Stopping the buck: Reforming the EXIM Bank so that it can finally be reauthorized

Earlier this month, the U.S. Senate confirmed three new board members to the U.S. Export-Import Bank (EXIM), giving it the quorum required to approve financing or loan guarantees larger than $10 million. There has not been a quorum at EXIM since July 2015 — in essence, EXIM has been nonfunctional since then.

Although EXIM has a new quorum, it now faces a new challenge: Its current authorizations end on September 30, meaning Congress must now reauthorize EXIM in order to continue operations. The last authorization was for five years, so it would be reasonable for Congress to reauthorize EXIM for another five years. Reauthorization may require some reforms. However, what “reform” (or perhaps “incremental changes”) looks like is an open question.

Why is reauthorizing EXIM important?

The Director of the National Economic Council, Larry Kudlow, recently captured EXIM’s importance, describing it as both a financial tool and “a national security weapon.” Financially, EXIM authorized $3.3 billion of short-term export credit and capital guarantees in FY 2018 alone, which supported $6.8 billion worth of U.S. exports and 33,000 U.S. jobs. Now that there is a quorum at EXIM, these figures are likely to see a dramatic increase.

{mosads}The last year that EXIM was fully operational, in FY 2014, EXIM authorized nearly $20.5 billion in support of an export value of $26.5 billion, which translated to 164,000 U.S. jobs. Indeed, EXIM has $40 billion worth of pending transactions as of the end of FY 2018 which, with a quorum, may now be approved and is predicted to support 240,000 U.S. jobs.

Without an export credit agency (ECA) like EXIM, the United States will lose out in a global competition. ECAs are active in 32 OECD nations and in many non-OECD countries such as China, which has some of the world’s largest and most flexible ECAs. China’s ECAs provided more medium- and long-term investment support in 2017 than the rest of the world combined — at nearly $45 billion. China also provided $412 billion worth of new commitments in official short-term export credit and other programs in 2017 — while the United States only provided $3.2 billion. It is thus not surprising that at the 2019 EXIM Annual Conference, Mr. Kudlow stated that “EXIM Bank can be working with us and helping American interests around the world because the geopolitics have gotten much tougher, and the competition has gotten much tougher. And, yes, a lot of this, too, revolves around China.”

Mr. Kudlow was probably referring to the fact that China has supplanted the United States as the top trading partner for 124 countries. The United States is now the top trading partner for only 76 countries, when only a decade ago the United States was the top trading partner for 130 countries.

‘Reform’ — then reauthorize

The vote for the three EXIM board members came after more than a year of delay. The reauthorization of EXIM will likely only get done in return for reforms of EXIM. Demands for reform come largely from the Republicans. There are three types of supporters in the Republican party for EXIM Bank. First, there are the “Main Street Exporters” who just want EXIM Bank reauthorized with the minimum amount of change to the current model. Second, there are the “National Security (But Mainly Because of China)” types — many of these are converts to supporting EXIM Bank because of great power competition. Third, there are the “I don’t like EXIM but will support it through gritted teeth” types. These supporters are only supporting EXIM because President Trump wants this done; otherwise, these supporters would like to see EXIM Bank go away. Groups two and three will want reform of some kind.

{mossecondads}What would reform look like? In a recent floor speech, Sen. Pat Toomey (R-Pa.) laid out his vision for reform. Many of his concerns are worth further discussion, such as: promote greater transparency; protect taxpayers in case EXIM becomes “the next Freddie Mac;” handle cases such as the Air India/Delta Airlines issue better going forward; work to ensure that EXIM does not compete with private financing; and crack down on fraud. One of Sen. Toomey’s suggestions is simply unrealistic: He calls for negotiating the elimination of ECAs around the world; this is just aspirational, akin to wanting to eliminate all nuclear weapons, everywhere.

There are other reforms to EXIM that likely will be reviewed as part of a reauthorization deal. These include getting a better handle on what counts as and how to track U.S. small businesses that benefit from EXIM. Another is the issue of default rates. The EXIM Charter has a rule that says that if EXIM has a 2 percent default rate (it currently has a default rate of 4/10th of 1 percent) then EXIM must effectively shut down (no other ECA has this rule).

Another legitimate issue to review is the appropriate “American content/sourcing” amount? For large companies, EXIM requires 85 percent, other ECAs such as the German ECA have gone to 50 percent, and others use 20-35 percent.

Finally, there is an issue about the size of EXIM’s “credit card limit.” If EXIM does about $20 billion of new business a year for the next 2-3 years, then EXIM will hit its current “exposure cap” (i.e. credit card limit) of $135 billion. Ideally the EXIM exposure cap would be raised to $200 billion reflecting an ever-increasing amount of U.S. exports and American jobs. Japan’s EXIM Bank equivalent, in contrast, does not have an “exposure cap.”

EXIM may now have a quorum, but there remains a lot of work to be done to get to reauthorization. The debate in Washington will soon turn to EXIM “reform.” In the meantime, China’s ECAs continue to grow in scale and influence.

Daniel Runde is a senior vice president and William A. Schreyer chair in Global Analysis at the Center for Strategic and International Studies. He previously worked for the U.S. Agency for International Development, the World Bank Group, and in investment banking, with experience in Africa, Asia, Europe, Latin America, and the Middle East.