US-EXIM’s Recovery: Lessons from Jonah
John Schuster, President at JLS Capital Strategies, takes a look at what a fully authorised US-EXIM could look like going forward. Will it be merged with the newly formed US International Development Finance Corporation (IDFC), or will it re-emerge as a pure ECA?
On 8 May 2019 the US Senate voted overwhelming to confirm Kimberly Reed as President of The Export-Import Bank of the US (EXIM), and Spencer Bachus III and Judith DelZoppo Pryor as Members of the agency's Board of Directors.
EXIM was “broken” when its authorization lapsed on July 1, 2015. Since the agency’s creation during the New Deal, it has enjoyed cross-party support and had just set records for export lending over the previous five years, nearly tripling its activity to $30 billion/year and creating over a million jobs. But for a while EXIM ceased to exist and for nearly four years it has lacked a Board quorum needed for loans over $10 million – until Senate confirmations restored EXIM’s authority earlier this week.
Breaking EXIM was all too easy. While a large, well-funded Koch Network instigated EXIM’s undoing, it was principally the work of a few political antagonists, starting with Rep. Jeb Hensarling (R-TX), who in 2015 ignored a majority on the House Finance Committee he chaired and refused to report a reauthorization bill for a floor vote. In the Senate, with the tacit acceptance of Majority Leader McConnell (R-KY), Senator Shelby (R-AL) refused to report Board nominations for Senate consideration through 2016 and Senator Toomey (R-PA) placed holds on Trump Administration nominees from 2017 to 2019. Ultimately Senator McConnell broke his fellow Senators in support of the President and forwarded nominees for cloture votes last week, clearing the way for yesterday’s confirmation votes.
To state the obvious, EXIM’s long hiatus was a grave loss for the bank’s leadership and staff, who believed deeply in EXIM’s mission to level the playing field for US exports. More fundamentally, it was a loss for US exporters who could no longer rely upon EXIM support in a complex world where competitors within the OECD Framework on Export Credits (framework) continue to support their exports and where China and other countries outside the Framework are increasingly aggressive. Because the loss involved jobs and work, which Freud equated with love as a “cornerstone of humanness”, the loss was deeply personal.
Recovering from loss is always possible, but when the loss is deep and personal, full recovery is difficult and only possible through deep, long-term commitments. Thus, apt metaphors for EXIM’s road to recovery may be found in the language of better-known personal recovery processes typically associated with substance abuse, severe physical trauma, and emotional illness. Notwithstanding some differences owing to the fact that EXIM is an institution at the mercy of a broken political system rather than an individual with human agency, EXIM’s recovery has many instructive parallels with personal recoveries.
Pre-Recovery – Rationalizations and Reforms
The first parallel with personal recovery relevant for EXIM is the long, difficult pre-recovery period during which one comes to grip with the underlying issues that made one vulnerable to loss, illness, or addiction. The process is painful but necessary to gain the self-understanding needed to make changes and achieve a sustained recovery.
EXIM’s pre-recovery period lasted 1,407 days – a long enough time to understand that EXIM is institutionally vulnerable to attack from a small, politically connected group. EXIM’s support is broad but too thin to protect the agency. Sustained recovery will require changes to remedy these vulnerabilities.
There are institutional differences. In personal recovery, the individual bears sole responsibility for change. As an institution, EXIM is not responsible for its own vulnerabilities. Rather, the political leaders ultimately responsible for agency governance must implement the reforms that will be important to EXIM’s long road back.
In personal recovery, meaningful change is impeded by rationalizations, which let one avoid rather than accept problems. One of the funniest but truest lines in the movie The Big Chill is that “Rationalization is more important than sex. I don't know anyone who could get through the day without two or three juicy rationalizations". We all take the easy path, but cutting back on the drink rather than quitting cold turkey is a rationalization and not a viable path to recovery.
EXIM’s recovery has likewise been delayed by rationalizations that have taken the form of alternatives to restoring and reforming EXIM, all of which would have ultimately failed to support US exporters.
