Should Congress Reauthorize the Export-Import Bank?

Two Experts Square Off on Whether the Bank Really Helps Small Business

WSJ.com

PHOTO: BLOOMBERG NEWS

Over the past few months, one of the most heated debates in small-business politics has centered on the fate of a federal agency: the Export-Import Bank of the United States.

At issue is whether Congress should reauthorize the bank when its current authorization expires in June. The bank’s mission, it says, is to support U.S. jobs by making it easier for domestic firms to sell abroad. As such, the bank says, it provides competitive export financing and ensures a level playing field for U.S. companies.

For instance, the bank encourages lenders to make loans to U.S. exporters by providing working-capital guarantees on the loans. It also provides products like credit insurance so that companies are protected if foreign buyers fail to pay bills. And it makes and guarantees loans to foreign buyers so they source from U.S. companies.

During the debates about the bank, one of the big arguments the bank and its advocates have made is that the institution is particularly valuable to small companies. Nearly 90% of the bank’s deals last year, covering more than $5 billion in financing and insurance, directly served small companies. Overall, the bank authorized $20.5 billion in financing.

Yes: It’s a Lifeline for Small Businesses Looking to Export
By Todd McCracken

Small firms face a host of financing challenges when they try to export. If Congress kills the Export-Import Bank, the challenges will get steeper.

Imagine the situation a small company faces when it approaches a bank for a loan to start selling overseas. The company is starting off with less equity than a big firm, and processing loans for smaller amounts isn’t as profitable for banks.

Exporting is, usually, strike three: The business’s customers are foreign buyers, and most banks won’t consider foreign receivables as collateral.

National Small Business Association data show that over the past five years between one-fourth and one-third of small firms haven’t been able to access adequate financing. And that’s among all small businesses; the number would almost certainly be higher among small exporters.

In light of that, the Export-Import Bank is a critical tool. Because the bank shoulders some of the risk of international deals, more small businesses are able to export today. There’s a larger argument for the bank, as well. There are foreign-export credit agencies around the world that provide substantial support for their country’s exporters. Killing the bank is tantamount to unilateral disarmament and will damage our global competitiveness.

Critics, however, say the bank doesn’t do much for small firms—and mostly helps industrial giants.

Helping the Little Guy
Yes, the bank does a lot of business with large companies. But small-business deals account for more than 85% of its transactions. Small companies did amount to a smaller percentage of the total dollar amount of deals—but smaller firms do smaller deals and represent a smaller total dollar amount. In 2014, nearly half of the bank’s small-business authorizations involved amounts under $500,000.

Let’s run down some of the other arguments made by critics. And refute them.

—Small companies that are helped aren’t actually as small or needy as the bank claims. But the bank uses Small Business Administration size standards, based on industry. Where a restaurant with 1,500 workers would be anything but small, a manufacturer with the same number is considered small by the SBA, which routinely revisits these standards with a good deal of stakeholder input.

—A report found the bank miscategorized 200 small companies. But that was 200 errors out of 6,000 companies examined—a 97% accuracy rate.

—The bank helps only a tiny fraction of small businesses. Less than 1% of small firms export; the bank couldn’t possibly benefit 10%, 20% or more.

—The Export-Import Bank is risky and a drain on taxpayers. The bank doesn’t provide subsidies. Customers pay for its financing and loan guarantees, and 98% of its deals include partnering with a private bank. The bank is a self-sustaining agency that in each of the past two years transferred nearly $1 billion in revenue to the Treasury—and its borrowers have had a very low default rate.

—An NSBA survey showed two-thirds of small exporters had no more trouble landing export financing than regular loans. Those who said that were older, larger and more experienced. We can’t dismiss the concerns of over a third of small exporters.

—The bank’s track record is all thanks to its accounting methods. But it uses the same method all federal agencies do—not some tricky system they’ve cooked up.

—The bank distorts the export market. But the market is already distorted for small firms, whether through the challenges they face or an unfair tax code. The bank helps to level the playing field.

Ex-Im Bank isn’t crony capitalism, it isn’t a drain on taxpayers and it has no private-market alternative. It’s a lifeline to small firms looking to export that otherwise wouldn’t be able to do so.

Mr. McCracken is the president and CEO of the National Small Business Association, a nonpartisan small-business advocacy group. He can be reached at reports@wsj.com .

No: The Bank Is Mainly Welfare for Large Firms
By Diane Katz

The Export-Import Bank is pushing out a slew of misinformation crafted to convince Congress that it is worthy of a long-term renewal. One of its central themes is that the bank is a champion of the little guy.

