Three Myths about the Ex-Im Bank

by , Petersen Institute

61ae8-exim-bank1Congress has begun holding hearings on the reauthorization of the US Export-Import Bank, which provides financing assistance to help US exports. TheEx-Im Bank’s charter expires in September. Three myths are being perpetuated by the new House majority leader, Kevin McCarthy, and other conservatives who would like to see the Ex-Im Bank closed. Below these myths are considered in turn.

Myth #1 — The Ex-Im Bank is a drain on taxpayers.

No, it sends money to the US Treasury from the interest and fees it receives on loans, amounting to $2 billion over the last 5 years. The reality for taxpayers is that the Ex-Im Bank pays interest on the funds it borrows and returns a profit at the end of the day. The default rate is very low, generating very little risk for taxpayer money.

The Ex-Im Bank’s foes argue that private banks would charge exporters higher interest rates, and therefore exporters are getting subsidized loans, which is costly to taxpayers. However, as my colleague Gary Hufbauer shows, this so-called “fair value” measure uses private rates that are arguably far from comparable.

Myth #2 — The Ex-Im Bank is a form of crony capitalism.

Crony capitalism prevails when ties between government and business determine success. The Ex-Im Bank’s detractors argue that too much money goes to big exporters like Boeing and General Electric (GE). In reality, the Ex-Im Bank’s clients reflect the broader distribution of US exports, where large exporters account for the bulk of trade. Specifically, 90 percent of borrowers are small businesses, similar to the rate of small businesses in trade (85 percent of exporters have fewer than 100 workers, and 95 percent of exporters have fewer than 500 workers). While small businesses accounted for only 19 percent of the total amount authorized by the Ex-Im Bank last year, this is also similar to their share in trade. Firms with 100 or fewer employees account for just 15 percent of export values, on average, and firms with fewer than 500 employees account for 25 percent of exports. The skewed distribution of export financing simply reflects the skewed distribution of exporting.

True, four employees at the Bank are being investigated by the Justice Department for allegedly accepting gifts in exchange for loans or contracts (not with the big companies). The investigation shows that corruption is not tolerated in the institution, but it still smells bad and comes at an unfortunate time. And, of course, corrupt individuals, with a much greater cost to society, are also found in private sector banks (and Congress, for that matter). In response, the Bank must be transparent in its anti-graft rules and their implementation in order to ensure we don’t toss out America’s top exporters with four bad apples.

Myth #3 — The private sector will do better.

The government intervenes when there are positive effects to lending in a sector. Take student loans. There are positive results derived by a more educated public, so governments offer students lower rates than they would receive on the private market.

The same argument can be made for trade (and exporters have a much lower default rate than students). There are public benefits from having more exporters, which create better jobs—exporting firms tend to pay more and offer more benefits than other firms—and are less vulnerable to fluctuations in local demand. In addition, there are a lot of hurdles to export participation, such as paperwork and logistics. Cheaper loans help to offset these costs, especially for small businesses that may otherwise be unable to enter the export market.

There is also a legal distortion in the private market. Trade is highly collateralized, but foreign accounts receivable are ineligible to count as collateral in bank borrowing. This means that private sector interest rates on trade finance tend to be well above what their real risk warrants.

Finally, there is the important issue of the level playing field. Our large trading partners have trade financing banks that are many times larger than the US Ex-Im bank. Without this tool, we put US firms that create good jobs for Americans at a disadvantage with respect to foreign competition.

Given the Bank’s extremely specialized role, with no obvious cost, it is difficult to understand why the Bank has even become a target. Unlike healthcare or unemployment insurance, where support follows traditional party lines, the reauthorization of the Ex-Im Bank pits the right against the far right. Does this new territory suggest that the Republican Party is fragmenting? Or is this part of a broader strategy, where bank closure brings the discussion on spending and redistribution one step closer to the bigger fish that conservatives in the party really want to fry?

SIA Deems Ex-Im Bank ‘Critical’ to US Satellite Industry

By Caleb Henry | Feature, Government, North America, Regional, Satellite TODAY News Feed


SSL workers assemble the ABS-2 satellite at the SS/L manufacturing facility in Palo Alto, Calif. Ex-Im Bank approved $461 million of credit to finance the export of three American-made satellites to Hong Kong. Photo: SSL [[Via Satellite 08-18-2014]

In less than two months the United States Congress must make a decision on the fate of the Export-Import Bank, an independent federal agency designed to provide export financing when private banks are not able. The satellite industry around the world stands out as the quickest-growing market the bank supports, which makes this decision pivotal for satellite as a whole. In one of her last interviews as president of the Satellite Industry Association (SIA), Patricia Cooper spoke to Via Satellite about the importance of the Ex-Im bank for the industry.

“We call it an increasingly critical element in U.S. companies winning satellite business, particularly given that there is such an increase in brand new satellite operators. More than 12 new countries in the last five years have become satellite operators, so while export credit financing may be helpful for traditional or fleet-based operators, there are a lot of new entrants to the business, and it’s a high upfront and fixed cost business. Securing the credit for such a costly up front project is a significant factor,” said Cooper.
Credit financing is one of many factors satellite operators consider when making a purchase. Without the Ex-Im bank, U.S. manufacturers would have to do their best to offer comparable terms to foreign competitors that have government-supported export credit agencies. According to the SIA’s “State of the Satellite Industry Report,” approximately 68 percent of the $15.7 billion global satellite manufacturing revenues in 2013 came from U.S. companies. Without the bank, satellite operator decision-making on new purchases is likely to change.

