Congressional path to re-chartering U.S. EXIM: Mismanagement, or Crime?

“Trade Bank Likely to Live – Only After it Lapses” read the headline in Friday’s edition of the  Wall Street Journal (see full reprint of the article, below). It was a subtle and interesting summary of the irresponsible, politically charged fight in both U.S. Senate and the House of Representatives, with respect to reauthorization of the Export Import Bank of the United States.Featured Image -- 2741

As someone who over the last 15 years has been intimately involved with Government backed Export and Project financing programs, and whose company works with the US EXIM and other export credit agencies (ECA’s) on the daily basis, I have been very closely following the process and listened to hours of Congressional hearings on the subject.

Frankly, the hearings scared me, as they clearly demonstrated to what extent our nation’s lawmakers will advance their political agendas and in the process be willing to inflict damage on ordinary Americans, often even on their own constituents.

The hearings followed a clear pattern – Pro EXIM Congressmen/women sending soft lobs at the Chairman and at other members testifying on behalf of the bank. Questions were repeatedly focused around highlighting EXIM’s  positives such as: US jobs support, small business support, surplus returned to the US Treasury, bank’s extremely low default rate, bank’s role in financing foreign receivables for exporters (something US banks cannot do)

On the other side of the isle, the vial Con set spoke in half truths, took a number of things out of context and spewed venom. Their ammunition consisted of absolutely flawed risk assessment arguments; insular and inward, rather than global view of the export credit agency’s roles in the global marketplace; flawed arguments on picking winners and losers; and bank’s role in financing only between 1 and 2% of the US exports. The latter argument trying to drive home a point that the bank is insignificant to begin with and thus something our country could live without.  The Cons  presented expert testimony from some seriously dubious sources. I wonder how much experience, a well educated economist and a respected researcher has in exports and international business, when his top job was as the administrator of the NY Census Bureau?

Then you had some Senators trying to ascertain preposterous concept of the damage, which has been caused to US Economy, when EXIM financed US exports to foreign buyers, while competing against other countries’ ECA offerings. Although the bank’s Chairman several times pointed out the fact that when US companies compete abroad, if their potential exports will not be financed by the US EXIM, the goods and services needed, will be purchased in other countries and will be financed by ECAs of those countries, thus causing double damage to the US economy.

Yet, despite hours of hearings, certain crucial information was completely overlooked. The very fact that US must have a stong ECA, since certain major public and private international projects involve non-payment risk for all American suppliers, and that such risk could only be mitigated by the US government and its potent economic, diplomatic, military and geopolitical levers, seemed completely lost on all involved.

Also completely under the radar, slipped the fact of building the exporter credibility and buyer confidence, while developing export sales into infrastructure projects abroad. Just an indicative availability of financing from a government Agency like EXIM goes a very long way to help US companies secure supply into multimillion dollar contracts for such projects, at early stages of their development

EXIM proponents also deployed a bit of their own sleight of hand.

The fact that US banks are not allowed to insure foreign receivables thus handicapping US exporters was discussed ad naseum, but no mentioned was made of the fact that an entire private insurance industry exists to take up a lot of slack in this segment.

A distinguished Senator from NJ practically perjured himself when he told the world a story of a NJ firm, which has no options financing a $300 million Ukrainian contract and would lose that business without EXIM. What he failed to mention was that EXIM stopped financing projects in Ukraine over a year ago and thus, even if reauthorized, would not consider financing this firm until the bank returns to financing projects in that country. True EXIM would have been an excellent option, but the contract has been signed, NJ firm has begun to export and another financing arrangement, with another US government agency, is now being put in place.

And so on these hearings went for hours and hours of spending taxpayers’ funds and valuable management and adinistrative resources.

Yet, at no time the esteemed members of Congress undertook to examine the damage they themselves were causing to the US economy by dragging what should be a routine reauthorization process through the mud, wasting taxpayers’ time and money and distracting the Bank’s Chairman and others at the bank from focusing on their jobs.  This reauthorization “process” also allows foreign competing ECAs gain competitive ground and creates costlu uncertainly among exporters, foreign buyers and bankers. The Conservative Republicans are sabotaging the process just simply because they can and are letting their partisan political agenda, personal feelings about the Bank’s leadership and lack of true understanding of the real world situation wreck havoc with the lives of ordinary Americans.  Yet now, when there finally seem to be enough votes to reauthorize the EXIM bank, the Congress is considering letting the bank’s charter lapse for technical reasons,  In the private sector world this type of irresponsible behaviour would border on criminal.

