U.S. Exports, Competitiveness, and the Export-Import Bank of the United States
FCIB 24th Annual Global Conference
Sean Mulvaney, Member of the Board
Sep 15, 2013 – Philadelphia, PA
Good morning. I appreciate the opportunity to engage you during the Finance, Credit, & International Business Association's (FCIB) main event this year.
FCIB is a valued partner of the Export-Import Bank of the United States. While I might be relatively new on the Ex-Im scene, many long-time professionals at Ex-Im continually comment how important and valuable the Ex-Im - FCIB dialogue has been these last five years.
One productive result of the US government inter-agency relationship with FCIB, which includes Ex-Im, has been the development of the Commerce Department's Trade Finance Guide. The US government would not be able to effectively develop or roll out such a guide without a strong partnership with FCIB. I had the opportunity to work with the FCIB and the Department of Commerce on the roll-out of the Spanish version of this guide recently in Los Angeles.
My remarks here today are my professional opinions. I am an independent Board member of the Export-Import Bank of the United States. There are five members of the Board, each of us report to the President, and all of us have our own opinions as we collectively serve the President and the US taxpayer in fulfilling the mission of Ex-Im. Therefore, one should not ascribe my views to my fellow Board members.
The focus of my remarks today will be on the US economy, American competitiveness in the global economy, and the role of the Export-Import Bank. I also would like to help you understand a bit of the current debate in Washington, D.C. regarding Ex-Im. Periodically, Ex-Im needs to be re-chartered by Congress. Our next reauthorization needs to take place by September 30, 2014. These debates are often characterized as particularly bruising affairs as some critics would like to shut Ex-Im down. You might think these are not serious debates. But let me assure you, these debates are real and significant. And as difficult and divisive as the dialogues can be, in essence they are fundamental rites of passage in our democratic form of governance. Such debates are necessary to earn our continued legitimacy in the political system. Ex-Im operates at the expressed consent of our nation's elected representatives.
The US Economy & American Competitiveness
But first, let me present a few comments on the state of the US economy. We remain in a fragile state of affairs on the 5th anniversary of the financial crisis, but there has been some recent positive economic news.
The Institute of Supply Management recently released an index figure of 55.6 -- a level above 50 indicating a period of expansion. US GDP second quarter growth was 2.5% -- better than the initial estimate of 1.7%. A key driver of the revision was the performance of US exports. This latest economic report means that the US per capita economic output -- four years after the end of the recession - has finally returned to the pre-crisis peak it reached in 2007. The unemployment rate stands at 7.4% down from a peak of 10%.
This positive news needs to be contrasted with a few concerning and negative statistical findings. We have not yet surpassed a 3% growth threshold that economists expected coming out of a recession. Over eleven million Americans remain unemployed even after four years of growth. One in six homeowners is still underwater. Median income is below what it was in 2008 and a recent revelation was how low the labor participation rate is in US economy: 63.2%, the lowest level since late 1970s. So we have “much road” yet to travel toward a complete recovery. The Congressional Budget Office believes the economy will operate below potential until 2017.
The next few months are going to be challenging. We are going to face strong headwinds creating political and economic uncertainty. Prospects for the future are hindered by rising mortgage interest rates, the timing of any removal of the Federal Reserve's quantitative easing policy, weaker emerging market demand, and instability in the Middle East. But I am not disheartened regarding the future. I remain optimistic for the US economy and US competitiveness.
As you know, we live in age of great debate about whether America may be in “decline”. These debates frequently populate the airwaves and print media. The conversation is an important one. Much of it has to do with the perceived loss of manufacturing prowess - either because of job losses or the perception that China surpassed the United States as the world's largest manufacturer. Parsing this issue with some statistics is insightful to better understand US manufacturing and the broader economy.
In 1970, the US held almost 18 million manufacturing jobs. By 2012, it dropped by a third to 12 million. At the same time, the size of the US workforce went from 71 million to 134 million, nearly doubling. Hence, manufacturing's share of total employment dropped from 25% of the workforce to just under 10%. The absolute number and relative share decline in persons making things creates the perception of potential US decline.
