Grey2White Initiative

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(Article Reprinted by Popular Demand)

Hypothesis:

Given Ukraine’s current economic and geopolitical situation, one of the most beneficial  steps the US government, business and NGO community can take, is to encourage significant external and internal direct investment into the country’s economy.

Although the US Government has had some success in attracting and supporting American direct investment into Ukraine, those investment amounts are far from sufficient. US investors new to the Ukrainian market are wary of the country’s reputation for corruption, difficulty in doing business, threats from Russia and lack of financing options.

A second and much more viable economic development option, would be to support and enable direct investment by the successful Ukrainian business people who have amassed sufficient capital and are much more comfortable and adept in investing in their home market.

One problem with pursuing that option are high Western standards, which often preclude US government development agencies and public US investors from working with this potential class of investors.  This is due to the fact that for the last twenty-five years, practically all business people in Ukraine had to operate under a certain set of conditions widely considered “grey” and in many cases “black” in the West.

Some of these “grey” conditions are lack of financial transparency, inadequate corporate governance, use of yellow press, use of cash, as well as offshore accounts to conduct operations, bribery and use of adverse political influence.

In their attempts to succeed, some folks in Ukraine went beyond previously acceptable business norms and crossed the proverbial line even further by engaging in criminal “black” behavior – graft, extortion, corruption, tender rigging and illicit drug trade.

To date, these grey conditions have presented significant challenges for the IFIs, development agencies and regulated financial US investors. Yet, it is vital to recognize the necessity to find an acceptable solution that allows Ukraine’s economy to reap significant benefits from the anticipated increase in direct investment and low-cost, long-term financing.

It is also very important to understand that the proposed Grey2White (G2W) initiative aims to broaden and scale up very important development and capacity building work already undertaken over the last quarter century by IFIs, such as IFC and EBRD, USAID; development agencies such as OPIC and USTDA and financial investment communities. Those initial efforts, although quite effective, focused on a relatively small sample of Ukrainian companies and were undertaken during a different stage of the country’s development.

Initiative

The G2W initiative will only work with those companies and individuals, who will be able to create meaningful economic impact in Ukraine, after undergoing the conversion process.  G2W will not in any way target those convicted of the “black” behavior, as their reputation gap is un-bridgeable within the scope of the project.

Thus the question becomes, is it possible for US stakeholders to create an environment and a broad platform from which so-called “grey” Ukrainian businessmen seeking to utilize US financing, equipment, services and franchises, as part of their major investment programs, become “bankable” under Western standards? If the answer is “Yes.”This type of conversion will provide hundreds of millions, if not billions of dollars in direct economic benefit and enhanced geopolitical security to Ukraine and the US.

If the answer is “No,” these businessmen will either be forced to forgo the planned capital investments, or seek alliances with other grey, or black global actors in countries like Russia, China, Brazil, Iran, etc.

It is the fundamental belief by the creators of the proposed initiative that given a concerted effort by the US and Ukrainian stakeholders to develop and implement realistic procedures to increase corporate transparency, introduce financial standards, address any existing reputation issues head-on and provide reputable outside management and board oversight, it is possible within short to medium time-frames to bring these so called “grey” businessmen and their respective projects up to elevated western standards, mitigate investment and reputation risks and affect substantial economic growth in Ukraine.

Thus we hereby propose the following:

Select three-four financially viable projects sponsored  the “grey” Ukrainian actors and use them as a pilot to develop, refine and implement an effective conversion strategy to bring that project up to acceptable Western standards.

From the government side, we propose to involve the US Commercial Service, USTR, US Embassy, Ukrainian Embassy, Cabinet of Ministers of UA, members of the US Congress focused on UA issues, OPIC, regional Governors and local administrations in Ukraine, IFC, USTDA and the US EXIM Bank (when that Agency resumes its activities in Ukraine).

Among the NGO stakeholders we would like to see US-Ukraine Business Council (USBC), AMCHAM, Transparency International, Freedom House, Atlantic Council and US Ukraine Foundation. Additionally, reputable international law firms, audit firms, press, appropriate private individuals, corporate off-takers, financial market regulators, as well as relevant providers of US goods and services should be involved.

The framework of the proposed initiative shall be as follows:

  • Initial Sponsor/Project assessment and preliminary due diligence
  • Project selection and stakeholder awareness and involvement
  • Project G2W Team building (attys., directors, advisers, auditors, suppliers, investors etc.)
  • Full due diligence and implementation plan for the Western financial, FCPA and governance standards
  • Investor cultivation and underwriting of the financing package
  • Project development and implementation
  • Monitoring and compliance

To kick off the proposed initiative, we propose an intensive education and awareness-building campaign designed to simultaneously involve all the stakeholders.

After the initial buy-in into the initiative is secured, work will begin on developing the pilot projects.

During the pilot project phase, the G2W pilot project team will be seeking to achieve specific and tangible goals:

  • Fully assess the existing reputation risks, possible political influence issues, suitability for OPIC/IFC financing and Political Risk Insurance for the US project participants
  • Prepare a legal due diligence report by a world-class law firm
  • Recruit highly reputable and competent outside board members to the Project’s Board
  • Design a comprehensive PR/IR strategy to inform stakeholders of the project and its ongoing developments
  • Design and implement transparent financial audit, reporting and management accountability standards
  • Develop ways to tangibly measure economic effect of the pilot project
  • Continue to promote the initiative and seek to move it from the pilot project phase to full-blown implementation.

(to be continued)

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ExportBOOST Helps US Companies Double Their Exports

By: Alexander Gordin

Fi3E BadgeInternational trade is thought to have its routes in 19th century BC with Assyrian merchants. Over centuries the business of exports changed dramatically with evolution in transport modes, advent of Incoterms, standardized shipping containers and computerized customs clearance.

