Rivals Already Outgun U.S. on Trade Subsidies as Ex-Im Imperiled
By Ian Katz, Kevin Hamlin and Brian Parkin
South Korea topped the U.S. on government-backed export credit last year with an economy one-fourteenth as large. Germany helps Airbus Group NV compete against Boeing Co. with loan guarantees. China supports exporters of petrochemicals and electronics.
The Obama administration is highlighting competition from abroad in its bid to keep alive the 80-year-old Export-Import Bank, which provides loans, loan guarantees and credit insurance to foreign buyers of U.S. goods. Republican lawmakers including Jeb Hensarling, chairman of the House Financial Services Committee, say Ex-Im is rife with cronyism and are threatening to let the bank’s charter lapse at the end of September.
In the arms race for world markets, export credits are “nuclear missiles,” said Stephen Myrow, a former chief of staff at the Ex-Im Bank.
“You have them because other countries have them, and the thought of unilateral disarmament is not realistic,” said Myrow, who is now managing partner of Beacon Policy Advisors LLC, an independent research firm in Washington.
Ex-Im says the U.S. is already outgunned by its competitors. In a report last week citing official data from foreign governments, Ex-Im said China financed $111 billion in long- and medium-term export credit last year, Japan furnished $33 billion and South Korea $24 billion, while the U.S. provided $15 billion.
Subsidy King
“China is the king of subsidies,” said Derek Scissors, a scholar at the American Enterprise Institute in Washington who focuses on Asia economic issues.
Foreign currency lending by the China Development Bank reached $248.2 billion in 2012, a 36-fold increase from a decade earlier, the Chinese bank said on its website. The bank has aided companies including PetroChina Co., Sinopec Shanghai Petrochemical Co., Baosteel Group Corp. and ZTE Corp.
In 2010, when Brazil’s Tele Norte Leste Participacoes SA was shopping for network equipment, China’s Huawei Technologies Co. had an advantage: access to a $30 billion credit line from the development bank. The terms helped create an unbeatable deal, Tele Norte Chief Financial Officer Alex Zornig said in an interview the following year. “The Chinese are filling the space left empty by Americans and Europeans,” Zornig said.
President Barack Obama wants to reauthorize Ex-Im for five years, and gradually raise its lending limit to $160 billion from the current $140 billion.
Unilateral Action
Allowing the bank to close would “immediately translate into lower sales” and a loss of jobs, U.S. Treasury Secretary Jacob J. Lew told Congress on June 25. “It’s a whole different question if there were to be an international agreement that everyone would step back from export support programs. But to fail to extend the Export-Import Bank would be unilateral action that I think would hurt the American economy.”
About 60 countries have export-credit agencies, according to a June 3 report by the U.S. Congressional Research Service.
Ex-Im’s financing is “parsimonious relative to the size of the U.S. economy,” said Gary Hufbauer, a research fellow at the Peterson Institute for International Economics in Washington who is on the bank’s advisory committee. The prospect of the lender shutting down probably is seen as “too good to be true” by U.S. competitors such as China, Japan, Canada and the U.K., he said.
Opponents argue that Ex-Im favors large companies that don’t need the help.
Sweetheart Deal
“It’s a sweetheart deal,” Hensarling said at a hearing his committee held June 25 to discuss the bank. “Taxpayers shoulder the risk” while politically connected companies such as Boeing Co., General Electric Co. and Caterpillar Inc. “get the reward.” Hensarling also cited published reports that four bank officials were disciplined for accepting kickbacks or steering contracts to certain companies.
The new House majority leader, Kevin McCarthy, last week backed Ex-Im’s demise, raising another obstacle to renewal of the charter.
While the U.S. considers pulling back support for exporters, some of its biggest competitors are expanding credit for sales abroad.
In Japan, Prime Minister Shinzo Abe’s government is boosting support for firms exporting infrastructure including trains, power stations, distribution networks and water supply - - with a target of tripling such orders to 30 trillion yen ($296 billion) by 2020.
The Japan Bank for International Cooperation is at the center of efforts to support exporters in the world’s third-largest economy, issuing loans to foreign companies to buy Japanese machinery, plants, vessels and equipment worth 127 billion yen in fiscal 2012. It also provides loans to Japanese companies to sell products abroad and operate infrastructure businesses outside the country.
The bank last month made two loan agreements with JSW Steel Ltd. in India, each worth as much as 3 billion yen.
Japan, Korea
When Japan pushed down its currency to boost its companies’ competitiveness, South Korea’s export-import bank responded early last year by cutting the interest rate for loans to small-to-medium-sized exporters by as much as 1 percentage point.
South Korea said in April 2013 it was adding 11.1 trillion won ($10.9 billion) of financial support for companies including small- to medium-sized exporters hurt by the sliding yen.
The EXIM Bank of Korea said in February it will increase funding for the shipping industry, which is experiencing a downturn, by 20 percent to help purchase vessels worth more than 600 billion won.
French Lender
In France, President Francois Hollande’s government set up the Banque Publique d’Investissement on taking office two years ago to bolster access to financing for French companies. The bank created a dedicated export arm intended to provide small and medium-sized companies with export financing starting in 2013.
German Chancellor Angela Merkel rebuffed critics of the country’s record trade surplus last year, including the International Monetary Fund, by asserting that the export competitiveness of the country’s companies was a sign of health. Exports account for about one-third of economic growth and totaled $1.49 trillion in 2013.
Siemens, Airbus
Siemens AG and Airbus, which competes with Chicago-based Boeing, are among the biggest German beneficiaries of government-backed export loans and guarantees jointly offered by KfW Group’s IPEX Bank GmbH and Allianz SE’s Euler Hermes unit. In January, loans worth 194 million euros ($264 million) supported the sale of Siemens power plants to South Korea’s Posco energy. KfW said on June 20 that it financed the sale over 10 years of A321-200s to JetBlue Airways.
In Britain, the export credit agency has been expanded as the government seeks to use overseas sales to boost an economic recovery. Chancellor of the Exchequer George Osborne in April doubled the U.K. Export Finance’s lending facility to 3 billion pounds ($5.1 billion) and cut interest rates on it by a third.
In the same month, the Bank of England expanded the list of collateral accepted in its liquidity operations to include debt capital market notes guaranteed by UKEF, which also provides insurance, working capital and guarantees on bank loans.
The agency said June 18 that it had signed an agreement with HSBC Holdings Plc to offer medium to long-term funding in Chinese renminbi, the second-most used currency in trade finance after the U.S. dollar. The deal is seen helping British aerospace manufacturers such as Rolls-Royce Holdings Plc gain further access to the Chinese aircraft market, UKEF said.