“The concern is it would distort decision making for buyers. They would no longer be looking at an even playing field where manufacturers from all of the global providers would have comparable [financing] packages. Instead they would be looking at financing as one of the lead items rather than one of the many factors they might consider,” said Cooper.

The Ex-Im bank has supported numerous satellite projects for SSL, Boeing, Lockheed Martin, Orbital Sciences and others. SpaceX too has received considerable support, including a 105.4 million loan to launch the Amos 6 satellite for Israeli satellite operator Spacecom. Without the bank, more deals may go to other foreign manufacturers and launch providers in the future.

“The bank is very important to Boeing, mostly for commercial airplane sales but also for satellite sales,report global or just within the U.S.?ext but I want to check with you that this is correct. is book.then see the headlines, I d” said Boeing spokesperson Tim Neale. “It is a significant competitive issue for us. Some 60 countries have export credit agencies, including all of the countries with aerospace industries. Airbus has the support of three export credit agencies (in France, Germany and the United Kingdom). Customers have been telling us for months that they are concerned about the future of the U.S. Export-Import Bank.”

Neale described the Ex-Im bank as a “critical competitive need.” Russia’s Export Insurance Agency of Russia (EXIAR) and France’s French Insurance Company for Foreign Trade (COFACE for its name in French) both support satellite projects in their respective economies. The decision to reauthorize the bank, should Congress do so, is seen as a move that would maintain a more level playing field for U.S. companies.

“The concern is that international buyers, particularly [with] private financing on their own, would either not be able to buy satellites or they’d be directed by the absence of credit financing in the U.S. to buy non-U.S. spacecraft,” said Cooper.

On July 15, governors from 31 states sent a signed letter to John Boehner, R-Ohio, Harry Reid, D-Nev., Nancy Pelosi, D-Calif., and Mitch McConnell, R-Ky., urging them to prevent the bank’s charter from expiring this year. Congress is currently on summer recess, pushing the decision even closer to the edge. Without authorization, the 80-year old bank’s charter will expire on Sept. 30.

Wine-Infused Ice Cream Boosts U.S. Small Company Exports

By Jeff Kearns , Bloomberg

Mercer’s Dairy in Boonville, New York. Mercer’s manufactures all of its products in Boonville for distribution throughout the world.Photographer: Mike Bradley/Bloomberg

Used to be, Mercer’s ice cream wasn’t found far from the 60-year-old dairy in Boonville, a town of about 4,500 in central New York.

Now Mercer’s Dairy owners Ruth Mignerey and Roxaina Hurlburt and their 25 employees ship specialtywine-infused ice cream in a half-dozen flavors, including Cherry Merlot and Riesling, to 14 nationsincluding China, Indonesia, the Netherlands, Seychelles and Trinidad and Tobago. The product was conceived at a 2005 event sponsored by then-U.S. Senator Hillary Clinton and sales began two years later. Exports started in 2008 and now account for about a quarter of annual sales of more than $1 million. Employment is up from 20 four years ago.

“We went from being a local institution with maybe a 100-mile radius of people knowing Mercer to building a global brand,” Mignerey says by phone amid preparations to expand on four continents. “There are so many people who say something can’t be done and it can. Just don’t take no for an answer.”

Photographer: Mike Bradley/Bloomberg  Half gallon cans of wine ice cream at Mercer’s Dairy in Boonville, New York, 
 

Foreign sales by small companies like Mercer’s are becoming a focus for economic development officials in upstate New York and other U.S. regions who are seeking a bigger slice of record exports to boost growth. Shipments abroad by businesses with fewer than 500 employees accounted for 32.9 percent of the U.S. total in 2012, up from 29.2 percent in 2005, according to Census Bureau data.

Continuing to move the needle means persuading more such companies that it’s possible to sell outside of the country. President Barack Obama, who pledged in his 2010 State of the Union speech to double exports in five years, created the National Export Initiative, in part to help small businesses sell abroad.

Photographer: Mike Bradley/Bloomberg

One Country

There’s still plenty of room for improvement. Less than 1 percent of the nation’s 30 million companies ship outside the U.S., significantly less than other developed countries, according to the Commerce Department’s International Trade Administration. Of those that do, 58 percent sell to just one country.

U.S. exports rose last year to a fourth-straight record of $2.28 trillion, increasing by almost $700 billion from 2009 to account for 13.5 percent of the $16.8 trillion gross domestic product, according to Commerce Department data. Selling goods and services abroad supports 11.3 million jobs, the datashow.

A report today showed confidence among small businesses increased in July. The National Federation of Independent Business’s optimism index increased by 0.7 point to 95.7, close to the almost seven-year high of 96.6 reached in May. A net 13 percent of respondents said they planned to hire, the highest share since September 2007.

Skepticism Challenge

Skepticism is the main challenge in working with small firms to expand beyond the nation’s borders, according to Robert Simpson, president of the CenterState Corporation for Economic Opportunity in Syracuse, New York.

He said he often tells business leaders more than 95 percent of the world’s population is outside the U.S. Demand from the global middle class will soar to $56 trillion by 2030 from $21 trillion in 2010, according to a report from the Organization for Economic Co-operation and Development.

“Antipathy toward the global market is the single-biggest hurdle we have,” Simpson said in a presentation at a recent Federal Reserve Bank of Philadelphia community development conference. “Companies don’t yet fully understand how their products can compete internationally.”

Toni Corsini, who helps jump-start exports by smaller firms as a New York-based loan officer for the U.S. Small Business Administration’s Office of International Trade, shares Simpson’s mission. She says her three-biggest obstacles among small business owners are fear, financing, and lack of faith.