Yet for all the progress and record $2.3 trillion amount, exports in the US still remain a complex and not terribly efficient process. Multiple players involved in exports are still largely silo(ed). Even at large companies export related functions like international sales, legal, shipping, banking, financing and insurance often have difficulty communicating with one another. Concepts such as international payment protection mechanisms, US content policy, or US flag shipping requirements are often misunderstood. Generally business approach to managing export transactions is reactive, rather than proactive. Situation is even more difficult in small and mid-size businesses where resources are significantly more scant. A relatively small percentage of businesses export. Of those that do, a large portion exports to only one country. Expanded exports of goods and services represent amazing possibilities not only to help companies grow their profits and shareholder returns, but also to benefit our nation’s economy by creating new jobs and generating additional tax revenues. President Obama’s National Export Initiative has served as a catalyst to spur job growth and along with general economic recovery led to a resurgence of manufacturing activity. More needs to be done, and companies should focus on exports as a fundamental part of their business activities, rather than an afterthought.

The entire export ecosystem is ripe for disruption and entry into the technological age. I can envision a day in the very near future when shipping containers of foodstuffs, plane loads of licensed computer equipment, dozens of Ro Ro tractors, or construction cranes will be as simple as buying individual items on eBay or Amazon. Of course handling export transactions is infinitely more complex and requires signed multilingual contracts, letters of credit, export credit and freight insurance, licensing, quality inspections and complex shipping arrangements. Thus the disruption process that is being put in place needs to account for the nuanced complexity that characterizes exports. Step one of the transformation is already on the way.

ExportBoost™ – a  curated service guaranteed to help small and mid-size companies to at least double their present exports in 18 months – was recently unveiled

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by the Broad Street Capital Group (“BSCG”) . Specifically developed for US manufacturers and distributors with revenues of between $5 and $750 million and for providers of professional services , ExportBoost™ uses proprietary export building met

hodology and tools such as: Fi3E™ Export Indices, XPORTINSURE™, FinanceABLE™ and EZShip™ to greatly simplify export operations and mitigate international business risks.

ExportBoost™ was designed to help small and medium companies who are either experienced exporters, or just looking to start their international expansion to significantly grow their exports. ExportBoost™ service has two tiers – one where the exporter is guided by the Broad Street Capital’s professionals and implements the program internally and the second where Broad Street Capital Group implements ExportBoost™ on its client’s behalf. In either case, the clients will be offered a unique guarantee, should they follow the program and their exports do not at least double in 18 months, Broad Street Capital Group will refund all the fees paid by the clients for the ExportBoost™ service.

ExportBoost™ is part of the product portfolio being developed by the Broad Street Capital Group, and its partners. to greatly streamline and finance international trading operations. The project code named “Barbell” is scheduled to be unveiled at the Broad Street’s annual conference later this year.

Trump scrambles Ex-Im Bank politics

The politics around the Export-Import Bank just got much weirder.

President Donald Trump is reaching for a compromise in the debate raging around the bank, aiming to keep the agency open while putting an outspoken, ultra-conservative opponent of the institution at the helm.

In doing so, Trump has confused the politics around the export credit agency, which had been a major boost to American manufacturers such as Boeing, GE and Caterpillar before Republicans took steps to crimp the flow of financing.

The formerly anti-Ex-Im Trump abruptly changed his tune on the bank last week when he called it “a very good thing” and announced plans to nominate two board members. That was a major step toward bringing the agency back to its full working capacity.

Then, two days later, he nominated for the chairmanship former Rep. Scott Garrett (R-N.J.), a vocal foe of the bank who has also come under fire in the past for his comments about homosexuality. That set up a political tightrope that both supporters and detractors of the agency may have trouble navigating.

Democrats who champion the agency because they say it creates jobs and promotes manufacturing are uneasy about supporting a social conservative who might try to hamstring the bank from within. Sen. Chris Van Hollen (D-Md.), a member of the Banking Committee, which will vet the nominees, said appointing Garrett as chair would put thousands of American jobs at risk.

Then there are conservative Republicans who have been critical of the bank and are now cheering Garrett’s nomination.

“For too long, the bank has been a clear example of corporate welfare run amok — benefiting special interests and foreign companies at the expense of U.S. taxpayers,” said Sen. Pat Toomey (R-Pa.), who also sits on the Banking Committee. “I am confident that Congressman Garrett will chart a new course for the bank that puts U.S taxpayers first.”

The result is a 180-degree flip-flop, where lawmakers and interest groups who had expended significant resources and political capital to rein in the bank could shift to support Trump’s nominees, while its biggest champions could be left behind.

“We’re encouraged and optimistic that [Garrett] would be able to substantively reform the Export-Import Bank, make it work better in the meantime,” said Chrissy Harbin, vice president of external relations at the conservative advocacy group Americans for Prosperity. “And then when the reauthorization comes up again … we’d encourage D.C. to have the same conversation about the possibility of letting it expire once and for all.”

Democrats on the Banking Committee have reservations about Garrett, including Sens. Heidi Heitkamp (D-N.D.), Joe Donnelly (D-Ind.) and Catherine Cortez Masto (D-Nev.).

Cortez Masto said she was pleased that Trump was committing to making the bank functional. Still, she has concerns about Garrett, “given his past opposition to Ex-Im’s mission, not to mention his divisive rhetoric toward LGBT families.”

“This Garrett nom is a Catch-22,” one Senate Democratic aide said. “We need to confirm him to have a quorum, but he could be a cancer inside the agency.”

Last November, Garrett lost a seat he had held since being elected to Congress in 2002. A key moment in the race came in 2015, when POLITICO reported that he told fellow GOP members that he wouldn’t support the National Republican Congressional Committee because it backed gay candidates.

Financial companies that had been campaign backers during his years as a senior member of the House Financial Services Committee pulled back.

Garrett later denied that he objected to gay candidates and said his problem was with support for same-sex marriage.

