WATERTOWN — Business leaders from across America descended on the nation’s Capitol during the week of Feb. 23 to lobby Congress for the reauthorization of the Export-Import Bank (Ex-Im), the official export-credit agency of the U.S. If Congress doesn’t reauthorize the Ex-Im Bank, it will no longer exist after June 30. Among those lobbying their […]
WATERTOWN — Business leaders from across America descended on the nation’s Capitol during the week of Feb. 23 to lobby Congress for the reauthorization of the Export-Import Bank (Ex-Im), the official export-credit agency of the U.S.
If Congress doesn’t reauthorize the Ex-Im Bank, it will no longer exist after June 30. Among those lobbying their representatives were two employees from New York Air Brake, headquartered in Watertown.
“Ex-Im is a critical benefit to U.S. corporations of all sizes,” says Brian Morrow, director of locomotive original-equipment sales at the manufacturer. “While people talk about the funds that go to large corporations, 80 percent to 90 percent of the transactions support small business. A substantial amount of those funds that support large corporations flow to small suppliers. At New York Air Brake, 15 percent of our sales results from direct exports and another 18 percent to 20 percent from our domestic customers shipping to foreign buyers. That means that a significant number of our jobs are dependent on exporting. Because 95 percent of the world’s [private-sector] consumers live outside the U.S., many in economies that are growing rapidly, exporting will be even more important in the future.” The Ex-Im Bank claims to have supported 164,000 jobs in 2014.
The National Association of Manufacturers and the U.S. Chamber of Commerce, both advocates of reauthorizing the Ex-Im Bank, point out that small business is often shut out of exporting because commercial banks will not lend against foreign receivables. Small businesses usually need a line of credit to finance the manufacturing and to bridge the gap between the placement of the order and the payment, a period that often takes three to five months or more. The Ex-Im Bank’s export-credit insurance also enables small businesses to offer terms to foreign buyers who cannot or prefer not to pay for the whole order at one time.
Morrow goes on to note that the Ex-Im Bank is not a burden on the taxpayers. “The Bank makes loans,” he declares, “not grants. The agency charges fees for its services and nets a surplus which is returned to the taxpayers. With an historic default rate under 1 percent [since its inception], Ex-Im is actually profitable.
“We would be at a serious disadvantage without Ex-Im,” Morrow continues. “There are 60 countries that have agencies to promote their exports, and some spend a lot more money to subsidize … [the process] than the U.S. does. I saw this first-hand when I was responsible for our international sales [for New York Brake].”
Another argument put forth by advocates is the concern for national security. President Franklin Roosevelt talked about America as “the arsenal of democracy.” While the Ex-Im Bank is not permitted to finance military exports, its loan and insurance programs play a role in sustaining our defense industrial base by ensuring a minimal pool of skilled workers, helping military contractors weather domestic defense retrenchments, and maintaining a defense supply chain of subcontractors and suppliers.
How it started
The Ex-Im Bank, headquartered in Washington, D.C. with regional export centers in 12 U.S. cities, was established by executive order in 1934 and made an independent agency in the executive branch in 1945. The mission of the Ex-Im Bank, which is chartered as a government corporation, is to finance and facilitate U.S. jobs through sales of U.S. exports to foreign buyers that the private sector is unwilling or unable to undertake. Its financial products include direct loans with fixed-interest rates to foreign buyers of U.S. goods and services; loan guarantees of commercial lenders to foreign buyers; working-capital finance, typically for raw materials or supplies; and export-credit insurance to protect against losses from non-payment. As an aside, why the Bank is called Ex-Im is a mystery to this reporter, since the agency doesn’t finance any imports.