One-Stop Shop

She works to alleviate all three from the Export Assistance Center in lower Manhattan, one of about 100 regional centers around the country. The office (called USEAC, which stands for US Export Assistance Center sic) also is home to other federal agencies that assist with exports(among them US Commercial Service and the Export Import Bank of the United States – US ExIm, the main Agency which finances and insures exports for large and small business exporters sic), making it a kind of one-stop shop.

“We’re available, don’t be afraid, come to us,” she says of her message to business owners. “If you are serious about continuing your business and growing your business, you better understand this is a global marketplace.”

Frigid Fluid Co. took advantage of a Commerce Department program to help expand exports of its funeral products to 16 nations, adding ItalyMexico, Poland and Spain over the past two years. President Brian Yeazel, whose family has had the Chicago-area firm for 122 years and five generations, says he’s turning to predominantly Catholic countries more geared to traditional burials as Americans increasingly choose cremation.

Buyer Meetings

Yeazel used Commerce’s Gold Key Service, which gives firms market research and arranges meetings with buyers on visits to the country. Trips cost $700 for small companies like Frigid Fluid, which has 17 employees; first-time users pay half price. Commerce Department specialists in 80 countries plan trips, attend meetings, and provide translators.

Exports of products like embalming fluid and casket-lowering devices have grown to make up 34 percent of Frigid Fluid’s $4 million in annual sales, he said.

While such small businesses add to exports, there probably aren’t enough of them to help Obama reach the 2015 goal of $3.1 trillion.

Caroline Freund, a senior fellow at the Peterson Institute for International Economics in Washington, calls Obama’s initiative focusing on small firms misguided and impractical, given the export dominance of bigger companies such as Chicago-based Boeing Co., the largest U.S. exporter.

Large Businesses

“Exporting is by its nature dominated by large businesses,” Freund, a former economist at the Federal Reserve, World Bank and International Monetary Fund, wrote in a February research report. A strategy built around small companies does “little to lift exports because only the most productive firms can compete globally, and such highly productive firms grow to be large firms precisely because they are so efficient.”

Yet boosting exports is the missing piece of the full-fledged recovery in the U.S. economy, according to Ludovic Subran, chief economist at Euler Hermes Group. The Paris-based credit insurer pays companies if foreign customers don’t, tracking risk through 1,500 underwriters.

“There is a misconception about the potential to grow outside of the U.S.,” he said. “People don’t realize they can make the big bucks if they go to Latin America or Asia.”

Some business owners have doubts about repayment, a consideration when one big unpaid bill can threaten their future, said Laurel Delaney, the Chicago-based founder of GlobeTrade who’s been helping entrepreneurs sell abroad since 1985. Still, she says insurance can cut risk.

‘Growth Potential’

“They’re just not realizing their growth potential,” she said. “You need to develop a global mindset.”

At Mercer’s, Mignerey is working to expand in new markets, including AustraliaKenya, Puerto Rico,South Africa, South Korea, the U.K., Philippines and Suriname. Classification makes approval complicated because some jurisdictions call its wine ice cream food, others label it alcohol. Packaging needs vary.

The hybrid product was born at a 2005 Washington event promoting New York Farm Day sponsored by Clinton. When attendees made ice cream floats with the wine from the next booth, Clinton and others suggested it may have a commercial future.

Labeling Products

Mignerey and Hurlburt, her aunt, introduced wine ice cream, which has about 5 percent alcohol content, in 2007. At a New York City trade show the same year, they met a Dutch distributor, who arranged their first foreign deals. They weren’t worried about payment because it was done in advance, but they were concerned about simple labeling errors, Mignerey says. Exports of the wine flavors began in 2008 with the Netherlands, though the company wants to also sell more traditional varieties abroad.

Foreign sales help take the seasonality out of the ice cream business. In the production facility, four employees work year-round where previously winter staffing fell to two full-time and one part-time. In the office, four workers help with export-related administration, up from two.

“It can be done,” Mignerey says. “But it’s a lot of work.”

To contact the reporter on this story: Jeff Kearns in Washington at jkearns3@bloomberg.net

To contact the editors responsible for this story: Chris Wellisz at cwellisz@bloomberg.net; Gail DeGeorge at gdegeorge@bloomberg.netCarlos Torres at ctorres2@bloomberg.net Gail DeGeorge, Carlos Torres

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The fate of US Ex-Im Bank

By  CC Solutions 

The Export-Import Bank of the United States (“EXIM”) is in the midst of a reauthorization battle. Whether or not EXIM gets reauthorized depends entirely on Congressional votes. Unfortunately, there are a significant number of vocal, powerful Congressional members who are seeking to shut the Bank. We ask readers to help reauthorize EXIM by engaging with elected officials and industry groups. Our collective voices need to be heard so Congress can be best informed as they prepare to vote on this critical issue.

Below are online petitions for the reauthorization EXIM. They take just a few moments to complete.

http://www.eximthoughtbank.com/?gclid=CIy2v-TzicACFYMF7AodnloADQ
http://www.secondtonone.org/site/PageNavigator/SecondToNone/Petitions/ExImBankPetition.html

Additionally, you can email your local Congressman/Congresswoman and Senators to let them know you support EXIM. We encourage you to write a short note asking for their vote to reauthorize EXIM. To find your Representative, click here and type your zip code. To find your Senator, click here, then navigate to their web page and write a quick note.

