Category Archives: Export-Import Bank

Tit-for-Tat Tariffs Don’t Work: Boeing and Airbus Show Why

A 16 year-long aerospace subsidies dispute between the United States and the European Union began another round this week. The U.S. claims that the EU’s Airbus subsidies are unfair. The EU argues that America’s Boeing subsidies are unfair. Both sides are right. But neither wants to admit that the other side has a point, too. The result has been tit-for-tat tariff increases and no subsidy reforms.

Today, the World Trade Organization (WTO) ruled that the EU may impose tariffs on up to $3.99 billion of American goods, because Boeing’s favorable tax treatment violates WTO rules.

This follows a 2019 decision allowing the U.S. to impose tariffs on up to $7.5 billion of EU goods due to the EU’s Airbus subsidies.

Boeing called today’s decision “irrelevant.” Last year, Washington state repealed the tax provision at the center of this decision. However, the larger sticking point in the dispute remains. Yes, this one tax break is gone, but Boeing still receives massive subsidies. That means the EU will not stop pressing the matter. Nor has the EU reformed Airbus’ special treatment. That means the U.S. won’t stop, either.

In addition to being ineffective, the tariffs are causing collateral damage to other industries that have nothing to do with the dispute, from French wines to American motorcycles. This deadweight loss matters at a time when the world economy is already hurting due to COVID-19.

The lesson both sides need to learn is, don’t copy other people’s mistakes. Instead, set a better example. Subsidized companies grow soft and lose their competitive edge. There is a reason why so much aerospace innovation these days, from space travel to supersonic flight, is happening outside of Boeing and Airbus’ subsidized comfort.

The right thing to do is for governments to stop subsidizing private businesses—even if the other side doesn’t. Set the right example. Boeing would likely do just fine without subsidies. They would certainly have far more incentive to improve their products and address their safety concerns than they do now.

And if Boeing can’t survive without subsidies, there is no shortage of entrepreneurs capable of unleashing engineering and manufacturing talent.

Either way, consumers and taxpayers win. Europe and Airbus can then either follow America’s positive example or be content with subsidized mediocrity. Realistically, they will very likely choose the subsidies. But we cannot let Europe’s mistakes be our own. The U.S. has been doing that for at least 16 years now, and we know it doesn’t work.

A modest starting point on the U.S. side would be closing the Export-Import Bank, which often devotes half of its business to securing below-market financing rates for Boeing’s customers, many of whom are state-owned. Boeing set record profits while Ex-Im was mothballed from 2014-2019, so we already know the company will do just fine without that multi-billion-dollar program.

For more on that idea, see my most recent Ex-Im paper.

Fred P. Hochberg – Trade Is Not a Four-Letter Word: How Six Everyday Products Make the Case for Trade

Review of Fred P. Hochberg, Trade Is Not a Four-Letter Word: How Six Everyday Products Make the Case for Trade (New York: Avid Reader Press / Simon & Schuster, 2020)

Hochberg, who headed the Export-Import Bank from 2009-2017, has written a surprisingly good book on trade. Few economists have favorable views of Ex-Im. The agency’s longstanding corruption problems, cozy relationships with Boeing and other large companies, and its mercantilist economics make it almost indefensible on the merits (see my papers here and here). As with many ex-government officials, Hochberg is a much better economist when he doesn’t have to play politics.

Unfortunately, Hochberg says little in the book about his eight years at Ex-Im. This would have made for fascinating reading. It would have been useful to learn, in extended form, about Hochberg’s views on how Ex-Im works in practice, how he would defend the agency, and where he would criticize it.

Hochberg also presided over the most eventful chapter in Ex-Im’s 85-year history, which included its authorization lapse in 2014-15, when the agency practically shut down. Even after its eventual reauthorization, Ex-Im operated at a severely limited capacity for the remainder of Hochberg’s tenure. The Senate refused to confirm the new board members needed to approve large transactions. Ex-Im did not return to full capacity until 2019.

While Hochberg does refer to his old job several times, it is usually in passing, and never in detail. He does not once mention the great post-2014 Ex-Im political controversy.

By sticking instead to broader-brush trade policy and avoiding anything too controversial, Trade Is Not a Four-Letter Word comes across as a subtle job application for a higher-level position in the next Democratic administration, such as Commerce Secretary or U.S. Trade Representative. If the Ex-Im version of Fred Hochberg took such a job, trade policy would likely continue to be ridden with special-interest handouts and trade-unrelated inititatives. If, instead, the Fred Hochberg who wrote this book took office, trade policy would be not perfect, but it would be pretty good, and certainly an improvement over the last few administrations.