Over the years, legislators have attached a number of “social” mandates, including the proviso that not less than 20 percent of its total aggregate authority must be allocated to small business and not less than 10 percent to renewable-energy exports. The Ex-Im Bank must also conduct a review of all long-term transactions of more than $10 million to evaluate any harmful environmental impact. A sub-Saharan statutory mandate requires the Ex-Im Bank to promote its financial commitment to that region. And, a minimum of 85 percent of the labor, materials, and overhead associated with a project must be associated with the production of the project. In 2014, the Ex-Im Bank’s aggregate exposure level was $112 billion: By product, guarantees were $69 billion; by geographic region, Asia received $46 billion; and by economic sector, air transportation netted $50.7 billion. In that same year, the Ex-Im Bank authorized $20.5 billion to support $27.5 billion in exports.
Criticism of Ex-Im
While the Ex-Im Bank has its supporters, it also has its detractors. Barack Obama, before he became president and an advocate for reauthorization, denounced it as “… little more than a fund for corporate welfare.” Opponents of the Ex-Im Bank criticize it for favoring special interests over the taxpayers. They point out that while most of the transactions go to small business, 10 of 3,746 recipients of Ex-Im Bank support last year received 76 percent of the dollars, and these companies are customers of multinational conglomerates such as Boeing, GE, and Caterpillar. (In fiscal year 2012, Boeing customers alone received 82 percent of all Ex-Im loan guarantees; in 2013 it was 67 percent.)
Domestic corporations complain that Ex-Im support of foreign purchases harms non-subsidized companies by putting them at a competitive disadvantage. Delta Airlines, for example, protests that sales by Boeing to foreign competitors are based on interest rates charged by the U.S. Treasury, which loans the funds to the Ex-Im Bank. Delta, on the other hand, has to borrow funds from commercial banks at market interest rates, which are substantially higher.
Minnesota iron-ore miners raise a similar objection to a $694 million Ex-Im loan to Australia’s richest man, which helps their competitor compete in the global trade. Tampa–area employers complain that a $117 million loan to a state-owned fertilizer company in Morocco puts them at a competitive disadvantage.
The argument that the Ex-Im Bank is a profitable agency is also disputed. Opponents contend that Ex-Im’s “supposed” profitability is based solely on its accounting method. If it had adopted a fair-value estimate, which incorporates market risk, the long-term guarantee program would actually show a loss.
Then there is the proverbial argument about government choosing winners and losers. In 2011, the Ex-Im Bank provided $10 million of loan guarantees to Solyndra, a solar-technology company that subsequently went bankrupt. But the poster child for the harm caused by business subsidies has to be Enron, which received $4.4 billion from Ex-Im (and other U.S. agencies) just for two projects: one in New Guinea and the other in India. Following its collapse, the public saw that Enron’s energy empire was really a group of corporations that spent time manipulating the tax code, lobbying for self-serving regulations, and chasing taxpayer handouts.
Finally, detractors of reauthorization debunk the idea that Ex-Im creates jobs. They argue that the Ex-Im Bank’s subsidies merely shift jobs from one sector to another with no net gain in employment.
The basic argument against the Ex-Im Bank is that it is just another example of rent seeking, where companies spend their money and energy on political lobbying in an effort to enrich themselves without actually creating any wealth. In the end, these efforts reduce overall economic growth, misallocate resources, stunt wealth creation, reduce government revenue, and even increase income inequality. In short, the time and money spent on lobbying would be better spent if invested in things such as research and development, improved business practices, employee training, and capital goods.
As the Congressional vote to reauthorize the Ex-Im Bank approaches, both proponents and opponents are ratcheting up the pressure on Congress. Despite being reauthorized numerous times over the past 80 years, it’s not clear this year how Congress will vote.
New York Air Brake was founded in Watertown in 1890. The company designs and manufactures electronic air brakes and integrated-control systems for the train industry. The Watertown plant employs 530 and the corporation’s total U.S. employment exceeds 800. New York Air Brake is owned by Knorr–Bremse A.G. of Munich, Germany, which operates a rail-vehicle division and a commercial-vehicle-systems division. Knorr-Bremse employs 20,800 people with 2014 consolidated sales of 5.2 billion euros.