He lost to a well-funded Democratic challenger, Josh Gottheimer, but stayed plugged in to the emerging Trump team. While in Congress, Garrett served with Vice President Mike Pence and is said to be close with the former Indiana congressman. He also counted White House counselor Kellyanne Conway as a constituent and campaign donor. A December meeting at Trump Tower was well-publicized.

Garrett could not be reached to comment on this story.

Beyond Congress, his nomination also puts big American manufacturers in an awkward spot. They need more board members at the bank to provide a quorum that’s necessary to approve deals with more than $10 million. Yet they are unsure what changes might be in store given Garrett’s past comments and promises from senior administration officials like White House Budget Director Mick Mulvaney to put “reformers” at the helm.

For now, major users of the bank are focusing on the fact that Trump has put forward any nominees rather than worrying about who they are.

“Generally speaking, between the president’s comments and naming of two nominees, it’s really encouraging,” said Kate Bernard, a Boeing spokeswoman. Boeing, she added, has experienced the loss or delay of three satellite sales since the bank first fell victim to political crossfire in 2015, so giving the bank back its quorum to “shake loose” projects that remain in the pipeline is the most crucial step at this point.

There’s no question, however, that the Garrett nomination “raises some eyebrows in the business community” and “sends some mixed messages given his previous history in the House,” said one bank proponent who asked not to be named.

Garrett established himself as a consistent and outspoken opponent of the bank while in Congress, twice voting against its reauthorization in the past five years. In 2014, he expressed skepticism that attempts at reform would ever be successful, and he pushed hard the following year to let the charter expire.

“We have the opportunity to save capitalism from cronyism and to fulfill a promise to the American people to work for them instead of a select few with special connections in Washington,” Garrett said in May 2015.

“For the sake of the American taxpayer and the preservation of the free enterprise system, Congress should put the Export-Import Bank out of business.”

The White House noted that history of opposition toward the bank in discussing his appointment, saying Trump chose him “to both usher in reforms and prioritize small businesses.”

“Former Rep. Scott Garrett has passionately spoken out on some of the problems that the Bank’s previous activities created,” a White House spokeswoman said in an email. “He will be a key voice for reform.”

61ae8-exim-bank1The current nominees represent only a temporary fix: Garrett and former House Financial Services Chairman Spencer Bachus (R-Ala.), who Trump picked to sit on the board of directors, would both have to be approved to restore the bank to full working capacity. What’s more, they’ll provide a quorum that will only last until July 19, when acting Vice Chairman Scott Schloegel’s term expires. At that point, the bank would lack a quorum once again if no additional members have been confirmed before then.

But in the meantime, major users of the bank fear that the administration is trying to reshape the agency in a way that would hurt large companies that have traditionally benefited from it. Various administration officials have hinted at their own ideas for reform.

Mulvaney, who was a critic of the bank while a member of Congress, told CNBC last week that Trump’s nominees would make sure the bank “sticks to its knitting.” Commerce Secretary Wilbur Ross told the network in a separate interview that he wanted a reformed bank to “help small businesses more.”

Some reforms will be put into place as soon as Garrett and Bachus — or any two nominees — are confirmed and a board with at least three members votes to approve them. The bank’s 2015 charter included a slate of changes for the bank, and while a majority have been completed, a handful require a board quorum to be implemented — something the bank has lacked since its reauthorization was passed almost a year and a half ago.

Two of the outstanding requirements involve appointing a chief ethics officer and chief risk officer. A third involves the bank’s lending to small businesses and “increases the authority of staff to approve applications for up to $25 million in export financing for small business working capital and insurance products.”

But beyond that, bank observers say there is little a chairman can do on his own to change the bank’s operations.

And while he could attempt to direct export credit assistance more often to smaller businesses, “there’s not a ton of discretion,” said Peter Cohn, an analyst with Height Securities.

“So I don’t know that we’re going to see a whole lot more than window dressing on that front,” he said.

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Dollar’s Rise Threatens Manufacturing Recovery

Greenback surges to 14-year high in wake of Trump win and Fed move, making U.S. goods more expensive abroad

 By ANDREW TANGEL and JOSH ZUMBRUN WSJ.com

An employee works on the interior of a Boeing Dreamliner 787 in North Charleston, S.C. Boeing last week cited 'fewer sales opportunities and tough competition' when it laid out plans for further layoffs. An employee works on the interior of a Boeing Dreamliner 787 in North Charleston, S.C. Boeing last week cited ‘fewer sales opportunities and tough competition’ when it laid out plans for further layoffs. PHOTO: BLOOMBERG NEWS

The U.S. currency, which has strongly appreciated over the past two years, surged to a 14-year high in the wake of Donald Trump’s election and the Federal Reserve’s decision to raise interest rates, adding a wrinkle to the president-elect’s pledge to boost factory employment.

Certainly, a strengthening dollar is a sign of rising optimism for the U.S. economy as the stock market also soars to new highs. Prospects of higher inflation and rising interest rates encourage investment in U.S. assets, reflecting growing hopes for better returns.

A strengthening dollar increases the currency’s purchasing power: If imports are cheaper, U.S. consumers would have more money to spend. That in turn could boost retail sales, a key driver of economic growth, and engender more confidence in the U.S. overall.

However, while good for U.S. consumers and companies that purchase components abroad, the dollar’s rise promises to hit U.S. manufacturers reliant on sales in overseas markets.

Many have started to dial back revenue forecasts and look for ways to cut costs. 3M Co. and United Technologies Corp. have signaled a strong dollar could make it harder to boost sales in 2017.

Manufacturing here in the U.S. has become a lot more challenging than we’d anticipated.

—Neal Keating, Kaman’s chief executive

Kaman Corp., a Bloomfield, Conn.-based maker of airplane parts, has seen its European rivals’ prices drop as the euro declined against the dollar. To compete, Kaman has invested in facilities in Germany, and acquired a company with operations in the Czech Republic.