At no time, our nation’s lawmakers considered what needs to be done to really reform this American Export Credit ​Agency to better serve the US manufacturers and exporters. All that was discussed were the recommendations of the compliance oversight bodies on the incremental reforms of the existing Agency. A Senator for Massachusetts tried to use a stick approach to bracket the bank into asinine compliance measures of requiring 25% of Banks reauthorizations to come from small business. A noble goal, which breaks down when trying to add up all $100K – $1mil small business transactions as percentage against financing $150 mil satellite, a $250 mil aircraft, or a $10 billion power plant.  Today, small business transactions by number account for something like 80% of the Bank’s total. To continue to force a 25% increase by volume is short sighted and politically charged.

I61ae8-exim-bank1 have written about the US EXIM for years and will be the first to suggest that the Agency could use substantial reform and improvement (Heck, the entire US Government could be made smaller, more streamlined and could use reform and improvement). The US EXIM is by far the one of the more siloed and insular of all the US Trade and Development agencies, which I have dealt with. On one hand it is largely unknown by the US exporter community, but on the other hand is is very small and overburdened, as it is demand driven and has no way to adjust its personnel to handle peak demand.  Civil Service protections, as wonderful ad they are, (two of my immediate family members work for the USG, including one for the Bank), sometimes work negatively and do not allow to effectively fire weak performers, Of the 450 employes at EXIM, probably about 20% need to be pruned and replaced.  If Congress really wanted to help US Exporters, rather than annihilate a perfectly good Agency in a politically charge bombardement, it would have conducted a series of round table discussions calling for constructive reform at the bank. Such discussions would involve all stakeholders who actually know exports and understand international business, rather than ivory tower theorists.

At the time when our nation is saddled with the largest debt and budget deficit in history, when we have problems with Iran, ISIS, Ukraine, Syria, health care, unemployment, falling exports, global warming and the list goes on and on. When we need congressional leadership and votes on really important legislature such as TPP, repeal of Obamacare etc., our lawmakers find all the time in the world to debate the need to reauthorize a tiny 80-year old SELF SUSTAINING US Government agency. They conveniently ignored the facts that EXIM sent $7 billion dollars back to the Treasury in the last decade to help reduce our dreaded budget deficit and that it is part of a global export ecosystem of about 80 such agencies world wide and closing it would be tantamount to unilateral disarmament of our export sector.

Whether we like it or not, international trade (certainly exports) will always be an issue deeply influenced and affected by our national foreign policy. To make an argument that markets must take care of themselves (and I am among the biggest proponents of a free market theory) in case of international trade is preposterous. Thus our government’s trade and development agencies, including US EXIM, are a vital part of our nation’s global economic tool set.  EXIM’s  mission has been to support US job creation by helping American companies compete globally and expand their exports, while mitigating risk. The bank has been true to its mission and should be reauthorized before expiration of its charter at teh end of June, while the lawmakers who irresponsibly stood in the way of the reauthorization process should at the very least be severly censured and certainly voted out of office at the next possible opportunity.

Fi3E Badge

 Trade Bank Likely to Live—Only After It Lapses

Backers believe they have votes to renew export-finance agency, but legislative calendar complicates path
The Export-Import Bank seems to have enough legislative support to pass, but the legislative calendar poses an obstacle to passage before its charter lapses. Companies from General Electric to Air Tractor, whose facility in Texas is pictured here, say passage is important for their business.
The Export-Import Bank seems to have enough legislative support to pass, but the legislative calendar poses an obstacle to passage before its charter lapses. Companies from General Electric to Air Tractor, whose facility in Texas is pictured here, say passage is important for their business. PHOTO: JUSTIN CLEMONS FOR THE WALL STREET JOURNAL

WASHINGTON—Supporters of the Export-Import Bank say they are poised to beat back a drive to kill the institution, but the victory may come only after a June 30 expiration of the bank’s charter causes a lapse in the bank’s ability to underwrite new loans.

For now, the legislative calendar looms as the largest obstacle for supporters of the agency, which provides financing for U.S. exports. Senate Majority Leader Mitch McConnell (R., Ky.) promised Senate Democrats last month to hold a vote on the bank in June.

But with no other major legislative deadlines before July, bank supporters are struggling to find a must-pass bill on which to attach a reauthorization, a move that would help garner approval in both chambers. Lawmakers and lobbyists said a measure to extend funding for highways, needed by late July, may be the best bill to carry an extension of the bank.

Backers believe they have enough votes to pass a reauthorization in both chambers. Until recently, the biggest question has been whether House Speaker John Boehner (R., Ohio) would bring a bill to the House floor amid GOP resistance. Mr. Boehner recently said that if the Senate passes legislation extending the bank’s operations, the House would consider it under a process that allows critics to try to overhaul or extinguish the agency through amendments.