Unfortunately, I have a hunch which side of Hochberg would prevail if he re-entered politics.

Like many politicians who also know better, Hochberg almost bends over backward trying to argue that the American middle and lower-middle classes are net losers from trade. These are America’s largest voting blocs, and many of them live in swing states.

This is a difficult long-term case to make when living standards by almost every measure, from life expectancy to average height to access to air-conditioning, internet, and other technologies, have been improving for both rich and poor for more than a century. In terms of hours of work needed to afford everything from a refrigerator to a new car, goods are becoming more affordable and higher-quality over time, which benefits the poor most of all. This has been happening for decades, and the process is not slowing down. Trade, as Hochberg persuasively argues elsewhere throughout the book, is a major reason why. This doesn’t stop him from trying to appeal to likely voters, though his biggest successes come from reasoning through anecdote, and by omission.

Still, Hochberg gets the big picture right, and he paints it well. The six chapters on the six products he chooses as examples are the strongest part of the book. Trade makes modern life possible, he argues. Whether it’s taco salads, minivans, bananas, smartphones, college degrees (an odd choice, but think of it as a stand-in for human capital), or Game of Thrones, just about everything we enjoy today is a product of international trade. Moreover, this is a good thing. What we have today is far better than what we would have under closed borders. As other thinkers from Hans Rosling to Matt Ridley to Julian Simon have argued for a long time, living standards today are higher, health care is better, ideas are more rigorously tested, and technology improves faster. This is what happens when there is a relatively open global market for both supply and demand.

Narrowing down to policy specifics, Hochberg is strongly anti-tariff. One hopes he would maintain this stance in a cabinet role or in elected office. His long section on why trade deficits don’t matter—in short, because people get something in return for their money—is similarly excellent. It is also inconsistent with his Export-Import Bank tenure. Ex-Im is intended, at least in part, to reduce the U.S. trade deficit by increasing exports. But at least Hochberg knows better now, and is willing to say so publicly now that he is out of office, though he doesn’t mention Ex-Im’s role in the capacity.

His defense of some other policies is weak, such as his case for defending trade adjustment assistance. He does not favor similar measures for workers displaced due to non-trade factors, such as technology or changing fashions. His way of resolving this inconsistent stance is unconvincing. Essentially, he argues that trade-related job displacements are due to government policy, while other job displacements are not. Therefore, the government owes them something to soften the blow of trade-related job displacements. But trade decisions are made by private individuals, and the role of policy in those decisions is indeterminate; how does one calculate how many job losses, or which ones, is policy-related? In jobs that are cut for more than one reason, which is most cases, what proportion is policy-related?

Moreover, many non-trade government policies cost jobs. These range from barriers to entry to environmental requirements to minimum wages to cumulative paperwork burdens. By Hochberg’s criteria, these displaced workers deserve compensation, yet he doesn’t favor it. I would argue that rather that treating symptoms with compensation, it would be better to treat the root problem by getting rid of the bad policies in the first place. But that’s for another time.

Taken as a whole, Hochberg is neither a brave nor an adventurous thinker, but he gets the big picture. As a bonus, Hochberg’s prose style is informal and easy to read, though the Game of Thrones references get to be a little much at times. Trade has costs and benefits. Add them up on a ledger, and the benefits are greater, by far. However, Hochberg’s interventionist streak is almost reflexive and seemingly unthinking. Markets fail all the time, including in international trade. That does not mean policymakers can improve matters. Given knowledge and incentive problems, this is rarely the case. The view that market failures can be fixed by an idealized government is known as the Nirvana fallacy, and Hochberg would do well to take it into account.

Just as a fish doesn’t think of the water it swims through, so do Washington types rarely think about the complicated web of policy they make others swim through. It’s just there, and always has been. It’s nothing to question or give careful thought to in a big-picture sense. Trade Is Not a Four-Letter Word definitely has that Washington vibe to it. But if Hochberg moves more Washington types to favor freer trade at the margin, his book will have done more good than he has, or will, in office.

In the Media: Export-Import Bank

Over at Foreign Policy, Keith Johnson has a thorough article on the Export-Import Bank battle. The whole thing is worth reading. He also quotes me in a few places:

“It’s the ‘they do it, too’ fallacy,” said Ryan Young of the Competitive Enterprise Institute. “The U.S. should not copy a Chinese policy mistake.”

“There is no traction right now for any bill” in the Senate, Young said—especially one that would reauthorize the agency for 10 years, giving little chance at congressional oversight in the meantime.