And here are some other organizations you can contact to voice your opinion in favor of EXIM:

National Association of Manufacturers (NAM)
Bankers Association for Foreign Trade (BAFT-IFSA)
Coalition for Employment through Exports (CEE)

Why is there such a challenge to EXIM’s existence? According to EXIM’s website, it has supported more than 1.2 million private sector jobs and has generated >USD 2 billion for US taxpayers since 2009. Nevertheless, many Congressional Conservatives and Tea Party activists consider EXIM to engage in corporate welfare due to loans supporting large exporters. While EXIM certainly finances the export of large capital goods, last year nearly 90% of transactions supported American small businesses.

And what if EXIM did not exist? American companies will be at a competitive exporting disadvantage to exporters in 59 other major exporting countries that have active export credit agencies. Republican Rep. Tom Reed states, “To unilaterally kill the Export-Import Bank would be a huge hit the the competitiveness of American companies.” Republican Rep. Chris Collins seconds the opinion, “This isn’t a government handout.” Jay Timmons, CEO of NAM articulates the competitive need for EXIM, “Our trading partners have larger export credit agencies and are growing them to boost their exports much more than the United States.” The closing of EXIM would negatively impact the US economy; lost sales, lost jobs, lost tax dollars. Please do your part and help save EXIM. Thank you.

Trade Gap Narrows Sharply as Imports Tumble

Economists Bump Up Second-Quarter GDP Forecasts

WASHINGTON—The U.S. trade deficit narrowed more than expected in June amid a sharp decline in imports, a development that is likely to boost economic-growth readings but raises a concern about domestic demand.

The U.S. trade deficit shrank 7% to a seasonally adjusted $41.54 billion in June from May, the Commerce Department said Wednesday. That was the fastest contraction in the gap since November. Imports fell 1.2% in June, the steepest decline in a year, while exports increased 0.1% to reach a record high.

The smaller gap than projected has many economists expecting the government to upgrade its measure of second-quarter gross domestic product later this month. The trade deficit has shrunk about 6% since March; a narrower trade deficit generally supports economic growth.

Forecasting firm Macroeconomic Advisers now projects GDP, the broadest measure of goods and services produced across the economy, expanded at 4.2% rate in the quarter. Other economists project as high as a 4.5% gain. Last week, the Commerce Department said second-quarter GDP expanded at 4.0% annual pace.

The latest data also may support third-quarter growth. Imports, especially outside of oil, surged in April and May but fell back in June. “A further correction is likely over the next two months,” said IHS Global Insight economist Patrick Newport. “As a result, imports will be a much smaller drag on growth than they were in the second quarter.”

But the trend isn’t entirely positive. It suggests importers may not be confident that U.S. consumers will ramp up spending in the second half. That runs counter to the Commerce Department’s measure of consumer spending, which increased steadily during the second quarter.

The June decline in imports was led by decreased U.S. demand for consumer goods, cars and car parts, and foreign oil.

“The broad-based declines in import activity seem at odds with the narrative of improving domestic demand,” said TD Securities economist Millan Mulraine.

Growth in consumer spending eased in the first quarter and exports fell, contributing to the economy contracting at a 2.1% rate. Those factors reversed in the second quarter, supporting the rebound in growth.

Exports rose sharply in May and held those gains in June. The small June improvement was led by increased foreign demand for U.S. cars, consumer goods and services, which include travel and intellectual-property use.

The numbers coincide with improved growth in China this spring and a stabilizing European economy. However, unrest in the Mideast, Africa and Ukraine could pose headwinds to global trade.

The U.S. trade ledger with Russia fell in June amid an escalating sanctions battle over the conflict in Ukraine. Exports plummeted 34% on the month to the lowest level since January last year. Imports from Russia fell nearly 10%. Russia, however, accounts for a relatively small share of total U.S. trade.

Trade with China, the No. 2 U.S. partner, has expanded modestly this year. The U.S. trade gap for goods with China widened 4.9% through June, compared with the same period a year earlier. That is only slightly larger than the 4% overall growth in the goods-trade deficit.

The goods deficit with European Union expanded 15.2% in the first half. The gap with Canada, the largest U.S. trading partner, widened this year. But the gap with Mexico, Japan and Brazil narrowed during the first six months of 2014.

—Ian Talley contributed to this article.

Write to Eric Morath at eric.morath@wsj.com and Jonathan House atjonathan.house@wsj.com

In these trying times a “Do It Yourself” approach to export financing is fraught with peril

1308 pose 9Financing large complex export projects and transactions through Export Credit Agencies, such as the US Ex-Im Bank, is difficult at best and impossible at worst.  Hundreds of moving parts, byzantine structures, political considerations, legal quagmire, shipping and logistics challenges, along with financial considerations, extensive due diligence, host country laws, licensing and public relations are just a few of the factors involved in this year-plus long process. Add to that geopolitical risks a la Ukraine, Russia, or Iraq and the process can befuddle even the most sophisticated practitioners. Thus it is vital to have a highly experienced team of financiers, lawyers, shippers, technical specialists and ECA compliance folks to work with committed exporters and buyers in order to develop and nurture such transactions to success.

Yet oftentimes in their desire to either save money, or driven by false sense of familiarity with the process, the exporter clients prefer to undertake what I call a “home depot” do-it-yourself approach to ECA financing.  During times of relative geopolitical normalcy this approach primarily works for those companies that have extensive experience dealing with ECAs in structuring complex export transactions. During times of political instability such approach is certainly doomed for all novices .

Although there are multiple players in the export finance industry and they range from the largest global banks, law firms and shipping companies, to small brokerage firms and advisors of different stripes; the world of export finance is fairly small with all players of substance knowing each other well and for many years.  For a newcomer exporter venturing into this world, the complexity of the process and the capabilities of the players are not well-known and oftentimes they are misled and misguided.  Thus after taking a hard look in the mirror and forgoing a do-it-yourself approach to complex export financing, the next step any company should take is to really understand the workings of the export finance industry, capabilities of the players, and the importance of an integrated approach of putting together a complete finance, legal, compliance and logistics team early on.

