Our Annual Report on Competitiveness
Fred P. Hochberg, Chairman and President, Export-Import Bank of the United States
Jul 30, 2013 – Center for America Progress, Washington, D.C.
“Competition brings out the best in products and the worst in people.”
The late David Sarnoff of RCA said that in the 1960s - and it's still true today.
American products are the best in the world. And on a level playing field, they often come out on top.
But, today more than ever, foreign governments are willing to do whatever it takes to close a sale - putting massive resources behind their chosen exporters, which are often state-owned enterprises.
So it's time drop the fantasy that a purely free market exists in the world of global trade.
In this fantasy, private enterprises compete globally for export sales in pure free markets where everyone plays by the same rules.
It's time to stop pretending.
In the real world, our private-enterprises are pitted against an array of competitors that are often government-owned, government-protected, government subsidized, government-sponsored, or all of the above.
These overseas competitors have access to their government's generous export credit with terms like one or two percent interest, 40-year loans, 100 percent financing, grace periods or tied or untied side deals.
Many countries will do whatever it takes to promote their chosen national champions - while America follows the rules.
That's the reality we face.
However, we at Ex-Im Bank work every day to provide financing to support America's exporters and their workers and keep them in the game. Without us, many American companies would be missing opportunities to sell to the 95 percent of the world's customers who live overseas.
You see, for decades, our economy - and the global economy for that matter - relied on American consumers to fuel economic growth.
That is changing. And that's a good thing.
It also helps me feel optimistic about our future.
Over the next two decades, the size of the global middle class is set to explode, creating massive new markets, new opportunities and, most important, a lot of jobs.
That middle class is demanding unprecedented amounts of infrastructure, including power - frequently clean power - clean water, airports and so forth.
Auburn Leather Company
Let me leave the global stage for a moment and take you to Auburn, Kentucky. It's a quintessential small town - 1,300 people live there.
That's where Auburn Leather, a family-owned company since 1863, turns out a million leather shoe laces each and every week. It's America's only leather lace producer - and the town's largest private employer.
If you have shoes with leather laces, chances are Auburn made them. Think of the laces on Topsiders.
When the U.S. shoe industry began its decline in the 1980s because of low-cost overseas producers, Auburn Leather faced extinction.
CEO Lisa Howlett - a relentless businesswoman if I ever met one and I've met many - found a way to keep this anchor of the town going. Lisa shifted Auburn's sales focus overseas.
Today, it's going strong. Auburn's American quality and workmanship enjoy an international reputation among shoe manufacturers - in Indonesia, Vietnam and Malaysia, to name just three. Now, two thirds of Auburn Leather's business comes from exports.
Making this transition wasn't easy for this 150-year-old Kentucky business, but Lisa made it happen. And Ex-Im was there to provide working capital to assist with those overseas sales. We provide Lisa with financing that keeps her cash flow healthy and helps to level the playing field for this small business.
And just last year, Lisa decided to close down her operations in Mexico and move all of her production back to Kentucky. Now 120 workers are on the job at Auburn Leather - up from 55 some 15 years ago.
One of the new hires is Tony Giles, until-then an unemployed single dad. He's now a producer and a provider.
Whether it's shoe laces or semi-conductors, the lesson is the same: Having a quality product is critical, but simply not enough.
What's often needed is the competitive financing that Ex-Im can provide to close the sale.
Global Middle Class
There's more at stake than the future of Auburn Leather.
Our entire export economy faces this challenge. That's nearly 300,000 small and medium-sized businesses, and virtually the entire Fortune 500.
We need them to succeed.
As the President's Council of Economic Advisors put it, “The Nation's economic recovery and long term growth prospects depend in large part on U.S. businesses being able to compete in an open, fair and growing world economy.”
The stakes have never been higher.
We all know that. And our competitors know that too.
By a recent Brookings estimate, the global middle class increases about 200 million people a year.
No longer just buying food and shelter, they're buying TVs, appliances and refrigerators. They've traded their bicycles for cars, motorcycles and high-speed rail. They expect clean water and sewer systems, airports, roads and public transit, schools and colleges, hospitals and clinics.
This demographic surge will lead to massive new investments to provide these vital goods, services and infrastructure.
More important, for America, this creates a historic export opportunity that we cannot afford to miss.
As my friend Congressman Denny Heck likes to say, “If we want to continue to grow the middle class in our country, we had better figure out how to sell things to the middle class in other countries.”
Before the most recent financial crisis, American businesses had much more access to commercial financing to meet their export credit needs.
Those days are over.
Good credit terms for all but the biggest, best customers are tough to come by. Obtaining long-term credit is even tougher, especially for small businesses. And capital requirements by such regulations as in Basel III will constrain long-term financing for years to come.
