The U.s. Exportimport Bank

Policy Dilemmas And Choices

James J. Emery, Michael F Oppenheimer, Norman A Graham, Richard L Kauffman

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781000306576
• Edition: 1
• Topic: Politics & International Relations
• Subtopic: Politics
• Index: Politics & International Relations

This book assesses the politics and programs of the U.S. Export-Import Bank and their relevance to U.S. trade policy. Focusing on the direct loan program for large credits with maturities of more than five years, the authors evaluate the broad criteria employed by the Bank in its decision-making process and the resulting allocation of Bank resources. They also examine the distribution of Bank loans and subsidies across industries and relate this to key industry characteristics such as comparative advantage and export dependence. The problems faced by the Eximbank in recent years—high borrowing costs, intensified export credit competition, limited resources, increased risks, conflicting mandates to be competitive yet self-sustaining -—have given tremendous importance to the careful articulation of policy and administration of programs. The authors find Bank policies to be broadly supportive of the U.S. trade policy goals, but also identify several areas of inconsistency and lack of definition and offer alternative means of specifying criteria to overcome these problems.

1
Introduction and Overview

The Historical Background

The Bank serves a multiplicity of purposes and is subject to a variety of influences. Global economic conditions affect the Bank's operations policies, as do the economic policy objectives of the current administration and overriding foreign policy interests. These factors will often pull the Bank in opposite directions, and make both policymaking at the Bank and specific decisionmaking on cases a complex process. The criteria the Bank employs thus represent a complex web of guidelines intended to meet an array of goals in a changing environment.

The Export-Import Bank of Washington was established in 1934 with the primary aim of fostering Soviet-American trade. With the extension of diplomatic recognition to the Soviet Union by President Roosevelt in 1933, a surge in demand for U.S. manufactured goods, particularly capital goods and machinery, was anticipated.¹ These types of goods required financing that was not forthcoming from commercial banks; hence the Eximbank was intended to ensure that one of the primary benefits of recognition, the opening of a huge new export market for U.S. industry, would not go unrealized.

Beyond this immediate purpose of establishing a government bank to finance Soviet trade, the creation of Eximbank was also spurred by the economic conditions of the 1930s. The breakdown of the international monetary system in 1931 created a period of instability in international finance, which was compounded by the widespread defaults on international borrowings. These factors increased the risk in international financial transactions, and reversed the trend toward internationalization of capital markets that had developed in the previous decade. International trade was suffering from worldwide depression and from a host of protectionist measures designed to preserve output and employment in the industrial countries. These efforts had at best an offsetting (effect, such as the competitive devaluation of currencies. In this environment Eximbank could play a modest but important role in its ability as a government bank to absorb and judge the risks in international lending and to assume that exports were not frustrated because of a lack of financing.

To meet this need, the Second Export-Import Bank of Washington was established later in 1934, specifically to finance trade with Cuba. Its mandate was soon broadened to include all countries except the Soviet Union. As the anticipated boom in exports to the Soviet Union never materialized, and the problem of Russian debts to the U.S. remained unresolved, the two Banks were merged with the general authority to support exports through financing in all markets.² Until 1939, the Bank concentrated primarily on exports of agricultural goods and exports of capital goods that required long financing terms.

With the outbreak of war in Europe, the Bank's lending became directed toward U.S. strategic and foreign policy interests. This meant principally the extension of loans for industrial goods to non-Axis powers in Europe, and the financing of public works and other projects in Latin America to ensure Western Hemisphere stability and support for the United States. Throughout World War II, the Bank remained a fairly small institution with a lending authority of $200 million and with a minor role in both international trade policy and U.S. foreign policy. In 1945, in response to the need for reconstruction loans to Europe, the Bank was reorganized and given a new charter under the Export-Import Bank Act of 1945.³ This Act, as amended through 1978, constitutes the basic legislation governing the Bank. The Bank's lending authority was greatly increased and its scope of activities broadened. However, its role in postwar reconstruction was short-lived, as it was superseded by the International Bank for Reconstruction and Development and the Marshall Plan.

With the task of reconstruction removed from Eximbank, it concentrated on loans to developing countries for projects that utilized U.S. goods. A major effort was made to encourage the production of strategic minerals through extending credits for the equipment and machinery required in mining and processing. The mid-1950s saw the Bank change the focus of its activities from developing countries to all countries, as it concentrated on export promotion in general. The shift was largely in response to the increasing competitiveness of Europe and Japan, which began to erode the U.S. predominance in capital goods and manufactures as reconstruction was accomplished.⁴ The new emphasis on tailoring programs to give financing support to U.S. industry in cases where it was facing strong competition intensified over the following decades as export credit became an increasingly important facet of international competition.

With the advent of serious competition for U.S. exporters of capital goods and the Bank's responsiveness to the pressure of competition, the set of factors influencing Bank programs today was basically established. While the international economic environment has changed significantly, and specific program criteria have changed, the basic character of the Bank as an institution was defined by the late 1950s. The most important reason for the creation of the Bank, the inability of the private financial system to undertake financing of certain types of exports to certain destinations, remains today as a specific policy goal of the Bank, but in an entirely different setting. The most recent orientation of the Bank, that of supporting U.S. industry where financing is a key factor in international competitiveness, is perhaps the most important rationale at the moment. These factors have been the economic arguments for Eximbank, and have served as the underpinnings of the policy debate that has centered over the Bank's role in recent years.

Economic Rationales for Eximbank

The ability of Eximbank programs to increase exports is the most fundamental rationale for the Bank; from this are derived the more specific rationales of assuring access to finance and providing credit support where they are factors in competitiveness. Yet this basic purpose deserves inspection on its own terms in order to clearly delineate the economic issues involved. The value of increased exports has been expressed in varying terms as the resulting increases in output and employment, an improvement in the balance of trade, or the appreciation in the value of the dollar.

