What is Ex-Im Bank and Why is it So Important to North Dakota?
Posted on June 17, 2015
The Export-Import Bank of the United States (Ex-Im Bank) is the official export credit agency (ECA) of the United States. Export credit agencies – which approximately 60 countries have – are institutions that provide non-payment insurance and finance guarantees to businesses selling their products overseas. Ex-Im Bank provides U.S. companies accounts receivable insurance in the event of foreign buyer non-payment, loan guarantees to encourage U.S. banks to provide working capital financing to U.S. exporters, and extended term financing to foreign companies purchasing U.S. made capital equipment. These financial products serve the purpose of minimizing non-payment risk in foreign markets to facilitate the extension of credit to foreign buyers – something that private banks may not want or are unable to do - in order to increase the competitiveness of U.S. companies.
Ex-Im Bank Background
The mission of Ex-Im Bank is to support U.S. jobs. The bank was founded by Franklin D. Roosevelt in 1934 as part of an economic policy to increase employment and income through trade with other countries. The bank’s charter must be renewed every 4 years, and for 76 years it wasn’t an issue. The bank’s existence became controversial in 2010 after it was accused of promoting corporate welfare and “crony capitalism.” They actually closed the bank down for a brief period, before Congress passed a continuing resolution that allowed them to operate until the reauthorization was finally passed. That reauthorization expired on September 30, 2014, and the bank is again operating under a continuing resolution which expires June 30, 2015. Without an appropriate bill on the congressional floor, the bank will discontinue its services to exporters.
Why North Dakota Needs Ex-Im Bank
North Dakota small businesses have greatly benefited from the existence of Ex-Im Bank, and serve as examples of defying the arguments as to why Ex-Im Bank should not be reauthorized. Critics have commented that Ex-Im Bank mainly benefits huge companies that don’t need it, such as its top beneficiary, Boeing. However out of nearly 3,700 authorizations in 2014, more than 3,300 – almost 90% – directly served U.S. small businesses, or about one quarter by dollar amount. A list of North Dakota businesses that have used Ex-Im Bank is available on Ex-Im’s website, and includes Summers Manufacturing, Kringstad Ironworks, Gussiaas Family Farm, and WCCO Belting.
These small business authorizations don’t include the tens of thousands of small and medium-sized businesses that supply goods and services to larger exporters, such as Boeing. According to Boeing’s 2015 statistics updated weekly, during the past 12 months, Boeing paid nearly $50 billion to more than 14,800 businesses, supporting an additional 1.5 million supplier-related jobs across the country. Boeing currently has 16 supplier/vender locations in North Dakota from which it made $222.4 million in purchases in 2014. These small businesses that supply Boeing are considered indirect exporters. This means that they have the ability to access the Ex-Im Bank working capital guarantee program, to finance production of the products that they are providing to Boeing.
Another criticism of Ex-Im Bank is that there is a large private lender market that could step in in Ex-Im’s absence. However, according to the Bankers Association for Finance and Trade (BAFT) and the Financial Services Roundtable’s (FSR) statement to the United States Senate on Ex-Im Bank, this is not the case. “If trade finance is not accessible through Ex-Im, BAFT and FSR believe sustained growth and jobs at U.S. companies would be lost,” the June 2nd, 2015 statement says. “Gaps in trade and export finance by the private sector exist in today’s economy for a variety of reasons including balance sheet capacity, foreign receivables risk management capability, and appetite for certain types of financing.” Essentially, private lenders, especially small lending banks such as those in North Dakota, do not have the capacity nor desire to participate in foreign market risk. These small North Dakota banks are not in a position to lend against exporters’ foreign accounts receivables. With the support of the Bank of North Dakota, which has a master guarantee program with Ex-Im Bank, and a short-term receivable finance program, they do have the capacity to support their exporting clients.
Ex-Im Bank is there to provide support where the private sector won’t and a commercial lender cannot. Commercial lenders usually have more constraints for lending to borrowers in another country because of the added risks. With Ex-Im Bank’s support they have the opportunity to lend much more money at much less risk. Their programs are not grants; Ex-Im does not push approvals for risky transactions, but rather eligibility is based on the finances of the foreign buyer and their ability to repay the loan, as well as that country’s financial and political stability. It is based on Ex-Im’s careful risk analysis. The exporter’s financial strength does not impact the approval decision of the foreign buyer. As such, North Dakota small and medium-sized enterprises are no longer limited by their lack of collateral, credit history, or trade finance expertise.
One could also look at Ex-Im Bank and wonder why the U.S. government is providing support for financing to, for example, a farming operation in Brazil purchasing North Dakota agricultural equipment that will help grow soybeans that will compete with North Dakota soybeans. Curt Hanson of Minneapolis-based Trade Acceptance Group explains, “Brazil will buy equipment from wherever they can get the best deal in terms of both price and financing. If it’s from a ND ag equipment company, that creates jobs and revenue for North Dakota. Ex-Im is not providing the money, they’re just guaranteeing the loan. The money would be lent by the Bank of North Dakota, who pays the exporter at time of shipment, and the foreign buyer would repay the Bank of North Dakota. If the foreign buyer defaults on the loan, then Ex-Im Bank would repay the Bank of North Dakota.”
If Ex-Im Bank went away, there are 59 other countries with official export banks that can swoop in and take customers away from U.S. companies. Even Boeing is not immune to competition. Their largest competitor is Airbus, headquartered in Toulouse, France. Airbus exports globally, including to the United States, and is supported by the export banks of France (Coface), United Kingdom (ECGD), and Germany (Euler Hermes). If Boeing loses its competitive edge due to its location in the U.S., that only encourages Boeing jobs to be relocated elsewhere.
North Dakota companies have the same issues, in that they must offer credit to foreign buyers to remain competitive. “Agricultural commodities and equipment are a world market,” says Hanson, “if those producers or cooperatives or brokers don’t have that opportunity to offer payment terms or financing, they’re going to lose that business.” Ninety-five percent of consumers are outside of U.S. borders and exporting to them creates more jobs, takes the seasonality out of a product, lengthens the product life cycle, and diversifies North Dakota businesses.
According to the Organization for Economic Cooperation and Development (OECD), the 60 official ECAs around the world have extended more than $1 trillion in trade finance support in recent years. If the U.S. disables its ECA, U.S. companies are at an immediate disadvantage in the global market. A long term reauthorization of Ex-Im Bank ensures North Dakota competitiveness, job creation, and economic advancement while mitigating country and counterparty risk.