Subscribe to the CEE’s Export Finance Newsletter.
Many of the criticisms of the U.S. Export-Import Bank (Ex-Im Bank) cited by conservative opponents of its reauthorization are based on flawed logic and factual assertions that are not grounded in reality. The debate over the Ex-Im Bank’s reauthorization must focus on these realities to ensure that American companies of all sizes, their employees, and the employees of their suppliers, can continue to compete on a level playing field in today’s global economy. If the Ex-Im Bank is not reauthorized in a responsible way, hundreds of thousands of jobs will be lost and there will be a flight of companies from the U.S. to more supportive business climates in Europe and Asia.
MYTH: Ex-Im Bank financing benefits only the large companies.
REALITY: The Ex-Im Bank supports three discrete exporter segments:
Ex-Im Bank is critical to each of these exporter segments. For the first two segments,
Ex-Im Bank insurance and guarantees are fundamental to insure commercial bank participation in export finance which is otherwise restricted by government regulations. For the third segment, Ex-Im Bank financing is necessary to level the playing field and encourage foreign buyers to choose U.S. products versus Europe or Asia. While the largest proportion of Ex-Im Bank financing goes to major infrastructure transactions, the overwhelming volume of individual transactions are provided to the small and mid-market companies and is just as critical to their ability to export.
MYTH: Commercial banks alone can provide competitive export financing.
REALITY: The Ex-Im Bank complements commercial lenders by enabling their participation in export transactions. Commercial lenders cannot compete directly with the foreign export credit agencies without Ex-Im Bank support.
All major commercial banks have tightened their lending criteria since the financial crisis. Foreign export credit agencies have filled the void, becoming larger, more flexible in terms of their programs, and more aggressive on behalf of their companies in undertaking strategic initiatives to establish commercial footholds in the frontier economies. Most have tripled in size since 2008.
The reason is simple—countries are seeking to utilize export growth as a core mechanism for rebounding from the financial crisis. For them, aggressive support of their exporters is simply an investment in their economy. According to the World Bank, in 2012 German exports represented 52% of its GDP, Belgium’s 86% of its GDP and even Italy’s exports represented 30% of its GDP, more than double that of the United States. In Asia, Korea’s exports represented 57% of its GDP. This heavy reliance upon export growth is why export credits won’t go away—they are fundamental to the recovery strategies of exporting countries around the world.
Commercial banks, both U.S. and international, since the financial crisis have become subject to regulatory constraints that discourage capital usage for export financing and are prohibited under Basel III from devoting significant capital to export financing. Ex-Im Bank is needed to neutralize these ECA offers so that U.S. companies can compete on a level playing field.
The reality is that ECA financing is increasingly required as part of any bidding package for large transportation or infrastructure transaction. For instance, ECA financing availability is needed to bid on nuclear facilities, large-scale power projects or petrochemical plants. Also, ECA financing is necessary when countries are purchasing expensive equipment like locomotives, satellites, or mining trucks.
MYTH: 98% of exports have access to private capital and don’t need the Ex-Im Bank.
REALITY: The reality is that Ex-Im Bank actually supports anywhere between 10-20% of capital goods to frontier markets whose value is estimated at more than $166 billion (FY12) with exports financed by Ex-Im Bank reaching $20.44 billion for that Fiscal Year.
It is those exports—the high technology, cutting-edge exports—that are the exports
most fought over.
Most exports, like agricultural commodities, tourism, or auto parts are settled with
cash, letters of credit, or less than 90-days open account and thus do not require ECA
financing. Contrarily, exported capital goods are necessary in developing countries as
they expand their infrastructure and support the U.S. with high paying jobs. This capital
equipment requires longer tenors that cannot be satisfied by commercial banks or
commercial markets alone. The U.S., Western Europe, and Japan are in fierce competition
to supply these critical goods and the follow-on sales they provide. Failure to win these
transactions precludes U.S. companies from competing for the follow-on service and
parts for a decade or more.
World infrastructure demand is on the rise. A failure to support the competitiveness for
these exports will only force these exporters to move their manufacturing to locations
where they can obtain more competitive financing.
MYTH: Ex-Im promotes production in one sector of the economy to the
detriment of another sector.
REALITY: If a foreign exporter has ECA financing and its U.S. competitor
doesn’t have the support of Ex-Im Bank, the U.S. Company will likely lose the
sale every time.
Protecting U.S. companies from unfair trade practices is the job of the International
Trade Commission. Blocking exports to a project that competes against a U.S. company
only concedes the project to European or Asian exports. Under such a policy, the U.S.
loses twice. The consequence for U.S. exporters are declining investments in R&D,
reduced exports, shrinking business, and increased job losses or no job growth.