As important as that debate is, we should not let it create so much anxiety that we forsake ourselves to some pre-ordained fate. We should not think that things are as bad as some would have us believe. Certainly we have challenges associated with job losses and I do not mean to minimize the implications for social mobility and job security in our country. But we also need to contextualize this with other important facts.
A report by the investment banking firm Goldman Sachs recently highlighted a number of the US economic strengths. The size of the US economy is nearly double the second largest, China, and two and half times the third largest, Japan. Per capita GDP is among the highest in the world, even though many of the countries with equal or higher figures contain a much smaller population. The US commitment to innovation is a key competitive strength. The US provides a third of the world's total R&D budget --the largest share -- and contains some of the best universities in the world. Demographically, the US workforce is going to be younger on average than that of our key competitors. By 2050, the median average age in China and Japan will be about 50, ten years higher than in the United States.
The United States is among the world's largest trading nations, with exports of goods and services of nearly $5 trillion a year. In the most recent World Economic Forum's Annual Global Competitiveness Index, the US reversed a 4-year decline to climb to 5th place.
Returning to the topic of manufacturing, notwithstanding the declining number and share of manufacturing jobs, manufacturing output was over 70 percent greater than in 1990 and six times greater than in 1950. At around $2 trillion, U.S. manufacturing production remains world class in volume and competitiveness. That amount is roughly two-thirds higher than Japan's and nearly triple the size of Germany's.1
Our competitiveness challenges these days are not purely domestic or even simply economic. We operate in a global economy and I often think to myself it is not my grandfather's or even my father's global economy. The world economy is dramatically different from the one in the 1950s and 1960s. Post World War II, developed economies' share of global GDP was about 80 percent, with the United States alone accounting for over 40 percent. Trade flows among developed economies accounted for over two thirds of total commerce. Simply put, it was a pattern of finished goods and commodities trade highly driven by a fraction of higher income countries while the rest of the world sat on the sidelines of official trade flows.
Fast forward to today and in a little more than a half century, we transitioned from a world dominated by trade flows between the US and Europe, what economists call north - north trade among advanced economies, to a global economy with large amounts of trade among developing countries, south - south trade or commerce separate from the US and Europe.2 Moreover, growing amounts of trade are in intermediate goods as production value chains are fragmented across national borders.
Let us look at Latin America specifically in the last 20 plus years. Two decades ago, trade among LAC countries was $18 billion, now the figure stands at over $180 billion. 60% of Latin American trade was with the US, while 10% was with Asia. Today, 40% is with the US and 20% is with Asia. In this globalized interconnected world, we are seeing some nations double their GDP per person in one decade rather than the quarter century it had taken some of the more traditional industrialized countries.
What Does This Mean For US International Economic Policy?
The United States cannot afford to stand still with a non-aggressive international economic and trade policy. Standing still in the global economy will mean that America will lose competitiveness as well as economic and security influence in the international system. Let me share a couple of other insights that help paint a picture of the opportunity costs relating to standing still.
In Africa since 2002, the market share of Chinese exports has more than tripled. China is providing almost 17% of Africa's imports according to a Standard Charter Bank report. Not long ago an issue of the Economist noted how South Korea is expected to be wealthier than Japan in the next five years. Think about what a tremendous accomplishment that is for South Korea since over 30 years ago it's GDP per capita was only 25% of Japan's. Both these statistics illustrate how dynamic export markets are and just how quickly the competitive landscape among nation states can change.
What is it that the United States should do? For starters, we need to get our own economic house in order. It is time for policymakers on both sides of the aisle to resolve our nation's fiscal crisis through entitlement reform and more effective controls on federal spending. A tax reform effort that lowers corporate and individual tax rates while broadening the base will be critical.3 Long standing thorny issues such as immigration reform should be addressed in a way that contributes to American competitiveness and border security. And finally, the Congress should vest this President, and future Presidents, with Trade Promotion Authority to aggressively conclude free trade agreements (FTAs) such as the Trans-Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP). If the United States were to successfully conclude these FTAs, it would put the US economy in a strong position to trade more freely with 65 percent of the global economy.