Selection of the financial advisor should not be based on the name alone, but on that advisor’s experience in the target market to be served by the exporter, his or her experience in handling complex transactions and the ability to add value to the process. Good advisors will oftentimes save the exporter such large sums during the structuring and implementation of the process, that their fees pale in comparison.  Once the advisor is selected, the exporter should let him or her invite the other team players into the process. There is a big difference between the exporter being totally committed to the process and working very hard to assist the advisors by supplying the needed information in the timely manner, helping to obtain necessary licenses, interfacing with the buyer etc and having the exporter venture into the process on his/her own. The first approach will lead to the successful financing and the latter will certainly lead to a painful and expensive failure.Fi3E Badge

U.S. Oil Exports Ready to Sail

Tanker of Texas Oil Heading to South Korea in First Sale Since 1970s Embargo

A tanker of oil from Texas set sail for South Korea late Wednesday night, the first unrestricted sale of unrefined American oil since the 1970s.

How that $40 million shipment avoided the nearly four-decade ban on exporting U.S. crude is a tale involving two determined energy companies, loophole-seeking lawyers, and an unprecedented boom in American drilling that could create a glut of ultralight oil.

The Singapore-flagged BW Zambesi is the first of many ships likely to carry U.S. oil abroad under a new interpretation of the federal law that bars most sales of American oil overseas. Analysts say future exports appear wide open: as much as 800,000 barrels a day come from just one of the many U.S. oil fields pumping light oil.

Though U.S. policy on oil exports hasn’t changed, production of this kind of oil, known as condensate, is surging. This early shipment “is the wedge that’s pushing the door open” for more ultralight oil exports, said Daniel Yergin, vice chairman of consulting firm IHSIHS -1.71%

Under rules Congress imposed after the Arab oil embargo of the 1970s, companies can export refined fuels like gasoline and diesel but not oil itself except in limited circumstances that require a special license. Such licenses, often for oil destined for Canada, are issued by the Bureau of Industry and Security, the unit inside the U.S. Commerce Department.

Until recently, domestic oil production had been declining and exporting oil wasn’t a hot issue. All that changed as new techniques for tapping oil from shale formations have sparked an oil boom in Texas, North Dakota and elsewhere. Since the end of 2011, U.S. oil production has jumped by about 48%, to about 8.4 million barrels a day, according federal data.

That has been good news for companies including Enterprise Products PartnersEPD -2.90% LP in Houston, a $47.7 billion company that processes, ships and stores oil and gas. Last summer, the company noticed a troubling trend: ultralight oil flowing from South Texas was flooding the market and pushing down prices. It predicted volumes would swell and prices could fall further as oil companies ramped up drilling and production.

Energy companies and lobbyists had started advocating for ending or at least relaxing the ban; Exxon Mobil Corp. XOM -4.17% , the nation’s biggest oil company, openly supported lifting export restrictions in December.

But neither Congress nor the Obama administration appeared willing to do more than study a change, which some lawmakers fear would result in higher gasoline prices in the U.S.

The industry embarked on a subtle, behind-the-scenes review of the regulations, discovering an opening for exports under existing definitions of the law. Enterprise and its lawyers found language that they believed would allow them to argue that the processing to remove some volatile elements from oil would be enough to make the resulting petroleum qualify as exportable fuel, even though it is a far cry from the traditional refining process.

The processing, which peels off fuels like propane and butane, is commonly done in oil fields across the U.S. Companies that manufacture the equipment involved say it costs between $500,000 and $5 million, a fraction of the expense of building a refinery.

When Enterprise made its case to the government, it said the equipment that its customers use to treat oil for shipment on its pipelines chemically alters the condensate in a way that makes it an exportable fuel. However, several industry executives say the equipment is not special.

“Early this year, we became very confident, extremely confident, that this was indeed a petroleum product that could be exported,” Bill Ordemann, a senior vice president at Enterprise, said in an interview.

In late February, Enterprise representatives gave a private presentation to Commerce Department officials and answered a battery of questions.

Oil executives who have met with Commerce say five to 10 department officials are involved in the talks and decisions on export rulings. When energy companies began to plead their cases with the department in earnest, an official asked one company representative how to spell condensate, said a person at the meeting.

“I look for practical solutions. I looked over the regulations, said, ‘What is my client trying to do, what windows do we have?’ ” said Jacob Dweck, a partner at Sutherland Asbill & Brennan LLP hired by Enterprise to press its case.

Pioneer Natural Resources Co. PXD -2.49% executives also were looking for a way around the ban. Pioneer, which drills across Texas, hired a former deputy secretary of the Commerce Department to represent it.

Ted Kassinger, a partner at law firm O’Melveny & Myers, zeroed in on existing oil field equipment and asked whether it might meet federal regulatory criteria. “We suddenly realized we had existing infrastructure that, at least in part, goes through a distillation process and is producing a product that’s not crude oil,” he said.

Jeff Navin, a partner at Washington, D.C.-based policy consultants Boundary Stone Partners, said that the final decisions rested on specific language in the export ban that didn’t define a refined product but rather said oil had to pass through a “distillation tower,” traditionally found at refineries, before it could be exported.

“So the question became, ‘What constitutes a distillation tower?’ ” said Mr. Navin, a former acting chief of staff to the Energy Secretary. “The more narrowly you define that question, the easier it is to get the administration to side with you.”

