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Jackson Mueller
Associate Director, Center for Financial Markets
Jackson Mueller is an associate director at the Milken Institute's Center for Financial Markets. He focuses on fintech, capital formation policy and financial markets education initiatives. Prior to joining the Institute, Mueller was an assistant vice president at the Securities Industry and Financial Markets Association (SIFMA), where he focused on...
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Politics heat up over the fate of Ex-Im Bank

By: Jackson Mueller
July 02, 2014
   
   

There is a flurry of activity on Capitol Hill these days as both House and Senate lawmakers rush to complete a gigantic to-do list before the end of the fiscal year on September 30. Beyond appropriations work, Congress must decide whether to reauthorize the Export-Import Bank of the United States, or Ex-Im. Established in 1934, the bank assists in the financing of U.S. exports to foreign governments and companies by offering them export credit insurance, loan guarantees, and direct loans, among other financing products. Ex-Im was last reauthorized in 2012, after the House and Senate voted largely in favor of increasing the bank’s exposure level cap to $140 billion and extending its charter for two years. 

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This time around the bank faces formidable headwinds. The surprise departure of House Majority Leader Eric Cantor (R-VA), who was defeated in a June 10 primary, has left the bank and its advocates with one fewer ally in the reauthorization fight. The current Republican leadership, including incoming Majority Leader Kevin McCarthy (R-CA), has expressed no interest in renewing the bank’s charter. 

On the other hand, Democrats, the White House, and “Establishment” Republicans are pushing for renewal. The Obama administration’s proposal calls for the bank to be reauthorized for five years and its exposure cap raised to $160 billion by FY 2018. On June 23, 42 Republicans signed a letter to House Speaker John Boehner of Ohio and McCarthy urging them to reauthorize. The next day, Rep. Denny Heck (D-WA) introduced H.R. 4950, a bill that would provide for a clean reauthorization for seven years. The bill currently has 200 Democratic cosponsors.

Critics have branded the bank as the face of crony capitalism, charging that it favors certain companies and industries based, in part, on political connections and influence on Capitol Hill. During a June 25 hearing, House Financial Services Committee Chairman Jeb Hensarling (R-TX) stated that more than 60 percent of Ex-Im financing in FY 2013 went to 10 large U.S. corporations. Boeing was singled out due to the amount of assistance the company receives from Ex-Im. Whether or not the cronyism accusations are true, it is clear that the bank’s financial relationships are concentrated. In 2013, the lion’s share of authorizations went to three sectors: manufacturing ($8.5 billion), aircraft ($8.3 billion), and oil and gas ($4.3 billion).

Ex-Im financing is also backed by the full faith and credit of the United States, which leaves taxpayers on the hook if foreign buyers fail to pay U.S. exporters. Ex-Im’s total exposure has increased substantially from $60 billion in 2006 to $113 billion today. Moreover, critics further charge that the bank operates at a cost to the taxpayer. Arecent report published by the Congressional Budget Office found that the bank would cost the Treasury $2 billion over 10 years if fair value accounting was used instead of using current accounting treatment under the Federal Credit Reform Act of 1990 (FCRA). Under FCRA, the Bank would generate $14 billion in revenue over 10 years.

The Bank also provides subsidies to wealthy and already subsidized foreign buyers, as Hensarling and the CEO of Delta Airlines noted during the June 25 hearing. For instance, Ex-Im provides cheap financing to large, state-supported air carriers, such as Emirates and Singapore Airlines, who are able to purchase Boeing aircraft at substantially reduced rates. U.S. carriers, on the other hand, operate at a competitive disadvantage as they have to rely on market financing. The bank has also extended financing to industries domiciled in countries with a history of human rights violations or policies antithetical to broader U.S. interests, including China, the Democratic Republic of Congo, Pakistan, and Russia.

Supporters point out that Ex-Im is critical to leveling the playing field for U.S. exporters against heavily subsidized international competitors. There are more than 60 export credit agencies situated around the world that support national industrial and corporate champions. In 2012, medium- and long-term financing from 34 OECD member countries totaled $120 billion, while China, India, and Brazil provided $58 billion in financing, with China accounting for $45 billion of that figure.

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Proponents also cite Ex-Im’s role in boosting small business exports and U.S. employment. During the hearing last Wednesday, Democrats cited the bank’s role in creating or sustaining 205,000 jobs in FY 2013 and its importance to Boeing’s suppliers, including many small businesses. In addition, the bank financed a record high of more than 3,400 small business transactions, or 90 percent of the total transactions the bank recorded in FY 2013. That being said, the value of those transactions added up to less than 20 percent of the total authorizations made by the bank in FY 2013. In fact, Ex-Im has a long track record of failing to reach Congress’ mandate that total lending authority to small business “shall be not less than 20 percent of such authority for each fiscal year.”

While the outlook for reauthorization seems dim, one of the more interesting developments to come out of last week’s hearing was GOP unease with killing the bank outright rather than implementing reforms in exchange for reauthorization. Rep. John Campbell (R-CA) released a discussion draft after the event that would lower the bank’s lending cap, limit aid to state-owned companies, and reauthorize the bank for three years. However, convincing Republican lawmakers who are adamantly opposed to reauthorization may prove far more difficult this time around after the bank failed to heed some lawmakers’ demands for reform back in 2012.