The Important Role of the Export-Import Bank of the United States
Let me shift subjects to discuss the role of the Ex-Im Bank. As many of you know, the Bank's mission is to support US exporters and US jobs. Its purpose is twofold. First, the Bank seeks to ensure a level playing field for US exports in the global market place by attempting to make sure that buyer decisions are based on price and quality, not state sponsored financing. And second, the Bank aims to fill trade finance gaps that the private sector is unable or unwilling to provide. To implement the mission, Ex-Im uses a variety of credit program products such as insurance, guarantees, and direct lending that span a spectrum of pre- and post-export needs of US exporters. These products, often referred to as official export credits, help US exporters manage political and commercial risk in cross-border trade or leverage credit to support US exports and jobs.4 In FY 2012, Ex-Im supported 255,000 jobs with the nearly $36 billion in credit authorizations.
I approach my work at Ex-Im with the idea that its role is targeted and some day that private sector finance and trade agreements will make its intervention no longer requested. I would prefer a global trading system without official export credits. Ideally, all buyers and sellers in international trade - in the US or abroad - would have access to and be serviced by a large, strong, and competitive contingent of financial service providers of trade finance. Moreover, governments would not resort to official export credits as a means to support national firms in competition with foreign firms. But since we face a non-ideal world where official export credits are a part of international trade, Congress and the President have chartered the Export-Import Bank to provide support to US exporters in select circumstances.5
As I said earlier, Ex-Im has a body of critics that would like to see its elimination. Their criticism draws its roots from America's attachment to limited government and our citizens' deep commitment to free markets and economic freedom. I also share that attachment for limited government and economic freedom. I am a strong believer in free trade and free markets.
However, as you can imagine, I have a different view on the role of the Export-Import Bank. I consider Ex-Im as an asset in US trade policy. It serves as a tool to defend American economic interests as well as a tool to help shape a rules-based trading system. Moreover, it is responsive to an important public policy priority of assisting US small business to engage in international trade.
But as I disagree with Ex-Im critics and make the case in support of Ex-Im, I will not question the integrity of their deeply held beliefs. In our democratic system when we engage in heated policy debates, we must recognize that we are serving the public and let the merits of our arguments support our position.
We must highlight how Ex-Im's mission and programming are part of a larger fabric of US international economic policy intended to re-enforce a global trading system and to ensure that our exporters have the opportunity to compete freely and fairly in a system of effective rules and minimal trade barriers. We should not begrudge the fact that Ex-Im abides by rules and principles that govern our conduct.
Undisciplined official export credit policies can be very costly to taxpayers and nations around the world. Moreover, both the gains from trade and the integrity of the WTO trading system the US spent decades constructing could be undermined without effective constraints on official export credits.
Discipline, particularly in the conduct of public policy, is an admirable trait. Americans expect leadership by example. US international economic policy will defend our interests but we should never lose sight of the fact that we want to model the way for the rest of the international community when it comes to official export credits.
As I identify and respond to concerns of Ex-Im critics, I would also like to underscore the important role that Ex-Im plays in sustaining a competitive economy.
Concern #1: Ex-Im's business model is a form of crony capitalism.
Response: Ex-Im does not pick exporters to support. Institutionally it is very demand driven by US business seeking an Ex-Im programming presence. Yes, it is true there are a certain number of high dollar volume users. But Ex-Im supports exports from companies like Boeing and GE because US jobs would be lost due to foreign government support of foreign competitors such as Airbus and Siemens.
Furthermore, it is untrue to think of us solely as a big business bank. We strive to serve small business too. Sometimes we are not as good at it as we would like, but we consider it a critical part of our mission. In FY 2008 Ex-Im Bank financed $3.2 billion in direct small business exports. In FY 2012 we financed a total of $7.5 billion in small business exports of which $6.1 billion was direct. At Ex-Im Bank, small business accounted for 88% of all transaction volume last year.