- Some speculated that the “BUILD” Act of 2018 could incorporate or replace EXIM because it replaces the Overseas Private Investment Corporation (OPIC) with the US Development Finance Institution (DFI) that will double OPIC finance and instead of US nexus requirements, will offer finance tied to a general preference for US involvement that might include US exports – BUT -
- Whether DFI doubles OPIC’s finance volume depends on deal size, country, and other statutory details that are as yet undefined, and even if finance volume did double, DFI’s finance would increase to $6 billion per year – less than half of EXIM’s average volume and only about 1/5 of EXIM’s loan volume after the Great Recession.
- “US preference” is not the same as EXIM’s mission to “level the playing field for US exports”.
- Parties affiliated with the Koch Network, including the Washington Examiner and the National Review suggested – as an alternative to their preferred position of eliminating the bank – transforming EXIM into a small business lending agency to support one key EXIM mission – BUT –
- This is not a serious suggestion to transform or reform EXIM but rather just a way to institutionalize EXIM’s status quo in its old “Sans Board” reality.
- This proposal would merely duplicate the mission of Small Business Administration (“SBA”) and wouldn’t level the playing field for millions of US workers who do not work for small businesses and the small business that make exports as sub-suppliers on large company deals.
- This would limit EXIM to smaller, more-difficult-to execute, less creditworthy deals that would become less profitable and even more politically vulnerable.
- Some argued that EXIM be replaced with a completely new agency after the 2020 election with “a new vision, perhaps even a radical one, of what a government-supported export credit program should be in the twenty-first century”. This could create a new institution with new rules and attitudes – BUT
- This is akin to someone promising to stop drinking tomorrow. If you can’t stop now, how will tomorrow be easier? In the wake of a shuttered EXIM, how can a more radical agency emerge?
- There is no such thing as an entirely new agency. US DFI just combines OPIC and USAID. The Departments of Homeland Security and Energy were just an amalgamation of existing agencies.
First Steps - the GOP and the Whale
Fortunately, political leadership has now allowed EXIM to move on from rationalizations of a pre-recovery period so it can re-emerge and proceed with reforms that can support EXIM’s recovery.
What led to this breakthrough shows parallels with personal recovery.
Given the irresistible lure of rationalization and because the first steps in personal recoveries typically require major life changes, recovery may not happen until one hits “rock bottom”. Decisions to quit smoking or eat healthy often aren’t taken unless catalyzed by imminent and sobering health warnings. But even if it takes hitting rock bottom, personal change can happen as soon as one decides to assume personal responsibility.
Institutional change of the type needed for EXIM is harder because EXIM and the exporters it serves don’t control their fate. Rather they depend on “change agents”, or political leaders, who have both the desire and ability to enact needed reform.
The biblical example of Jonah is highly instructive about these institutional dynamics. A central story in the Christian and Jewish bibles, it is read on the afternoon of Yom Kippur, the holiest days in the Judaic calendar, and offers many levels of meanings relevant to us all, although this is probably the first time one has applied its meanings to an export credit agency.
The tale is best known as the story of Jonah’s hitting rock bottom before finally agreeing to follow God’s orders. Rather than doing as commanded, Jonah flees. Only after being beset by a storm, thrown into the sea, and swallowed by a great fish does Jonah finally agree to do as commanded.
But Jonah is really an institutional agent for change for both the Ninevites, who must repent and Israel, which must forgive its Ninevite enemies. Relating this story to EXIM is helpful to understanding the identities and motivations of the agents for EXIM’s long awaited re-emergence and the limitations of the changes being embraced by EXIM’s current change agents.
Who are EXIM’s change agents?
- Not the parties affected by EXIM’s loss of authority named at the start of this article – EXIM personnel and US exporters reliant upon EXIM support. After years of EXIM lacking full lending authority, they hit bottom long ago. Had it been left to them, EXIM would have never lost full Board authority. But just as God enlisted Jonah because “free will” precluded the option of making the Ninevites and Israel change, EXIM depends on political leadership for change.