But, in fact, the bank is a fount of corporate welfare—and its subsidies put other U.S. firms at a competitive disadvantage and distort export markets.

It is impossible to know precisely how many small businesses actually benefit from Export-Import financing. Officials claim 20% of annual authorizations, but that is a stretch given the bank’s expansive definition of “small,” which includes firms with as many as 1,500 workers or revenue of up to $21.5 million annually. A recent investigation by a news agency found that the bank improperly categorized hundreds of corporations and conglomerates as small businesses.

Also consider that the bank finances less than 2% of U.S. exports overall. Economist Veronique de Rugy of the Mercatus Center at George Mason University calculates that the bank benefits just one-half of 1% of small businesses in the country.

Just How Crucial?
Proponents claim that the Export-Import Bank provides export financing that is otherwise unavailable to small companies. But based on the bank’s own data, Ms. de Rugy has documented that only 10.9% of the bank’s loans and long-term loan guarantees were categorized as necessary because the risk was too great for an exporter or a financial institution to assume. In other words, 89.1% of those loans and guarantees had nothing to do with private financing being unavailable.

Record demand for U.S. exports indicates no shortage of private capital to finance the sale of American goods overseas. In a 2013 survey of small exporters by the National Small Business Association, some 63% reported that getting export financing was no more difficult than getting regular financing.

U.S. exports would remain very strong if the bank isn’t reauthorized—regardless of whether other nations have export credit agencies to subsidize native businesses. Reauthorization would not remedy actual barriers to export growth, such as high corporate tax rates and budget deficits that push hundreds of billions of dollars into Treasurys instead of business investment.

No Benefit at All
What’s more, the contention that the bank is a financial plus for the government is a mirage caused by the bank’s accounting. The Congressional Budget Office reported in May that Export-Import Bank programs, if subjected to the fair-value accounting methods required of private banks, actually operate at a deficit that will cost taxpayers some $2 billion over 10 years, in addition to the bank’s operating costs.

The same goes for the supposedly low default rate of bank clients. The bank’s true financial condition is obscured by its narrow definition of default, which does not cover a variety of loan violations designated as defaults by private banks.

The Export-Import Bank’s officials are spending millions of dollars attempting to convince Congress and the public that small businesses would disappear without export subsidies. They assume that the economic activity they subsidize would not occur absent bank financing—an absurd notion, but one prevalent among bureaucrats who cannot fathom that business actually functions without them.

All propaganda to the contrary, the vast majority of Ex-Im subsidies benefit America’s largest corporations. If Congress really wants to help the little guy, it will allow the Export-Import Bank to expire and eliminate the tax and regulatory barriers that cripple small business.

Ms. Katz is a research fellow in regulatory policy at the Heritage Foundation. She can be reached at reports@wsj.com .

 

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About Alexander Gordin
An international merchant banking professional with over twenty years of business operating and advisory experience in the areas of export finance, international project finance, risk mitigation and cross-border business development. Clients include foreign governments, municipalities and state enterprises as well as Fortune 500 and small/medium enterprises. Strong entrepreneurial instincts, combined with leadership and strategic skills. Transactional and negotiations experience in over thirty five countries. Author of the highly acclaimed "Fluent in Foreign Business" book and creator of the "Fluent in OPIC", "Fluent in EXIM","Fluent In Foreign Franchising", "Fluent in FCPA",and "Fluent in USTDA" seminar/webinar series. Currently developing "Fluent In ......" seminars and publications. Co-author of the Fi3 Country Business Appeal Indices. Extensive international business development and project finance transaction experience in healthcare, aerospace, ICT, conventional and alternative energy infrastructure, distribution and hospitality industries. Experience managing international public and private corporations. Co-Founded three companies abroad. Strong Emerging and Frontier Market expertise. Published and featured in numerous publications including: The Wall Street Journal, Knowledge@Wharton, NBC.com, The Chicago Tribune, Industry Week, Industry Today, Business Finance, Wharton Magazine Blog, NY Enterprise Report, Success magazine, Kyiv Post and on a number of radio and television programs including: Voice of America, CNBC, CNNfn, and Bloomberg. Frequent speaker on strategy, cross-border finance and international business development. Executive MBA from the Wharton School at the University of Pennsylvania. B.S. in Management of Information Systems from the Polytechnic Institute of NYU. Specialties Strategic Management Advisory, Export Finance, International Project Finance & Risk Management, Cross-border Negotiations, Structured Finance transactions, Senior Government and Corporate officials liason

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