If there is an appropriate criticism of Ex-Im, it is that our rules do not recognize how supply chains of many US exporters have gone global to remain competitive and that fewer firms are able to fully or effectively leverage our mission to level the playing field. Moreover, Ex-Im's procedures inadequately
identify the growing importance of the US service sector economy and the need for Ex-Im to be available to US services exporters.6
Concern #2: Ex-Im programming is corporate welfare. US taxpayers are expensed for its activities crowding out scarce resources for other programs. Eliminating Ex-Im would reduce federal spending and the size of the deficit.
Response: Over the past five years Ex-Im has generated $1.6 billion for U.S. taxpayers, above and beyond all administrative operating costs, claims and loan loss reserves set aside. Ex-Im's business model aims to operate at no cost to U.S. taxpayers and maintain a self-sustaining status. In fact, in 2012, the Bank collected $1 billion in fee income and sent more than $800 million to the U.S. treasury, representing the excess of Bank expenses and loan loss reserves.
But this is important for you to know: Ex-Im's objective is not earnings. The objective is not deficit reduction either. To the extent Ex-Im excess receipts contribute to reducing the deficit, it is simply a by-product of executing the core mission of keeping US exporters competitive, preserving US jobs, and protecting the US taxpayer.
Concern #3: Ex-Im's extra-ordinary growth from $58 billion in 2008 to $107 billion in 2012 is recklessly exposing the US taxpayer.
Response: In FY 2012, the Bank paid $37 million in gross claims on a portfolio of $106 billion. Ex-Im paid these claims not out of general revenues of the US government, but out of reserves generated from fees collected for its products. Our most recent report dated June 30, 2013 indicated a default rate of around 1/4 of one percent. More than 77% of our entire portfolio is backed by some form of collateral.
Ex-Im's takes its responsibility to protect the US taxpayer while executing its mission seriously. Because of increasingly careful underwriting, exposure monitoring, and an active stance towards fraud prevention in the form of our Inspector General, Ex-Im reduced the amount of claims paid out from $200 million in FY 2008 down to $37 million in FY 2012.
Now, I do not want to convince you that Ex-Im's default and loss experience will always be as such. Its mission is not risk free. Ex-Im losses may be higher in the future. As a credit program, Ex-Im's mission is to take calculated risks and to manage those risks appropriately.7
The US government has been very fortunate because of the nation's role as a superpower. Borrowers and countries are not served well by defaulting on the US government. The US government actively pursues those who default and refuse to pay. When defaults occur, Ex-Im Bank aggressively seeks recoveries and collects nearly 50 cents on the dollar. At the moment, the US taxpayer benefits from this track record of low defaults and substantial recoveries.
Of course, in an emerging multi-polar world where challenges to US hegemonic power are growing, Ex-Im may not be as successful in avoiding defaults or collecting on bad debt. Furthermore, the trading system and global economy appear more fragile and less resilient than before the financial crisis. At that point, the focus will be whether Ex-Im has sufficient reserves to absorb losses.
Concern #4: Ex-Im's growth and execution of mission is crowding out private sector finance by competing with or reducing the role of private banks.
Response: Ex-Im manages its public footprint in financial markets very carefully. The Bank executes its mission respecting the role of private sector trade finance and aims to insert itself only when private lenders and insurers are unable or unwilling to provide resources necessary to fulfill the needs of US exporters. That means our mission is a targeted one. Instead of competing with the private sector, Ex-Im works to supplement it.
Ex-Im's intention is not to fund just any export. The agency aims to finance export transactions that would not take place but for Ex-Im's presence. You might be surprised to learn that 98% of U.S. exports are financed in the private sector. On average, we support only about 2% of US exports.
Concern #5: The US economy would be better off without Ex-Im mission and programming.