“When Ex-Im went away, exports still bloomed,” Young said. Even at full capacity, the bank used to underwrite only about $20 billion worth of deals a year—a tiny fraction of overall U.S. exports. “Almost 99 percent of U.S. exports happen without Ex-Im involvement,” he said.

Read the whole thing here.

Ex-Im Reauthorization Vote Today in the House

Over in the Washington Examiner, I have a piece about the Ex-Im reauthorization bill that the House of Representatives will vote on today. I argue that even if this year’s battle ends in defeat, it has already been a significant nearly five-year-long victory, with guaranteed chances for victory in the future:

The Nobel-winning economist Ronald Coase once wrote, “An economist who, by his efforts, is able to postpone by a week a government program which wastes $100 million a year (which I would call a modest success) has, by his action, earned his salary for the whole of his life.” Over the period from 2014 to 2018, Ex-Im’s reduced activity spared taxpayers from nearly $48 billion of risk exposure, or nearly $12 billion per year. Ex-Im’s total portfolio decreased by $52 billion, or an average of $13 billion per year. This is more than a modest success.

Due to Ex-Im’s reauthorization requirement, reformers will have another opportunity in a few years — a lesson in institutional design that should be applied to other agencies.

Read the whole thing here.

CEI Opposes Waters Ex-Im Bank Reauthorization Bill

This is a CEI press release, originally posted here.

The Competitive Enterprise Institute (CEI) opposes a bill authored by Rep. Maxine Waters (D-CA) that would reauthorize Export-Import Bank (Ex-Im Bank) operations. The bill is different from a Senate bill introduced by Sens. Kevin Cramer (R-ND) and Kyrsten Sinema (D-AZ) that was the subject of a CEI study, entitled “How the Ex-Im Bank Enables Cronyism and Wastes Taxpayer Money.” That study stated CEI’s opposition to Ex-Im Bank reauthorization, but also proposed several key reforms to the Cramer-Sinema bill.

CEI senior fellow and study author Ryan Young said:

“The House should decline to reauthorize the Export-Import Bank, for several bipartisan reasons. Republicans oppose the Bank’s support of state-owned businesses in China and other illiberal countries. Air China is Ex-Im’s single largest state-owned beneficiary. Ex-Im cuts against other administration priorities in trade and foreign policy. Democrats oppose Ex-Im’s support of fossil fuel programs. America’s emergence as a net energy exporter also means that energy businesses do not need Ex-Im’s corporate welfare. More than 99.8 percent of American exports happen without Ex-Im involvement, and total exports hit record highs throughout Ex-Im’s 2014-2019 period of reduced activity. Even Ex-Im’s largest individual beneficiaries, such as Boeing, reported no trouble finding private financing and posted record profits during this period. Add in dozens of Ex-Im-related corruption allegations and millions of dollars of resources wasted on lobbying instead of becoming more competitive, and Congress should close the Export-Import Bank, not renew it. Failing that, any legislation should have a short authorization period of two or three years, not 10 years. Any reauthorization should also preserve Ex-Im’s board quorum requirement that gives the agency at least a modicum of accountability to Congress.”

Read more:

Export-Import Bank Reauthorization Update

It is a busy time right now in the Export-Import Bank reauthorization battle. Rep. Maxine Waters (D-CA) introduced a new bill to reauthorize the Export-Import Bank for the next 10 years. It would attempt to improve Ex-Im’s image not by reforming the agency, but by changing its name. Her bill for the proposed Export Finance Agency was marked up in committee on Tuesday, but is unlikely to pass. Ex-Im’s charter is currently set to expire on November 21, when the current Continuing Resolution (CR) ends.

Waters’ bill ran into bipartisan opposition. Republicans such as Rep. Patrick McHenry (R-NC) want Ex-Im reauthorization to be tough on China. He cosponsored a previous version of the bill that contained such language. Its removal in the new version caused him to withdraw his support, and to call the bill “weak sauce.”

Some Democrats such as Rep. Denny Heck (D-WA), worry that the tough-on-China language would limit Boeing’s ability to get Ex-Im financing. China is Ex-Im’s largest foreign beneficiary, and state-owned Air China, a Boeing customer, is Ex-Im’s single largest foreign client. Boeing is one of Heck’s constituents.

Other Democrats, including Rep. Rashida Tlaib (D-MI) and Aryanna Pressly (D-MA), oppose Ex-Im financing being used for fossil fuel projects. Pemex, Mexico’s state-owned oil company, is another major Ex-Im client.

Neither party seems much interested in critiques against Ex-Im’s cronyism, corruption, and ineffectiveness.

