A political shake-up in Congress has potentially put a little-known federal agency on the chopping block, much to the dismay of major American manufacturers, particularly Boeing (NYSE:BA), but also General Electric (NYSE:GE) and Caterpillar (NYSE:CAT). The manufacturers claim they need the Export-Import Bank to keep American products competitive in the global market and support American jobs, but incoming Republican leadership in the House is opposed to the agency, which they allege is a tool of crony capitalism.
What does the Export-Import Bank do?
Created in 1943, the Export-Import Bank is a federal agency charged with encouraging the foreign purchase of American products. The bank has four major programs to help finance American exports:
- Direct lending to foreign purchasers of American products.
- Providing guarantees to banks that lend to purchases of American products.
- Insuring American exporters and banks against losses from foreign borrowers.
- Guaranteeing bank loans going to provide working capital to U.S. exporters.
The Export-Import Bank finances its own operations by borrowing money from the U.S. Treasury, later repaying the funds borrowed with interest. The bank covers its operating costs through fees to its customers and interest charged on its own loans,
Who benefits from the Export-Import Bank?
There's a reason the Ex-Im Bank has been nicknamed the "Bank of Boeing." The aviation giant's jet planes have historically been by far the largest recipients of the Ex-Im Bank's loans and guarantees in terms of total dollar value. In 2013, the Ex-Im Bank provided over $8 billion in financing to Boeing, making up over 30% of the bank's total financial exposure. Foreign airlines purchasing Boeing jets are similarly benefiting by being on the opposite end of the transaction, receiving favorable financial terms under which to buy the planes.
Other big manufacturers to receive windfall financing from the bank include General Electric, which enjoyed loans and guarantees totaling over $2.6 billion in 2013, and Caterpillar, whose Solar Turbine subsidiary received guarantees totaling over $1.3 billion in 2013.
The Ex-Im Bank also assists much smaller American businesses seeking to export. Historically the largest manufacturers have eaten up the lion's share of the Ex-Im Bank's total financial assistance by dollar value, and 2013 was no different with the top 10 beneficiaries taking in over 75% of the bank's total financial assistance portfolio. But the Ex-Im Bank notes that small businesses account for over 90% of the bank's total number of transactions, and that the bank has made exports possible for over 3,000 American small businesses.
Who's opposed to the Export-Import Bank?
The primary industry opponents of the Ex-Im Bank are the big domestic airliner, like Delta (NYSE:DAL), who feel that their foreign competitors are getting rosier terms to purchase Boeing jets than they are, allowing foreign airlines to outcompete domestic airlines on U.S. -- international routes. Delta CEO Richard Anderson recently called for the Ex-Im Bank to be renewed, albeit with the critical "reform" that it be prohibited from financing the purchase of wide-body aircraft by foreign state-owned or state-subsidized airlines -- which is basically all of them.
Critics also charge that the Ex-Im Bank is in the business of picking winners and losers, and it's hard to disagree. Small businesses that receive preferential Ex-Im Bank financing have significant advantages over their direct competitors that don't, making it unclear just how many jobs the Ex-Im Bank supports on net.
Beyond picking winners and losers, the Ex-Im Bank has also been accused of being a taxpayer subsidy to big business, as it uses taxpayer money to finance risky private loans. For decades, the Bank has returned more to the Treasury than it borrowed, essentially acting as a free revenue source for taxpayers. However, critics up to and including the Export-Import Bank's own Inspector General believe that the agency is not assessing risk properly or responsibility. That could expose the Bank, and therefore the U.S. Treasury and the taxpayer, to massive losses in the case of customer defaults.
What would happen if the Export-Import Bank wasn't reauthorized?
The Ex-Im Bank would be permitted to carry out the terms of its current agreements, but could not originate new loans or guarantees, essentially winding itself down to nothing over time. American manufacturers currently enjoying access to the bank would need to arrange alternative financing or export fewer goods. Larger manufacturers with global exports typically have their own internal credit businesses specifically to make it easier for customers to buy their products, and in Boeing's case in particular, these captive finance arms would likely be expected to pick up the slack. Only Boeing would be seriously stressed by this, as according to credit-rating agency Standard & Poor the company could need to double or triple its customer finance portfolio, which could hurt its credit rating.
Longer term, supporters of the Ex-Im Bank warn that American exporters may be outcompeted by foreign firms that enjoy the favorable financing of their own export credit agencies, and again this is a more serious threat for Boeing than anyone else. While the advantage of favorable financing is relatively slight, Boeing's competition with European competitor Airbus tends to be close and brutal, and could therefore hurt Boeing's order book.
As far as broader economic repercussions, with the vagaries of international trade, it's impossible to know what effect this would have on the broader economy, but whether positive or negative the effect is unlikely to be noticeable. In 2013, the Ex-Im Bank authorized $27 billion to support $37 billion in export sales, accounting for about 1.6% of total U.S. exports.