In the macroeconomic context of the balance of payments, an export financed by an Eximbank loan has a delayed effect. An Eximbank loan is disbursed directly to the exporter upon shipment; hence, there is no net foreign exchange activity associated with the Eximbank financed portion of the export. The cash payment portion, normally 15 percent of the export value, results in a net demand for dollars abroad for that amount. Any amount of participation finance has the same effect as the Eximbank financed portion. The impact upon the balance of payments, or foreign exchange markets, is spread out over the term of the loan. This impact is positive as amortization payments are made, and the additional positive impact of interest payments would affect the services account. A breakdown of a $100 loan in terms of its immediate balance-of-payments effects is presented as an example in Table 1.1. As is evident from the table, the current impact of the export is offset by the financed portion. In addition, importers often arrange commercial financing for the cash payment

TABLE 1.1
Balance-of-payments effects of an Eximbank direct loan

	Debit	Credit
Current Account
Balance on Merchandise Trade		100
Capital Account
Long Term
U.S. Assets
Official Loan	42.5
Private Loan	42.5
Short Term
Foreign Assets	15

Note: It is assured here that the cash payment is made by drawing down balances held with U.S. banks. Supplying or restoring these balances would create demand for dollars.

portion, which would further delay the impact of the transaction on the balance of payments.

The effect of interest payments, while positive for any loan, is less so for an Eximbank credit because the interest rates it charges are lower than the commercial rates, if they were available, for the same products. Hence, an Eximbank credit does clearly improve the trade balance, but will have a delayed effect on the balance of payments either in the fixed exchange rate context of the official reserves transactions balance, or in the floating rate context of demand in the foreign exchange market and pressure on the exchange rate. The positive effect will occur only as the loan is repaid. Eximbank loans generate this net benefit to the balance of payments only to the extent that the exports it finances are "additional," or would not have been undertaken without Eximbank financing. The additionality of Eximbank lending depends on the degree to which it directs its resources to those transactions where financing is a critical element.

It is clear that Eximbank lending does bring about an expansion of exports, to the extent that its lending is additional, and thus helps the trade balance. However, there is no clear normative significance one can attach to the trade balance. It is one component of U.S. external economic activity and is not independent of the other components such as services, transfers, and long- and short-term capital flows. There is no economic policy rationale for achieving a balance (or surplus) in trade, per se, although there is a benefit in terms of greater employment and income resulting from increased exports.

Several perspectives from the literature on commercial policies help to further define the balance-of-payments effects of Eximbank lending. To begin with, there is no theoretical basis for a commercial policy measure to be effective under a floating exchange rate regime. Consider an export subsidy (or import duty) that affects all exports (imports) evenly. An export subsidy of this sort would create an initial expansion of exports that would, ceteris paribus, lead to an appreciation of the exchange rate until such point as equilibrium was restored—i.e., the point at which the resulting appreciation exactly offsets the effect of the subsidy.⁵ This conclusion is in sharp contrast to the assertion that under fixed exchange rates commercial policy can increase income, through an increase in production of traded goods, in periods of slack domestic demand. While the actual result may deviate from that predicted by theory, because of the lag in the response of exports to exchange rate changes and other imperfections, the basic conclusion remains valid. However, the asset market theory of exchange rate determination suggests that the anticipated impact of any commercial policy would be factored into expectations of exchange rate movements, resulting in immediate exchange rate appreciation without the full trade effects.⁶

For the type of commercial policy represented by Eximbank lending, an additional refinement to the above general discussion is required. Eximbank credits are targeted and selective; they do not benefit all exports or affect competing sectors equally. Hence, any expansion in exports occasioned by Eximbank lending, leading to an appreciation in the currency, adversely affects all other exports. This results in an inter-sectoral reallocation of production and resources in favor of the industries benefiting from Eximbank. The same would, of course, be true of any selective export subsidy or subsidy equivalent.

In general, the scale of Eximbank lending is small relative to trade flows and other components of the balance of payments. Levels of economic activity abroad, interest rates, the exchange rate, and a host of variables affecting factor prices all far outweigh any impact the Bank may have on U.S. export competitiveness or on the balance of payments. The justification for the Bank rests on more specific factors concerning the importance of financing to particular types of exports.

The original rationale for Eximbank's establishment in 1934, that of providing finance for exports where none was forthcoming from private sources, survives as a more specific purpose of the Bank. This rationale is based on the existence of imperfections in the international financial markets that operate to depress exports, particularly finance-sensitive exports, from what they would otherwise be. The imperfections that affect access to finance are based on either exaggerated risk perception or an unwillingness on the part of commercial banks and other institutional lenders to absorb the risk inherent in export finance. This inability to absorb risk, whether due to misperception, the application of normal standards of financial prudence, or regulatory and statutory restrictions, is not shared by the U.S. government. A government agency such as Eximbank has a better ability to absorb concentrations of risks, greater leverage in negotiating compliance, and a longer time horizon. ...

Table of contents

• Cover
• Half Title
• Title
• Copyright
• Contents
• List of Tables
• Preface
• 1 INTRODUCTION AND OVERVIEW
• 2 CRITERIA IN THE DIRECT LOAN PROGRAM
• 3 THE PATTERN OF EXIMBANK LENDING
• 4 PROVIDING ACCESS TO FINANCE: IMPLICATIONS FOR TRADE POLICY
• 5 REDUCING THE DISTORTIONS OF SUBSIDIZED CREDIT: IMPLICATIONS FOR TRADE POLICY
• 6 MAJOR FOREIGN PROGRAMS AND POLICIES FOR FINANCING EXPORTS
• 7 ALTERNATIVE CRITERIA
• Abbreviations