“Whether it is 14 days or 14 weeks or 14 months, this institution will be reauthorized,” said Rep. Frank Lucas (R., Okla.) one of nearly 60 House Republicans that supports a bill to reauthorize the bank.

“If the charter lapses,“ he said, “it may take a number of occasions where U.S. companies lose substantial business around the world—to help us focus.”

Created in 1934, the bank provides financing for American companies to sell exports overseas through a wide range of programs, including guaranteeing loans to foreign buyers and providing credit insurance. It provided $20.5 billion in credit assistance to support an estimated $27.5 billion in exports for the year ended last October, and sent $675 million to the U.S. Treasury that it earned from interest and fees. A large share of its guarantees go to corporate titans like Boeing Co. and General Electric Co. because it backs big-ticket exports of aircraft and industrial equipment.

If the bank’s charter does expire, it would honor existing guarantees but it wouldn’t be able to underwrite new loans or renew other financial tools aiding exporters. Already, the threat of a shutdown has led to fewer applications for certain guarantees, said Fred Hochberg, the bank’s chairman.

Republican divisions over the agency are likely to put Mr. Boehner in an uncomfortable but familiar position: Having to pick between upsetting conservative lawmakers who already distrust him or the business establishment that has long supported him and other GOP lawmakers.

With the two other top House Republicans—Majority Leader Kevin McCarthy and Majority Whip Steve Scalise—opposed to reauthorizing the bank, “if it comes to the floor, it’s going to be because Mr. Boehner wants it to come to the floor,” said Rep. Mick Mulvaney (R., S.C.), a bank opponent.

Conservatives, led by Financial Services Committee Chairman Jeb Hensarling (R., Texas), are pushing for expiration of the bank, which they believe interferes in the market and creates taxpayer risk. Mr. Hensarling hasn’t attempted to pass legislation winding down the bank out of his committee because the bank’s charter will expire on its own, but that has left GOP leaders without their own bill to bring to the House floor.

Mr. Hensarling said Wednesday that he recognized that Republicans were divided on the issue, and that he hadn’t yet decided how to move forward. “I do understand that one person’s corporate welfare and politically driven capital allocation is another person’s vital export support program and level playing field,” he said.

Many lawmakers expect a bill reauthorizing the Ex-Im Bank would pass, if brought up in the House, where nearly all 188 Democrats support it. Close to 60 Republicans back a bill from Rep. Stephen Fincher (R., Tenn.) that would reauthorize its charter with some minor changes.

The bank’s critics have been optimistic because they prevail if “we get Congress to do what they’ve been so good at in the past—absolutely nothing,” said Brent Gardner,government affairs director for Americans for Prosperity, a conservative group backed by industrialists Charles and David Koch.

Business groups have ratcheted up their lobbying in recent days to secure a long-term extension, particularly in the Senate, where supporters hope a lopsided vote for the bank would ease its path in the House. “The votes are there. At least let us have our vote,” saidDanny Roderick, chief executive of Westinghouse Electric Co., who met with lawmakers on Tuesday.

Some firms have said that, while they could manage a short-term lapse, the brinkmanship and any failure to provide a long-term reauthorization is damaging the bank’s credibility in foreign countries when U.S. manufacturers compete against Chinese, South Korean or European firms that offer their own export-credit backing.

“These are 10-year, 15-year projects that we work on, and we can’t even decide month to month whether we’re going to have the Export-Import Bank,” said Mr. Roderick.

Some conservatives, meanwhile, are trying to pressure Mr. Boehner to pledge not to bring Ex-Im reauthorization up for a floor vote in exchange for conservatives’ support of upcoming trade legislation.

House Ways and Means Committee Chairman Paul Ryan (R., Wis.) said Thursday that the fight over the bank would not be tied to the trade bill.

“It’s just not going to happen,” said Mr. Ryan, who supports the bank’s expiration. He also said he anticipated that the charter will expire as scheduled on June 30.

Write to Nick Timiraos at and Kristina Peterson

Should Congress Reauthorize the Export-Import Bank?

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


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 .

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 .


U.S. Relaxes Rules on Cuba Travel

A tourist bus in Old Havana on Thursday. U.S. law forbids tourist travel to Cuba but several tour operators said business has been booming.
A tourist bus in Old Havana on Thursday. U.S. law forbids tourist travel to Cuba but several tour operators said business has been booming. ENRIQUE DE LA OSA/REUTERS

The U.S. will allow eligible citizens to travel to Cuba on the honor system, eliminating a requirement for many to seek prior approval and making visits easier for thousands of Americans, according to details released Thursday.