That's why Ex-Im Bank must continue to step up to the plate for American exporters - and help level the playing field.
In this year's competitiveness report, we found that China, Korea, Japan and others are ramping up government export support.
Last year alone, Korea Ex-Im increased its total financing volume to almost $64 billion worldwide - nearly twice our total of $36 billion - this from a nation with a GDP far less than ours.
Yet, here at home, Congress has required the Treasury Department to begin negotiations with our competitors to end export credits. The theory goes that free markets alone will solve the problem.
Here is the reality:
To end export credits - when our competitors are playing by a completely different set of rules - and increasing government support by leaps and bounds - many of them operating with no rules whatsoever - this would be a self-inflicted wound our economy cannot sustain.
In the wake of the financial crisis, the competition for global growth and jobs has never been greater.
The 2013 Competitiveness Report
We describe this in our annual report to Congress on competitiveness - a report we are unveiling today.
There are three key findings in our report:
First, the financial crisis has upped the ante everywhere.
Government after government is searching for ways to grow their economy and put their people to work. This leads our competitors to take a more aggressive stance in supporting their national champions, doing whatever it takes to close the sale.
Nowhere is this more evident than Russia's aggressive push to be the world's leading exporter of nuclear power. Armed with generous financing and terms outside the OECD arrangement - which incidentally, they are not party to - Russia is trying to dominate the nuclear energy industry worldwide.
Second, the global financial crisis has altered the landscape where the developed world - mostly Europe - is no longer our most formidable competitor.
Manufacturing prowess has vastly improved in Asia. Countries there have ambitious export plans to gain market share and the financing that goes along with it. Due to their product innovation and huge capacity investments, Asia has gone from customer to competitor as well.
Third, more and more financing is being offered outside of OECD norms that govern such arrangements, like interest rates.
But it's not just that. It is open season on other inducements as non-OECD countries continue to use financing to sway purchase decisions.
One example not mentioned in our report:
The Chinese, in bidding for business in sub-Saharan Africa, build soccer stadiums and shiny new government buildings - often at little to no cost for the host countries.
They are also out for new business in Latin America - offering loans with low interest and generous terms - without strict environmental or human rights guidelines that we require.
Competing for Nuclear Power System Sales
As I mentioned earlier, the role of Ex-Im is particularly critical for large infrastructure projects. And power is at the top of the list.
Let me give you an example.
Just 48 hours ago, I returned from Prague, where I met up with Westinghouse CEO Danny Roderick. We were both there to promote the American bid to the Czech government for a $10 billion expansion of a nuclear power plant.
The reactors would be made by Westinghouse in Cranberry Township, PA, Newington, NH, and many other states - supporting an estimated 40,000 American job, according to Westinghouse.
I also meet with Czech Energy Minister-at-Large Vaclav Bartuska, who told me point blank that the Czechs wouldn't even consider the American bid if Ex-Im wasn't fully behind it.
I can think of no more pivotal project for US nuclear exports - and exports to Eastern Europe for that matter - than this one.
This is pitting American nuclear technology and expertise head-to-head against the Russian state-owned nuclear company, Rusatom.
If you think I don't like to lose, how do you think the Russians feel about it?
Nuclear power is central to Russia's export strategy.
According to Reuters last week, of the 68 nuclear reactors under construction worldwide, Russia is building 28 - nine in Russia and 19 elsewhere. Russia has increased its foreign contracts by almost $67 billion in the last two years, aiming to triple sales by 2030.
A decision on the Czech plant is now expected next year.
Westinghouse has a proven track record of superior technology, operating reliability, and success. But that may not be enough.
The Russians have made it clear that winning this project in the Czech Republic is a top priority.
They have mobilized a whole-of-government approach with a range of inducements that is tough to match by following the rules. According to Reuters, Rosatom is funded by $38 billion in government money over the next eight years to carry out this export drive.
We need to stay in this competition. Every nuclear reactor built means thousands of jobs and follow-on sales for the next 50 years.
At Ex-Im, we have already had some success in this field.
For example, the UAE is building the Barakah nuclear complex - a $30 billion project.
The US is providing about $2 billion in exports, backed by the Ex-Im Bank, one of the largest transactions the bank has ever done - supporting some 5,000 U.S. jobs.
But our share pales in comparison to the $20 billion that Korea captured to build and manage the project. The Export-Import Bank of Korea is financing that project and many others - part of an aggressive expansion.
It has told buyers around the world that it is plenty willing to dramatically expand that financing in the future and will do whatever it takes to win these sales.
So where does that leave us?
We have intense competition from the Russian and Korean governments - and Russia is not a member of the OECD - and thus is not bound by any international rules that govern export finance.
This isn't just about one sale.