What are the likely next steps for Ex-Im? The Waters bill could possibly pass the Democratic House, but not the GOP Senate. A similarly awful Ex-Im bill from Sens. Kyrsten Sinema (D-AZ) and Kevin Cramer (R-ND) similarly lacks traction. Meanwhile, Congress has more pressing matters on its plate. Besides the impeachment investigation taking up much of leadership’s attention, a new CR needs to pass by November 21 to avoid another federal shutdown. Congress is out of session until November 12, making for a tight time frame. Neither the Waters bill nor the Sinema-Cramer bill will likely be able to go through the full legislative process by then.

That means Ex-Im will likely get a short-term extension in the new CR, similar to what happened in September. Though both parties want to reauthorize Ex-Im, they currently disagree too much on the particulars to fold a full reauthorization bill into a must-pass CR. Neither party sees any advantage in a shutdown, so where possible they’ll keep anything controversial out of the CR to keep the process smooth. Simply continuing Ex-Im’s funding as-is for a short time will give Congress some time to hash over details and pass a full reauthorization bill before the new CR expires.

The Sinema-Cramer bill is a reformless disaster. The Waters renaming bill is no better. Both bills would extend Ex-Im for another 10 years, increase its portfolio cap to $175 billion, and end its board quorum requirement for funding projects over $10 million in size. Absent a new, better bill, the best feasible option for Ex-Im reform is to amend whatever legislation that reaches the floor with substantive reforms to limit Ex-Im’s cronyism, internal corruption, and dealings with shady governments. Several ideas are in my recent paper. Moreover, not all of them require Congressional action. There is much Ex-Im can do internally to improve its business model, and there is much the White House can do if it is interested in reform. The best policy, of course, is to close Ex-Im.

Ex-Im Bank Reauthorization: Lesson in Institutional Design

For all its flaws, the Export-Import Bank’s charter gets an important thing right: the agency must be reauthorized every few years, or it will close. This makes Ex-Im an important case study in institutional design. Its reauthorization requirement should be applied to nearly every government agency. Reauthorization offers regularly scheduled opportunities for Congress to enact possible reforms, or close an agency entirely. It also adds a level of democratic accountability to agencies that mostly lack it.

The executive branch has long since become too powerful. The other branches have too few meaningful checks on executive power. The result has been that agencies often face no consequences for abusing their authority, wasting resources, corruption, or ineffectiveness. If an agency has to face reauthorization every so often, it gives agencies more incentive to self-police against problems and reform them proactively, so emerging problems do not metastasize.

More to the point, the burden of proof properly lies on agencies for justifying their existence. If they are going to command resources rather than other agencies or taxpayers, they should have good reasons. If the federal government really needs an Economic Development Administration, a Hass Avocado Board, or a U.S. Board on Geographic Names, that agency should have no problem making its case every few years to Congress. If it has compelling arguments, the agency can continue on. If it does not, reauthorization provides regular opportunities to reform or end wasteful or harmful policies. This is an important part of governmental hygiene. Reauthorization allows Congress to enact reforms an agency cannot, or will not enact on its own.

Reauthorization also means that an agency’s window for reform never fully closes. Sometime soon, depending on how the current federal funding fight goes, the Export-Import Bank’s charter will almost certainly be renewed. Some needed reforms might even be part of the deal. Usually, a minor agency like Ex-Im will only garner congressional attention once every few decades, if at all. But charter reauthorization guarantees regular opportunities to enact reforms, or discipline the agency where needed. As happened temporarily in 2014-2015, Congress was able to close Ex-Im by simply declining to vote on reauthorization.

The only agencies that should fear a reauthorization requirement are the ones that do not deserve reauthorization. Policymakers and the public can identify them by their reaction to a potential requirement.

For more on reauthorization and other lessons from Ex-Im’s last five years, my new paper is here. For a short summary of the main findings, a press release is here.

Export-Import Bank Fight Not Over Yet

The Export-Import Bank’s charter is currently set to expire on September 30. If authorization lapses, the agency will shut down. On Thursday, the House passed a continuing resolution (CR) to fund the government through November 21—specifically including Ex-Im. The Senate will likely pass it next week. This means the Ex-Im fight could drag on for an additional seven weeks, and possibly longer. Here is a breakdown of the current situation.

The most likely reauthorization vehicle is a bill from Sens. Kevin Cramer (R-ND) and Kyrsten Sinema (D-AZ). It contains no positive changes and several bad ones. It would do away with board approval for large projects, increase Ex-Im’s portfolio cap to $175 billion, and would last for ten years, more than double the usual period. It would mainly benefit large companies like Boeing and Caterpillar that don’t need help, plus large state-owned enterprises such as China Air.