“Manufacturing here in the U.S. has become a lot more challenging than we’d anticipated,” said Neal Keating, Kaman’s chief executive.

Some dealers of Harley-Davidson Inc. motorcycles and Caterpillar Inc.’s bulldozers and excavators are bracing for the companies’ Japanese rivals to capitalize on the yen’s weakness against the dollar to undercut them on price. Caterpillar has said the yen’s weakness makes competition harder. Harley declined to comment.

In interviews, several business leaders said Mr. Trump’s pledges to promote business would more than counter the sting of a stronger dollar, especially if there are lower taxes and lighter regulatory burdens. They are hopeful Mr. Trump’s plan to overhaul infrastructure will spark economic growth, and that higher domestic sales could make up for any decline in exports.

“There’s bigger fish to fry,” said Mike Haberman, president of Ohio-based construction-equipment maker Gradall Industries Inc., which exports about 20% of its products. “I’m not panicked about the dollar.”

Jerry Johnson, president of the farm, ranch and agriculture division of Blount International Inc., a Portland, Ore., maker of outdoor products, said the strong dollar may be offset by declining import prices. About 50% of the components used in Blount’s products—they include mowers, log splitters and rotary cutters—come from overseas, Mr. Johnson said.

The dollar has been relatively weak against most of the world’s major currencies over the past decade. This helped U.S. exports rebound swiftly following the financial crisis.

By the end of 2010, exports reached record levels and continued to grow, hitting $598 billion per quarter in 2014. Employment in manufacturing began to recover, and optimism grew the U.S. could be entering a manufacturing renaissance.

The dollar has since risen sharply against currencies such as the yen and the euro. Meanwhile, the British pound dropped in the wake of the country’s June vote to leave the European Union. Earlier this month, the U.S. Federal Reserve raised rates, and hinted at more tightening next year.

The WSJ Dollar Index, which measures the U.S. currency against 16 others, hit a 14-year-high last week.

Bond yields have been rising amid expectations of more growth and inflation during Mr. Trump’s administration. The dollar rally could undermine his agenda by making exports more expensive and imports cheaper.

Collateral Damage

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Trump transition team officials didn’t respond to a request for comment.

For some companies, a stronger dollar will likely limit interest in expanding domestic manufacturing.

China’s yuan has fallen to its lowest level against the dollar in eight years, a move that could entice manufacturers to keep factories there rather than following in the steps of those that have brought some operations back to the U.S.

Mexico’s peso is down 13% against the dollar since the election, making it more tempting to move U.S. factories south of the border, despite Mr. Trump’s vows to punish firms that shift jobs abroad.

Emerson Electric Co. last week said the stronger currency worsened the extent of its orders’ decline from September through November by 2 percentage points. Overall, they fell by 7%.

Boeing Co., the nation’s largest exporter, last week cited “fewer sales opportunities and tough competition” when it laid out plans for further layoffs at its commercial-airplane unit next year after cutting staff by 8% in 2016.

Boeing didn’t mention currency fluctuations. The strengthening dollar has helped rival Airbus Group SE, which for years wrestled with an appreciating euro. Boeing declined to comment. An Airbus spokesman said the tailwind the company gets from the dollar is muted because 40% of its plane parts are purchased from the U.S.

Many manufacturers have begun to reduce their workforces; employment in manufacturing fell by 51,000 from January 2015 through November 2016, according to Labor Department data.

Ben Herzon, senior economist at Macroeconomic Advisers, an independent economic forecasting firm, conducted a simulation for The Wall Street Journal to illustrate how a further 10% increase in the strength of the dollar would ripple through the U.S. economy.

Over the next three years, companies would gradually adjust, by among other things boosting capacity at foreign plants while reducing at home, changing their supply chain or increasing the use of automation.

If the dollar doesn’t strengthen further, inflation-adjusted gross domestic product would cumulatively rise by 6.3% over the next three years. If it strengthens by a further 10%, that growth would be 1.8 percentage points lower, or 4.5%, according to Macroeconomic Advisers’ simulation.

The pain of a further 10% dollar rise would be especially concentrated in U.S. factories. Manufacturing production would be 3.6 percentage points lower under a strong dollar, inflation-adjusted imports would be 3.6 percentage points higher, and real exports from the U.S. to the rest of the world would be 6.2 percentage points lower.

Initially, U.S. consumers would stand to benefit by paying lower prices for imported goods.

“It’s good for consumers, as long as they’re still working,” said Mr. Herzon. As time goes on, this benefit will also be offset by the job loss in the manufacturing sector, he said.

Write to Andrew Tangel at Andrew.Tangel@wsj.com and Josh Zumbrun at Josh.Zumbrun@wsj.com

Seasons Greetings and Best Wishes in the New Year!

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Why Weak Currencies Have a Smaller Effect on Exports

Because manufacturers increasingly use components from abroad to make things, exports now incorporate a lot more imports

Workers at a Robert Bosch GmbH plant in Blaichach, Germany, use touchscreen panels on the automobile gasoline direct injector valve assembly line. Germany is an export powerhouse.
Workers at a Robert Bosch GmbH plant in Blaichach, Germany, use touchscreen panels on the automobile gasoline direct injector valve assembly line. Germany is an export powerhouse. PHOTO: KRISZTIAN BOCSI/BLOOMBERG NEWS

As various central banks loosened monetary policy this year, some economists predicted another cycle of beggar-thy-neighbor currency wars, in which countries race each other to become the cheapest exporter.

But it hasn’t panned out that way, and now a growing body of evidence suggests why: A shift in trade dynamics is blunting the impact of a weak local currency.

This could be all the more relevant now, when the monetary policies of the world’s most powerful central banks—the Federal Reserve and the European Central Bank—are heading in very divergent directions, possibly taking the value of their currencies along with them.