U.S. law forbids tourist travel to Cuba. Under the law, U.S. citizens may visit only if their travel fits into one of a dozen categories, including family visits, humanitarian work and journalism, and many eligible travelers have needed a license from the U.S. government to visit, in addition to obtaining a Cuban visa.

Under the new policy, an administration official said on Thursday, citizens still may only travel to Cuba for eligible purposes, but they will no longer need a U.S. government license to do so.  READ MORE

Yes, America Should Be the World’s Policeman

Bush did too much and Obama too little—but a ‘broken-windows’ model of U.S. foreign policy can be just right

‘If the world’s leading liberal-democratic nation doesn’t assume its role as world policeman,’ writes Journal columnist Bret Stephens, ‘the world’s rogues will try to fill the breach, often in league with one another.’
‘If the world’s leading liberal-democratic nation doesn’t assume its role as world policeman,’ writes Journal columnist Bret Stephens, ‘the world’s rogues will try to fill the breach, often in league with one another.’ PHOTO ILLUSTRATION BY STEPHEN WEBSTER; GETTY IMAGES (COP, BADGE)

When it comes to U.S. foreign policy, Americans must sometimes feel like Goldilocks in the three bears’ house. The porridge that was President George W. Bush’s “freedom agenda”—promising democracy for everyone from Karachi to Casablanca—was too hot. The mush that has been President Barack Obama ’s foreign policy—heavy on rhetoric about resets, pivots and engagement but weak in execution and deeply ambivalent about the uses of U.S. power—is too cold.

What we need instead, as the fairy tale has it, is a foreign policy that is just right—neither too ambitious nor too quiescent, forceful when necessary but mindful that we must not exhaust ourselves in utopian quests to heal crippled societies.

The U.S. finds itself today in a post-Cold War global order under immense strain, even in partial collapse. Four Arab states have unraveled since 2011. The European Union stumbles from recession to recession, with each downturn calling into question the future of the common currency and even the union itself. In Asia, China has proved to be, by turns, assertive, reckless and insecure. Russia seeks to dominate its neighbors through local proxies, dirty tricks and even outright conquest. North Korea’s nuclear arsenal and Iran’s effort to develop one tempt their neighbors to start nuclear programs of their own. And even as the core of al Qaeda fades in importance, its jihadist offshoots, including Islamic State, are metastasizing elsewhere.

As for the U.S., the sour experience of the wars in Iraq and Afghanistan has generated a deep—and bipartisan—reluctance to interfere in foreign conflicts, on the view that our interventions will exact a high price in blood and treasure for uncertain strategic gains. One result is that aggressive regimes seem to think that they can pursue their territorial or strategic ambitions without much fear of a decisive U.S. response. Another is that many of our traditional allies, from Israel to Saudi Arabia to Japan, are quietly beginning to explore other options as the old guarantees of the postwar Pax Americana no longer seem as secure as they once were.

How should an American president navigate through this world of ambitious rogues and nervous freelancers? How can the U.S. enforce some basic global norms, deter enemies and reassure friends without losing sight of our global priorities and national interests? How do we conduct a foreign policy that keeps our nightmares at bay, even if we can’t always make our dreams come true?

When it comes to restoring order in places widely assumed to be beyond the reach of redemption, there is a proven model for us to consult. But it has nothing to do with foreign policy; it has to do with policing our toughest inner cities. And it has brought spectacular—and almost wholly unexpected—results.

Could it be that there’s a ‘broken windows’ cure not just for America’s mean streets but for our increasingly disorderly world?Could it be that there’s a ‘broken windows’ cure not just for America’s mean streets but for our increasingly disorderly world? GETTY IMAGES

The year 1991 was a year of foreign policy triumphs for the U.S., from victory in the Gulf War to the collapse of the Soviet Union. But it was the annus horribilis for American crime, with nearly 1.1 million aggravated assaults, 106,590 forcible rapes and 24,700 murders. In every category, crime was up from the year—and the decade—before. As late as 1995, some criminologists were predicting that a new wave of “super-predators” would descend on American neighborhoods. “If current trends continue, the number of arrests of juveniles for violent crimes will double by the year 2010,” reported the New York Times, citing a Justice Department report.

“Current trends” did not continue.

In 1990, New York City registered a homicide rate of 30.7 murders for every 100,000 people. By 2012, it had fallen to a rate of 5. A similar, if slightly less dramatic, story unfolded in every other major U.S. city. The social deliverance happened despite the fact that many of the factors often cited to explain crime—bad schools, broken homes, poverty, the prevalence of guns, unemployment—remained largely the same from one decade to the next.

What happened? The crack epidemic crested in the early 1990s. The police began developing new techniques to track and control patterns of criminal activity. Between 1992 and 2008, the number of law enforcement personnel rose by 141,000, a 25% increase, and from 1990 to 2000, the adult incarceration rate nearly doubled. More cops on the streets; more bad guys behind bars. It was bound to have an effect.

