The Pandemic Depression
The Global Economy Will Never Be the Same
In the face of increasing competition from China and other emerging economies, the continued disruption of the Export–Import (ExIm) Bank is undermining U.S. competitiveness in key manufacturing sectors. For most major economies, state-backed export credit—the use of loans and other forms of government financing to facilitate exports—is a core element of industrial policy. But while its rivals are expanding their use of this policy tool, the United States has moved in the opposite direction, dramatically constraining its use of export credit.
Financed by the billionaire Koch brothers, a collection of ultra-free-market advocacy organizations, such as Americans for Prosperity, the Cato Institute, and the Mercatus Center, have made the ExIm Bank a prime target in their campaign to dramatically reduce the size of the U.S. government and its role in the economy. By urging congressional Republicans to block the bank’s reauthorization, they successfully shut down ExIm and halted its lending operations for five months in 2015. At that time, approximately 200 transactions worth over $9 billion were stopped in the pipeline. Although ExIm was subsequently reopened, most of its lending activity remains blocked. Free-market conservatives in the Senate have barred appointments to the bank’s board, leaving it without the quorum required to finance transactions over $10 million, which typically constitute 80–90 percent of its loans.
President Donald Trump has nominated two people to fill the vacant seats on ExIm’s board. If approved by the Senate, this would be a first step toward restoring the bank’s quorum and lending authority. But Trump’s appointment to lead the bank, former Congressman Scott Garrett (R–N.J.), is a founding member of the Tea Party-aligned House Freedom Caucus and one of ExIm’s fiercest critics. Many view the appointment of Garrett as an intentional act of sabotage. Meanwhile, the bank’s opponents continue to aggressively press for its elimination.
Conservatives object to ExIm as a deviation from free markets, arguing that it represents crony capitalism and corporate welfare. The bank’s critics say that the government should not be intervening in the markets. By unilaterally constraining its use of export credit, however, the United States is relinquishing an important industrial policy tool, with significant implications for the competitiveness of U.S. manufacturing.
In recent decades, the global landscape of export credit has changed dramatically thanks to a surge in export credit provision by the BRIC countries (Brazil, Russia, India, and China). Since 2000, the BRICs have increased their share of global export financing from less than three percent to 40 percent. The vast majority of this increase has come from China, which is now the world’s largest export credit provider. As seen in Figure 1, in 2014 China supplied its firms with $58 billion in export credit—far more than the $12 billion provided by the United States and, indeed, more than all the G–7 rich countries combined.
Government-supported export credit has been an important driver of China’s industrial expansion. China is aggressively deploying its financial power to give its exports a competitive edge in global markets, while fostering industrial upgrading, the development of strategic sectors such as aerospace, rail, and power equipment, and the global expansion of its firms.
U.S. spending on export credit is already dwarfed by that of China, and eliminating ExIm would make the United States the only major economy in the world without an export credit agency. Many of the companies the bank supports, including Boeing, General Electric, and Caterpillar are among the country’s leading exporters, and are at the apex of large supply chains that support vast numbers of U.S. firms. ExIm financing is concentrated in the capital goods and services sectors, including so-called “big-ticket” exports such as aircraft; satellites; product-manufacturing machinery; mining, oil, gas, and large agricultural equipment; power plants; and major infrastructure projects.
The capital goods and services sectors, the products of which are technology-intensive and high-value-added, are a cornerstone of the advanced manufacturing activity that remains in the United States. They are also precisely the sectors that China is targeting as it seeks to move up the value chain into more sophisticated industries. China’s stated goal is to become a major competitor to the United States in advanced manufacturing within the next decade, and it is pursuing a highly effective strategy of using export credit to foster industrial development. In almost every capital goods sector, China is going from being a bit player to one of the biggest.
Despite recently being surpassed by China, the United States is still the world’s second-largest manufacturer and retains the lead in advanced manufacturing (see Figure 2). Advanced manufacturing remains a critical part of the U.S. economy, not only because of its contribution to GDP and high-skilled employment (generating $1.2 trillion worth of output annually and 5.5 million jobs), but because it is essential to sustaining many associated high-value services sectors, such as engineering, product design, and research and development. Over the long term, the loss of advanced manufacturing would result in a significant hollowing out of the U.S. economy.
Without a functional export credit agency, the United States is undermining its own exports and jobs at a time when they are already increasingly under threat, and impeding the ability of its leading firms and industries to compete with emerging challengers.