Economy / Other / Politics / Regulation

Validity of the ExIm Bank: Why Market Radicals Fail to Understand the Modern Economy

 

Recent political proceedings on Capitol Hill regarding the reauthorization of the Export Import Bank have revealed a deficit in economic competence on the part of market fundamentalists who believe that the Ex-Im Bank should be shuttered. Founded in 1934 under the FDR administration, the Ex-Im bank has been one of the primary establishments within the U.S Government that establishes a crossroad between foreign policy and monetary policy. Over the last 79 years, The Ex-Im bank has provided approximately $550 Billion worth of financing, 85% of which directly impact small businesses. This funding primarily is directed at developing economies that are either unwilling or unable to accept private financing, shielding financially vulnerable countries from credit risk. Past projects include the construction of the Pan American Highway, the funding of exports to Southeast Asia during their fiscal crisis in the late 20th century, and the provision of insurance of waivers to airline companies after the September 11th 2001 attacks.
There are two major concerns that critics of the Export-Import Bank commonly cite.  This paper will outline why the Ex-Im Bank is a necessary component to the US financial system that promotes competitive manufacturing practices within the United States. The following points address the uninformed concerns that have surfaced from the claims of those who advocate for the complete abolishment of the bank. The necessity of Ex-Im is an economic reality, and is completely justified by an unapologetic and pragmatic trade policy.

Claim 1: The United States abuses the Ex-Im Bank to prop up American Manufacturing and exports, at the cost of consumers.

As a disclaimer, it is in fact true that the United States is an exporting power. Despite what some media sources may claim, United Nations data shows that the value of US value of exported goods and services in 2012 was almost $2.1 trillion, whereas the value of China’s exports during that same year was $2.3 trillion. With our Ex-Im bank investing $14.5 billion in credit volume compared to China’s $45.5 billion in 2013, US leverage is alive and well. Put plainly, if the United States’ economic institutes were consuming vitamins to supplement their diet, Chinese government’s economic export policy would be on steroids. One traditional argument against this point of view would be that China’s wellbeing relies more heavily on exports, whereas the United States GDP relies on domestic consumption (and subsequently has a primarily inward facing economy).  However, with China’s exports as a percent of GDP decreasing by 3 percent over the last two years, the United States has found recent traction in exporting highly specialized goods (namely airplanes, solar panels, and other technologically advanced products.). This has led to the United States increasing exports relative to GDP by 3% over the last 2 years. With the economy being subject to weak economic growth since the recession, international trade is required to supplement current monetary policy.

Considering export credit volumes in China are almost 3.2 times when compared to the United States, it is clear that the Ex-Im bank is a value proposition for both American manufacturing and labor. With 6,000 domestic jobs created for every added billion dollars of exports to boot, consumers that may not be employed in the manufacturing and assembly are assisted by a bank that yields a positive return to the Treasury, and accounts for less than 0.001 percent of federal debt expenditures.

Furthermore, some scholars believe that the bank “coaxes foreign companies to buy planes.” This dangerous claim assumes that the Ex-Im bank forces developing nations to take loans for private products. I personally am not sure as to what grounds are used by Libertarian scholars to make this claim, but one could safely presume that Ex-Im is simply a lender of last resorts. In the case that the Ethiopian Government chooses to finance with Ex-Im, it would be the State of Ethiopia’s discretion alone that leads to this decision. In the misguided situation that we make economics a question of morals rather than one of scarcity, would the Ethiopian government not be to blame for deciding to pursue this alternative?

Claim 2: The strategy employed by Ex-Im distorts price signals, allowing for companies that otherwise wouldn’t survive international competition to be privy to “crony capitalism.”