Commerce gave Enterprise the green light for exports at the end of March and Pioneer received its ruling soon after. Both companies said their applications weren’t coordinated.

The decisions mean unrefined ultralight oil can now be exported from the U.S. in some cases, because the processed condensate that comes from field-level equipment is considered chemically altered enough to skirt the ban.

The White House was caught off guard by the news of the department’s actions, which weren’t coordinated with other parts of the administration, according to senior White House counselor John Podesta.

Pioneer said its ruling is narrowly drawn to fit its own operations. But Enterprise said its ruling isn’t specific to its own operations or processing equipment. Any company that processes condensate in a manner that adheres to Commerce’s ruling can sell it to Enterprise for export, the company said.

As many as 10 other companies have since applied for their own rulings on oil exports, according to people familiar with the matter. All those requests are on hold for now.

The 400,000 barrel shipment leaving the U.S. from Enterprise’s terminal in Texas City, south of Houston, was purchased by GS Caltex Corp., a South Korean refiner. Oil traders and executives say negotiations are already under way for additional sales to Asian buyers.

— Amy Harder, Eric Yep and Alison Sider contributed to this article.

Write to Christian Berthelsen at christian.berthelsen@wsj.com and Lynn Cook atlynn.cook@wsj.com

The Right Way to Invest Globally

U.S. Investors Have Ramped Up Their Holdings of Foreign Stocks, But Some Do It the Wrong Way

U.S. investors have increased holdings of foreign stocks, but many could still go further. Getty Images

Investors are going to the ends of the earth.

Shares of foreign companies are making up an increasingly large chunk of U.S. investors’ stock portfolios, as barriers to investment fall, global economies integrate and the potential benefits of international diversification are widely embraced.

More than a quarter of the money in U.S. equity mutual funds and exchange-traded funds is in foreign-stock-focused funds, up from 14% in 2000, according to the Investment Company Institute, a trade group. Investors hold nearly $2.6 trillion in those foreign-focused funds, up from less than $600 billion back then.

Yet not every investor is on board. Vanguard Group, the large financial-services firm, says nearly a quarter of the 401(k) accounts it oversees own no foreign-focused funds at all, though that is down from 66% in 2004. Rival Fidelity Investments says only 12% of the assets in its average brokerage account are in funds that focus on foreign stocks or securities issued by companies based abroad.

They may be missing out. Experts say a stock portfolio that is widely diversified internationally can provide protection against a prolonged downturn in an investor’s home market. In addition, some market analysts say U.S. stocks look relatively expensive and many foreign markets appear less pricey, which could increase their chances of outperforming in coming years.

Here’s what you need to know about investing in foreign stocks, the right amount to hold and the smart way to go about it.

Why Hold Foreign Stocks?

Investors around the world show a strong preference for stocks in their home countries—a phenomenon known as “home bias.”

With domestic stocks near record highs, that bias may seem understandable to U.S. investors. The S&P 500 is up 8.8% this year, including dividends, through Thursday, according to FactSet, after logging double-digit gains last year and in three of the prior four years.

Foreign stocks have been hit or miss. Germany’s stock benchmark has gained 2.5% this year through Thursday, and India’s has gained 25%, but Japan’s is down 5.3%. Saudi Arabia’s stock market is up 22%, according to MSCI, but that market won’t open to foreign investors until next year.

Such a range of performance, however, could end up helping an investor if U.S. markets are sagging.

For example, an investor in the broad Wilshire 5000 index of U.S. stocks generated an average loss of 0.4% annually from 2000 through 2008, encompassing two major market drops. But if 20% of that stock portfolio had been invested in the MSCI World ex USA Index—which tracks markets in 22 other developed countries—that investor would have logged an average gain of 0.2% annually, according to Chicago-based investment researcher Morningstar. A portfolio split evenly between foreign and domestic stocks would have gained 0.9% on average.

Sometimes, stocks around the world move in lock step. But the experience of Japanese investors demonstrates the risk of prolonged underperformance in a domestic stock market. The benchmark Nikkei Stock Average fell 82% from its all-time peak in 1989 to its financial-crisis low in March 2009, excluding dividends. During that same period, the Dow Jones Industrial Average rose 152%.

“The real risk that you face is that you’re going to have crummy returns in one part of your portfolio over 30 years. And you’re certainly reducing that risk if you are internationally diversified,” says William Bernstein, co-principal of portfolio manager Efficient Frontier Advisors in Eastford, Conn.

Owning shares in large multinational companies isn’t the same thing as owning shares of companies in foreign markets, according to Mr. Bernstein and other experts. International diversification means being exposed both to what is happening in foreign stock markets and to the swings in the value of foreign currencies, they say.

U.S. multinationals often try to smooth out that impact by hedging against currency fluctuations, as they aim to report results in dollars.

“You have to invest in a company whose executives are trying to post a profit in local currency,” says Bruno Solnik, a finance professor at Hong Kong University of Science and Technology who wrote an oft-cited 1974 study on international diversification.

How Much Foreign Stock Should You Own?

The average 401(k) account that owns stock or stock funds has less than 18% of its stock portfolio in foreign stocks, according to a February study by Columbia University finance professors and others that looked at more than three million accounts.

By contrast, foreign firms represent about 50% to 60% of the market value of all stocks in publicly traded companies. Some experts believe that could be a good starting point for deciding how much foreign stock to hold.

Investors should consider whether they are exhibiting home bias in allocating their stocks. U.S. investors, for example, shouldn’t give special standing to U.S. stocks, says Clifford Asness, co-founder of AQR Capital Management, an investment firm in Greenwich, Conn. Mr. Asness co-wrote a study published in 2011 titled “International Diversification Works (Eventually).”