When a country loosens its monetary policy, interest rates fall and investors tend to pull their money out in search of higher yields elsewhere, pushing down the currency’s value.

That is still happening. But the dynamic isn’t affecting trade flows as much as expected. What has changed is where businesses source the things they need to make the products they export. Manufacturers once found most components needed to make their goods at home. Now they increasingly look abroad for such inputs. As a result, exports now incorporate a lot more imports.

It is still the case that when a currency such as the euro weakens, it reduces the price of goods sold by German manufacturers in the U.S. But it also increases the price of the things that German manufacturers import to make those exported goods.

Containers at the Port Newark Container Terminal in Newark, N.J.
Containers at the Port Newark Container Terminal in Newark, N.J. PHOTO: JULIO CORTEZ/ASSOCIATED PRESS

Measuring the impact of global supply chains on trade flows is the task of a project undertaken by the Organization for Economic Cooperation and Development and the World Trade Organization.

Using detailed figures from economies around the world, economists at the two bodies have measured how much foreign content there is in each nation’s exports, confirming a significant increase since the mid-1990s. The foreign content of Switzerland’s exports, for instance, increased to 21.7% in 2011 from 17.5% in 1995, while the imported content of South Korea’s exports almost doubled, to 41.6% in 2011 from 22.3% in 1995.

Economists at the International Monetary Fund and the World Bank have used those measures to assess whether currency movements have the same impact they once did on exports and imports. They found that the effect has in fact reduced over time, by as much as 30% in some countries.

Policy makers are beginning to take note. “As countries become more vertically integrated via global value chains, exchange-rate variations will have a diminishing impact on the terms of trade,” said Benoît Coeuré, a member of the European Central Bank’s executive board and one of its thought leaders, speaking in California last month. He concluded the process will reduce the role of currency moves as “shock absorbers” that direct global demand toward weaker economies from stronger ones.

Japan offers the clearest indication that big currency depreciations don’t deliver the export boost they once did. In early 2013, the Bank of Japan launched a massive stimulus program that increased the supply of yen and led to the currency’s sharp depreciation against the dollar and the euro.

That strategy was a key element of Japan’s package of measures designed to lift the economy out of a long period of stagnant growth. But what followed was something of an anticlimax. The yen’s weakening had little impact on Japanese exports, and failed to restart economic growth. Puzzled policy makers pointed to the weak state of demand in the global economy, but even if that were the case, Japanese exporters should have gained market share.

A similar pattern has emerged in the wake of the ECB’s January decision to launch its own program of quantitative easing. Like the yen, the euro weakened, continuing a decline against the dollar that started in early 2014 and now amounts to roughly 20%.

In early 2015, the launch of QE was expected to boost eurozone growth by aiding exports. But once again, the impact of a weakened currency has been modest. Indeed, in the three months to September, eurozone growth was held back by a more rapid growth of imports over exports, while industrial output flatlined.

Experts believe it takes about 12 to 18 months for foreign-exchange moves to have their full impact on trade flows, so the effect would have been felt by now in both the eurozone and Japan. The euro started weakening against the dollar in early 2014, while Japan is about three years into its currency depreciation.

Those disappointments don’t mean currency movements caused by the great divergence between the Fed and the ECB won’t have any impact. That is a key concern for U.S. businesses in the wake of the Fed’s decision this month to raise interest rates for the first time in almost a decade—just weeks after the ECB moved its policy in the opposite direction. Many economists still expect the U.S. to suffer some slowdown in exports, while the eurozone enjoys some pickup. Already in the first 10 months of 2015, the U.S. trade deficit widened by 5.3% from a year earlier, reflecting a decline in exports.

And as the economists from the IMF and World bank have noted, the degree to which a currency movement boosts or reduces exports depends on how large their foreign content is. For the economy as a whole, the foreign share of U.S. exports is at the lower end of the global range, at around 15%, compared with more than 25% in Germany.

“It’s more complicated as a story for the U.S. because of the low foreign content,” saidSebastian Miroudot, a trade economist at the OECD.

Write to Paul Hannon at paul.hannon@wsj.com

Shutdown of U.S. Ex-Im Bank Puts Companies in a Financing Bind

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Ethiopian Airlines had to scramble at the last minute this summer when it needed to pay for a plane it ordered from Boeing Co. MMBAMM years ago.

The East African carrier got the aircraft last month but, instead of owning it, the airline is leasing the plane from a bank, said Chief Executive Tewolde Gebremariam. It couldn’t secure a loan for the purchase because it lacked a financing guarantee from the U.S. Export-Import Bank.Amid a clash over spending priorities, congressional Republicans effectively shut down the U.S. Ex-Im Bank by failing to reauthorize the agency at the end of June. That means the bank can’t make new loans or provide loan guarantees to foreign companies so they can buy American products and services. And American companies can’t renew their export-credit insurance policies.

The shutdown was a blow to many companies in the U.S. and abroad that are fighting for revenue in a sluggish global economy. Many foreign companies like Ethiopian Airlines are looking to do business with trusted American suppliers, while U.S. companies are searching abroad for new customers.

A strong dollar and weaker growth hamper those efforts. U.S. exports of goods and services were down 3.5% from a year earlier in the first seven months of 2015. Exports fell 3.2% in August, according to the Commerce Department.Declining exports, combined with a lack of U.S. Ex-Im Bank funding, is “a double-whammy,” said David Ickert, finance chief of Air Tractor Inc., which makes small aircraft for the agriculture industry. Softer prices for crops such as soybeans have growers in places like Brazil and Argentina ordering less equipment, he said.Air Tractor, based in Olney, Texas, typically uses export-credit insurance from the U.S. Ex-Im Bank. Foreign customers typically account for over half of the company’s sales, but Mr. Ickert expects that figure to drop to 30% this year. “There are definitely some multiple headwinds we’re facing right now,” he said.

