Monday, April 27, 2015

What Americans for Prosperity Gets Wrong About the Ex Im Bank

Ted Jones
The following is a guest post by Ted Jones, Director of International Supplier Relations for NEI.

A spokesperson for Americans for Prosperity told The Hill last week that Congress should allow the U.S. Export-Import Bank to expire when its authorization ends in June.
If a particular sector like the nuclear sector needs Ex-Im to survive, “the fact that your industry has grown dependent on taxpayer-backed loans doesn’t mean that it needs to continue forever,” Russell said.
While that sounds like a principled free-market argument, a closer look at the realities of international trade demonstrates that it is a mistaken premise for ending the Ex-Im Bank. To the contrary, the conservative principles of fiscal responsibility and American leadership in global affairs should lead Tea Party groups to support Ex-Im.

Ex-Im Bank serves a crucial role for nuclear exporters that the private sector cannot. U.S. nuclear exporters turn to Ex-Im precisely because financing alternatives in the private sector don’t exist, not because they can’t compete as AFP claims. This happens for a variety of reasons, including the following:
  • Export credit agency support is almost always a bidding requirement for nuclear power plant tenders. Ex-Im Bank is therefore vital to the success of U.S. exports even in cases where the customer ultimately elects not to use Ex-Im financing. Without Ex-Im Bank, U.S. commercial nuclear suppliers would suffer a major competitive disadvantage or be excluded for failure to meet tender requirements.
  • Emerging markets – where commercial nuclear energy opportunities are concentrated – do not have well-developed capital markets. This makes competitive financing from a foreign export credit agency vital.
  • Ex-Im Bank participation enables commercial lenders to assume a role in financing nuclear power plants that they would not otherwise accept. Risk in nuclear power plant finance is typically low. But commercial lenders are averse to financing nuclear power projects for regulatory reasons – specifically, the higher capital requirements mandated under the Basel III accord.
George Landrith, President of Frontiers of Freedom, put it this way in a piece in 2014 at
By law, the Ex-Im Bank does not compete with private sector lenders. It is a “lender of last resort” and simply provides economically sustainable loan guarantees where they are not otherwise available. Some nations have underdeveloped economies or banking systems. The Ex-Im Bank fills-in banking gaps so that U.S. goods can be exported to nations where commercial financing is insufficient or underdeveloped.
Here’s one last note on this important point: Without Ex-Im Bank support, U.S. companies would specifically be at a severe disadvantage against international rivals, especially the Russians which offer competitive financing and strong state support for their nuclear bids. Without a doubt, Vladimir Putin is applauding AFP’s efforts to kill the Ex-Im Bank.

Ex-Im Bank is not a significant taxpayer risk. Ex-Im has highly diversified portfolio that spans the industry sectors and regions of the world, and it authorizes insurance, guarantees, and loans in a judicious manner. As a result, Ex-Im’s current default rate is just 0.194 percent – far lower than the typical rates in the commercial banking sector. In the nuclear energy market, sovereign guarantees usually apply because the customer is typically owned or backed by the foreign government.
Ex-Im Bank subsidizes the American taxpayer, not the other way around. Ex-Im uses the interest and fees it receives to cover all of its own operating expenses, meaning U.S. taxpayers don’t actually fund any of Ex-Im’s operations. When the Bank’s revenue exceeds the cost of doing business, taxpayers make money. In 2014, taxpayers made $675 million from Ex-Im. The year before that it was $1 billion. Over the last two decades, taxpayers have profited more than $7 billion. That’s $7 billion that went to reducing the U.S. deficit.

Current accounting methods are appropriate for Ex-Im Bank. Some critics of Ex-Im point to an analysis by the Congressional Budget Office (CBO) that considers an alternative accounting method called fair-value estimation – an analysis that has come under fire from former OMB Chairman and one-time Congressional budget hawk Jim Nussle. While the fair-value approach has its uses, it does not provide actual data on whether or not Ex-Im is profitable. CBO’s fair-value analysis seeks to compare Ex-Im loans and guarantees to those of private banks. If private banks generated higher returns than Ex-Im for similar loans, one could conclude that Ex-Im and taxpayers are losing out on potential profits. However, there’s a big problem with this logic – there are no comparable loans or guarantees in the private sector. Ex-Im only lends where the private sector is unable or unwilling in order to match foreign competition.

Ex-Im Bank supports national security interests. As a group of former national security officials have argued, Ex-Im Bank provides critical support to exports that have strategic value. Nuclear energy is a prime example. When U.S. firms win foreign nuclear energy tenders, U.S. interests in energy security, nuclear safety and nonproliferation are advanced. U.S. firms face formidable international competitors – all of which receive competitive export financing. Russia, for example, has rapidly expanded its share of the international nuclear energy market – in large part due to its aggressive export finance. Without Ex-Im Bank to maintain a level playing field against Russian finance, the United States will cede many transactions – and influence – to Russia.

Looking at this issue solely through an ideological lens can obscure the facts about Ex-Im Bank. Ex-Im Bank enables the U.S. nuclear energy industry to compete for and win international nuclear energy tenders, reducing the energy dominance of Russian energy suppliers while generating billions of dollars in U.S. exports and tens of thousands of American jobs. But that is not all. Ex-Im Bank also eases the American taxpayer’s burden and reduces the U.S. federal deficit. That is a deal that all of us – and especially the Tea Party – should strongly embrace.


Anonymous said...

I'm not opposed to the Ex-Im Bank on principle, because it does provide a means to support exports in a way that wouldn't happen without it. However, I do believe that it should operate as a lender of last resort, and not a lender of first resort. The main objections I see to it from domestic companies is that it often allows their competitors to buy product at terms that are better than what they can obtain themselves. That part bugs me. The Ex-Im Bank should provide funding at a cost that is some amount higher than anyone else in that industry can obtain. Otherwise the government is simply distorting competition in the market - and that just leads to problems in the long run.

It should be the goal of all users of Ex-Im to become better credit risks so that they don't have to use Ex-Im in the future - and thereby get better credit terms.

Joseph said...

If private financing is prevented by regulations, wouldn't it make more sense to try to get the regulations repealed? That way you would be working with natural allies instead of against them.