But something else was at work. In 1982, George Kelling, a criminologist at Rutgers, and James Q. Wilson, a political scientist at Harvard, wrote an essay for the Atlantic Monthly titled “Broken Windows.”

Their core insight turned on a social-science experiment conducted in 1969 by Philip Zimbardo, a psychologist at Stanford. Dr. Zimbardo parked a car on a street in the Bronx, with the hood up and without license plates. Within 10 minutes, vandals begin to pick the car clean of its valuables: battery, radiator, tires. By the next day, people began destroying the car, ripping up pieces of upholstery and smashing windows.

Dr. Zimbardo then conducted the same experiment in tony Palo Alto, Calif., near the Stanford campus. This time, the car—also with the hood up and the license plates removed—sat untouched for several days. So Dr. Zimbardo smashed a window with a sledgehammer. “Soon, passersby were joining in,” wrote Drs. Kelling and Wilson. “Within a few hours, the car had been turned upside down and utterly destroyed.” What to conclude?

“Disorder and crime are usually inextricably linked, in a kind of developmental sequence,” Drs. Kelling and Wilson argued. It had long been known that if one broken window wasn’t replaced, it wouldn’t be long before all the other windows were broken too. Why? Because, they wrote, “one unrepaired broken window is a signal that no one cares, and so breaking more windows costs nothing.”

The idea that the mere appearance of disorder encourages a deeper form of disorder cuts against the conventional wisdom that crime is a function of “root causes.” Yet municipalities that adopted policing techniques based on the broken-windows theory—techniques that emphasized policing by foot patrols and the strict enforcement of laws against petty crimes and “social incivilities”—tended to register sharp drops in crime and improvements in the overall quality of life.

We are disposed to think that, over time, order inevitably dissolves into disorder. But the drop in crime rates reminds us that we can go the other way—and impose order on disorder. Could it be that there’s a “broken windows” cure not just for America’s mean streets but for our increasingly disorderly world?

President Obama often talks about rules. After Syrian dictator Bashar al-Assad used sarin gas to murder more than 1,000 people near Damascus in August 2013, Mr. Obama warned that “if we fail to act, the Assad regime will see no reason to stop using chemical weapons.” After Russia seized Crimea in 2014, he denounced the Kremlin for “challenging truths that only a few weeks ago seemed self-evident, that in the 21st century, the borders of Europe cannot be redrawn with force.”

The language is elegant; the words are true. Yet the warnings rarely amount to much. The U.S. succeeded in getting Mr. Assad to give up much of his chemical arsenal, but the Syrian dictator goes on slaughtering his people, sometimes using chlorine gas instead of sarin. The president’s immediate response to the seizure of Crimea was to sanction a handful of Russians, send a few fighter jets to Poland and Lithuania, and refuse Ukrainian requests for military support.

This is how we arrive at a broken-windows world: Rules are invoked but not enforced. Principles are idealized but not defended. The moment the world begins to notice that rules won’t be enforced, the rules will begin to be flouted. One window breaks, then all the others.

The most urgent goal of U.S. foreign policy over the next decade should be to arrest the continued slide into a broken-windows world of international disorder. The broken-windows theory emphasizes the need to put cops on the street—creating a sense of presence, enforcing community norms, serving the interests of responsible local stakeholders. It stresses the need to deter crime, not react to it, to keep neighborhoods from becoming places that entice criminal behavior.

A broken-windows approach to foreign policy would require the U.S. to increase military spending to upward of 5% of GDP. That is well above the 3.5% of GDP devoted to defense in 2014, though still under its 45-year average of 5.5%. The larger budget would allow the Navy to build a fleet that met its long-stated need for 313 ships (it is now below 290, half its Reagan-era size). It would enable the Air Force to replace an aircraft fleet whose planes are 26 years old on average, the oldest in its history. It would keep the U.S. Army from returning—as it now plans to do, over the warnings of officers like Army Chief of Staff Gen. Raymond Odierno —to its pre-World War II size.

The key to building a military ready to enforce a broken-windows policy is to focus on numbers, not on prohibitively expensive wonder-weapons into which we pour billions of research dollars—only to discover later that we can afford just a small number of them.

Broken-windows foreign policy would sharply punish violations of geopolitical norms, such as the use of chemical weapons, by swiftly and precisely targeting the perpetrators of the attacks (assuming those perpetrators can be found). But the emphasis would be on short, mission-specific, punitive police actions, not on open-ended occupations with the goal of redeeming broken societies.

