Rarely will you find a person familiar with the Export-Import Bank, or how it relates to the GDP of the U.S. Although this bank only has a direct impact on 1.6% of U.S. exports, the Export-Import Bank and equivalent versions in other countries play an important role in the well-being of international exchange.
For instance, a well-known company by the name of Nike (NYSE:NKE) is all too familiar with the ways of this variety of financial backer. Indeed, Nike might never have been launched without the backing of Japan's version of the Export-Import Bank.
Meanwhile, stateside, politics have thrown the Export-Import Bank into the theoretical spotlight. With the country in limbo for decisions on the next U.S. president, the U.S. Senate is about to have the final say as to whether this bank's charter will be renewed. With a track record of support from both Republicans and Democrats -- until recently -- will the Export-Import Bank get the boost it so desperately needs to stay in business?
A full transcript follows the video.
Kristine Harjes: The little-known way the U.S. government boosts exports. This is Industry Focus.
Hi, everyone! Welcome to Industry Focus financials edition. I'm happy to welcome John Maxfield back to the show. I'm Kristine Harjes. John, how's it going out there in Portland? Are they still fluorinating your water?
John Maxfield: They aren't fluorinating our water and that's the problem. You know what? Here's the thing -- since you did ask the question -- it's going great out here in Portland, with one exception. It is not raining at all right now which means that everybody's grass is a little bit brown. Especially for cheapskates like me.
Harjes: Is it even Portland?
Maxfield: I know! Isn't that horrible? It is summertime, but it's super dry right now.
Harjes: Well, it is also hot as anything here in D.C. So I can totally understand the grass frying up a little bit. Well, last week we received an email from Joe Traver, a listener in New York, asking about the Export-Import Bank. For a bit of background, the purpose of this bank is to provide loans, and credit guarantees to foreign buyers of U.S. goods, in a move to boost exports. John, how exactly does this work?
Maxfield: The way this works -- if you think about this on a larger scale -- if you go back to the Great Depression and Franklin Delano Roosevelt's New Deal, a big part of that was transitioning the government from a largely passive player in the U.S. economy to playing a more active role. One of the things that the New Deal did to facilitate that transition was create a bunch of different governmental agencies that guarantee loans that are designed to further specific goals.
For example: you have Fanny Mae and Freddie Mac, and this whole idea came from the new deal. That was to help the U.S. housing market. You have the Small Business Administration to do things with small business loans. The Export-Import Bank does the exact same thing, but it does it to help the businesses in the U.S. into U.S. exports. So it guarantees loans. Not to the businesses that are exporting, but to the customers abroad which are buying the goods.
Harjes: So, is this just everyone that's looking to buy a good? How do they choose? Like "You're worthy of this loan." How does that work?
Maxfield: I don't know every step of the analysis, but on a general basis it has to be an export-related good, and the buyer that's seeking the financing from the Export-Import Bank cannot have been able to get the financing through a traditional lender. The Export-Import Bank steps in as a 'lender of last resort' when it comes to exports.
Harjes: So this is basically when companies that want to buy our goods can't get funding from private lenders?
Maxfield: That's exactly right.
Harjes: Interesting. Do they then make the loans themselves, or are they just there to say "We've got your back if you want to go back to the private markets"?
Maxfield: The way it works is, the Export-Import Bank facilitates specific transactions. We talked about this a little before the show, but let me give you a specific example of how this works, yet in a reverse capacity. Basically, all the major economies of the world have a version of the U.S. Export-Import Bank that they use to boost their own exports.
If you go back to the 1960s a Japanese development bank -- or their equivalent of their Export-Import Bank -- provided Phil Knight, the founder of Nike -- with a loan in order to help him bring in shoes manufactured in Japan. So he was able to compete against the higher-priced shoes from Germany. Namely, Adidas and Puma. At the time they had a lock on the market in the United States. It was that loan from the equivalent of the Japanese Export-Import Bank that allowed Nike to be born and to then turn into what it is today.
Harjes: Are all the major countries doing this?
Maxfield: It's my understanding that every major country does one of these. It's become an issue in the United States recently because, as we were talking about this earlier, most people have never heard about the Export-Import Bank. Even if they have heard of it they don't have a good grasp on precisely what it does.