- Not the Tea Party that led the attack against EXIM, which has had the power restore EXIM but not the willingness to do so. Similar to the Ninevites who only repent once threatened with annihilation, the Tea Party will never abandon ideology in the face of reality. Its members They actually believe shutting down EXIM can create free trade even though it just unilaterally disarms the US and a zero sum economy in which EXIM “creates export jobs only by destroying non-export jobs”.
The one group with both the power and the willingness to enact change that has served as the change agent is the GOP leadership outside the Tea Party in the White House and in Congress. In control of the executive branch and the Senate, they have supported EXIM and are interested in US jobs. But just as Jonah must balance his need to be freed from the whale with a reluctance to forgive his enemies, GOP leaders have had to search hard for reasons to support EXIM in the face of needs to work with Tea Party factions in their party.
The national and political urgencies that JLS Capital has articulated for years may have been helpful motivators but were not enough. Manufacturing jobs may have declined due to EXIM’s loss of lending authority and manufacturing jobs as a percent of total US employment has hit an all-time low. One might even have to concede that jobs are growing more quickly among US competitors and some might be concerned future economic instability arising from unprecedented and unsustainable levels of debt. But in a strong economy in which manufacturing jobs are growing now, these are far-off concerns that didn’t justify confronting a key faction in the GOP.
The clearly more tangible threat that rose to the level of Jonah’s being engulfed by a storm and swallowed by the whale that has clearly prompted the Administration and the GOP to take steps to allow EXIM to re-emerge is China. The country’s trade and lending policies, aptly represented by the Belt and Road Initiative, have become not only economic matters but national security issues. While Trump’s tactics to counter China on trade might have raised eyebrows, the Administration does deserve credit for being the first to sound the alarm on Chinese commercial practices that have been previously ignored. EXIM thus becomes an important instrument for confronting China.
In the keynote address to EXIM’s annual conference last month, Director of the National Economic Council Larry Kudlow “tipped his hat” to Tea Party concerns and “acknowledged his reservations as a ‘free-market economist’ about government subsidies and credits” but also acknowledged support for EXIM in the current trade environment that is increasingly dominated by China.
EXIM Bank can be working with us and helping American interests around the world because the geopolitics have gotten much tougher, and the competition has gotten much tougher. And, yes, a lot of this, too, revolves around China... This is an export credit lending matter that we believe will be very helpful in the new tougher global competition. (EXIM is) a financial tool and a national security weapon.
These same China-related concerns that were largely responsible for the Administration’s and the Republican controlled Senate’s endorsement of the BUILD Act have led the Administration and the GOP to take important first steps
Six Steps to EXIM’s Re-emergence – Lessons of Jonah
What are those important first steps and what comes next?
As with anything, the place to start is at the beginning, to do what can be done. For EXIM this means doing what has just been done – confirming Board members and establishing a quorum needed to make large loans – and implementing basic reforms, many of which Congress has already enacted, which can help meet the competitive challenges now made critical by China. Implementing a full plan to make EXIM’s recovery sustainable is far more complicated and uncertain.
Jonah’s full story is instructive about the simplicity of taking the first steps and the haziness of the future.
Continuing the story, to be free of the storm and the great fish, Jonah did as instructed. He warned his enemies to repent—and they did. What happens next is less well-known and fathomable, but highly instructive.
Jonah never wanted to spare his enemies and so he broods under a leafy shade vine, which wilts, allowing the sun to scorch him. Jonah bemoans the death of the plant and wishes for death. God asks Jonah why he is more concerned about a plant than his fellow humans. The story ends there in one of the earliest great moments in existential literature.
What happened? Did Jonah finally become happy about human salvation as God wished? Or did he continue brooding and die in the desert? We don’t know – Jonah and all of us have to make our own futures.
The six-point plan outlined for EXIM’s recovery mirrors Jonah’s tale. The first three steps are straight-forward, politically feasible and critically important for addressing urgent competitiveness and free trade goals. Like the exit from the great fish, they can, should, and likely will be done in the near term.
