Last December, Congress reauthorized the Export-Import (Ex-Im) Bank of the United States for seven years—the most prolonged period in its history. While it would have been better not to reauthorize an agency with a history of using taxpayer dollars to provide subsidies for primarily a few large corporations, it remains crucial that Congress fulfill its duty to conduct its essential oversight responsibilities of the Bank. On June 23rd, the Senate Committee on Banking, Housing, and International Affairs performed its due diligence through extensive questioning of Bank President Kimberly Reed in a full committee hearing on the “Oversight of the Export-Import Bank of the United States.”
Last year before the Bank’s reauthorization, Reed vowed to implement six critical reforms. These reforms included increasing transparency, strengthening taxpayer protections, improving protection for domestic firms, ensuring Ex-Im does not crowd out private investment (which it terms “additionality”), cracking down on bad actors (i.e. Ex-Im employees who engage in fraudulent conduct), and meeting statutory obligations requiring the Bank to reduce reliance on other export credit agencies (ECA’s) globally. In the June hearing, Senate Banking Committee Chairman Mike Crapo (R-ID) requested an “update… on EX-IM’s implementation of those initiatives, and all provisions included in the reauthorization.” Subsequently, he reminded the committee of the congressional mandate to initiate the new program on China and Transformational Exports (CTE) in the Bank’s reauthorization.
Reed responded to the Senator by stating the Bank is “dedicated to these six reforms and ensuring that America and the world can rely on a robust and principled ECA.” The agency conducted an extensive and transparent internal review that resulted in the Bank adopting reforms to its economic and additionality procedures. It also approved a Chief Risk Officer and Chief Ethics Officer to aid in cracking down on bad actors, like the 2015 Bank employee who “plead guilty to accepting bribes for pushing unqualified loan applications.” More good news followed when President Reed revealed the Bank’s goal of increasing the size of small business loans in its portfolio to 30 percent.
Protecting and extending support to small businesses is a critical issue Ex-Im should address. Before Ex-Im’s reauthorization, the Bank operated with limited capabilities because its Board lacked the quorum needed to authorize financing above $10 million. In 2018, Ex-Im’s outstanding loans hovered around $5 billion, a 90% reduction from its balance sheet in 2012. This four year period where the Bank was prohibited from providing extensive credit helped drive up the share of small business loans in its portfolio.
In 2019, the agency authorized over 2,000 small business transactions totaling $2.3 billion. To increase the volume of these transactions, Senator Sherrod Brown suggested that the Bank’s 2 percent default rate cap needs to be increased or even eliminated. The default rate cap ensures that lending halts if the Bank’s customers fail to deliver more than 2 percent of its total expected repayments in a quarter. The Bank’s current default rate of .452 percent remains relatively low, but it may be of concern due to its 71.2 percent increase in overdue payments since 2016.
The average Ex-Im transaction with a small business amounts to $1.05 million. Raising the default rate would not increase Ex-Im’s ability to provide credit to small businesses, but instead elevate its ability to engage in more extensive and riskier transactions including with multinational corporations.
Ex-Im’s new CTE program mandates the Bank allocate 20 percent ($27 billion) of its $143 billion portfolio to supporting the extension of credit at rates that are competitive with “rates… to the extent practical, established by the People’s Republic of China.” The program’s policy provides no limitations on the Board’s discretion to determine the size and scope of lending within the $27 billion cap. Attentive to the issue, Senator Toomey asked the Bank President in the recent hearing, “how big of a subsidy is too big if a foreign subsidy agency is subsidizing a competitor?”
The question went unanswered, however recent actions indicate the Bank may be back to its old ways under the guise of this new program. The Bank’s Board granted a record-setting direct loan for the Mozambique LNG project of $5 billion (later adjusted to $4.7 billion). The terms of the deal to provide financing for natural gas production in the African country were determined in competition with Russia and China.
The agency claims the transaction will be a win because it is estimated to support 16,400 American jobs. However, the American firm involved in the project recently sold its stake to a French firm for $3.9 billion. To make matters worse, eight French workers were shot on-site while working in the politically unstable country of Mozambique.
Ex-Im’s new program on CTE is carrying on the Bank’s tradition of providing substantial taxpayer-funded subsidies to a handful of large multinational corporations that provide them with an unfair advantage over their competitors. Some argue that Ex-Im levels the playing field with foreign competitors, but “by handing out taxpayer backed loans to favored companies, the… Bank distorts the free markets at the expense of the larger U.S. economy.” The consequences of Ex-Im’s actions are especially bad “in industries where there are few producers, numerous customers, and limited substitute products,” like natural gas, because sellers are given greater market power than they already have.
The Bank’s seven-year reauthorization cements its role in providing export credit to American producers and foreign consumers. Now that the agency has a long-term defined purpose, it is time for Congress to perform a comprehensive review of the eight other major government programs with overlapping missions to provide export subsidies. These include the Department of Agriculture, the Department of Commerce, the Department of State, the Department of Treasury, the Office of the U.S. Trade Representative, the Small Business Administration, the Overseas Private Investment Corporation, and the U.S. Trade and Development Agency.
Senator Toomey described the time in which Ex-Im’s Board lacked the quorum needed to approve loans above $10 million, as a “controlled experiment.” During that experiment, American export volumes soared to record heights without the help of Ex-Im. Congress should continue to regularly pursue transparent information from the agency while remembering American exporters prospered in the Bank’s absence.