Many investors, however, won’t be comfortable going too far afield. Experts suggest that typical investors should hold at least 20% to 30% of their stock portfolios in shares of foreign firms.

Vanguard, Fidelity and T. Rowe Price GroupTROW -0.34% another fund giant, typically allocate about 30% of the stocks in their target-date retirement funds—which generally hold a mix of stocks and bonds and grow more conservative as investors approach retirement—to shares of foreign firms. Many investors are enrolled in such funds automatically through 401(k) plans, which is one reason ownership of foreign stocks has risen.

One important consideration: What can you live with through thick and thin? Avi Norowitz, a 30-year-old systems analyst who lives in Jersey City, N.J., says he decided to invest in foreign stocks earlier this year and put about 20% of his stock portfolio into the Vanguard Total International Stock Index Fund, which charges annual fees of 0.14%, or $14, on a $10,000 investment, and invests in 45 countries around the world.

He says he is increasing the share of foreign shares in his portfolio to nearly 40% over the next six months or so. But Mr. Norowitz says that if he went much higher, he might end up regretting the move if U.S. stocks strongly outperformed foreign shares and he felt left behind.

“It would be hard to go, say, 10 years in a period where the media says the stock market is doing great, and my stocks are doing terrible,” he says.

Frank Warnock, a professor at the University of Virginia who has studied investors’ tendency to favor home-country stocks, says an individual investor’s circumstances may also play a role in figuring out how much foreign stock is appropriate.

Investors who own real estate abroad or are employed by a foreign-based company might lower their foreign stock allocation to compensate, for example. On the other hand, if investors hold a significant chunk of U.S. bonds but no foreign bonds, that might be a reason to consider increasing their foreign stock allocation, says Mr. Warnock, who estimates one-third of his equity portfolio is in foreign stocks.

What Is the Right Way to Invest Abroad?

Buying foreign stocks may seem intrepid. But rules of thumb that apply in the U.S. also hold true overseas.

Investors in low-cost funds that passively track a broad range of U.S. stocks will often fare better than investors who bet on fund managers who try to beat the market, in part because investors in actively managed funds are at risk of underperforming and in part because those funds often charge higher fees that eat into returns.

The same is true abroad, and active fund managers in foreign markets may also lack information more readily available to locals, says Mr. Bernstein, of Efficient Frontier Advisors.

“Who’s the patsy at the table there?” says Mr. Bernstein. “It’s the American fund manager.”

He recommends funds from Dimensional Fund Advisors that allocate their investments across many countries, such as the DFA Large Cap International Portfolio, which invests in developed markets, and the DFA Emerging Markets Portfolio. The funds charge annual fees of 0.29% and 0.57%, respectively, according to Morningstar. The funds are available to individuals through fee-based advisers and in some 401(k) plans, according to the company.

Other DFA funds allow investors to tilt their foreign stock portfolios to value stocks and small stocks, Mr. Bernstein says.

By contrast, investors who buy one or two single-country ETFs could end up increasing their risk, rather than lowering it, experts say.

Investors also risk giving too much weight to emerging markets or frontier markets, which are often even smaller and riskier. Emerging markets, for example, represent just 11% of the value of companies in the MSCI ACWI + Frontier Markets Index, and frontier markets represent just 0.3%, with the remaining nearly 89% of the value in companies in the index in developed markets.

Be alert, as well, to challenges that may come with investing in certain countries. In China, for example, there are often limits for foreign investors on buying shares in Chinese companies.

Is It a Good Time to Buy?

Owning foreign stocks isn’t a get-rich-quick scheme. But at the moment, it might be an opportunity to get a bargain.

That’s because a widely watched ratio of stock prices to corporate earnings popularized by Nobel Prize-winning Yale University economist Robert Shiller shows that U.S. stocks look pricey. That could point to subpar returns in years to come.

Stocks elsewhere look inexpensive by comparison, says Joachim Klement, chief investment officer at Wellershoff & Partners, an investment consultancy based in Zurich. He argues that stocks in many other countries are therefore likely to generate higher returns over the next five years.

For example, Mr. Klement estimates that U.S. stocks will generate a cumulative 7% return above inflation over the next five years, based on their Shiller price/earnings ratio. By comparison, he says that stocks in France, India, Italy, Mexico and many other countries could generate returns of more than 50% over the same period.

“The U.S. stock market at the moment has one of the lowest expected returns for the next five years of all the developed markets,” says Mr. Klement. As a result, he says, “This is probably a good time for U.S. investors to broaden their international diversification and buy stocks outside the U.S.”

What’s In A Name? If it’s “Made in USA,” Quite A Lot.

By TIMOTHY AEPPEL, WSJ.com

Deciding when something can be called “Made in USA” is harder than you might think. You can thank both the Federal Trade Commission and the state of California for that.

Reuters

Federal law says goods that are “all or virtually all” manufactured in the U.S. qualify, though the FTC doesn’t define what “virtually all” means, leaving some wiggle room. The FTC decides on a case-by-case basis when disputes arise over use of the phrase. That can be frustrating for producers, many of whom would prefer it spelled out.

But a bigger problem is California. State law there is explicit and clashes with the federal standard: If a product contains just one imported screw or rivet, it cannot carry the label. California is the only state with such a rule.

That’s not a big problem for something simple like bath towels or plastic lawn chairs. But with more complex goods, such as electronics or machinery, it can be difficult to assure the domestic pedigree of all the raw materials and component parts. In some cases, there are no domestic suppliers or their cost is prohibitive.

