In a previous article, we addressed President Donald Trump’s approach to trade policy, touching specifically upon his protectionist attitudes, as well as the dangers of a growing incoherence and listlessness in the way his administration is approaching the subject of trade and trade agreements.
Today, we discuss a specific component of the overarching trade architecture: the Export-Import Bank, or Ex-Im for short. One might imagine that a president with the express desire to protect American business and promote its interests abroad would look favorably on an institution whose mandate is to provide financial backing for large American export deals. But Trump is anything but predictable. Instead of embracing the Ex-Im Bank, he has sought to undermine it. That makes little sense in terms of his stated goals.
What is the Ex-Im Bank?
For the sake of clarity, this is what the Congressional Research Service has to say about the purpose and function of the Ex-Im Bank:
“The Export-Import Bank of the United States (Ex-Im Bank or the Bank), a wholly owned federal government corporation, is the official export credit agency (ECA) of the U.S. government. Its mission is to assist in financing and facilitating U.S. exports of goods and services to support U.S. employment.”
The bank’s purpose is to operate as an export credit agency, meaning that it provides financing and facilitation services to American businesses seeking to engage in export transactions. Its charter explicitly states that this financing is not to be competitive with the private lending space. In other words, the Ex-Im Bank provides financial backing to export transactions for which there is insufficient private capital to back the transaction.
When do companies go to the Ex-Im Bank in practice? Usually it happens when a foreign buyer of American goods needs a loan guarantee. The Ex-Im Bank guarantees the loan to purchasers of American goods, which allows the transaction to be carried out when otherwise it would likely have failed.
What’s the problem?
There has been tremendous political division over the future of the Ex-Im Bank for years. Free-market conservatives within the Republican party have been especially critical of the bank, while more traditionally pro-business groups have continued to support the institution. To quote again from the Congressional Research Service:
“Debate continues in Congress over Ex-Im Bank’s rationales. Proponents contend that the Bank supports U.S. exports and jobs by filling gaps in private sector financing and helping U.S. exporters compete against foreign companies backed by their ECAs. Critics contend that Ex-Im Bank crowds out private sector activity, provides “corporate welfare,” and poses a risk to taxpayers.”
It will be no shock to anyone that the Ex-Im Bank is unpopular among free-traders. After all, it intervenes in the market, supporting various American businesses through guarantees to foreign buyers. It could be described as a textbook case of government picking and choosing favorites, supporting incumbent industries and using taxpayer money to fund the actions of a few big companies. Boeing (BA, Financial) has for many years been the greatest beneficiary of the Ex-Im Bank. In fact, some recent years have seen between 60% and 80% of all loan guarantees going to companies purchasing Boeing aircraft and equipment. That has led, unsurprisingly, to the Ex-Im Bank receiving the moniker of the “Bank of Boeing” from its detractors.
Supporters of the Ex-Im Bank, on the other hand, will point to its utility in supporting major American export contracts (including Boeing, which remains the largest American export by dollar value and a crucial piece of the aerospace and national security apparatus). The bank provides financing for deals that would otherwise never happen. And that means pushing a higher rate of exports than would happen in the absence of the bank’s support.
But why isn’t Trump onboard?
While it is easy to understand why traditional Republican free-marketers hate the Ex-Im Bank, it is much harder to see why the president has been so vociferously opposed to it. After all, Trump has made a major stand on the subject of trade imbalances, going so far as to threaten a trade war with China. So why does he dislike an institution whose purpose is to support American exports?
The answer to that question is somewhat difficult to parse. Part of it may be a lack of clear understanding of exactly what the Ex-Im Bank does. And it probably also does not help the bank’s case that it has been fairly listless regarding policy, and has done little to innovate. That said, such criticisms matter more in the context of the Ex-Im Bank doing less than it probably could. But Trump’s attacks have had a much more active character. He has even parroted the common conservative lines about the Ex-Im Bank being nothing more than a vehicle for crony capitalism to bilk the American taxpayer.
Why so controversial?
Trump railed against the Ex-Im Bank on the campaign trail, and his negative attitude did not change upon his accession to the presidency. Indeed, he swiftly nominated Scott Garrett to head the bank. The nominee was obviously no friend to the institution, having attempted to dismantle it while a member of the U.S. Congress. Garrett has not had a chance to make his mark at the Ex-Im Bank, however, since the Senate Banking Committee torpedoed his nomination in December. While saved from a chairman who savored its destruction, the bank has been left in a state of limbo.
Despite all that, the Ex-Im Bank remains a powerful tool for supporting American exports. And it is far from controversial among the community of nations. Many countries do, in fact, have equivalent institutions, some much more willing to go to bat for their domestic corporations than is the Ex-Im Bank. That is especially the case of aggressive economic expansionists like China. China backs its domestic exporters to the hilt through myriad financing institutions akin the Ex-Im Bank and, in absolute dollar terms, is much more deeply involved.
Could Trump change course?
The question is this: Why is Trump not seizing on the Ex-Im Bank as a vehicle for enacting his agenda? The answer remains beguiling. But it seems to largely be the product of accreted media and ideological negativity on Capitol Hill.
Trump has not talked about the Ex-Im Bank too much lately, even as he has ratcheted up the trade confrontation rhetoric. It is genuinely strange that he would reject a tool that so perfectly maps with his vision of trade policy.
Indeed, the Ex-Im Bank is an organ of state power he could wield far more freely. And, considering that opposition has previously come from the right of his own party, we could reasonably expect the president to be able to bend enough of Congress to his will on this issue.
Should investors care?
This forum is about investing, not politics or macroeconomics. Of course, investing does not happen in a vacuum and prudent investors must keep abreast of the political and economic policy winds in order to be best placed to profit from the changes and shifts.
But more than that, many companies trading on the stock exchanges are deeply interwoven with an international financial and trade order. Understanding how and when that order is changing, and how much the U.S. government is acting to shape the rules and outcomes within that order, is vital to long-term successful investing in these companies.
Building an understanding of the Ex-Im Bank and the role it might play during the next phase of the Trump administration is something all serious investors should undertake.
Disclosure: I/We own none of the stocks discussed in this article.
