U.S. Export – Import Bank scheduled for upgrading

U.S. Export – Import Bank scheduled for upgrading

In a time when export trade issues are becoming such vital components of every country’s economy, the activities of one of the most prominent actors on the “trade stage,” the Export-Import Bank of the United States (Ex-Im Bank), need to be addressed. This little known entity often plays a decisive role in fostering international trade and finance. The Ex-Im Bank works primarily to turn potential business opportunities into tangible export sales for both small and large American companies, while also helping to fund export transactions.

The Bank provides three main categories of financial aid: guarantees, loans, and insurance. Some corporations need to be covered by insurance to boost investments in developing countries, aid emerging economies, and cover political and commercial risks. [1]

Currently, the Ex-Im invests in approximately 175 countries, but Latin American countries, particularly Brazil, Colombia, Argentina, and Mexico provide some of the most important markets for U.S. exports-imports. The Caribbean and Latin America represent one-fourth of the Ex-Im’s total global transactions. In terms of its protected sectors, the Ex-Im directs its attention primarily toward oil equipment, technology, machinery, power projects, schoolbooks, food, and engineering trade services. [2]

On a broader scale, the Ex-Im strives to create new jobs in the U.S. as well as strengthen the American economy overall.

The Ex-Im Bank’s History

The Ex-Im, an independent U.S. government agency based in Washington D.C., is the official Export Credit Agency (ECA) of the U.S. It was established in 1934 through a decree issued by President Franklin Delano Roosevelt. While the Great Depression shattered the U.S. economy, the Soviet Union, on the other hand, was experiencing high industrial production and a relatively low rate of unemployment. Consequently, policy makers viewed the Soviet Union as a potentially large market for American goods, and saw the resulting trade relationship with Moscow as a promising means of fostering U.S. economic growth and lowering unemployment. The anticipated relationship could also represent an attempt to promote diplomatic ties between the two countries, as well as between the U.S. and Cuba. The Bank’s first transaction, in fact, was a loan to Cuba in 1935 to expedite the purchase of U.S. silver ingots involving a total amount of 3.8 million dollars. [3]

Since the attempt to promote diplomatic relations with Cuba and the Soviet Union proved largely unsuccessful, the Ex-Im began to embrace the global aspects of trade. For instance, President Harry Truman turned to the Bank to rebuild European economies after the Second World War under the terms of the Marshall Plan. Because of the Bank’s expanding post-war role and its increasing importance, Congress formally designated it an independent government agency, with the Export-Import Bank Act of 1945.

Years later, President Lyndon B. Johnson turned to the Bank to finance development projects in Latin America. Johnson designed his plan to thwart Soviet influence in the region during the 1960s. Prior to 1980, the Bank operated under a single methodology: it granted loans directly to American companies interested in exporting abroad.

In the 1980s, Ex-Im encountered something of a crisis. The Bank lost a large amount of funds due to the high level of trade transactions between the late 1970s and early 1980s. In 1981, with the inauguration of the Reagan administration, the country’s financial institution experienced a new challenge. The administration embraced a strategy that conflicted with large government programs, and weakened the Ex-Im through a consistent drain of funds. President Reagan and the Federal Reserve attempted to balance the domestic economy by increasing the dollar’s value and lowering inflation, but this invited a blow against exports. Moreover, the Latin American debt crisis of the 1980s reduced demand and economic activity in the region.

From the mid-1980s to 1991, demand for U.S. products froze, offering an opportunity for Ex-Im to rethink and reorganize its role and its relationship with the finance and insurance industries.

The collapse of the Soviet Union in 1991 increased demand for Ex-Im products along with new development solutions for the countries formerly in the Soviet bloc.  Those accelerations during the 1990s compelled the Bank to change its focus through the OECD understandings. OECD’s “Arrangement on Export Credits” is a “Gentlemen’s Agreement” among the OECD Members. The main purpose of Arrangement is to provide a framework for the orderly use of officially supported export credits, setting terms for credit and for the use of tied aid.

Most of all, the Bank sought to reaffirm its position as a provider of credit.

This was an impetus for President George W. Bush, who signed the Export–Import Bank Reauthorization Act in 2002. This measure shifted the expiration of the charter to September 2006 and presented new rules regarding insurance and loan practices. The law requires that the Bank evaluate human rights violations for any of its transactions involving more than 10 million dollars. The Bank must focus on projects that create American jobs. Moreover, the 2002 Act underlines that the Bank submit additional rigorous transparency rules regarding the Organization for Economic Cooperation and Development Export Credit Arrangement. [4]

The Ex-Im Bank was reauthorized on December 20, 2006, when Congress extended the Bank’s authority through September 30, 2011. [5]

Congress may introduce legislation to renew the Ex-Im Bank’s authority. In considering such legislation, issues that Congress may examine include the economic rationale behind the Bank, its impact on the federal budget and U.S. taxpayers, its role in promoting exports, its support for specific types of business, and the trade-off between the Ex-Im’s advancement of U.S. commercial interests and other U.S. policy initiatives. Also under examination could be the Ex-Im Bank’s competitiveness compared to foreign Export Credit Agencies, including both those that are members of the OECD Arrangement and those that are not.[6]

The United States Senate Committee on Banking, Housing, and Urban Affairs has discussed the next re-authorization act since May 17, 2011. [7]

