June 16, 2014
The Export–Import Bank (Ex–Im) funnels billions of taxpayer dollars each year to overseas businesses for the purchase of American products. This subsidized financing is supposedly a win-win proposition for exporters and their customers abroad. But rare is a subsidy that does not produce disparity elsewhere. In the case of Ex–Im, the losers include domestic companies that are left to compete against foreign firms bankrolled by the U.S. government.
This and other drawbacks of Ex–Im are important to acknowledge as Congress considers whether to reauthorize the bank before its charter expires on September 30. The decision should be an easy one. Ex–Im effectively ignores the impact of its actions on American workers, as well as the risks to taxpayers, while exaggerating the benefits of those actions.
Government authorities have documented a variety of problems with bank operations, but the fact that Ex–Im financing handicaps at least some American businesses is sufficient reason to end it. Recently, for example, the bank approved $694 million in financing for U.S. equipment to develop an open-pit iron ore mine in Australia (owned by the country’s richest woman). The deal was consummated despite warnings from the United Steel Workers, the Iron Mining Association, and all four Senators from Minnesota and Michigan that the subsidies would jeopardize thousands of U.S. mining jobs.
Global trade benefits the U.S. economy, but Ex–Im subsidies confer a competitive advantage to a select group of favored firms. Rather than perpetuate this cronyism, Congress should allow the bank’s charter to expire and undertake tax and regulatory reforms that would strengthen the competitive position of all U.S. businesses.
Foreign firms receive Ex–Im financing to purchase U.S. equipment for manufacturing and resource extraction or to provide commercial services. However, the bank’s charter prohibits financing under three conditions:
These statutory prohibitions are intended to balance the interests of U.S. exporters and the domestic firms that would compete against subsidized businesses overseas. But there is a major loophole: The charter allows the bank’s board of directors to override the constraints if they decide that a transaction would produce a “net benefit” to the U.S. economy.
In order to determine the potential effects of an export subsidy, the bank is supposed to perform an economic impact analysis, but a review by Ex–Im’s inspector general (IG) of the analyses conducted between 2002 and 2009 found that the bank
did not address directly several elements of economic impact contemplated by the Charter, omitted relevant data and analysis beyond that considered necessary to support the staff’s recommendation, did not state the limitations and qualifications of the data, assumptions, estimates, methods and analysis, did not fully address the sensitivity of the staff’s conclusions to possible changes in assumptions and estimates that could be reasonably anticipated.
Indeed, none of the Ex–Im personnel interviewed by the IG’s office possessed professional training or expertise related to economic impact analysis. Moreover, the bank does not consider the impact of any finance deal involving less than $10 million, which excludes some 80 percent of Ex–Im transactions.
All of this means that bank officials dole out billions of taxpayer dollars to foreign firms without a meaningful consideration of the impacts on American workers and the businesses that employ them.
Every type of industry undergoes booms and busts. Neither one typically results from a single cause but instead is a product of myriad factors, including changes in demand, currency fluctuations, and innovation. But government policy can dampen gains and exacerbate losses, which is the case with export subsidies. Ex–Im financing of coal mining in Colombia, copper excavation in Mexico, and airplanes for India has been identified as contributing to losses among domestic firms.
The following Ex–Im deals have been cited by lawmakers and industry experts as examples of just some of the billions of dollars in taxpayer subsidies that put domestic firms at a competitive disadvantage:
Ex–Im beneficiaries argue that export financing preserves American jobs, but the vast majority of bank subsidies benefit very large corporations that could self-finance or obtain private investment—as is the case for 98 percent of all U.S. exports. Rather than perpetuate these subsidies, Congress should help all American businesses by reducing corporate tax rates and regulatory burdens.
Allowing the bank’s charter to expire should be a no-brainer for lawmakers. (Even Barack Obama, as a presidential candidate, endorsed its end.) With strong growth in privately financed exports, there is no justification for maintaining this Depression-era relic.
—Diane Katz is a Research Fellow for Regulatory Policy in the Thomas A. Roe Institute for Economic Policy Studies, a department of the Institute for Economic Freedom and Opportunity at The Heritage Foundation.
Originally appeared in Eurasia Review