Three Myths about the Ex-Im Bank

by Caroline Freund, Petersen Institute

Congress 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?