces tends to matter more than where it is sold: Zambia and Sweden both export just under 50 percent of GDP, but Zambia exports minerals, tobacco, and flowers, whereas Sweden exports Ericsson mobile-network equipment and Volvo automobiles. China exports more as a share of GDP than does the United States; in fact, it exports 27 percent, just like Burkina Faso, one of the poorest countries on earth. Large, rich countries such as the United States may have relatively small export profiles, mostly because their hungry domestic markets consume so much of their economic output. Papua New Guinea is a big gold producer, but it’s also poor, so it’s a gold exporter, not a gold consumer.
So, bearing in mind that achieving an increase in exports for its own sake is a questionable goal at best, the next question is: Does the Ex-Im Bank effectively achieve that goal? The short answer is: Yes, it does. Setting aside the critical related question — At what price? — the Ex-Im Bank makes some export deals happen that would not happen otherwise. It is probably a marginal factor, but marginal factors are not to be sneered at. How much Ex-Im Bank subsidies function as deal-makers rather than as deal-sweeteners is unclear and probably unknowable. But whatever economic effect they have could be replicated simply by writing checks to Boeing and Boeing clients, who together received 82.7 percent of Ex-Im Bank benefits in 2012. The outcome would be the same, but the federal government would have to account for the transfer as spending.
#page#The effect of Ex-Im Bank policies on the national economy is minuscule; U.S. exports are mainly driven by factors other than the policies of the U.S. government or other governments, and our exports do not correlate very strongly with Ex-Im Bank activity. If there is a policy driver, it is more likely the North American Free Trade Agreement: Before the passage of NAFTA in 1994, our exports hovered between 10 percent and 11 percent of GDP; today they are closer to 14 percent of GDP. Unsurprisingly, the biggest national buyers of U.S. exports are, by far, Canada and Mexico, with China coming in third. Having the standard of living in Mexico rise from its current level to that of Poland or Slovenia would probably do as much for U.S. exports — and for the U.S. economy — as all of the reforms currently contemplated in Washington combined.
Supporters of the Ex-Im Bank and similar programs often argue that such measures are necessary to offset similar subsidies offered to overseas competitors by the governments of the countries in which they are based. This is a fairly thin rationale. China, the country that earns most of our resentment vis-à-vis the balance of trade, does indeed use government policy to make its exports more attractive. But no sane American wants to replicate the Chinese approach, which consists of artificially reducing the quality of life for Chinese people: Their artificially low wages make Chinese exports relatively attractive, and their diminished purchasing power makes imports less affordable for Chinese buyers. This is a net benefit to Americans, particularly poor Americans, though it does place some specific U.S. firms at a disadvantage — but not the sorts of firms whose sales are generally subsidized by the Ex-Im Bank. Boeing does not really have any Chinese competitors, the market being a duopoly comprising Boeing and Airbus. The Chinese-made Comac C919, expected to launch next year, is intended to bring China into that market, and we’ll see how many of the world’s airlines are eager to risk life, limb, and solvency on an airliner with a “Made in China” label.
The manufactured exports that have suffered in the United States as a result of competition from relatively low-wage countries are for the most part low-value-added products — T-shirts and flip-flops, plastic toys, lower-end electronics, etc. Until recently, more than 40 percent of the U.S. trade deficit was in the form of oil and refined-petroleum products; thanks in no small part to better hydraulic fracturing (“fracking”) and other technological developments, the United States is about to export significant amounts of crude oil for the first time in a generation.
The economic case against the Ex-Im Bank is strong; the fact that senior officials of that institution currently are under investigation on corruption allegations does not help its standing.
Republicans have long faced the dilemma of whether they desire to be the party of free markets or the party of big business, and the revolt against the Ex-Im Bank suggests that they are primed to come down on the angels’ side. This is to be celebrated, but conservatives should proceed with caution on this and similar issues. While narrow self-interest may provide a great deal of corporate America’s political energy, there remains substantial overlap between that self-interest and the interests of principled conservatism. And conservatives should always be mindful of facts and particularities, which should not be subsumed by ideological puritanism.
It is a fact — and it is perfectly legitimate — that there are real and meaningful economic interests attached to bad policies, be they the Ex-Im Bank or the tax code. Boeing has been effectively singled out for certain benefits, but it also was singled out by the National Labor Relations Board for punitive attention. The Ex-Im Bank should be wound down, but the sting of winding it down would be mitigated if paired with, e.g., reform of our unusually burdensome tax treatment of overseas earnings. The Fortune 500 have legitimate interests, too, and Republican reformers would do well to keep that in mind. Eliminating corporate welfare should be a centerpiece of Republican thinking going forward, but conservatives should not let the desire to reform degenerate into the desire to punish. Big business is not always our friend, but it is not the enemy, either.