Bashing US Ex-Im continues to damage US exporters and industry
Anti US Ex-Im comments from the US is nothing new over the past couple of years, but the latest anti-blast coming from the Wall Street Journal is just plain wrong. Politics seems to be at play in this case and it is American exporters who will continue to suffer.
The Wall Street Journal (WSJ) last Friday came out with a damning attack on US Export Import Bank (US Ex-Im) and its activities in what appears to be the newspaper’s support for President Trump’s nominee for the new chairman of US Ex-Im — Scott Garrett, one of US Ex-Im’s longtime critics. But in doing so the article is misleading, using incorrect information and falsehoods about Ex-Im in the attempt to back up its argument.
The article, entitled: ‘Reformers Not Welcome at Ex-Im Bank - Crony capitalists fear Scott Garrett might limit taxpayer credit’, was penned by the paper’s editorial board. Garrett, a New Jersey Congressman, is no fan of Ex-Im, and had twice voted against renewing Ex-Im’s charter. He has described Ex-Im’s activities as: “taxpayer-funded welfare for mega-corporations.” Why President Trump nominated Garrett in the first place is difficult to fathom, but it would appear that it is being reconsidered. There is now a growing likelihood that Garrett may withdraw his nomination from consideration due to Senate opposition. President Trump, who spoke out against Ex-Im before he was elected, is now in favour of the agency. It would seem that others in the White House are not.
Historically the WSJ has been ambivalent about Ex-Im. This latest article appears convinced Garrett would be a good leader, irrespective of whether Ex-Im’s supporters like the nomination or not. Sadly, though, the WSJ is building the case in favour of Garrett by portraying Ex-Im as a corrupt and mismanaged institution, in need of a ‘sceptical leader’ whose focus should be to redeem the institution and bring it back to a virtuous path. One New York banker tells TXF: “We all know that a few of Ex-Im’s strategies are perhaps questionable – but this is the case with many ECAs globally, and Ex-Im at its core is healthy, well-managed, and certainly not corrupt in any way. Therefore the image of it being depicted by the WSJ is far from reality.”
It needs to be remembered that Ex-Im is not only without a chairman it is still without a proper board and the quorum necessary to approve new business over $10 million. This is a very damaging situation for US exporters and workers. While this situation continues, there also remains a backlog of exports related to deals and projects – signed before Ex-Im was denied reauthorisation back in 2015 – amounting to approximately $30 billion in exports of US-manufactured capital equipment (primarily financed by commercial banks but with Ex-Im guarantees). How many US jobs are directly impacted by this is unknown – but it has been estimated that 1.4 million jobs are reliant on Ex-Im support, and the current situation is certainly detrimental to many US companies and the overall economy.
Crony capitalism codswallop!
At the heart of the WSJ article is the assertion that Ex-Im is supporting crony capitalism, just a few big companies. This old chestnut, which was also widely brandished around by the ‘Tea Party’ and other opponents of Ex-Im through 2015 and 2016 simply demonstrates a complete lack of understanding of capital equipment production, the supply chains involved and global trade flows today. Big US exporters, such as Boeing and GE have certainly received significant credit guarantees from Ex-Im in the past. But such companies have massive supply chains – both domestically and internationally.
The WSJ article also implied that Ex-Im was not supporting small businesses. This is of course complete nonsense as the bank has done a huge amount, particularly in recent years, to support SMEs with working capital and guarantees. In fact Ex-Im assisted small businesses with more than $10 billion in insurance and banking products over the last three years.
And on the issue of big company subcontractors, thousands of companies are involved in the supply chains for Boeing, GE, Caterpillar and other major exporters supplying a vast range of components or sub-assemblies and supporting many thousands of jobs across the US. Even the WSJ reported recently that Boeing had cut 6,000 jobs during the first half of 2017, about 4% of its workforce – and this is largely due to the inability to secure deals because of the lack of the right financial support for certain markets.
Where big US companies are failing – because of the lack of financing – others are stepping in. Foreign competition is loving lack of US competition. In the case of Boeing and competition, the biggest beneficiary is obviously Airbus. Some foreign export credit agencies (ECAs) have stepped in here though, as they are keen to see their own companies that are involved in Boeing’s supply chain, not impacted detrimentally by the lack of financial support while Ex-Im is hamstrung.
Most recently, the Italian ECA, Sace, agreed to back up to $1.25 billion of credit lines for new Boeing 787 Dreamliner aircraft. Why? Because we live in a globalised supply chain world and specifically because 14% of components are built by Leonardo Aerostructure in Italy under subcontracts. The company works on the construction of the central and rear fuselage sections and horizontal stabilisers of the Dreamliner.
