EXIM has work to do at home
by John Schuster with JLS Capital Strategies and Kenneth Hansen, in Washington
The US government's international lending agencies are occasionally deployed domestically.
The Trump administration issued an executive order recently directing the US International Development Finance Agency (formerly known as the Overseas Private Investment Corporation or OPIC) to use its project investment expertise to support domestic production of goods needed to fight the COVID-19 pandemic. That led to a single, awkwardly pursued transaction that fell off the rails because of an appearance of self-dealing by Eastman Kodak executives.
Nonetheless, the affair may stand not only for the proposition that any idea can be poorly implemented, but also that circumstances may exist in which the resources of the international lending agencies may be usefully deployed at home.
A better example may be the Export-Import Bank of the United States. EXIM is the official export credit agency of the US. It provides loans, guarantees, and insurance to foreign purchasers of products made in the United States. Its mission, as stated in its annual report, is to "support American jobs by facilitating the export of US goods and services."
Its existence has often been criticized as introducing non-competitive distortions into an otherwise free market and for "picking winners and losers." EXIM's key defense is that it "levels the playing field" for American producers facing foreign competition supported by export credit agencies in other countries. EXIM is needed for US goods and services to be able compete "on the merits" without being disadvantaged by foreign subsidies.
Whether EXIM truly levels the playing field for American businesses is debatable on many levels. To qualify for an EXIM loan, one must meet content, shipping, economic impact and other requirements that no other export credit agency in the world imposes. Thus, even before its five-year lapse of authority and lack of a board quorum, EXIM's support per unit of GDP was among the lowest in the world.
Perhaps the most important corner of the international playing field where US manufacturers have been left to confront subsidized competition without access to EXIM is the United States. This has incentivized developers of projects in the United States to procure goods and services offshore.
Consider a large infrastructure project being developed in the United States, with global bidding to provide equipment, materials and construction services. The bidders for that work hailing from Europe or Asia or even Canada could submit proposals with associated financing offering attractive terms -– the kinds of terms that EXIM could offer US bidders if the project were being undertaken elsewhere in the world. But because the project is in the United States, the jobs associated producing the equipment, materials and construction services for that project could well be induced to go offshore for lack of equally competitive financing available in the United States.
This has happened and will be happening again in increasingly competitive and complex markets. A decade ago, in the aftermath of the financial crisis, dozens of US and foreign companies sought project and structured finance from EXIM for domestic projects that used US goods and services, but typically received a quick no. EXIM could not help them. In constrained financial markets, they learned their only recourse was to use foreign goods and services that benefited from foreign export credits.
Between 2008 and 2018, the US was the world's largest country destination for OECD export credits.
In one case, a marquis power project was being developed by a European sponsor in the southwestern US. The US Department of Energy provided project financing. A portion of the sponsor's equity investment was to be provided in kind through the contribution of large, expensive turbines. A US manufacturer was in tight competition with a European company to supply those turbines. The European option came with below-market export credit agency financing that substantially reduced the cost of the turbines to the sponsor. The US product on its merits had advantages, but not so much as to overtake the financing advantage of the European product. The US manufacturer approached EXIM to see if it could provide financing on matching terms.
In this one case, the answer was not a quick no. Indeed, EXIM issued a letter of interest, indicating that there was "no policy impediment" to providing the requested financing. That was a bit surprising, since EXIM providing financing for the purchase of equipment that would not be exported might raise a question of mission creep.
Export in substance
To be fair, a technical detail helped EXIM's comfort with the proposed financing. The turbines were not to be purchased by the US project company, but rather by the European sponsor. Although there was no plan to export the turbines from American soil, from an economic perspective, the transaction would create enhanced demand for dollars by the European sponsor and increase the US supply of foreign exchange, just as much as if the turbines had traveled overseas. And the same jobs were supported in the United States regardless of where the turbines ended up. From an economic perspective, in fact, the turbines were an export.
Consider a European tourist who travels to the US and consumes food while here. Those sales of US goods to a foreign purchaser count, in national income accounting, as exports whether or not the food consumed ever leaves the United States.
So, the financed goods really were exports, and EXIM could have closed that financing in good policy conscience. But it did not. Concerns about acting beyond what Congress might narrowly have seen as its appropriate role trumped the letter of interest, and matching financing was not offered.
To be sure, EXIM already has a well-established program of domestic lending — its working capital program, which provides pre-export financing to companies planning to export goods produced with the support of EXIM loans.
This provides effective encouragement to mostly smaller firms to venture into exporting, but it is typically far removed from meeting head-to-head competition from foreign export credit agencies. US domestic lending is nothing like the supplier credit programs in Europe, Japan, South Korea and China, which are available to virtually all these countries' exporters.
Beyond the "supplier credit gap," the inability to provide export credits based on a broader definition of US exports will become a larger problem in markets that cross borders with increasing regularity. Satellite and telecommunications companies that are US-based, but sell services overseas or have foreign partners, cannot qualify for financing without taking extraordinary steps of creating offshore entities and restructuring sales processes that may be impractical or impossible.
The growing threat of Chinese government-supported exports will not be met without a more expansive view of export credits.
For example, the US is leading the way in creating global telecommunications networks that will eliminate the rural-urban broadband divide in the US and around the globe. US firms are — on the merits — well ahead of their Chinese competitors. But US companies cannot approach EXIM for finance related to the US market and face challenges getting support for global sales using EXIM's narrow criteria for financeable exports. In comparison, Chinese companies have access to supplier credits, domestic credits for their home market and export credits for US and other markets, all with opaque terms.
China is using its financing tools aggressively. According to EXIM's competitiveness report, long and medium-term export credits are six times those of the US. Even counting the DFC (formerly OPIC), which does not have a formal export mission, total Chinese export assistance from all sources is nearly nine times that of the US.
Beyond the technicalities of national income accounting, the real issue is whether EXIM, in its quest to support American jobs by leveling the playing field, should be prohibited from performing that key function when the relevant playing field happens to be in the United States. The United States is an important part of the global market. US manufacturers being put at a disadvantage in their home market when foreign export credit agencies are free to support their competitors is an imbalance EXIM is suited to redress.
EXIM's statutory authorizations are broad enough to permit it to meet such competitive at home as well as abroad. No Congressional action is needed. Congress, in its oversight function, just needs to let EXIM do what should be its job.