The last three steps are critical to the long-term health of a robust lending institution requiring political support and market confidence to reliably help the US compete with China and the rest of the world. Without them, the bank’s long-term standing and viability are in doubt. But many of them may face opposition and would – at the very least – require political will. Just as we don’t know Jonah’s fate, EXIM’s long-term future and its pro-exporter mission is uncertain, dependent upon long-term actions of US political leaders.
Steps 1-3: What Can Be Done Now
Step 1: Board Authority – The first step to EXIM’s re-emergence has already been done. EXIM has a quorum of three Board members that will allow EXIM to make loans over $10 million. There are two other Board members that should be confirmed shortly, giving EXIM a full five-member Board.
Moreover, that GOP leaders took the proactive measure of seeking a cloture as an apparent move to counter the China trade threat should give comfort to those who worry about EXIM’s reauthorization later this year. Reauthorization should happen for the same reasons. Furthermore, a functioning Board is a prerequisite to the next two steps. A Board can implement helpful reforms. With a Board, EXIM now has a chance to attract qualified professionals to rebuild banking expertise.
Step 2: Recognition and Reform – In personal recovery, an important early step is to recognize and accept underlying problems. For EXIM, this would mean addressing the agency’s underlying vulnerabilities through reform. But, while personal recovery requires examination and resolution of all issues, political limitations necessitate partial reform– in three areas where there is political consensus.
- Board implementation of reporting requirements and other reforms legislated under the 2015 reauthorization that were never fully implemented due to EXIM’s lack of a Board quorum. While some of the more onerous requirements may have been intended as impediments to EXIM’s activity business, collectively these requirements may be seen as reforms that make EXIM more politically viable. Reporting and process changes help make EXIM more transparent thus enhancing EXIM’s credibility and political standing.
- Increase the reauthorization period to five years or more, up from a previous de jure period of four years that has become a de facto period of three years when reauthorization gets delayed. Ideally, the reauthorization period would be as long as the seven-year period given to the DFI, but, but even a five-year window would take EXIM out of election cycles. Instead of partisan and threatening control, Congress would have appropriate governance and oversight.
- Grant of lending authority of more than $10 million with any number of Board members – Current rules require that the Board have a quorum of three politically appointed members. This change, which has been proposed previously and enjoys bipartisan support, would prevent lone Senators from being able to cripple the bank by blocking Board appointments and eliminate the key vulnerability that has plagued EXIM since 2015.
Step 3: Bank Expertise – EXIM’s base of expertise, once among the best of agency lenders, has been sorely diminished. The award-winning Structured Finance Division has gone through four leadership changes and with a few exceptions lacks senior personnel. The Transportation Division, once the world’s largest financier of commercial aircraft, has lost personnel during a time when financing has been measured in increments of $10 million rather than billions. The bank has undergone yet another re-organization that – if history is prologue – may be repeated again. Bank morale is challenged to say the least.
Restoring lost expertise and experience is both an immediate priority and a long-term process. It can and should start now that the bank has authority to finance large deals. But it may be challenging until after re-authorization and will face hurdles until the remaining steps below are implemented that will solidify the bank’s political and market standing and make EXIM a rewarding place to work for those who love finance and care about US exports. Rebuilding will need to continue for years.
Steps 4-6: The Longer and More Uncertain Road Ahead
JLS Capital has previously stressed “broad themes about how EXIM, its supporters, and US workers must address (the bank’s) underlying problems”. Until this happens, EXIM’s recovery will be shallow, not unlike a personal recovery that was motivated by acute trauma but without recognition of the underlying causes or Jonah’s acquiescence so he could exit the whale, even though he didn’t want to forgive his enemies. Without a broader political constituency and greater financial relevance – in the contentious, interest-driven political climate plaguing the US – EXIM will be more vulnerable and less reliable than other ECAs and thus not fully able to create a level playing field for US exports.
Step 4: Political Constituency – JLS Capital has previously opined that EXIM must expand its active political constituency so that the battle with multi-billion dollar Koch interests opposing EXIM is a fair fight. The reality of EXIM’s broad support is something of a political secret.