Many foreign companies say they can’t secure financing from commercial banks without some kind of government-backed financing or guarantee, which most developed countries offer through their own Ex-Im banks.Ethiopian Airlines’s Mr. Gebremariam said he hopes to buy more than two dozen planes from Boeing in coming years, but will consider going to European rival Airbus Group SE if the U.S. Ex-Im Bank stays out of business.“There’s definitely an impact on our expansion and growth,” he said. “Some economies in Africa are considered high risk, so banks wouldn’t be able to finance us directly without Ex-Im backing.”

In a letter sent to Boeing officials last week, Comair Ltd., an aviation company based in South Africa, said a continued lack of U.S. Ex-Im Bank support would force the airline to borrow in foreign currency. But doing so, given the volatility of its local currency, the rand, would “expose Comair to too great an exchange-rate risk on its balance sheet,” said CEO Erik Venter.Boeing said such sentiments reflect private conversations it has been having with customers for months. “They want to keep buying American, but the uncertainty over the future of the Export-Import Bank is forcing them to consider other options,” said a company spokesman. Boeing, a strong proponent and major beneficiary of the bank, expects it to reopen. But an extended shutdown would prompt Boeing to consider moving work offshore to compete for contracts that require Ex-Im backing, Chairman Jim McNerney said last month.General Electric Co. MMGEMM is already doing so, to make it easier for its customers to use Ex-Im funding from other countries, such as Canada, France and Hungary. In Hungary, where GE has manufacturing facilities, the export-import bank is providing a loan to Bresson AS Nigeria Ltd., a power-generation company, to buy GE turbines for new plants in Nigeria, said Barakat Balmelli, a financial adviser to Bresson on the deal.

Hungarian officials are looking to increase their level of new export-import-related lending to €1 billion, or about $1.1 billion, by the end of the year. Last month the government expanded agreements between its Ex-Im Bank and local Hungarian commercial banks.

Ms. Balmelli said Bresson chose to work with Hungary’s Ex-Im Bank partly because of the U.S. shutdown. “You have other countries changing their policies to accommodate these new business opportunities while the U.S. is just fiddling about,” she said.61ae8-exim-bank1

Last week, the U.S. Ex-Im Bank’s Republican supporters moved to bring the bill reauthorizing the bank to a vote. The procedure would force a vote on the bill, which is backed by nearly all Democrats and many Republicans, later this month.

Meanwhile, small U.S. companies, which can’t relocate or move jobs overseas, are feeling the brunt of the bank’s closure. W.S. Darley & Co., a maker of firetrucks and related gear, said the shutdown already has cost it a contract worth about $7 million.

The customer’s loan didn’t get final Ex-Im Bank approval, and since W.S. Darley’s contract was contingent on that financing, “that sale could just be gone,” said Chief Operating Officer Peter Darley.

With projects falling out of the pipeline, employees at the Itasca, Ill., company are worried about their jobs, he said. “It hurts us. We had a lot of good momentum,” he said, referring to building firetrucks for foreign cities and towns.

Featured Image -- 2741“We might be losing projects we’re not aware of,” he said. “If a buyer knows that Americans don’t have an open Ex-Im, they might not even knock on the door, or invite us to the bid table.”

Write to Kimberly S. Johnson at Kimberly.Johnson@wsj.com

http://www.wsj.com/articles/shutdown-of-u-s-ex-im-bank-puts-companies-in-a-financing-bind-1444093160

U.S. Export Weakness Hampers Growth

Strong dollar and global economic strains undermine foreign trade in goods and services

Hopes for an American export boom are wilting under the weight of a strong dollar and global economic strains.

U.S. exports are on track to decline this year for the first time since the financial crisis, undermining a national push to boost shipments abroad. Through July, exports of goods and services were down 3.5% compared with the same period last year. New data released Tuesday by the Commerce Department showed that exports of U.S. goods sank a seasonally adjusted 3.2% in August to their lowest level in years.
IT-USExportsReprint_Page_2
The weak trade performance is restraining overall economic growth, a sign of how troubles in China and other major economies are dinging the U.S. economy.

“Foreign demand remains the weakest part of the economy,” said Jim O’Sullivan, chief U.S. economist at consulting firm High Frequency Economics.
It didn’t seem that way in 2010, when President Barack Obama set a goal of doubling exports over five years. Some big cities took up the challenge, including Portland, Ore.

Facing a battered economy at home, Vanessa Keitges, president of Portland-based Columbia Green Technologies, lined up sales in Belgium and New Zealand. In Canada, she chased public-building projects and Wal-Marts. Within three years, one-quarter of the green-roofing company’s sales were outside the U.S.

But that proved to be a high-water mark for the company’s foreign ambitions. Ms. Keitges is now focusing on the strengthening domestic market for the company’s rooftop planters as weak growth abroad tempers demand and a strong dollar creates pricing problems.

Exports seemed a golden opportunity as Portland and the rest of the nation emerged from the 2007-09 recession. Foreign sales were a major contributor to U.S. economic growth in 2010 and 2011, outstripping past recoveries. Political leaders hoped selling goods and services abroad would offer a sustained boost to the job market at home.

But the dream of an export boom has faded.

As unemployment has declined, American consumers have reasserted their dominant role in driving economic growth. And a strong dollar and weakness overseas have helped turn international trade into a drain on overall economic growth in four of the past six quarters.

The Federal Reserve worries exports will be a persistent drag on the broader economy going forward. Fed Vice Chairman Stanley Fischer in August said it was “plausible to think that the rise in the dollar over the past year would restrain growth…through 2016 and perhaps into 2017.” If the Fed begins to raise short-term interest rates later this year, that could provide new fuel to push the dollar’s value even higher.