It's become a big issue recently though because even though it's had bipartisan support -- Reagan was a big supporter, Clinton was a big supporter, obviously FDR was a bit supporter, George W. Bush's father was a big supporter -- so even though it's had all this bipartisan support all along, since the financial crisis there's been a groundswell of concern around the United States stepping in and bailing out certain types of companies. Mainly your AIG (NYSE:AIG), your Lehman Brothers -- not Lehman Brothers. They probably should have done that. Your AIG, your Bear Stearns, your Citigroup (NYSE:C), Bank of America (NYSE:BAC); there have been people concerned that the government stepping in and doing that is impeding the free market and the Export-Import Bank has turned into a rallying cry for that movement because at the end of this month it has to be rechartered by the U.S. Senate. If it's not rechartered by the U.S. Senate then outside some emergency majors it will basically go out of existence.
Harjes: Do you think this free market argument has any political traction in this case, or is this bank going to continue to be around?
Maxfield: That's a very good question. It remains to be seen. Right now it looks like -- there's dissension in the Republican ranks between the moderate conservatives and the more extreme, free market-based conservatives. There's a flip between them. because you have someone like Lindsey Graham, who's a Republican, and he was a big supporter of the Export-Import Bank. So it's not strictly a Democrat/Republican issue, it's also an issue within the Republican group. If the Republicans can't garner the support for it, it looks like it will struggle to get that charter reupped.
Harjes: So what's the argument that could save it? What exactly is this bank doing that is worthy of having it stick around if it's going to stay?
Maxfield: The whole argument boils down to -- if you take a million mile up view it boils down to economic growth. If you break your GDP down you have consumer expenditures which take up 70% of our GDP. You then have business investment, you have government expenditures, but on top of that you have a venire of the difference between your exports and your imports, and over the past few decades we've been a net importer of goods; we import more than we export, which decreased our GDP as opposed to increasing it.
The rationale for this bank is, by facilitating exports you're facilitating economic growth in the short term, but the contrary opinion is, "You may be taking these short-term measures to facilitate economic growth, but over the long run the government's involvement in the private sector -- business in particular -- is a bad thing for an economy. Therefore, for a short term gain we shouldn't sacrifice a long term loss.
Harjes: Right. Especially along those lines I think about, "Who's actually going to back these loans if they were to default?" It's going to come down to taxpayer dollars.
Maxfield: That's exactly right. Under the current situation it comes down to taxpayer dollars. We haven't heard a lot of concern is that the Export-Import Bank is losing billions of dollars every year. In fact, we haven't heard anything like that of the sort. It really boils down to a theoretical argument about how perceive the government's relationship vis a vis the economy.
Harjes: That's really interesting. How big of a deal is this bank to the export market in terms of a relative basis?
Maxfield: On a relative basis I'll give you a statistic. In 2013, the Export-Import Bank facilitated $37.4 billion worth of U.S. exports. That seems like a lot; $37.4 billion. When you consider that American companies shipped $2.28 trillion of the goods and services abroad in 2013, the Export-Import Bank accounts for only 1.6% of the total amount. That's a relatively marginal amount. What's important to keep in mind is that -- to your point -- because most of these borrowers -- although they're not actually borrowers.
They're asking for credit guarantees for the most part -- because most of these people cannot get that financing through a traditional bank, most of the Export-Import Banking business that is supported by the bank will probably go away, absent some other thing that comes in and fills its role.
Harjes: But we're still only talking about 1% or so?
Maxfield: Yeah. 1.5%. It may not seem like a lot on the national level, but if you're a politician in a territory where Boeing (NYSE:BA) has a large manufacturing facility, and Boeing gets a lot of credit from the Export-Import Bank in order to ship these goods to countries that couldn't otherwise get the financing to buy these planes, it would have a huge impact on a local level.
On a national level it doesn't seem to be that big of a deal. The other thing to keep in mind is that 1.6% of exports may not seem like a lot, but when you consider that we're fighting for every 2% in economic growth nowadays since the financial crisis; every little bit certainly does matter.
Harjes: Yeah. All of a sudden it does become a much bigger deal. John, thanks so much for being here. Joe, thank you for writing in and giving us something to dig into and talk about today. Folks listening, if you have anything on your mind that you want to see us do a show on, don't hesitate to send us an email. Our email address is email@example.com. We would love to hear from you guys.
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