- Most EXIM loans go to overseas buyers to finance purchases from small businesses;
- Substantial portions of larger loans used for purchases from large companies go to sub-suppliers that are predominantly small businesses;
- All EXIM support is specifically tied to US jobs at large and small businesses alike.
Yet, only a few large exporters and groups have led the charge for the bank, which has made EXIM vulnerable to unsubstantiated charges of corporate welfare.
Rather than broadening, EXIM coalition seems to have shrunk. The Council for Employment through Exports – historically the lead group supporting EXIM – ceased to exist last year, leaving groups such as the National Association of Manufacturers and the Nuclear Energy Institute to take up the charge along with Boeing, Bechtel, and GE.
A broadened base of support needs to reflect the groups benefiting from EXIM support and extend to all sides of a divided US political landscape that barely knows EXIM exists. Supporters should include everyone who works in an exporting industry or whose job is supported by an exporting industry – about 99% of the country – the same group for whom Sen. Bernie Sanders (I-VT) wishes to speak. Rather than opposing EXIM, Sanders should support the bank that supports workers and small businesses that comprise the 99%. Labor groups need to broaden their concerns from arcane content rules and get out in front in support of EXIM’s broader mission.
Step 5: Market Relevance and Confidence – Not only has EXIM’s political support been relatively thin, but awareness of the bank itself has been low. Much of the public doesn’t even know EXIM exists or what it does – effectively muting what is, on paper, overwhelming public support for the bank and providing a cover of obscurity for the EXIM antagonists identified in the introduction to this article.
A major reason for EXIM’s relative obscurity is that, relative to the size of US economy, EXIM has historically lent less than other ECAs. Even before EXIM lost full lending authority, and even at a time when EXIM’s lending activity had increased in the wake of the Great Recession, EXIM’s support per unit of GDP was among the lowest in the world.
The major reason for this relatively low activity is that EXIM “stands alone” among ECA’s in a number of restrictive policies, which have driven foreign buyers to purchase from countries whose ECAs have no such restrictions. While there are myriad restrictions that the US alone imposes, three stand out. EXIM is the only ECA that (1) limits loans to US content, (2) requires goods to be shipped on US vessels, or (3) has “economic impact policies” that inhibit loans to expand production that may compete with the US.
These rules preclude EXIM from “leveling the playing field” for US exporters whose competitors have access to finance without such restrictions. Further, because they have been imposed in response to political special interests and – in the case of economic impact policies – invite political intervention, they undermine market trust in EXIM as a reliable long-term lending partner.
The existing rules have rationales, but are generally designed to serve specific interests rather than the broader cause of US workers and thus need reform.
- Content rules – favored by labor groups because they prevent use of EXIM finance for foreign purchases – often steer purchases to competitors, ironically providing less support for US labor.
- Shipping rules promote US flag carriers, but create market barriers and subsidies for few companies and increase US export costs, thus reducing US exports and shipping as a whole.
- Economic impact rules can compensate for any harm caused by the use of EXIM loans to expand foreign production that competes with the US. But they are frequently applied most vigorously in response to political power rather because of economic merit. When rules drive sales to competitors, competing US production can still be hurt and the US loses the export.
Reforms to the above need not be a long-term effort, as there are short-term options available to a new Board:
- A Trump-nominated Board concerned more about US competitiveness than special labor interests might be willing to implement amendment provisions that previous Boards did not and examine how content flexibility might increase overall support for US jobs.
- Together with a more market oriented MARAD, a new Board might be able to resume an initiative started by previous Boards and increase the transparency and flexibility of MARAD policies.
- There are a number of ways in which economic impact procedures can be reformed to remove special consideration for special interests and to provide more balanced assessments while still providing support for sensitive sectors of the US economy.
However, in the short-term and even in the long run, such changes will inevitably face opposition from the special interests that were responsible for rules in the first place. EXIM’s relevance and political strength may continue to be diminished and EXIM may remain vulnerable to Koch Network and other special interests that believe they are best served by EXIM’s demise.