 

Critics

Most of the institution’s critics argue that the Ex-Im Bank, a New Deal-era agency, has no present-day relevance in promoting the world’s economic growth.  Therefore, they claim, it should be eliminated since it is a corporation designed to boost American exports and nothing else. The charter for the Ex-Im Bank’s first expiration was set for the end of 2001, and the institute has since operated under continuing resolutions. According to critics, the government should not have reauthorized the Ex-Im’s charter. They maintain that it is difficult for a nation to improve its economy by subsidizing exports, as the effect of export financing is more directed toward altering the domestic economy’s production rather than stimulating the world’s economic activity as a whole. Export financing is also a means of subsidizing foreign consumption of domestic goods at the expense of the United States’ economy. Furthermore, promoting exports will not lower unemployment in the domestic economy; rather, it is most likely to shift the composition of employment among different sectors. Other opponents assert that subsidized export financing increases costs for all lenders by using such resources that would otherwise be available for other investments. The result is a crowding-out effect that nullifies any positive impact that subsidized export financing might have had on the domestic economy. [8]

 

On the other hand, according to the proponents, the Ex–Im should remain extant because its programs help U.S. exporters compete with other institutions of foreign export financing and pressure foreign governments to eliminate concessionary financing of their own. It serves three main purposes: correcting overdrawn risk evaluations for exports to developing countries, increasing the availability of export financing for small businesses, and providing U.S. Treasury with leverage in international negotiations on rules for official export credit agencies. [9]

 

In support of this contention, during the Ex-Im annual conference last year, President Obama said: “Ninety-five percent of the world’s customers and the world’s fastest-growing markets are outside of our borders. We need to compete for them because other nations are competing for them. […] During the financial crisis, as trade finance dried up, the Export-Import Bank lived up to its mission and stepped up to fill the void. And under the National Export Initiative[1], we’ll continue to increase the amount of trade financing Ex-Im offers.”[10]

This is the rationale that Congress should consider when the Bank’s mandate is up for renewal. The Ex-Im is not just competing with private financial markets, but provides additional support for U.S. exports.[11] It has been perhaps unfairly accused of being an antiquated institution tied to the era in which it was created, but in fact it has adapted to meet new situations. It would only need to more aggressively identify new challenges in order to continue to increase the competitiveness of U.S. exporters and the utility of its enduring value.

References:

[1] “Export-Import Bank of the United States Annual Report 2010”, available on the website www.exim.gov, accessed on May, 2011;

[2] John A. Emens, “Ex-Im Bank Help Companies to Boost Exports to Latin America”, March 2004, www.exim.gov accessed on May, 2011;

Eduardo Aguirre, Jr., “Export-Import Bank Financing for U.S. Exports to Latin America”, Seton Hall Journal of Diplomacy and International Relations, Winter/Spring 2003;

[3] http://www.exim.gov/news/reporter.cfm

[4] William H. Becker, William M. Mc. Clenahan Jr., “The Market, The State and the Export-Import Bank of the United States 1934-2000”, Cambridge University Press, 2003

[5] Export-Import Bank Reauthorization Act Of 2006, Public Law 109–438—Dec. 20, 2006;

[6] Shayerah Ilias, Export-Import Bank: Background and Legislative Issues, Congressional research Service, February 9, 2011

[7] Testimony of Fred P. Hochberg – President And Chairman Export-Import Bank Of The United States Before The Senate Banking Committee, May 17, 2010 Available on http://banking.senate.gov/public/index.cfm?FuseAction=Hearings.Hearing&Hearing_ID=3971a00d-7a3f-4441-97ce-36442bfee441 accessed on May, 2011;

[8] James K. Jackson, “Export-Import Bank: Background and Legislative Issues”, CRS Report for Congress, Updated November 14, 2001;

[9] “International Economics Policy Briefs”, Number PB02-4, May 2002;

[10] Remarks By The President At The Export-Import Bank’s Annual Conference, Office Of The Press Secretary, March 11, 2010, http://m.whitehouse.gov/the-press-office/remarks-president-export-import-banks-annual-conference

[11] Gary Clyde Hufbauer, Rita M. Rodríguez, “The Ex-Im Bank in the 21st Century: a new approach?” Special Report 14, Institute for International Economics, January 2001

Other sources:

Ex-Im Bank of the United States Official Website (www.exim.gov)

Organization for Economic Cooperation and Development (www.oecd.org)

The Journal of Commerce (www.joc.com)

All Gov: Everything Our Government Really Does (www.allgov.com)

U.S. Census Bureau (www.census.gov/foreign-trade/statistics)

National Archives. Records of the Export-Import Bank of the United State (www.archives.gov)

“The Charter of the Export-Import Bank of the United States”, www.exim.gov, accessed on May, 2011;

Delio E. Gianturco, “Export Credit Agencies: The Unsung Giants of International Trade and Finance”, Library of Congress Cataloging-in Publication Data, 2001

Allan I. Mendelowitz, “The New World of Government-Supported International Finance”, Institute of International Economics, www.iec.com, accessed on May, 2011;

Ike Brannon, Elizabeth Lowell, Export-Import Bank: Obstacles and Options for Reform, May 2011, www.americaactionforum.org