The U.S. Export-Import Bank could be facing its final days

31/07/2015

US Export/Import Final Days

US Export/Import Final Days

The U.S. Export-Import Bank, which helps finance foreign trade deals, had its authorization from the U.S. Congress lapse as of June 30, 2015.

Its previous charter, authorized in 2012, was extended in September 2014 to June 2015. However, divisions on Capitol Hill – and even within the bank’s one stalwart supporter, the Republican Party – mean that the bank’s future is unclear.

Though it no longer has the capacity to issue new loans, it is still able to follow through on loans agreed before the June 30 deadline.

Why do we have an Ex-Im bank?

The philosophy behind the Ex-Im bank runs as such: deals that otherwise would not get trade financing, which includes lending, export credits, insurance, and the issuance of letters of credit, would be able to get this financing from the bank, thereby propelling trade with other countries.

The Republican-controlled Congress allowed authorization to lapse, now viewing the bank as a means of “corporate welfare”, which allows poorly-managed corporations to benefit from lucrative international trade deals.

Case in point: in 2014, Ex-Im approved US$20 billion to finance exports. Of that, Boeing received 40% of the financing; the bank is occasionally referred to as “Boeing’s bank.”

What are the effects of losing the Ex-Im bank?

The failure to reauthorize the bank has already had trade implications, Boeing said. The aircraft manufacturer said in a statement July 2,

A suspension of the Bank’s ability to do new business after June 30 is a boon to overseas competitors at the expense of thousands of U.S. exporters and the jobs they support.

General Electric has also warned of the effect of Congressional inaction on Ex-Im for future sales contracts.

U.S. companies are concerned that lack of access to cheaper trade finance puts them at a disadvantage with foreign competitors, especially those coming from China and other developing markets where trade financing is more competitive.

The shutdown on the bank is expected to hurt large corporations the most, as these constitute the largest recipients of Ex-Im financing. The top 10 recipients of Ex-Im funds received 75% of the US$27.3 billion it dispersed in 2013, the Financial Times reported July 1.

Losing the bank is a big loss for exporters to developing markets

But it will also hurt companies who do a lot of trade in less developed countries, which often do not have the funds or the infrastructure to provide trade financing to its businesses, and so rely on foreign corporations to shoulder those responsibilities.

Trade deals with Africa are likely to take the biggest hit, the Brookings Institute in Washington D.C. argues.

Most African states do not have Export Credit Agencies, and so rely on foreign institutions like the Ex-Im Bank to allow trade deals to go through.

In 2013, Brookings said, the bank financed 188 transactions in Africa for over US$600 million to allow 35 of the 49 sub-Saharan African countries to export goods to the U.S.

In the first seven months of 2015, authorizations amounted to US$1.1 billion.

So, if the bank, despite the exhortations of President Barack Obama, is allowed to expire, what will take its place?

What is the alternative to the bank?

The expectation that private sector lending will replace an extinct Ex-Im bank is not entirely feasible, financial expert Amadou Sy writes.

The top challenge that SMEs [small- and medium-size enterprises] face in accessing foreign markets is obtaining financing, either for their buyers or to support their own growth.

“Banks are unlikely to jump in to solve the problem”, he added.

“Relatively high transaction costs and costs of risk that banks incur when financing small transactions are why banks are less involved in the business of helping SMEs export their products and services abroad.”

However, the overall impact on SMEs should the bank fail to be authorized is expected to be small, as large corporations take a sizable portion of Ex-Im trade financing.

The bank’s lack of authorization may be short-lived, Senate Majority Leader Mitch McConnell said June 30. There are enough votes to put through the re-authorization of the bank, and he intends to put the issue to the floor once more.

Do you think that the US Ex-Im Bank needs to be re-authorized, or would you prefer to see it expire permanently?

Disclaimer: The opinions expressed in this article are those of the contributing author, and do not necessarily reflect those of the Forum for International Trade Training.

About the author

Author: Jacqueline Côté

I am a working journalist, with experience as SNL Financial’s Canadian correspondent for its Mining and Metals vertical. I also served as the Managing Editor for Central Asia Newswire – covering daily economic and investment news in the region – as well as Features Editor for the Washington-based Magharebia.com, which covers developments in the North Africa region. I have been published in The Montreal Gazette, The Guardian (UK), The New Statesman (UK), Red Pepper (UK), Geopolitical Monitor and CNN.com.

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