A company like Delta, for example, doesn’t want any new wide-body aircraft sales
because it undermines their very successful business model that relies on older,
refurbished planes. So its strategy is to attack Ex-Im Bank financing of Boeing aircraft,
regardless of whether it would jeopardize hundreds of thousands of Boeing jobs and
those of its 15,000 plus suppliers. But Ex-Im Bank cannot prevent sales of wide body
aircraft from taking place; it can only give Boeing a fair chance to compete against
Airbus. And for that the Ex-Im Bank deserves to be vilified? For those exporters
needing competitive financing, we think not.
MYTH: Ex-Im Bank is just another Fannie Mae or Freddie Mac.
REALITY: Ex-Im Bank poses no risk to the U.S. government and does not
disturb the marketplace.
Ex-Im Bank’s portfolio is well-diversified regionally and by sector; the Ex-Im Bank
portfolio is over collateralized, especially in its largest product sector; and it has
significant counter guarantees taking low Japanese and other sovereign risk. Its loan
loss rate is proscribed by Congress and is carefully monitored by the Ex-Im Bank and is
currently less than one quarter of one percent. What’s more, borrowers are acutely
aware that defaulting to the U.S. government has significant adverse consequences.
The Ex-Im Bank’s strong portfolio has withstood the test of market disruptions in
the past. The Ex-Im Bank made money through the Mexican financial crisis, the Asian
financial crisis, the Russian financial crisis, and the 2007-08 financial crises. It has made
money for the U.S. Treasury throughout its existence from 1934 to the present and in
2013 paid a dividend of over $1.1 billion to the U.S. Treasury.
MYTH: If everyone is “subsidizing,” than we should remain aloof.
REALITY: The World Trade Organization is clear that Ex-Im Bank financing terms
and conditions are not subsidies.
OECD member countries charge market rates and enjoy good returns on their
export credit programs. Countries like China and India, which don’t follow the OECD
arrangement, may still be providing export subsidies but most do not. Only once since
mid-2010 has Ex-Im Bank financing terms gone beyond OECD terms in an effort to
match a Chinese financing package in Pakistan. The bank has provided a dividend to the
U.S. Treasury of over $2 billion in the past several years, and under the Federal Credit
Reform act of 1990, CBO recognizes that Ex-Im Bank makes money for the taxpayer.
But the real issue is whether the U.S. should unilaterally disarm and drive our best
manufacturers offshore. The result would be devastating to the economy and to
American jobs. Recently, one of my association’s members has received invitations from
four foreign export credit agencies (three in Europe and one in Asia) in the past month
to discuss moving production from the U.S. and for them to displace US Ex-Im Bank in
support of these sales. U.S. sales teams are now hearing about quotations from House
Financial Services Committee Chairman Hensarling, which have begun appearing in
foreign competitors’ sales pitches. Other companies have discussed export opportunities
already lost because of uncertainty about the U.S.’s willingness to compete. This situation
will only get worse as time goes on.
MYTH: Ex-Im Bank supports companies like Solyndra.
REALITY: The Ex-Im Bank doesn’t invest in U.S. companies; it supports U.S.
exports by providing financing to the buyers of U.S. goods and services contingent
upon their selection of American exports.
A European company selected Solyndra solar technology to purchase and install in a
project it was developing; Ex-Im Bank supported that sale. The equipment was installed,
the project has been successful and the buyer is current on its loan repayment.
MYTH: The Ex-Im Bank provides disproportionate benefits to 10 major companies.
REALITY: Ex-Im Bank financing supports exports from small, mid-sized and large
businesses, 3200 in all.
For most of these companies, the loss of Ex-Im Bank financing would preclude their
ability to export their products. For some, the loss of Ex-Im financing would put them
out of business.
The larger businesses also have thousands of small suppliers that are dependent
indirectly on Ex-Im Bank financing. The bottom line is that Ex-Im Bank financing is
critical to all of these companies.
MYTH: Ex-Im Bank direct loans compete against the private sector.
REALITY: Competitive financing from Ex-Im Bank may also require direct lending
from the Ex-Im Bank to address liquidity shortfalls.
During the recent financial crisis commercial banks could not lend long term even with
a U.S. government guarantee. But as the banks have recovered, Ex-Im has reduced its
direct lending except in situations such as project finance where the commercial banks
have not been interested in participating.
MYTH: Ex-Im Bank is no longer necessary.
REALITY: As export growth represents an increasing share of U.S. GDP growth,
Ex-Im Bank plays an increasingly critical role both in supporting small business
exporters and in leveling the financing playing field for the larger exporters.
With more small companies trying to export and larger exporters facing aggressive
financing from the export credit agencies of their competitors, Ex-Im Bank’s role
continues to be vital to the U.S. economy and to American jobs.
1 12 CFR Part 3
2 European Banking Federation - Basel III Assessment
3 Hermes Annual 2012 and JBIC Annual Report 2013
4 Generally Accepted Accounting Principles (GAAP) as set forth by the Federal Accounting Standards Advisory Board