In an optimal world, mechanisms such Ex-Im could cease to exist and a pure market would be allowed to control pricing indiscriminately. Yet, the important tenet that market purists fail to recognize is that international markets have been far from free, especially with the conclusion of the first Bretton Woods Conference in 1944. Since then, a combination of expansionary and contractionary monetary policy have become a necessary evil, as Reagan proved that well-timed contractions in a monetary system can in fact increase aggregate wealth at the cost of income equality.  The creation of complex debt instruments further perpetuates this, as information asymmetry has become a systemic risk to uninformed investors. These risks create the necessity for limited government intervention, and said intervention should not be discredited for the sake of an ideology that is factually outdated and consistently placed out of context.

The data below provides a framework for considering the Ex-Im bank’s current policy in context of the policies of other countries.  This includes the top ten countries ranked by GDP, from smallest to largest. This list is ranked by each country’s “gross export value” (the dollar value of exports as a percent of GDP.). The credit to GDP ratio was created by taking 2013 GDP estimates (in trillions of dollars) from the World Bank dividing that figure by the export credit volumes reported by each credit authorization bank (in billions of dollars.). The intervention rate is calculated by dividing export credit volume by Gross Export Value.

 

 

 

 Country  GDP

($Trillions)

 GDP

(%total)

 Export

Credit (Billions)

 Credit: GDP Ratio  Exports/GDP

 Ratio

Gross Export Value ($Billions) Intervention rate
Brazil 2.24 4% 4.1 1.83 0.13 291.94 1.40%
India 1.87 4% 5.1 2.72 0.25 469.20 1.09%
Canada 1.82 4% 1.9 1.04 0.30 547.53 0.35%
Russia 2.09 4% 0.7 0.33 0.28 587.10 0.12%
Italy 2.07 4% 5.4 2.61 0.30 621.39 0.87%
Japan 4.90 10% 2.1 0.43 0.15 735.23 0.29%
France 2.73 5% 9.5 3.47 0.27 738.44 1.29%
UK 2.52 5% 3.9 1.55 0.31 781.90 0.50%
Germany 3.63 7% 22.6 6.22 0.51 1853.76 1.22%
USA 16.8 34% 14.5 0.86 0.14 2352.00 0.62%
China 9.24 18% 45.5 4.92 0.26 2402.47 1.89%
Summary: 49.94 100% 115.3 2.31 0.26 11380.95 1.01%

 

Brief analysis reveals that many arguments against the Ex-Im bank are sorely misguided. The United States has the second largest Gross Export Value, trailing behind China’s export value by a relatively small margin of 2.2%. With export credit volumes of less than $15 billion, this means that the United States manages to yield the second highest Gross Export Value of the top 11 economies ranked by GDP, while maintaining the 5th lowest intervention rate. This means that only .62% of our dollar value in exports is attributed to Ex-Im. Compared to China’s intervention rate of 1.89%, it is undoubtable that the United States manages to leverage their export position without having Ex-Im distort price signals. Although it is accurate to state that we have the third largest export credit value, it would be unfair to state this as an aggregate value without normalizing values for GDP and contributions to international wealth. For every one trillion dollars produced by the United States in goods and services, the Export Import Bank only intervenes in $.86 Billion, compared to Germany’s heavily intervention rate which equates to a $6.22 billion distortion for every trillion dollars of goods produced within Germany.  The United States has an Ex-Im bank that is 95% smaller than Germany’s export credit agency when accounting for GDP, and still manages to leverage assets correctly in order to maintain a 21.2% higher next export value in the United States. Crony capitalism would imply that the United States is somehow managing to maintain this lead by out-funding the German and Chinese effort to boost export activity.  With Germany and China doubling and tripling our intervention rate respectively, this is hardly the case. Even in the case that Ex-Im is somehow favoring certain larger corporations (although 85% of their transactions directly benefit small businesses), the dollars spent on Ex-Im in the United States with respect to economic size and activity is marginal when compared to other countries, at best.

In summary, the far right needs to understand that macroeconomic policies are subject to relativism. Making an egregious claim that the United States exporting intervention is a facet of crony capitalism is a stubborn rejection of commonly held beliefs in international trade theory, and economic relationships.

 

 

 

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