Exports of goods and services grew 80% from 2003 to 2008, but then expanded only 48% from 2009 to 2014, according to Census Bureau data.

A Commerce Department official described President Obama’s export-growth initiative as “catalytic and a success,” driving exports “despite strong global economic headwinds and macroeconomic factors outside our control.”

The administration is looking to spur trade growth through agreements such as the Trans-Pacific Partnership. Senior officials from around the world are meeting in Atlanta, trying to complete the expansive trade deal after talks stalled earlier this year.

It isn’t just the U.S. where exports have been a disappointment in recent years. Globally, growth in trade volume is set to trail the pace of economic growth for the third year in a row, and trade growth has been averaging just half its pre-financial crisis pace. In the immediate aftermath of the recession, confronted by weakness in the domestic economy, U.S. policy makers saw opportunity in global markets.

Following Mr. Obama’s lead, the Portland metro region in 2012 set its own goal to double its exports in five years. “This is how we fight for jobs in the next economy,” then-Portland Mayor Sam Adams declared. In the past year, Portland has quietly shelved that aim. The value of Portland-area exports actually declined slightly between 2012 and 2014, according to tallies from the Commerce Department and the Brookings Institution, a Washington think tank.

After Portland set its goal, economic conditions started to shift. The value of major currencies declined relative to the dollar, making American-made goods more expensive for foreign customers. Growth slowed in key markets such as China and Canada. At home, the U.S. economy regained its footing.

Over the past year, Portland first was caught up in a labor dispute that caused gridlock at ports along the West Coast, then it lost regular ocean-bound container service. Local officials also came to realize export growth depended overwhelmingly on chip maker Intel Corp., MMINTCMM which has extensive facilities in the Portland suburbs.

Exports of computer and electronic products helped drive a more than doubling of the metro area’s exports between 2003 and 2008, according to Brookings. But Intel has suffered from a slowdown in demand for personal computers.Measurable gains from smaller companies are likely to take years to materialize. Federal estimates show only about 5% of U.S. firms export, with nearly two-thirds of the annual value concentrated among 500 companies.

Hand-tool maker Astro Tool Corp. in the Portland suburb of Beaverton has seen many of the challenges up close. Over the past year, general manager Mike Barnes dedicated half his time to chasing foreign customers, while still overseeing day-to-day operations of the 30-employee company. He faced a steep learning curve. “We, A, didn’t know how to do it, and B, we didn’t have the money to do it,” he said. “You can’t just go to the Internet and say, ‘Where do we find foreign opportunities?’ ”

He eventually landed a small grant to hire a consultant and tapped connections for advice. The share of Astro’s business coming from overseas climbed over the past year to 25% from 15%. But he also watched at a trade show as a foreign competitor sold a cheap, knockoff version of a product similar to his.

The Portland region is trying to court foreign companies that already incorporate exports into their business model. But those companies aren’t immune to global pressures.

Two years ago, exports were nearing 70% of the sales of Shimadzu USA Manufacturing Inc., a subsidiary of the Japanese maker of instruments to test everything from wine fermentation to the urine of Olympic athletes. Now the plant in an industrial park at the far southern edge of metro Portland is getting closer to 50-50 as domestic growth outpaces sales gains abroad.

Foreign customers “can get it cheaper from Japan now than they can from the United States. We’re not as competitive as we were,” said Joe Shaddix, vice president of operations and manager of the factory, referencing the strong dollar.

At the same time, domestic demand for test instruments is developing among marijuana growers as states move to legalize the drug. The factory has expanded what it can make, becoming U.S. Food and Drug Administration registered.

Mr. Adams, the former mayor, remains a strong advocate for the goal of doubling exports—if not by 2017, then eventually. He worries the Portland economy isn’t keeping up with the quality of life that draws twenty- and thirty-somethings at an enviable rate.

“Obviously the timeline will move, but keeping that goal front and center is key,” he said.
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Write to Mark Peters at mark.peters@wsj.com and Ben Leubsdorf at ben.leubsdorf@wsj.com

http://www.wsj.com/articles/u-s-export-weakness-hampers-growth-1443576283

Post-Boehner, risk of December government shutdown and Export-Import Bank closure is high

On Friday, House Speaker John Boehner announced he will resign at the end of October.

Photo: Associated Press The Export-Import Bank building in Washington D.C.

With John Boehner stepping away from the negotiating table, the chances increase for a December government shutdown and a permanent shuttering of the Export-Import Bank.

Other question marks: Will Congress and the White House be able to agree on new federal borrowing authority and revise the way the U.S. pays for the upkeep of roads and bridges.

The immediate shutdown threat may have passed, since Mr. Boehner, a core group of House Republicans, House Democrats and a Senate majority appear to be in agreement on a stopgap bill to carry the government from Oct. 1 through Dec. 11.

Mr. Boehner told reporters he plans to get as much done as he can before he leaves. President Barack Obama said he hoped Mr. Boehner would try to get as much done as possible in the next month and pledged to help him do that.

What happens to the government in December will be determined by Mr. Boehner’s successor.

If House Republicans choose a new speaker who favors more confrontations with the White House, the outcome could be either a partial government shutdown or a full-year stopgap spending bill—an option that the Defense Department, in particular, opposes unless the measure is written to allow new programs to begin.

Whoever gets the speaker’s gavel may feel obliged to promise the conservative wing of the party a willingness to go all the way to a shutdown to achieve goals such as ending funding for Planned Parenthood.

For years, there has been speculation that Mr. Boehner would strike a grand compromise with Obama and the Democrats and then resign. The first part of that—a push for a grand bargain on tax and entitlement spending, as he tried to negotiate in 2011—is probably out of reach given the proximity of the next elections.

More in realm of possibility before Boehner leaves is a smaller agreement, perhaps on the debt ceiling and reviving the Export-Import Bank. If not, all bets are off.

