Will Direct Subsidies to Corporates Replace Exim Bank?

For the last year, Exim Bank has been unable to approve transactions benefiting the GEs, Boeings, Caterpillars and other large corporates. Why? When Congress reauthorized Exim back in November 2015, only two of the five seats on Ex-Im’s board of directors were filled, which left the agency without a quorum and unable to approve transactions of more than $10 million.

When President Obama nominated Republican Mark McWatters to fill the third board seat in January, the Senate Banking Committee led by Chairman Richard Shelby, R-Ala held up his nomination. The Senate Banking Committee is Ex-Im’s authorizing committee and Senator Shelby, once a supporter of Exim, is no longer. It hasn’t helped that four Ex-Im officials were suspended for bribes and kickbacks.

The spending bill put before Congress included changes to Ex-Im’s quorum.  The temporary spending bill was approved by the Senate and sent to President Barack Obama, who signed the measure early Saturday morning, December 10. Republicans were denied in a bid to revive the Export-Import Bank's ability to approve export financing deals exceeding $10 million.  This will most likely set up a showdown between conservatives who oppose the bank and its Republican supporters.

According to Exim, there are currently 30 transactions worth $20 billion awaiting board approval.

What I find interesting is Trump’s recent bullying-carrot approach of the air conditioning firm Carrier to keep them from closing one plant and moving it to Mexico. Carrier will Receive $7 Million in Tax Breaks to Keep Jobs in Indiana.

This is a direct subsidy. Essentially, Ex-Im is an indirect subsidy using the Treasury’s balance sheet to provide large banks and large corporates like Boeing and GE with subsidies to conduct foreign business.

Which one makes the most sense?

People that make the bulk of profit from Exim Insurance are banks and GE, Boeing, Caterpillar. Many banks rely on Exim to bolster their trade finance business.

Personally, I believe we don't frame the argument correctly. The question is really about the best way to provide Government subsidies. What is the best way to subsidize GE?  Caterpillar?

When I hear from bankers, brokers and consultants the argument that Ex-Im is necessary, I ask why? First I get its profitable.  Well, I would argue that because of how Ex-Im is constructed, it has the imprint of not costing what it costs, but it is no question a subsidy paid to a handful of companies, just an indirect one versus direct.  Also, Government is in the business of providing services, not making profit.

The other issue that comes up is that China, Korea, Canada, and others have government insurance programs and subsidize their own companies. My reply is again it comes down to the best way to subsidize business.  Perhaps just cutting a cheque is the most efficient way, like what was done with Carrier.  Perhaps not.

My piece Corporate Welfare or Export Champion covers this in more detail.  Perhaps Exim operates under the illusion all can access its guarantees and working capital, and through their network of brokers offers an opportunity for small or medium sized businesses.  But in reality, its the global 100 companies, with big lobbying efforts, that take advantage of Exim.

How do you give subsidies? That’s the real question. What do others think?

p.s. Exim Bank has laid out furlough contingency plans here

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Voices (2)

  1. David Gustin:

    Dave,

    Really, Insurance doesn’t cost much?

    The fact that its not funded does not mean it has no cost. If the Federal Govt issues debt what is the difference between that and writing an insurance contract thats contingent to issuing debt? If US Govt has to pay off insurance claim, has legal obligation to pay claimant. Only difference is funding cost for duration. They have the risk until it matures.

    Your point is like saying Letters of credit have not risk because its not funded.

    Sorry Dave, insurance is not free. And when it comes to Exim, these are long term deals.

    Since the Governments been bailing everyone out, maybe thats why you think this way. Next time you respond, figure out how things work – details matter!

    Wake up, I’m awake dude.

  2. Dave Bryant:

    I think you’re missing the point. THe US Gov’t places its balance sheet (not real cash) onto the deal so a company can foster a trade export. It’s the full faith and credit of the US gov’t without incurring any real debt (only a contingent liability).It’s the one little value add the gov’t can actually bring to the table. And it doesn’t cost much…wake up!

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