Element Electronics Corp., a television company based in Eden Prairie, Minn., is just one U.S. company that’s had to wrestle with this issue. Element is trying to revive the industry at a factory in South Carolina. Its solution is to label its goods “Assembled in the USA.”

Manufacturers have tried to get California to relent. In 2011, the California assembly unanimously approved a bill to amend the law so it would harmonize with the FTC rule. But the move eventually floundered in the face of staunch opposition from consumer and trial lawyer groups.

California has become a minefield for producers like Lifetime Products Inc., a Clearfield, Utah maker of portable basketball hoops. Lifetime recently settled a class-action suit brought against it over labeling hoops that were sold at Sports Authority stores in the Golden State.

“We make everything in Utah—including our own metal tubing and the plastic parts,” saysRichard Hendrickson, the company’s chief executive. The woven netting that came with the hoops in small plastic bags, however, is imported from China and ran afoul of the law.

Many companies today follow the California rule, even when they have no intention of selling there. The risk is simply too high, since complex distribution networks sometimes send goods to markets where they were not intended. In the meantime, companies including Lifetime have shifted focus to the FTC, hoping to get legislation passed that would give the federal law priority over state regulations.

Export-Import Bank helps Wisconsin businesses create jobs

As the reauthorization saga of the US Ex-Im bank continues, today we publish yet another opinion favoring reauthorization.  These arguments make sense  and provide a generally correct view of the situation.  Our own view on the US Ex-Im Bank situation will be published in the upcoming issues of this publication.

Milwaukee-Wisconsin Journal Sentinel
OUR VIEW | EXPORT-IMPORT BANK

House Budget Committee Chairman Paul Ryan (R-Wis.): Ryan opposes the Export-Import Bank.
House Budget Committee Chairman Paul Ryan (R-Wis.): Ryan opposes the Export-Import Bank.
Associated Press

If world markets really worked the way Rep. Paul Ryan wishes they did, he’d be right about the need to eliminate what he calls a “strange collusion of big business and big government,” an obscure little federal agency called the Export-Import Bank.

But world markets do not work that way. Governments routinely support domestic businesses; Chinese export credit subsidies were about 50% higher than those provided by the Ex-Im Bank in 2012. Given the reality of the global economy, the U.S. needs to be in this game to compete. And the U.S. government needs to play a role.

Killing the bank, as critics such as Ryan advocate, would kill American jobs, including jobs in Wisconsin. The bank’s charter expires Sept. 30, and, for the first time, this efficient agency may be in jeopardy. That could be costly to the state.

It’s surprising, all this huffing and puffing about “crony capitalism” and government waste, because this is a tiny agency as measured against a $3.5 trillion federal government. The Ex-Im Bank had a total operating budget in 2013 of a mere $90 million, the Congressional Research Service reports, and it costs taxpayers exactly nothing to operate; the cost of running the bank is paid by fees and interest charged to its private customers. In fact, the bank returned $1.1 billion to federal taxpayers last year.

We might be more willing to listen to Ryan and his cohorts in this venture if they were more willing to carve up some of the fatter budget hogs — say farm subsidies — but lawmakers of both parties have been loathe to touch those sacred cows. As columnist Robert J. Samuelson of the Washington Post concluded recently, this is “mostly political grandstanding.” We quite agree.

“In a perfect world there’d be no need for it, but the Ex-Im Bank prevents the U.S. from facing a competitive disadvantage with our trading partners based on policies put in place by their governments,” Republican U.S. Rep. Reid Ribble told Journal Sentinel reporter Craig Gilbert.

The Ex-Im Bank is a reasonable way to help American companies climb over such hurdles. The bank, which was created in 1934 by President Franklin D. Roosevelt, makes loans and provides loan guarantees and credit insurance to help foreign buyers purchase American-made products. The bank estimates it supported about 205,000 export-related jobs in 2013.

And while it’s true that the overall effect of the bank’s work is sometimes hard to gauge, that’s hardly a reason to eliminate it and put jobs in Wisconsin and elsewhere at risk.

As the Journal Sentinel article noted, the bank last year authorized a $694.4 million loan to help an iron ore mine in Australia with the condition that it buy hundreds of millions of dollars of equipment from Caterpillar Inc. and two other companies. While the bank claimed that the loan would bolster 3,400 jobs in the U.S., critics of the deal say production at the Australian mine will put downward pressure on prices and harm producers in this country.

One of the loudest critics of the bank has been Delta Air Lines, which competes against foreign airlines that buy their American-made Boeing jets with subsidized loans backed by the bank. Delta may have a reasonable concern, but it’s one that the bank and lawmakers could address, as U.S. Sen. Tammy Baldwin (D-Wis.) has noted. Killing an agency that has helped to support so many other jobs is not the way to address those concerns.

Since 2007, the bank has worked with 183 Wisconsin companies and supported $4 billion in exports in the state, according to statistics provided by the bank. That translates into an estimated 25,500, many of them with small businesses.

If the Export-Import Bank were closed, “it would have a ripple effect throughout the U.S. economy,” says Tim Sheehy, president of the Metropolitan Milwaukee Association of Commerce. He told Gilbert that the argument against reauthorization “crashes on the rocks of reality when it comes to competing in a global market.”

Lawmakers need to face that reality. They should have a healthy debate because no government agency is above tough scrutiny. And if loan procedures need to be tightened to address unintended consequences and legitimate complaints, then they should be tightened. But don’t kill the bank. If the Ex-Im Bank goes away, jobs will go away, too, and some of them will be in Wisconsin.

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