Response: US trade with the rest of the world, whether through exports or imports, is an important part of the US economy. Such trade is a key source of US economic growth, typically accounting for at least a quarter of total growth. Going forward, a critical task for America is how we leverage the prosperity beyond our borders into more growth and prosperity here at home. It will not simply just happen. Moreover, it will not be the responsibility of just a few US exporters.
With ninety-five percent of the world's consumers living outside our borders and a significant number of Americans unemployed, it is imperative that more US companies look abroad for opportunity by strengthening their capabilities to engage in exporting. Of the U.S.'s 30 million companies, only 1%, or 280,000 companies export, and of those who do, 58% export to only one market. To engage successfully in cross border trade, US companies must:
Develop cross-cultural skill sets in sales, marketing, and customer service Learn how to move goods effectively around the world Become more sophisticated in methods to receive foreign payment or extend credit internationally
Within this third area is where Ex-Im plays a support role to US exporters. When private financial sector solutions are unavailable, Ex-Im can help US companies secure working capital, mitigate foreign buyer payment risk, or provide assistance to facilitate credit to foreign buyers. Without Ex-Im, many US companies would not be able to convert sales opportunities abroad into economic growth here at home.8
Prior to the credit crisis, Ex-Im used to do about $10-12 billion in annual credit authorizations. Post Lehman Brothers, that average has more than doubled. The substantial growth is a result of the counter-cyclical role that Ex-Im plays in times of global economic downturns, where credit is not as readily available as before.9 This support has helped maintain trade finance relationships and prevented export and trade flow declines. The counter-cyclical lender of last resort role is particularly important for industries that produce capital goods.
Capital goods are sophisticated, expensive, and involve long lead times with complex supply chains. If demand dries up because of a financial failure or other type of globalization shock, there is a risk that the production losses will be permanent. Foreign competitors, with foreign government Export Credit Agency (ECA) support, might permanently take advantage of a US industry weakness.
Concern #6: Within US international economic policy, there is no appropriate role for an official export credit agency.
Response: Approximately 60 countries around the world have official export credit agencies that operate with the intent of supporting their exports. Without Ex-Im, US exporters would not have a defensive tool to fight foreign ECA supported competition. And US policymakers would be unilaterally disarming an effective offensive tool in international negotiations to limit or eliminate their distortive effects.
Few people realize it, but Ex-Im, in the fulfillment of its mission, helps to enforce negotiated international agreements supporting a rules-based trading system premised on free and fair trade among nations.10 This is particularly true when US companies bid on project work around the world. For instance, when Ex-Im participates in project transactions with other export credit agencies or when going head to head while leveling the playing field for a US exporter, Ex-Im is policing the practices of foreign governments even as it is operating in support of US exporters. When abiding by international norms for official export credits, Ex-Im is both a “stick” aiming to discourage unfair competition as well as a “prod” aiming to keep the ECA “herd” in line against the non-compliant use of export credits.
Ex-Im also contributes to commercial and foreign policy alignment as the US government conducts economic and commercial diplomacy. Around the world, Ex-Im works in concert with agencies like the US Trade and Development Agency (TDA), the Overseas Development Investment Corporation (OPIC), and the Department of State. As it does so, Ex-Im helps ensure that governmental agencies work closely together to help US businesses orient themselves to international markets.11
Growing Use of Official Export Credits around the World
As I said before, the concerns or allegations of Ex-Im critics need to be taken seriously. As Congress debates the re-authorization of the Export-Import Bank, policymakers may have constituents expressing these concerns. Ex-Im should respond to such concerns in a non-partisan and mission centric fashion.
To assist policy maker deliberations, it will be important to frame what is going on in the world of state sponsored export credits. It is not a comforting picture. While Ex-Im is governed by competitiveness and transparency standards established by the OECD, these rules are increasingly becoming less effective in limiting foreign ECA competition. Many fast-growing economies such as China and Brazil are not members of the OECD.