The central tragedy of the Iraq war is that it took nine months, at a cost of some 480 American lives, to remove Saddam Hussein from power and capture him in his spider hole—which ought to have been the central goal of the war. Yet we spent eight years, and lost an additional 4,000 Americans, in an attempt to turn Iraq into a model of Arab democracy—a “root cause” exercise if ever there was one. There’s a big difference between making an example of a regime like Saddam’s Iraq and trying to turn Iraq into an exemplary state.

A broken-windows foreign policy would be global in its approach: no more “pivots” from this region to that, as if we can predict where the crises of the future are likely to arise. (Did anyone see Russia’s invasion of Ukraine coming?) But it would also know how to discriminate between core interests and allies and peripheral ones.

As Henry Nau of the George Washington University notes in a perceptive recent essay in the American Interest, we should “focus on freedom where it counts the most, namely on the borders of existing free societies.” Those are the borders that divide the free countries of Asia from China and North Korea; the free countries of central Europe from Russia; and allies such as Israel and Jordan from many of their neighbors.

A broken-windows foreign policy wouldn’t try to run every bad guy out of town. Nor would it demand that the U.S. put out every geopolitical fire. American statesmen will have to figure out which of those fires risks burning down the entire neighborhood, as the war in Syria threatens to do, and which will probably burn themselves out, as is likely the case in South Sudan.

Then again, foreign crises rarely present a binary choice between doing nothing and conducting a full-scale military intervention. A cruise-missile strike against a single radio tower in Rwanda during the 1994 genocide could have helped to prevent Hutus from broadcasting instructions for murdering Tutsis, potentially saving thousands of innocent lives at minimal cost to the U.S. Bomb strikes by NATO to lift the siege of Sarajevo helped to turn the tide of the war in the former Yugoslavia against Serbian dictator Slobodan Milosevic, also at no serious cost to the U.S. Perhaps it is time for a strategy that enshrines the principle that preventing tragedy should enjoy greater moral legitimacy than reactingto it.

In his famous 1993 essay, “Defining Deviancy Down,” the late Daniel Patrick Moynihan observed how Americans had become inured to ever-higher rates of violent crime by treating as “normal” criminal activity that would have scandalized past generations of Americans. “We are getting used to a lot of behavior that is not good for us,” the senator from New York wrote. Twenty years later, the opposite has happened. We have defined deviancy up. But having done so, we have tended to forget how much better things are now than they were before.

Americans have lived in a relatively orderly world for so long that we have become somewhat complacent about maintaining it. Perhaps that explains why, in recent years, we have adopted a foreign policy that neglects to do the things that have underpinned that orderly world: commitments to global security, military forces adequate to those commitments, a willingness to intervene in regional crises to secure allies and to confront or deter aggressive regimes.

In recent months, however, and especially since the rise of Islamic State and the beheading of American journalists Steven Sotloff and James Foley, Americans have begun to rediscover certain truths about Pax Americana: If our red lines are exposed as mere bluffs, more of them will be crossed. If our commitments to our allies aren’t serious, those allies might ignore or abandon us. If our threats are empty, our enemies will be emboldened, and we will have more of them.

In other words, if the world’s leading liberal-democratic nation doesn’t assume its role as world policeman, the world’s rogues will try to fill the breach, often in league with one another. It could be a world very much like the 1930s, a decade in which economic turmoil, war weariness, Western self-doubt, American self-involvement and the rise of ambitious dictatorships combined to produce catastrophe. When President Franklin Roosevelt asked Winston Churchill what World War II should be called, the British prime minister replied, “the unnecessary war”—because, Churchill said, “never was a war more easy to stop than that which has just wrecked what was left of the world from the previous struggle.” That is an error we should not repeat.

To say that the U.S. needs to be the world’s policeman isn’t to say that we need to be its preacher, spreading the gospel of the American way. Preachers are in the business of changing hearts and saving souls. Cops merely walk the beat, reassuring the good, deterring the tempted, punishing the wicked.

Not everyone grows up wanting to be a cop. But who wants to live in a neighborhood, or a world, where there is no cop? Would you? Should an American president?

Mr. Stephens writes “Global View,” the Journal’s foreign-affairs column, for which he won a Pulitzer Prize in 2013. This essay is adapted from his new book, “America in Retreat: The New Isolationism and the Coming Global Disorder,” to be published Tuesday by Sentinel.

Showdown Is Nearing On Export-Import Bank

61ae8-exim-bank1The political brawl over the future of the Export-Import Bank, set to come to a head next month, represents two battles over economic policy—one global and the other domestic.

The Obama administration says the 80-year-old agency helps U.S. companies compete in a cutthroat trade race against other major economies as they step up export financing.