At the moment, India, Vietnam, Saudi Arabia, South Africa and many others all have nuclear power needs and plans for the next decade. If we lose those sales, this would shut America out of an entire generation of new nuclear power plants and the jobs that come with them.
So we must do all we can to level the playing field for American companies competing for these once-in-a-lifetime opportunities.
Our Chinese Competition
Now, no conversation about global competition would be complete without talking about China, our most formidable competitor.
Its phenomenal economic expansion has lifted hundreds of millions of people out of poverty. And there's more to come.
In the next few years, it intends to move some 300 million Chinese from rural areas to cities to join the formal economy. The Chinese government is scrambling to ramp up its domestic manufacturing to provide jobs for this vast urban migration. This will both increase the competition for the sale of goods overseas, but also has the potential to create a vast new market of Chinese consumers.
China is determined to become a rich country - not in decades - but now. And it has put its entire government and society behind increasing its global reach.
At the same time, China is moving steadily up the value chain to challenge some of our most sophisticated exports.
For example, China is developing a 150-seat aircraft to compete with the medium-size passenger planes that Boeing and Airbus sell worldwide. Because of its ability to mobilize its huge economy - and extend one-off financing deals no part of global financial arrangements. - it would not surprise me if China becomes Boeing's most formidable competitor in a few short years.
China's not the only competitor going all-out. Japan, India, Brazil, Korea - just to name a few - are pulling out all the stops to increase their share of exports.
So while Ex-Im's critics can describe our increased financing of U.S. exports as “unprecedented” - I suggest they consider the genuinely unprecedented economic competition from China and other countries - facilitated by a full array of government-backed support.
As I travel the world on behalf of American companies, I know China, Brazil, Russia and Korea, are right behind me. These nations are a serious competitive threat.
Exports and Ex-Im Bank
So before I close, let's look at what is going on here at home.
Exports are leading our recovery. Consider this:
• In 1950, U.S. exports of goods and services were barely four percent of GDP.
• But the last two decades have seen a surge, with exports rising to nearly 14 percent last year.
• Exports now total $2.2 trillion of an economy of nearly $16 trillion.
• Export-related jobs have increased by 1.3 million since President Obama launched the National Export Initiative.
• So we're on our way to the NEI goal of two million more export jobs.
Just two weeks ago the Senate confirmed me for another four-year term as Chairman and President of Ex-Im. Even 4,000 miles away in Prague, the first questions I received in two separate press interviews were all about the opposition to renewing the Bank's charter. They went:
“During your confirmation hearings, we read about the movement to close the Export-Import Bank. Will the bank operate after next September? Will you be shut down?”
Congressional calls to shut us down resounded loud and clear, even in Prague. The uncertainty they hear affects American competitiveness and resonates around the world.
And let me remind you that China, Russia, Korea and Japan are not having this debate.
Their export credit agencies are here to stay. They don't require a bruising Congressional fight every two or three years. They simply resolve to do what it takes to win in global markets.
Make no mistake, foreign governments would love to see Ex-Im go out of business - so they could swoop in and snatch the $50 billion worth of exports we financed last year. They would love to have those 255,000 American jobs for themselves.
Failing to reauthorize our charter next year is a particularly bad idea in light of the growth of the global middle class and the unprecedented competition America faces from Asia and Russia, among many others.
So where are we?
We got high marks in this year's Competitiveness Report. We noted that Ex-Im continued to level the playing field with other OECD countries, most notably the Europeans.
We continued to offer innovative products and won a few “best of” awards along the way. The 35 years of negotiations over OECD rules have largely eliminated unfair competition by member countries.
As I pointed out a year ago, if we truly want to root out subsidized financing globally, the best way to do that is to get everyone playing by the same set of rules.
Ending export credits prematurely will only push more of the business to the shadows. And that won't serve American companies and American workers.
In meeting this challenge, America cannot respond in kind.
• We don't offer bribes.
• We are not in the business of building soccer stadiums for free.
• We continue to rely on rules-based export finance by which trading nations will compete on quality and price without market distortions.
The lesson of history is that, in the long run, this is the only path to sustainable jobs and prosperity.
Fortunately, America's underlying strength is still our greatest advantage. The values that America embodies - ingenuity, openness, honesty and transparency - have enormous value in the global marketplace.
We still have the largest economy in the world, fueled by a skilled labor force and innovative products. On top of that, we are in the midst of an unprecedented domestic energy boom.
But these advantages will mean less if American companies are not on a level playing field.
As long as Congress allows us, the Export-Import Bank will continue to help level that playing field by filling in export credit gaps and supporting job growth. We provide an export credit support second to none all at no cost to the American taxpayer.
As President Obama likes to say, we won't stop until every American who wants a job, has one.
It's what we are all about here at the Export-Import Bank.
You can count on us keep America in the race.