And even those inside the OECD are frequently finding ways to operate outside its framework. Official financing covered by international rules has dropped from two-thirds to forty percent of export finance in the past decade. In 2011, Ex-Im underwrote $33 billion in financing, but five times more was spent worldwide on unregulated financing.12
In the last decade, the major providers of official export credits have evolved from a group dominated by the G-7 countries, which historically provided about 85 percent of all medium- and long-term export credits, to one in which major emerging market countries, including China, India, and Brazil, now provide about as many official export credits to support their own exports as the G-7. For instance, over this time period, China has grown from a minor player to the largest provider of official export credits. With China and other emerging market official export creditors operating outside of official export credit rules, US exporters will be facing a non-level playing field.
I imagine some in Congress remember how long it takes to build a consensus on official export credit disciplines. In 1980s and 1990s, successive Administrations aggressively pursued limits on the use of official export credits among OECD countries. The OECD Arrangement, as it is known, took a long time to negotiate, but it has had some success. The Clinton Administration estimated substantial savings to US taxpayers as a result of avoiding an escalation of official export credit use.13 It is my understanding that this is why some in Congress mandated that Executive Branch engage globally for an expanded scope of disciplines and elimination of trade distorting official export credits.
Today, more than a decade after the OECD Arrangement has gone into effect, the US finds itself facing a new set of circumstances: the use of export credits by OECD members outside the OECD Arrangement as well as a new set of players operating outside the OECD. If Congress, Ex-Im, and the Treasury Department observe this growing use of official export credits around the world, it would seem entirely appropriate and prudent for the Executive Branch to start building a stronger, expanded consensus on adhering to new, more stringent disciplines - particularly with emerging powers. Such rules are vital mechanisms to help ensure that the export credits provided by governments align with
market principles, promote transparency, and foster a level playing field among all competing national firms.14
Otherwise, the United States may find itself in an export subsidy race - an outcome that is potentially costly to US exports and jobs and would challenge the resolve of US policy makers, and by extension US taxpayers.
Rising Geo-Economic/Political Competition
In closing, let me say that we are living in a world of tremendous multi-polar competition, one we have not seen since the Victorian Age over a century ago. One aspect of this competition relates to the rapid rise and use of wealth in sovereign state hands. And now, to be clear, I am referring to much more than just ECAs.
Around the world, governments are venturing out into the global economy directly through their hard currency reserves, natural resources, and state owned enterprises or sovereign wealth funds. And they are engaging in international markets not just for economic returns but to build and exercise influence on behalf of the nation state. This is a phenomenon that may not be new, but I would argue it is reaching a scale that is perhaps unprecedented. And because of the nature of globalization and the growing interdependence of nations, the deployment of this new wealth could have far reaching geopolitical implications. A decade ago, the governments of emerging nations added a combined $100 billion a year to their reserves. In 2009, they took in $1.6 trillion. Sovereign wealth funds now control 12% of investment worldwide.
I highlight this fact not to suggest that Ex-Im's mission should be expanded. Nor am I suggesting that Ex-Im is a tool of US foreign policy. I am stating my belief that as nation state competition continues to play out, it would be unwise for the US government to remove or reduce the role of Ex-Im.
As we speak, the competition is playing out intensely across Latin America and Africa -- key regions of US commercial and strategic interest. China's loan commitments of $37 billion to Latin America in 2010 were more than those of the World Bank, Inter-American Development Bank, and Export-Import Bank of the United States combined. The Fitch Rating Service noted that the Export-Import Bank of China extended $12.5 billion more in loans to sub-Saharan Africa in the past decade than the World Bank.
Finally, let me say that the Export-Import Bank has been operating with bipartisan support for over three quarters of a century. Republican Presidents such as Dwight Eisenhower, Ronald Reagan, Bush 41, and Bush 43 have joined with a long list of Democratic Presidents such as Bill Clinton and Barack Obama to support Ex-Im as it carries out its mission to sustain a healthy, competitive US economy.
I believe that bipartisan support can continue into the 21st century. But it is incumbent upon us to renew our efforts and make a persuasive case based on policy rationale which will appeal to Republicans and Democrats alike. Thank you.