Republican opponents of the bank see it as a prime example of federal government overreach and are pushing to let its charter expire in a bid to draw private-sector capital to the arena.

It is hard to predict which side will prevail, but the battle is clouded by immense uncertainty over what the business world would look like without some form of government-backed trade finance.

“Logically, with more-open trade, and with more reliance on private finance, there should be a diminishing role for export-credit agencies,” said Eswar Prasad, a trade-policy professor at Cornell University. But with some countries’ reliance on exports to drive growth, he said, “the importance of such agencies has if anything increased.”

Veronique de Rugy, a senior research fellow and Ex-Im critic at the Mercatus Center at George Mason University, said getting rid of the bank might affect the price of credit in some deals, but that would be a small price for a fairer marketplace. The fact that companies “enjoy being able to borrow money at a much cheaper prices doesn’t mean that they cannot do it otherwise,” she said.

The agency’s mission is simple—to support U.S. exports—but how it advances that is increasingly complicated and combative. The agency helps large and small businesses sell products overseas through a combination of guarantees, credit insurance and loans, occasionally with direct White House involvement. But it also wades into thorny domestic issues, such as controversial new limits on greenhouse-gas emissions for fossil-fuel projects it funds overseas.

One result: The agency is positioned squarely in the middle of some of the world’s largest trade fights between nations eager to gain an advantage for their exporters. This includes battles with Europe over aircraft sales and fights over who wins huge Asian infrastructure jobs.

Ex-Im’s trade support is packaged in numerous ways, in part to compete with export subsidies offered in 60 other countries. In the past two years, Ex-Im’s biggest beneficiary, Boeing Co. BA -0.24% , has won contracts over European competitor Airbus in part because of the agency’s agreement to guarantee financing in 30 countries, from Morocco to Mexico. In 2013, close to 25% of Ex-Im’s guarantees went to Boeing. Similar figures for Airbus weren’t available, but the company disclosed in 2011 that 26% of its deliveries that year were backed by the export-credit agencies in the U.K., France and Germany.

Export-credit agencies helped Boeing and Airbus navigate the financial crisis, and government support for airline makers became so pronounced in recent years that countries agreed to ratchet back assistance in 2011. Last year, under new rules brokered by the Organization for Economic Cooperation and Development, export-credit agencies began to charge higher financing fees to airlines in wealthier countries that had better credit and less need for government support. Still, Ex-Im backed Boeing sales to 24 countries in 2013, down only slightly from 2012.

If the Ex-Im Bank stopped guaranteeing the financing for purchases of Boeing’s planes, what would happen?

“The big risk is that Airbus sweeps the checkerboard,” said Howard Pack, professor emeritus of business economics and public policy at the University of Pennsylvania.

It isn’t all about airplanes. In 2011, with the OECD’s permission, Ex-Im offered a cheap financing package to help American manufacturers sell 150 locomotives to Pakistan by agreeing to an uncustomary 12-year loan at a 3% interest rate. Pakistan accepted the U.S. bid over a competing China offer, delivering a big win for U.S. manufacturing. But now General Electric Co. GE -0.12% and Caterpillar Inc. CAT +0.39% are battling over which company ultimately wins the contract and gets the government support.

The agency also offered loans and insurance to back more than 3,000 other transactions last year, including things like popcorn and breathalyzers. Legacy Paddlesports, a small North Carolina company that sells kayaks, uses Ex-Im to guarantee payments from places like South Korea and Australia.

“It allows us to increase our sales overseas, and then in turn hire more people,” said Joe Mallory, controller at Legacy Paddlesports, whose company receives assurances from Ex-Im that it will backstop certain sales to foreign competitors. “It is a job creator as far as I am concerned. What they do with Boeing, I don’t really care.”

The agency’s longer-term political outlook will probably remain in doubt for some time.

With Congress split on how to proceed, Senate lawmakers are expected to try to attach a temporary extension of Ex-Im’s charter to a government funding bill, which must be passed by the end of September to avoid a partial government shutdown.

That would pose a test for House Republicans, many of whom have openly questioned whether Ex-Im should be reauthorized but aren’t eager for the second partial shutdown in as many years right before the midterm elections.

The likely scenario is that they agree to a short-term extension of Ex-Im’s mandate, possibly with some new restrictions on its involvement in trade deals. That would delay the bigger fight over the bank’s long-term future until the end of the year.

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 and Jonathan House

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 and Lynn Cook

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.”

U.S. Seeks to Revise Rules on Gas-Export Projects

Proposal Could Push Back Approval Process for Some Companies’ LNG Permit Requests


Cheniere is well-positioned to export liquefied natural gas. Pictured, its LNG terminal in Louisiana last year. Cheniere Energy/Bloomberg News
The Obama administration said it would perform a more rigorous upfront review of proposals to export liquefied natural gas, offering a mixed bag for the roughly two dozen projects seeking federal approval.

