This piece was originally published at Washington Times
Opposition to the U.S. Export-Import Bank (Ex-Im) is now at the point where the bank’s reauthorization is genuinely in doubt. Spurred by accusations of corporate welfare, crony capitalism and outright corruption, opponents believe the Ex-Im Bank’s palpable violation of free-market principles fully warrants its early demise.
The Ex-Im Bank’s critics have their economics entirely correct, but they have their geopolitics wrong. Their solution – simply terminating the bank – is appealing but counterproductive. What America should do, under a president with the wit to do it, is negotiate the global elimination of “export credits” (as these subsidies are generically known). This approach would eliminate the Ex-Im Bank’s market-distorting effects without harming U.S. political and economic interests in the wider world.
Whatever the bank’s flaws, and they are many, U.S. businesses do not operate in a free-market world. Outside our borders, mercantilism is rife, among both friends and adversaries. Undeterred by arguments that they are playing domestic favorites, redistributing wealth inequitably, or distorting job creation and capital investment, foreign governments use agencies like the Ex-Im Bank to make their own exports more attractive to international customers.
Their objective is plain: undercut the competition to gain market share and then squeeze out competitors going forward by garnering favorable political treatment. These tactics work because many sales in international markets involve foreign governments as purchasers, state-owned enterprises (where state equity or debt control comes in a wide variety of shapes and sizes) or other “business” decisions susceptible to purchasing-country governmental “persuasion.” Foreign regimes don’t worry whether export credits make good economic sense, but are instead driven by strategic thinking internationally (like China or France) or powerful domestic pressures, such as protecting favored jobs or political allies (like the European Union generally).
Export credits come in many forms (loan guarantees, below-market interest rates, and more), and they have expanded dramatically in recent years. In key respects, export credits represent the flip side of tariffs and other import barriers. The intent of all these government interventions is to tip the balance in favor of domestic businesses: tariffs to resist competition in the home market from foreign sellers, and export credits to give domestic businesses a leg up in foreign markets.
Bluntly stated, the Ex-Im Bank is, therefore, also a political weapon. Whether in sales of big-ticket items that have military as well as civilian applications (such as airplanes and high-tech components), or in American exports into particularly sensitive countries and regions (such as Latin America, where China is vigorously expanding its “commercial” presence), the Ex-Im Bank has been an arm of U.S. national-security policy.
While the case for eliminating tariffs is acknowledged by economists of all political stripes, powerful protectionist forces in America and elsewhere have essentially required that tariffs and non-tariff barriers be eliminated through hard-bargained international agreements. The process is imperfect, messy and frustrating, but succeeding rounds of multilateral, plurilateral and bilateral negotiations have reduced tariffs dramatically since World War II, with corresponding boosts to economic prosperity worldwide.
The same path beckons for the permanent elimination of export credits. The utility of a sustained politico-diplomatic campaign to achieve this objective is clear. No one should think for a moment that eliminating the Ex-Im Bank will mean its business beneficiaries will fade quietly away. They will return with alternatives to achieve the same objectives as the bank, albeit in a less transparent, more piecemeal fashion. Far better to deal with the problem comprehensively, thereby also eliminating the foreign anti-competitive behavior motivating so much of American business’s support for the bank.
I first encountered export credits while serving at the U.S. Agency for International Development in the early Reagan administration. There, the issue was “mixed credits,” the blending of export credits with foreign assistance for projects in developing countries that also benefited U.S. businesses. In September 1982, we issued a joint State Department-AID policy determination stating: “We are opposed in principle to the use of mixed credits for export financing. We recognize, however, that other donors are actively using mixed credits to promote their own exports and that this can put U.S. exporters at a serious competitive disadvantage.” Our solution was to approve mixed credits only in very limited circumstances, and to carefully monitor “international efforts to increase the transparency and reduce the use of mixed credits.”
This Reaganite approach is still valid today, especially given that more and more countries have begun using export credits in the intervening years. The Ex-Im Bank’s critics will say that a multilateral negotiation, perhaps through the World Trade Organization, would be too time-consuming and difficult. But that proves precisely the opposite of the point they think they are making. Foreign resistance to eliminating export credits evidences just how important and pervasive the practice has become for our trade competitors and geostrategic adversaries.
The last thing we need in an increasingly threatening world is to disadvantage ourselves while other nations enhance their own export-credit programs. Far better economically and politically that all stand down together, rather than U.S. interests alone suffer.
• John R. Bolton, a former U.S. ambassador to the United Nations, is a senior fellow at the American Enterprise Institute.