As bad as this flip-flop is, his excuses for doing so are downright pitiful.
As a candidate in August 2015, Trump categorized the bank as “feather bedding,” adding, “I don’t like it. I think it’s a lot of excess baggage. I think it’s unnecessary. And when you think about free enterprise, it’s really not free enterprise.”
He was right, of course, but that was then.
If the two are confirmed, the bank will return to full operation after 21 months without a board quorum—which prohibited deals exceeding $10 million.
And that means billions of taxpayer dollars to foreign firms and foreign governments with which to purchase exports from favored multinational companies such as Boeing, General Electric, and Caterpillar.
The best course of action would be to eliminate the bank altogether. There is no shortage of private export financing, and the subsidies distort credit and labor markets.
Perhaps worst of all, unsubsidized American companies are placed at a competitive disadvantage compared to the foreign firms collecting Ex-Im subsidies. (Delta, for example, loses out when Air India gets a sweetheart deal from Boeing by way of Ex-Im.)
A Meritless Flip-Flop
The White House is making much of the fact that Garrett has been a critic of Ex-Im, twice voting against renewal of the bank charter. That supposedly portends reform, although Congress has previously tried to do so without appreciable effect.
No amount of bureaucratic tinkering can shield taxpayers from bailouts in the event that bank reserves run dry—as occurred in the 1980s—nor protect American businesses from the disadvantages of the U.S. government subsidizing their foreign competitors.
In an April 12 interview with The Wall Street Journal, Trump acknowledged that he had been “very much opposed” to the bank but changed his mind because “lots of small companies will really be helped.
“But also maybe more importantly,” he said, “other countries give it, and … we lose a tremendous amount of business.” He also added, “So instinctively you would say it’s a ridiculous thing but actually it’s a very good thing and it actually makes money. You know, it actually could make a lot of money.”
All of which is nonsense.
Bank proponents focus on small firms to deflect attention from the fact that the vast majority of Ex-Im beneficiaries are titans of industry that are well-positioned to prosper without Ex-Im subsidies.
They do not lack access to private capital, and most have billions of dollars of backorders with which to keep production going.
In recent years, the bank supported less than half of 1 percent of small businesses—which in many cases aren’t so small.
(The bank’s definition of “small business” includes manufacturers with as many as 1,500 employees and service firms and retailers with as much as $20.5 million in annual revenues.)
On their own, businesses with fewer than 500 employees account for 98 percent of all firms exporting goods, and exports have reached high levels in recent years. In fiscal year 2016, for example, U.S. exports totaled $2.2 trillion, with Ex-Im supporting just 0.22 percent ($5 billion).
That makes one thing very clear: Export financing obviously is not a problem for small firms in the aggregate.
This is further validated by the fact that small businesses ranked “Exporting My Products/Services” as the least problematic of 75 business problems assessed in the 2016 annual survey by the National Federation of Independent Business Research Foundation.
(The cost of health care ranked as the most severe problem. The president would do well to focus on that rather than resuscitate Ex-Im.)
In the event that a small business cannot access private capital, it can seek to export through wholesalers or associate its business operations with larger firms or with global supply chains.
The real beneficiaries are the big boys like Boeing (market cap $110 billion), and the extent to which the bank caters to the company is staggering.
As of March 2014, at least 28 percent ($32 billion) of Ex-Im’s total portfolio was devoted to financing wide-body jets. In 2013, the bank authorized financing for the purchase of Boeing aircraft in 25 countries, including China, Russia, and the United Arab Emirates.
Subsidies for air transport, in general, comprised more than 45 percent of all export subsidies that year.
General Electric (market cap $256 billion) is another top Ex-Im beneficiary. The company began 2017 with a record backlog of $321 billion. Likewise, Caterpillar (market cap $54 billion) posted a backlog of $12 billion at the end of 2016.
Ex-Im Doesn’t ‘Level the Playing Field’
The claim that U.S. companies will lose sales to foreign competitors without Ex-Im financing is also drivel.
Economist Veronique de Rugy of the Mercatus Center has documented that only about a third of Ex-Im financing—which benefits just 2 percent of all U.S. exports—is designated in bank records as necessary to counter subsidized foreign competition.
A whopping 66 percent of the financing classified as necessary to counteract foreign competition went to Boeing.
In other words, Ex-Im Bank financing counteracts foreign subsidies for less than 1 percent of U.S. exports—with more than half the benefit accruing to Boeing.
Finance costs are only one among a variety of factors that affect a purchaser’s choice of supplier. Availability, reliability, and stability all play significant parts in purchase decisions. There should be no question that U.S. firms are capable of competing successfully without corporate welfare.
The claim of “competitive disadvantage” is further belied by the agreement among 31 member countries of the Organization for Economic Cooperation and Development to abide by a set of financing rules covering loan term limits, minimum fees, and other practices.
There is rarely such a thing as a “level playing field” in trade. Every country has advantages that others lack.
The ingenuity and drive of American companies can, in many instances, trump the export subsidies doled out by foreign governments—assuming, of course, that tax and regulatory barriers do not further restrict free enterprise.
It is silly for Ex-Im advocates to cite China’s massive subsidies as proof that Ex-Im is necessary. Do they really want America to emulate a country in which all the largest enterprises are owned by the state?
As reported in The Wall Street Journal, almost 14 percent of China’s listed, nonfinancial companies’ profits are attributable to government support, according to an analysis by Wind Info.
And let’s not forget that Trump campaigned on challenging China’s trade practices. He cannot now claim with any credibility that we must match its subsidies to stay competitive.
An Anti-Market Institution
Perhaps most disappointing, though, is the president’s defense of Ex-Im based on its potential to “make money.” That statement, out of all his others, insults the very concept of free enterprise and limited government.
By that rationale, Washington should assume control of all profitable companies to feed its insatiable appetite for spending.
In any event, the claim that Ex-Im is profitable is illusory: The bank uses “accrual” accounting, which does not factor in the risk of defaults related to bank financing.
For example, under current accounting methods, bank officials claim that Ex-Im will return a $14 billion surplus to taxpayers in the next decade.
But the Congressional Budget Office reported in 2014 that Ex–Im 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).
Ex-Im advocates offer myriad excuses for maintaining government interference in export financing, including job creation, gaps in private investment, and government subsidies lavished on foreign firms.
Such justifications do not stand up to the facts, and the purported benefits—if any—are not commensurate with the risk to taxpayers.
The president has made a huge mistake on Ex-Im, but it isn’t too late for him to change direction—back to where he was in the first place.