Under the arrangement, Sace will guarantee credit lines from commercial banks for the sale of Boeing aircraft. Commenting on that deal, Sace CEO, Alessandro Decio, said: “We intend to use this commitment to generate new opportunities for Italian excellence in this sector, with positive impact on growth and employment for many subcontractors, especially small and medium enterprises.” According to Sace, from 2015 to 2016, Boeing purchased $2.5 billion in goods and services from Italian companies, generating 12,000 jobs along the supply chain.
Similarly, the UK’s agency UK Export Finance is discussing with Boeing export finance support for Boeing aircraft where those aircraft are built with UK-built Rolls Royce engines.
Today there are some 100 plus ECAs around the world supporting their exporters. And with many commercial banks retrenching from trade and risk, it would seem that ECAs are needed just as much today as during times of market crises. One US trade observer tells TXF: “Exporters and bankers have made it very clear that private financing is just not there in the amounts and terms necessary when dealing with longer term financing, over 7-10 years, for below investment grade borrowers - less than BBB). For Ex-Im, we estimate that gap amounts to $10 billion – $20 billion a year.
“Even Boeing – in the midst of an historically unprecedented liquid and massive funding flow for aircraft (which it does not expect to last more than another year or two) – has had to rearrange delivery schedules and help with temporary funding in order to meet foreign airline needs in the last two years. Yes; Exim is less necessary today than it was five years ago - in the midst of the global financial crisis, especially for aircraft. But less necessary at the peak of commercial availability does not mean unnecessary.”
The WSJ also took issue with Ex-Im’s support of renewable energy companies, something which was mandated by Congress. Ex-Im support for the renewable export sector is vital as commercial banks are less keen to get involved in this sector, and valuable solar and wind contracts have been won for US exporters – particularly in Latin America with Ex-Im support. These contracts would have been lost to foreign competition without vital Ex-Im backing. WSJ claims that support for renewables by Ex-Im is a “political favourite”, however, renewable energy makes up less than 1% of Ex-Im’s total portfolio and less than 2% of its overall energy portfolio. WSJ cited the example of one solar company - Solyndra - receiving a $10 million loan, and then failing. However, the related export deal was successful, and the performing loan will make money for US taxpayers.
Accounts and fraud - putting the record straight
On the agency’s accounting front, the WSJ also claimed that Ex-Im would have to report a $2 billion loss if it used fair-value accounting standards used by private businesses. This is another incorrect assumption. Ex-Im prepares its financial statements in accordance with the Federal Credit Reform Act of 1990, a legal requirement set by Congress that all US government credit agencies must follow. Furthermore, a subsequent Congressional Budget Office report concluded there would be no significant difference under fair-value accounting, and the Government Accountability Office has stated that the current accounting rules mandated for Ex-Im are more appropriate for budget estimates than a fair-value accounting approach.
And, getting down to real returns, it should be noted that in fiscal year 2014, the last year that Ex-Im was fully operational, the agency approved $20.5 billion in total authorisations. These authorisations supported an estimated $27.5 billion in US export sales, as well as approximately 164,000 US jobs across the country. In addition, nearly $675 million was sent to the US Treasury that year.
The WSJ also claimed that: “during a five year stretch during the Obama administration, 46 public employees were convicted of defrauding the bank”. This assertion is completely untrue. In connection with Ex-Im reauthorisation hearings in April 2015, the Office of the Inspector General (OIG) submitted prepared testimony to the House Financial Services Committee, stating that since 2009, Ex-Im OIG investigations had led to 47 convictions involving outside parties attempting to defraud Ex-Im. These convictions did not involve any charges against employees at Ex-Im.
Today, every financial institution is on its guard and making every effort to ensure it is not defrauded in any way. US Ex-Im is no different and rightly works with all departments to ensure the US taxpayer is protected. Since 2009, Ex-Im, in cooperation with the Department of Justice, has extradited defendants from Mexico, Argentina, and the United Arab Emirates. These criminal investigations have produced $336 million in criminal and civil court-ordered forfeiture and restitution, fines, and recoveries.
It is clear that Ex-Im is the collateral damage of an acrimonious political fight in the US. Only the appointment of a strong and credible leader by the White House fully committed to leading export-led growth can help Ex-im to liberate itself from the continued bashing and ill-informed reporting of the good work it does. A fully reauthorised Ex-Im is now urgently required with a robust mandate to support jobs, exports and ensuring the US is able to properly compete with other countries in all export markets around the globe.