Because the bill is so tilted against reform, it would likely have difficulty making it through the standard legislative process without significant amendments. So while an up-or-down vote on the merits is possible, Ex-Im backers will avoid one if they can. The easiest way is to fold the bill into some other piece of must-pass legislation. That way, even Ex-Im opponents will still have to vote to renew Ex-Im on Cramer-Sinema’s terms, possibly without amendment.

The continuing resolution that passed the House yesterday is clean, in that its only Ex-Im language is extending it through November 21. It does not contain Cramer-Sinema or any of its provisions. This will likely remain the case when the Senate takes it up next week.

But—when November 21 approaches, Congress might well punt again and pass a second CR that goes until early next year. If Congress does not separately pass Cramer-Sinema by then, another Ex-Im extension is likely. Maybe it would be another clean extension until CR round 3 (and possibly beyond). Or someone could add in Cramer-Sinema to the bill text.

This complicates matters for reformers. The current 43-page CR was introduced on Wednesday night after working hours, and passed by the House the very next day. If congressional leadership pulls similar last-minute shenanigans with the next CR, Ex-Im reformers will need to have amendments ready in advance to the extent possible. Section numbers and such for amendments to refer to can only be accurately identified once the final text is available, so there would still be plenty of late-night work for reform-minded staffers.

This dynamic could repeat for any number of rounds until Congress can finally pass a budget—and even this budget could be a vehicle for Cramer-Sinema or another Ex-Im bill. Reformers’ job until then is to be both patient and persistent. There might be no rest for the wicked, but the same goes for those of us who oppose cronyism.

For positive reforms for Ex-Im, see my recent paper “How the Ex-Im Bank Enables Cronyism and Wastes Taxpayer Money.” For reasons to shut down Ex-Im entirely, see this paper from Ex-Im’s previous reauthorization fight.

Conservatives Should Oppose Ex-Im, Too

Over at CNS News, I argue that conservatives should favor closing the Export-Import Bank, even though President Trump supports the agency:

Finally, an underappreciated point is how Ex-Im can make some U.S. businesses less competitive. When Ex-Im offers favorable financing for a foreign airline to buy a Boeing plane, that airline often directly competes with U.S. airlines such as American, United, or Southwest. Often, Ex-Im can only help one U.S. business by hurting others. Besides being zero-sum, this opens up a fierce lobbying game with predictable ethical consequences. The Trump administration supports Ex-Im as part of its larger trade agenda. In practice, Ex-Im turns out to undermine it.

Read the whole piece here. My recent paper on Ex-Im is here.

Ex-Im Bank Reauthorization: Major Victory against Cronyism, Despite Setback

Nobel laureate economist Ronald Coase wrote in his 1975 essay “Economists and Public Policy” that “An economist who, by his efforts, is able to postpone by a week a government program which wastes $100 million a year (which I would call a modest success) has, by his action, earned his salary for the whole of his life.” By Coase’s measure, the Ex-Im fight that began in 2014 was an enormous success, despite the coming reauthorization setback.

Based on data available in Ex-Im’s annual reports, this fight over a relatively small agency was worth $47.9 billion of dollars in reduced Ex-Im activity from 2014-2018. This reduced taxpayer risk exposure by an average of nearly $12 billion per year. Moreover, this figure assumes Ex-Im activity would have remained constant without the shutdown and board quorum fights of the last five years. Agencies tend to grow, so $47.9 billion in savings is likely an underestimate.

By another measure, the size of Ex-Im’s total portfolio went from $112.3 billion in 2014 to $60.5 billion in 2018, reducing taxpayer exposure by a total of nearly $52 billion, or an average of just under $13 billion per year. If this much in savings can come from temporary activity reductions in one agency, savings from successful permanent reforms of larger agencies could be substantial.

The free-market movement deserves a lot of credit for one of its biggest victories in recent years. Veronique de Rugy at the Mercatus Center, Bryan Riley at the National Taxpayers Union, Daniel Ikenson at the Cato Institute, Diane Katz at the Heritage Foundation, and many others have been tireless in their advocacy against cronyism, and pushing for a pro-market, rather than a pro-business, approach to policy.

While this month’s reauthorization is a setback, there is still a chance to enact some helpful reforms. Moreover, the fight is not over. Ex-Im will also require another reauthorization in a few years’ time, which will be another opportunity to finally end an 85-year old monument to cronyism.

The whole paper is here. For a short summary of the main findings, a press release is here.