Here are some of the deadlines to watch during the House leadership transition:

EX-IM: The charter for the Export-Import Bank of the U.S. was allowed to lapse on June 30. Some Republicans and small- government groups oppose reauthorization, saying Ex-Im benefits only a few large corporations and that its activities should be left to the private sector. Boehner backed the Ex-Im’s renewal.

Two key decision-makers, Majority Leader Kevin McCarthy and Financial Services Chairman Jeb Hensarling, are Ex-Im opponents.

OPIC: The Overseas Private Investment Corp.’s authorization runs through Sept. 30. Republicans have been divided over whether the loan-guarantee agency should continue. Last year, 116 House Republicans voted against reauthorization.

DEBT LIMIT: The Treasury Department has been using so- called “extraordinary measures” to juggle the government’s cash flow. Secretary Jacob Lew has said that borrowing authority needs to be raised before late October or else the U.S. could default on its obligations.

In 2011, the government was pushed to the brink of default in a dispute over a debt-limit extension.

HIGHWAY BILL: Highway, transit and road safety programs are currently authorized only through Oct. 29. Lack of action could cause programs financed through the the Highway Trust Fund to shut down, partially or completely. The chief complication is that the fuel taxes that provide the bulk of Highway Trust Fund revenue haven’t been increased in more than two decades and haven’t kept up with growing infrastructure needs, better fuel efficiency and changing driving patterns.

Agreement on sustainable funding streams—such as shifting to a vehicle-miles-traveled system—has been difficult, and leading House Republicans have discussed using corporate tax changes to fund a long-term bill, though so far no plan has been unveiled.

TAX BREAKS, NUTRITION: The race to be speaker — and a possibly more contentious battle for the majority leader spot — could determine the ability of Congress to renew dozens of tax breaks that expired at the end of 2014 and to come to a compromise on reauthorizing $30 billion in nutrition programs that expire Sept. 30.

Main Street awaits fate of Ex-Im Bank, key lender

Mary Howe, president of Howe Corp. in Chicago, relies on the Export-Import Bank of the United States for credit insurance.

Lawrence Collins
Mary Howe, president of Howe Corp. in Chicago, relies on the Export-Import Bank of the United States for credit insurance.

The fate of the Export-Import Bank of the United States, a key lender for many small companies that do business overseas, again hangs in the balance.

The bank’s fund runs out Sept. 30. While the bank’s charter technically expired June 30, it continues to service loans with terms of up to 18 years. Adding to the drama, the U.S. government could potentially shutdown Oct. 1 if a budget agreement is not reached. However, the bank’s reauthorization is not directly tied to the federal budget process.

Known as “Ex-Im” for short, the bank is a financial lifeline and safety net for many small businesses that export goods in foreign markets than can be risky. The bank provides loans and insurance to support exports. President Barack Obama has been a vocal supporter of renewing Ex-Im’s funding, calling the move a “no brainer” over the summer.

For small business owners such as Mary Howe, the potential closure could reduce her access to working capital. Howe’s family business, Howe Corp. in Chicago, exports up to 40 percent of its industrial refrigeration equipment to places including Central America and Canada.

And if the Ex-Im Bank’s funding isn’t renewed? “Our backup plan is to self-fund; it’s going to get tight,” Howe said.

Read MoreBattle lines drawn over Export-Import Bank renewal

The Senate voted in July to fund Ex-Im as part of a longer-term highway bill, which has since moved to the House for consideration.

The vote in the U.S. Senate on the bill was a strong signal of bipartisan support for the Ex-Im bank and “businesses and workers that we have empowered in the past to grow their exports,” the bank’s Chairman Fred P. Hochberg said in an email statement to CNBC. Ex-Im Bank has been funded for some 80 years.

Since Ex-Im’s charter expired in June, it has not been able to make or guarantee any new loans, or extend insurance, partly due to congressional disagreement over who receives funding from the bank. The financial institution did $20.5 billion in financing last year.

Ex-Im Bank’s small-business authorizations in fiscal year 2014 were more than $5 billion, as measured by total dollar volume, which is nearly 25 percent of the total-dollar volume of overall authorizations.

The bank approved more than 3,300 small-business authorizations, nearly 90 percent of the total number of Ex-Im Bank authorizations.

The remaining $15.5 billion supports exports at other big corporations—including General Electric, which announced last week it would move about 500 U.S. jobs overseas to avoid losing business to foreign competitors, due to uncertainty about the bank’s charter. GE says 400 of the 500 positions will now be based at its facility in France, dependent on the company’s winning bids. The additional 100 jobs currently are in Texas, but will move to Hungary and China.

“Our customers rely on export credit agencies, like U.S. Ex-Im, to finance their critical power projects,” said Jeff Connelly, vice president of supply chain at GE Power & Water, in prepared remarks.

But critics, including House Financial Services Committee Chair Jeb Hensarling, Republican of Texas, see the bank as a form of corporate welfare. “Most of this goes to very successful, well-heeled companies that don’t need the help in the first place,” Hensarling told CNBC over the summer.

Export-Import bank

Andrew Harrer | Bloomberg | Getty Images

Still, the future of the bank is a “huge issue” for small companies, according to Morrison Textile Machinery Co. in Fort Lawn, South Carolina. President Jay White says Ex-Im allows the company, which designs, manufactures and installs textile machinery globally, to insure its overseas business on a rolling basis.

“If I can’t get Ex-Im insurance, I am taking on credit risk myself—the profit on my job would be eaten up if I get commercial credit insurance,” White says. “This overseas credit support is very important to my business,” he says.

And while Ex-Im Bank’s charter technically has expired, it will remain operational through the end of the month and continues to service existing loans. The bank’s funding lapse coincides with a potential government shutdown if a congressional continuing resolution is not passed to keep the government operational.

Read MoreEntrepreneuers who do biz overseas await bank’s future

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