The U.S., which is enjoying a natural-gas boom, is expected to start exporting LNG in significant volume next year. The administration has only approved one export facility, but about 25 additional proposed projects are under review. A few projects far along in the approval process could benefit from the proposed rules change because they could be cleared as others are delayed by the new requirements.

The Energy Department said Thursday that the proposed revisions would require export-terminal proposals to first undergo a more expensive regulatory review by the Federal Energy Regulatory Commission involving an environmental impact assessment before the DOE reviews the permit application. The DOE previously was granting conditional approval either parallel to or before completion of the environmental review, a process that allowed companies to get a project started with a smaller financial commitment.

The proposal could push back the approval process for some companies’ LNG permit requests, while more-advanced proposed projects are expected to be able to jump forward in the queue.

“The proposed changes to the manner in which LNG applications are ordered and processed will ensure our process is efficient by prioritizing resources on the more commercially advanced projects,” DOE Assistant Secretary Christopher Smith wrote in a blog post on the department’s website.

Kevin Book, of ClearView Energy Partners LLC, said under the proposal, energy companies will need to clear the environmental review before they can raise capital or secure loans to build LNG export terminals.

Houston-based Cheniere Energy Inc. LNG +8.94% is the only company that has already attained all the required permits to export natural gas from the U.S. to any country in the world. Its Gulf Coast plant in Louisiana is under construction and on track to begin shipping LNG in late 2015.

Oregon LNG’s proposed export facility in Warrenton, Ore., is the next one in the Energy Department’s queue. Chief Executive Peter Hansen said the company’s request for conditional export approval is probably just weeks away, based on how the department has processed other applications. He said it wasn’t clear whether the revised procedure could change the timeline. Oregon LNG is in good shape to move forward with Asian and North American partners, once the permits are in place, he said.

Mr. Hansen said the DOE’s proposal makes sense; as it stands, coordination between the DOE and FERC could be improved. “When you do sort of look at the fact that a lot of the projects that are fairly high up on DOE’s list—some of those haven’t done much yet. They’re barely real. And yet there are projects that are clearly real much further down,” he said. “Maybe the DOE queue wasn’t really reflective of the real world.”

The proposal is subject to a 45-day public review and comment period before the rules can be made final.

Write to Alicia Mundy at and Alison Sider at

U.S. Trade With Russia Grows in March Despite Ukraine Crisis


Rising U.S.-Russian tensions and escalating threats of sanctions didn’t derail trade between the two Cold War rivals in March, the same month Russia annexed the Crimea region of Ukraine.

Exports of U.S. goods to Russia rose 9% in March from the prior month, compared to a decline in the same month last year. That’s according to non-seasonally adjusted figures deep within Tuesday’s report from the Commerce Department on international trade.

Meanwhile, imports from Russia rose 36% in March from February, stronger than the 25% monthly gain a year earlier.

Exports to Russia were up 10% from March 2013, while imports rose 2% from a year earlier. Much of the monthly change came from a surge in exports of civilian aircraft and autos.

Month-to-month figures on trade with individual countries can be extremely volatile and are not always representative of current economic and geopolitical conditions. Still, the March developments in U.S.-Russia trade were more in line with global trends than a falling out between trading partners.

For example, U.S. exports to the European Union rose 17% in March, and imports increased 20%.

Russia doesn’t rank among the top 15 U.S. trading partners, according to the Commerce Department. So far this year, total trade with Russia ranks just ahead of Ireland, and behind that of Colombia and Thailand.

Russia supplies oil, metals and fertilizer to the U.S. and imports American machinery, vehicles and food. U.S. trade with Ukraine is much smaller.

(Ian Talley and Ben Leubsdorf contributed to this post.)


Ship Modeler

Ship Modeling News by Clare Hess

Fluent In Foreign Business

Helping To Grow and Protect Your Business Abroad

Emerging Market Insights

How to make a killing in Emerging Markets without losing your shirt?

Ideas That Work @ GIDASPOV.COM

Strategy | Creativity | Innovation | Fundraising | Marketing

Nu Leadership Revolution Blog

“Helping Emerging Leaders Gain the Competitive Advantage in the Future"

Mike Z's Blog

Exploring the causes of cancer throughout the world

Bucket List Publications

Indulge- Travel, Adventure, & New Experiences

Acceler8Success Cafe

Serving Entrepreneurs Daily!

We Help Insurance Agencies Stand Out News

The latest news on and the WordPress community.

%d bloggers like this: