Targeting Eximbank Subsidies

Volume 1, Number 2
October 1996

Written by George Kourous and Tom Barry
Editors: Tom Barry (IRC) and Martha Honey (IPS)

Key Points

Although little known outside corporate circles, Eximbank is a major instrument of U.S. foreign policy.
While many elements of the government have suffered cutbacks, Eximbank has expanded. Bank exposure rose from $12 billion in 1980 to $53 billion in 1995.
Most Eximbank financing backs the exports of large transnational corporations like Boeing, GE, and Westinghouse. Small businesses account for only 12-15% of Eximbank's total financing.

The Export-Import Bank (Eximbank) is an “independent,” wholly owned government corporation that assists U.S. corporations with financing exports of U.S. goods and services. In 1934 the U.S. Congress established Eximbank to increase employment in the export sector.

Although little known outside corporate circles, Eximbank is a major instrument of U.S. foreign policy. The executive branch frequently employs Eximbank financing to reward countries that adopt policies serving U.S. political and economic interests.

Eximbank is central to the U.S. drive to make its exports more attractive on the world market. While many elements of the federal government have suffered cutbacks, Eximbank has expanded. Eximbank loans, guarantees, and insurance—backed by the U.S. Treasury—rose to $53 billion in 1995, up from $12 billion in 1980.Eximbank provides four main financing services: 1) loan guarantees to creditors that provide financing of commercial loans to U.S. exporters; 2) insurance protecting U.S. exporters against defaults by importers because of political and commercial risks (currency instability, for example); 3) loan guarantees to creditors providing financing to importers of U.S. goods and services, and 4) direct loans to foreign importers.

According to its congressional authorization, Eximbank financing is designed to provide assistance either when political and commercial risks preclude unsubsidized private financing or when subsidized financing by other governments makes U.S. exports less competitive. To U.S. exports, Eximbank not only provides financing when private credit is unavailable or overly costly but also when government-subsidized financing may give U.S. exporters an extra competitive edge.

Increasingly, the president and congress have encouraged Eximbank to play a major role in furthering U.S. economic interests in the “emerging markets” of the low-income countries (LICs) and in the “transitional states” of the former Soviet Union and Central Europe. These new market emphases are reflected in current financing patterns. The primary destinations of Eximbank financing in 1995 were, in order, Mexico, Brazil, China, Indonesia, Venezuela, the Philippines, Argentina, Russia, and Colombia—each of which received more than $1 billion in financing.

Eximbank receives its government funds primarily through the International Operations budget. Separate authorizations cover Eximbank’s administrative costs, its loan subsidies, and its “war-chest” for “tied-aid” programs designed to increase the competitive advantage of U.S. exporters in certain countries. In the 1992-95 period, Eximbank received $9.6 billion in total appropriations.

Although often justified as a component of U.S. foreign aid, Eximbank financing is primarily a subsidy offered to U.S. corporate exporters. Most of this financing backs the exports of large transnational corporations (TNCs), including Boeing, General Electric, and Westinghouse (See In Focus: Controlling TNCs). Air transport is Eximbank’s leading industrial sector, closely followed by oil and gas extraction and power generation. More than 50 percent of Eximbank’s long-term loan guarantees are for the aviation industry. Small businesses in the U.S. receive only 12-15 percent of the Eximbank’s total financing.

Eximbank’s programs account for and more than one-third of the outstanding loans owed to the U.S.—more than the Defense Department, Agency for International Development, or any other U.S. agency. Moreover, the arrearages of Eximbank loans account for nearly half of total arrearages on U.S. bilateral debt. Since its founding Eximbank has lost $8 billion in guarantees and unpaid loans, practically all since 1980. There is no sign of improvement. In 1995 alone Eximbank suffered $1.3 billion in losses.

Problems with Current U.S. Policy

Key Problems

Eximbank hasn't offered a convincing cost-effectiveness assessment that its programs result in either additional U.S. exports or increased domestic jobs. Nor has it made the case that its subsidies are the most effective way to meet its stated program goals.
Eximbank's purported independence and "fiscal prudence" is undermined by congressional and presidential pressure to extend financing to countries and projects for political purposes.
According to the CRS,"The ultimate recipients of the proceeds of the loans...have been...domestic exporters. Thus the programs are...subsidies for U.S. domestic interests."

Eximbank has offered no convincing cost-effective assessment either that its programs result in additional U.S. exports or that they boost jobs in export industries. Since the mid-1980s the fifteen largest U.S.-based exporters have steadily reduced their U.S. work forces, even though their export sales have nearly doubled. Neither has Eximbank made the case that its generous subsidies are the most efficient and effective way to meet its stated program goals. There is, for example, little elasticity (i.e., costs do not significantly affect demand) in the commercial aircraft market, yet it is the main beneficiary of Eximbank subsidies. Boeing, a favored Eximbank customer, has nearly 60 percent of the world aviation market and can count on most sales regardless of Eximbank financing.

Increasing exports through Eximbank loans is not necessarily the best way to expand employment. Major Eximbank financing agreements have involved deals under which U.S. exporters agree to transfer part of their production overseas in return for winning new foreign sales. Such was the case in Boeing’s 1994 sale of 757s to China (underwritten by nearly $1 billion in Eximbank loan guarantees) in which Boeing agreed to relocate production facilities and purchase tail sections from Chinese factories. Subsidies given to exporters through below-market interest rates and coverage of losses might be better spent creating jobs in the domestic market.

There is a dangerous lack of clarity about the function of Eximbank. It presents itself variously as an independent and self-sustaining financial corporation, a foreign aid agency, and a job-creation bureau. Only in the sense that there is little government oversight or accountability could Eximbank be considered independent. The export-financing agency has failed to take advantage of its capitalization by the U.S. Treasury to create a self-sustaining, export bank. Instead, Eximbank represents a steady drain on tax revenues.

Eximbank’s purported independence is also undermined by congressional and presidential pressure to extend financing for political purposes. Previous to the Gulf War, constant pressure by George Bush, a college friend of the Eximbank chairman, resulted in new Eximbank financing to Iraq (to reward Iraq for its war against Iran and to increase U.S. sales of oil equipment) despite the agency’s determination that loans to Iraq “lack a reasonable expectation of repayment.”

Eximbank should not be disguised as foreign aid. As a Congressional Research Service (CRS) report on U.S. loan guarantees concludes: “The ultimate recipients of the proceeds of the loans extended to foreign borrowers have been, with relatively few exceptions, domestic exporters. Thus the programs are, in effect, subsidies for U.S. domestic interests,” namely, TNC exporters of capital-intensive goods.

In effect, Eximbank is overseeing an inappropriate transfer of tax revenues to corporations such as Caterpillar and AT&T, firms whose position in the international market is already strong. Eximbank staff refer to these corporate giants as “The Customers.” Some critics, pointing out that Boeing receives about 20 percent of the bank’s subsidized financing, derisively refer to Eximbank as “Boeing’s Bank.”

Eximbank is so focused on servicing TNC exports that noneconomic considerations (such as human rights conditions, which play at least some role in shaping the operations of other foreign policy agencies) are routinely overlooked. Its loan evaluation process does not consider a country’s human rights record unless the president notifies the bank that financing should be denied because of human rights abuses. This explains why Eximbank extends multibillion-dollar financing to China while other U.S. aid agencies are inactive in that country.

Lobbying by environmental groups forced Eximbank to agree to evaluate the environmental impact of its financing, but the bank still does not undertake serious environmental evaluations. Eximbank announced in 1996 that it would no longer provide export financing for the controversial Three Gorges Dam in China. However, persistent pressure from companies such as the Illinois-based Caterpillar and from the Illinois congressional delegation could mean that narrow U.S. economic interests will override concerns about the dam’s human and environmental impact.

Toward a New Foreign Policy

Key Recommendations

Taxpayer funds used to provide subsidies to U.S. exporters through Eximbank could be put to better use.
Eximbank financing is corporate welfare and should not be considered as foreign aid nor as part of a cohesive national plan to improve the well-being of U.S. workers.
Eximbank funding represents a misuse of public revenues and the agency should be dissolved in 1997 when its authorization expires.

Government funding for Eximbank should be discontinued, and the agency should be dissolved when its authorization expires in September 1997. Eximbank funding represents a misuse of public revenues for the following reasons:

No convincing data exists to indicate that Eximbank financing results in higher export and employment levels. As a CRS study stated: "Most economists doubt . . . that a nation can improve its welfare over the long run by subsidizing exports. Internal economic policies ultimately determine the overall level of a nation's exports. . . . By providing financing or insurance for exporters, Eximbank's activities draw from the financial resources within the economy that would be available for other uses. Such opportunity costs, while impossible to estimate, potentially could be significant." A Congressional Budget Office study also concluded that "little evidence exists that [Eximbank] credits create jobs."

Eximbank financing is corporate welfare and should not be considered foreign aid. Including Eximbank funding and appropriations to cover Eximbank's bad debts in the foreign aid budget is inappropriate since the real beneficiaries are large U.S. corporations and their business associates abroad.

Eximbank financing is neither part of a cohesive national plan to improve the well-being of U.S. citizens nor part of a strategy to improve social and economic conditions in the low-income countries. Instead of directly meeting the challenges of creating job opportunities in the United States, increasing the productive capacity of the U.S. economy, or promoting equitable development abroad, Eximbank hands out public revenues mainly to TNCs.

Such noneconomic factors as labor rights violations, human rights abuses, and environmental impact are not given due consideration in Eximbank financing decisions. For example, despite policy guidelines requiring it to consider environmental impacts in granting loans, Eximbank approved loans that officials representing the U.S. at the World Bank rejected on environmental grounds. It provides financing for controversial nuclear power plants, riverside power plants, coastal oil refineries, and mining ventures that violate its own environmental guidelines.

Congress should revoke Eximbank authority to finance dual-use exports that can be used for military purposes, military articles for drug interdiction, and "nonlethal" imports by foreign armies. Although Eximbank cannot underwrite weapons sales, it has strengthened armies in repressive states such as Turkey and Iraq by financing imports of helicopters and laser-equipment used for military purposes.

Eximbank is a clear case of a U.S. government agency that has been twisted to assist the global activities of large U.S.-based firms-often to the detriment of both U.S. workers and the global environment. Presidential and congressional support for increased Eximbank operations in the 1990s reflect the power of TNC lobbying and the heightened emphasis on tying U.S. economic welfare to the interests of large exporters. Rather than supporting broad U.S. economic development and stimulating equitable development overseas, Eximbank is another instance of the U.S. government's "Aid for Dependent Corporations." The elimination of Eximbank could open up a vital discussion over what type of U.S. economic agencies could be established to promote broad and sustainable economic development, both at home and abroad.

Sources for more information

Essential Information
P.O. Box 19405
Washington, DC 20036
Tel: (202) 387-8034
Fax (202) 234-5176
Website: http://www.essential.org/
Contact: Janice Shields

The Cato Institute
1000 Massachusetts Ave., NW
Washington, DC 20001
Tel: (202) 842-0200
Fax: (202) 842-3490
Email: cato@cato.org

The Competitive Enterprise Institute
1001 Connecticut Ave., NW
Suite 1250
Washington, DC 20036
Tel: (202) 331-1010
Fax: (202) 331-0640
Email: foinfo@cei.org
Contact: Jim Scheehan, Research Associate

Export-Import Bank of the United States
811 Vermont Ave., NW
Washington, D.C. 20571
Toll Free (800) 565-3946
Fax (202) 565-3377
Website: http://www.exim.gov/

Friends of the Earth
1025 Vermont Ave., NW
Washington, D.C. 20005
Tel: (202) 783-7400
Fax: (202) 783-0444
Email: foedc@igc.apc.org
Contact: Michelle Chan

International Rivers Network
1847 Berkeley Way
Berkeley, CA 94703
Tel: (510) 848-1155
Fax: (510) 848-1008
Email: irn@irn.org
Contact: Juliette Majot

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