Does Ex-Im Bank need a ‘third option’?

Long dogged by claims of corporate welfare, the Export-Import Bank (Ex-Im) finds itself once again fighting for its survival. At 80 years old, Ex-Im has always won the fight. But this time, a “third option” of reform might just be what it needs — one that focuses on making the agency better, not closing its doors.

The Export-Import Bank is a government agency with a mission to support U.S. jobs through exports. The bank provides loans, guarantees and insurance to help U.S. exporters level the playing field against foreign competitors, in a world where 59 other countries provide export financing assistance. As a “lender of last resort,” each transaction must demonstrate “additionality,” where the export would not go forward absent Ex-Im Bank.

In the past, trade promotion by leveling the playing field has been argument enough for reauthorization. But now, the battle over Ex-Im Bank is about more than corporate welfare — it’s a face-off between the establishment Republicans and Tea Party conservatives

{mosads}Yet what seems like yet another ride on the Ex-Im political merry-go-round could actually be a unique opportunity. New legislation introduced by Rep. John Campbell (R-Calif.) for a “third option” path to reauthorization provides a starting point for a better Ex-Im Bank.

A third option has the power to make Ex-Im Bank better, by enabling reforms to fulfill its mission more effectively. Such reforms would enhance the global competitiveness of U.S. companies, not take it away.

As such, any third option should modernize the Bank for 21st-century competition, not reduce its already small trade finance footprint. The reality is that China, South Korea and Japan are ramping up state export support for industry, and not everyone plays by the rules. That’s why Ex-Im needs more tools to level the playing field, not less. Reducing Ex-Im’s ability to match competition would be as good as giving China Exim Bank and Sinosure the extra business.

In fact, some would call the post-crisis rise in Ex-Im’s business a success. That’s because international financial markets remain risk-averse, especially in developing countries. New research from the Federal Reserve demonstrates the rising importance of financing from commercial banks, particularly large banks, in enabling U.S. export transactions. The increase in Ex-Im Bank activity corresponds with the need to fill gaps in available market financing, a role it was created to fill.

Moreover, a third option need not focus on Ex-Im’s reputation as “Boeing’s Bank.” Yes, over 45 percent of total outstanding exposure in 2013 was for air transportation. But this isn’t very surprising, given the large and concentrated nature of aircraft risk. And yes, Delta and other U.S. airlines get the short end of the stick when Ex-Im provides support to foreign airlines. But if Ex-Im didn’t, another export credit agency would support its domestic aircraft manufacturer and steal the deal. If we agree that trade is an essential part of a high-growth strategy, then we must help our companies be competitive, or let them be left behind — to move overseas.

Instead, a third option for Ex-Im Bank should take an objective look at some of its longstanding policies and mandates. For example, in its financing programs, Ex-Im plays favorites. This includes mandates for small business, renewable energy and exports to Africa. The most restrictive, for small business, requires that small business comprise 20 percent of bank financing annually on a volume basis. Yet because of the large dollars in aircraft and project finance deals, it is a strain on bank resources, and ultimately imposes direct competition with the Small Business Administration.

Ex-Im also has an onerous domestic content rule, which requires that a certain percentage of the export’s production cost originates in the United States. However, in practice, it essentially prohibits digital goods and services exports, like software and IP. Moreover, it holds U.S. companies to production requirements that may not reflect the industry standard or be globally competitive.

And Ex-Im has a requirement that all exports over $20 million be shipped on U.S. flag vessels. The policy, borne out of Public Resolution-17 of 1934, is known to add tremendous cost to the export. Shipping on U.S. flag vessels can cost three to five times more than on foreign flag ships.

To be sure, each of these policies has trade-offs. Encouraging more small businesses to competitively export boosts the economy. The U.S. content rule provides additional assurance that U.S. jobs are being supported. And without Ex-Im, an already small U.S. merchant marine fleet would likely be further reduced, especially for non-container vessels like roll-on/roll-off and heavy lift. This could have defense or national security implications. Yet these questions deserve asking.

With a third option, a better Ex-Im Bank could still come out of this latest political gamesmanship. But only if it includes reforms the bank needs, not leaving U.S. companies to fend for themselves in the global marketplace.

Carew is an economist and the director of the Young American Prosperity Project at the Progressive Policy Institute. She formerly worked at the Export-Import Bank.