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The U.S. needs to encourage the supply of more exports and trade to other countries, particularly in the face of predatory economic behavior by China. While trade deals are what commonly make headlines, the Export-Import Bank (EXIM), the official U.S. export credit agency, plays a significant role in enhancing trade between U.S. exporters and foreign buyers — particularly those in developing countries with uncertain markets.
An export credit agency (ECA) is an institution that provides financing to boost trade between domestic exporters and foreign buyers. One way that ECAs do this is by offering “official export credits,” financing commitments (such as a loan guarantee or loan) that an official government source provides to a foreign entity to help facilitate the export of a required amount of domestic goods to the foreign entity.
For example, in 2019, the EXIM authorized up to a $5 billion direct loan (later amended to up to $4.7 billion in financing) toward building an integrated liquefied natural gas project in Mozambique. The five-year project will be constructed using goods and services exported from the U.S. The project will support approximately 16,700 U.S. jobs and suppliers across the country. An additional $600 million in revenue is expected to be generated from fees and interest on the loan to benefit U.S. taxpayers.
These financing terms and conditions are governed by the Arrangement on Officially Supported Export Credits. The U.S., Australia, Canada, the European Union, Japan, Korea, New Zealand, Norway, Switzerland and Turkey are all participants. This non-legally binding “gentleman’s agreement” includes transparency provisions and limitations on the financing terms and conditions of official export credits (i.e., interest rates or repayment terms). The agreement’s objective is to level the playing field for exporters. As a result, the competition between exporters is focused on the price and quality of the goods themselves, rather than the official export credit benefits.
The arrangement doesn’t cover all types of financing offered by export credit agencies, nor does it cover non-participating countries. (Keep in mind, all of EXIM’s medium- and long-term programs fall under the arrangement and its terms.)
EXIM’s recent Competitiveness Report found there has been a substantial increase in official trade-related financing outside of the arrangement’s framework. Such financing can offer opaque and more favorable terms than those that are included in the arrangement. This influence on buyers’ decisions — outside of the quality and price of an exporters’ offerings — has eroded the level playing field the agreement sought to foster and has been hurting American exporters.
Importantly, the most significant participant in this shadow financing trend is China.
EXIM found that China supplied at least $76 billion in medium- and long-term official export and trade-related financing in 2019. Since China is not a participant in the arrangement, all of this was done outside of its framework. For context, the $76 billion figure is equivalent to 66 percent of all such financing done outside of the agreement.
China is “unquestionably” the “most aggressive” in using its export credit agencies to advance its geopolitical goals, the EXIM report notes. Clearly, such financing is one weapon China is using to establish itself as the world’s dominant economic and technological powerhouse.
Though China’s official financing tactics are opaque, we know that the status quo harmed the competitiveness of U.S. exporters and tilted the scales in China’s favor.
For Americans, EXIM President and Chairman Kimberly A. Reed said, “It comes down to competing for jobs through exports, and EXIM stands ready to support our great American workers.”
In December 2019, President TrumpDonald John TrumpMark Kelly clinches Democratic Senate nod in Arizona Trump camp considering White House South Lawn for convention speech: reports Longtime Rep. Lacy Clay defeated in Missouri Democratic primary MORE signed into law bipartisan legislation that reauthorized EXIM for seven years, the longest authorization given to EXIM in its 85-year history. Additionally, the law mandates that EXIM establish a “Program on China and Transformational Exports” with the aim of neutralizing the advantages China’s opaque export financing provides when competing against American companies for the exports of goods and services.
The law requires EXIM to allocate at least $27 billion in support of the program. The program will extend loans, guarantees and insurance at rates and terms that are competitive with China’s, or with other countries that are not participants in, or do not abide by the terms of, the arrangement.
The program also aims to advance American leadership in innovation, employment and technological standards by supporting direct exports in industries such as artificial intelligence, biotechnology and wireless communications equipment.
This new program is a strong step and will be important to the success of U.S. exporters. It will also better position the U.S. to push back on China’s global industrial policies and geopolitical ambitions.
Another important step will be renewing EXIM’s 50-year-old partnership with the Private Export Funding Corporation (PEFCO), a privately-owned entity that enhances the ability of private banks to engage in transactions supporting U.S. exports.
When EXIM wants to issue a loan, it can lend money from the Treasury Department or guarantee the financing provided by private lenders. PEFCO plays a key role in enabling the partnership between EXIM and private lenders because it repackages financing to make the transactions easier for the lenders to complete and record.
PEFCO keeps capital in the private sector and makes the execution of EXIM’s financing programs more efficient. For U.S. exporters to compete with China for contracts in places such as Africa and Latin America, EXIM needs PEFCO to be operational to maximize its impact and leverage the private sector.
American businesses must be able to successfully compete with China — and others — for export opportunities worldwide. With access to competitive financing, American companies will be incentivized to seek out and be better positioned to win foreign contracts to export their goods and services. This will help prevent the loss of U.S. jobs, enhance or open up trade relations with foreign countries, and ultimately lead to the strengthening of American businesses and industries.
Newt GingrichNewton (Newt) Leroy GingrichMORE is a former Speaker of the U.S. House of Representatives, chairman of the board at Gingrich 360 and a Gallup senior scientist. Follow him on Twitter @newtgingrich.
Claire Christensen is director of research and Chinese studies at Gingrich 360, a consulting, education, and media production group.