So, like Jonah EXIM’s future is uncertain.
Uncertainty is one thing for a character in a biblical story intended to teach and another thing altogether for a financial institution whose market confidence has been badly damaged by nearly four years without full lending authority, one upon which buyers of US exports who are the bank’s borrowers need to establish long-term financial relationship, upon which exporters must rely in their long-term production decisions. The consequences of reform for US competitiveness couldn’t be higher.
Step 6: Broader ECA Relevance – If the above reality is sobering, the next step is positively chilling.
Not only must EXIM enhance its own relevance and restore market confidence in an institution that has been, and will continue to be, under attack, but it must also be a leader in enhancing the relevance of OECD ECA lending in in a world where growing competition exists outside the OECD.
The reason for urgency? The same concern that might lead to first steps in EXIM’s re-emergence – China.
Even before EXIM’s loss of authority, the importance of ECA lending has been diminished by the rise of non-OECD countries, especially by BRIC countries of Brazil, Russia, India, and – last but not least – China. These and other countries are expanding manufacturing capacity and – especially China – have financial capacity that they use to support – or even subsidize – exports, as part of what has been referred to as the Weaponization of Trade.
The OECD has made an effort to invite BRIC countries into a process under which they might join the Framework or adopt similar rules that would codify finance rules and allow for competition that is based on the price and quality of exports rather than cheap financing that countries are willing to offer, the very theory that underlies the Framework. That process has – from all available evidence – gone nowhere.
The reason for the lack of progress? BRIC countries – especially China – don’t want to be bound by any rules of fairness and see no reason why they should. Anyone who has spent even a day in BRIC discussions has witnessed a process that makes OECD deliberations look positively speedy. Without any incentive to participate with the OECD fairly, BRIC countries are deliberately slow-walking the process.
Rather than continue a process that will result in changes only in the unlikely event that China and other BRIC’s perceive that participation is in their interests, the US has two avenues that it might pursue.
First, the US is already moving towards having a second agency that might allow the US to do what most other countries have done for years – sidestep limitations of an OECD Framework when necessary or convenient. While nearly every country has some form of public or private non-ECA vehicle that can act for domestic export interests, the US has had strict “market window” prohibitions that have limited OPIC’s activity to non-export transactions. While mixed public/private lending will continue to be anathema in the US, by allowing the DFI to provide loans based on US preference, the 2018 BUILD Act allows the DFI to support transactions based on US exports.
Second, the US must reverse its current conservative posture toward the Framework and take the lead on pushing for enhanced flexibility or – at the least – the ability to provide more flexible terms when BRIC or other countries are offering low or subsidized terms. This would take the choice for joining the Framework away from BRIC countries who will never willingly join, and enhance the control of US and other OECD countries.
This is a controversial step. For this to happen, the US would have to do an “about face” and convert from being a consistent “foot on the brake” on flexible OECD rules and become a force for reforming the OECD into a more market-relevant force.
But perhaps this is a step that the current Administration – intensely concerned with China and willing to confront Beijing head-on on trade issues that previous Administrations have avoided – would take. To quote a great line from a very poor Star Trek VI movie, “only Nixon could go to China.” Perhaps only Trump can help make EXIM’s broader OECD participation more relevant.
All of the steps outlined herein – even the initial straight-forward steps – will be challenging. The last three steps are particularly challenging and uncertain. But until all steps are taken, EXIM risks being less relevant and politically strong than it should and thus – in the contentious US political system in which the Koch Network that is opposed to EXIM is a huge force – politically vulnerable.
EXIM’s sustained outlook is as uncertain as Jonah’s ultimate fate. But – to use the example of Jonah one last time – just like God takes the trouble to ask Jonah about his concern for humanity without clarifying what happens – political leadership needs to try. If they don’t try – and if political leaders from the opposing Democratic Party are more willing to support EXIM in a more fundamental way – the US electorate may need to play the role of God and elect new leaders who are willing to enable EXIM’s complete and sustained re-emergence.