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The Mercantilist Impulse

by Robert Capozzi

You may also note that virtually every other major economy has their own export credit agency.
-ACC, TFL Commenter
But, Mom, everyone else is doing it.
-Proverbial Child
Everyone might want to go jump off a bridge, that doesnt mean you should, too.
-Proverbial Mother

A spirited, unexpected discussion here on TFL about the Ex-Im Bank. Highly recommended. I hadnt realized that the Ex-Im Bank has been self-financing in recent years, so thank you for that fact. It has fallen on my list of most absurd government programs, but I still find it absurd.

Weve established that industry is sometimes inefficient, and probably that government is more inefficient. The big difference, of course, is that government imposes its will on citizens, while industry must compete to attract customers. Thats a built-in advantage for industry in my book. Over time, I have a lot more confidence that Boeing can and will find customers for its products. Government intervention may seem on the surface to help make the markets that is, the people more efficient, but that all depends on which fact set one looks at. For example, the US corporate tax rate is intolerably high. Its high relative to the rest of the industrialized world, even. If we want to help Boeing, we should start by lowering their tax rate. Thats an undue burden that certainly is putting US industry at a competitive disadvantage.

Let's see. They finance US exports that commercial banks can't finance to help US exporters compete and keep Americans working... their default rate is around 2%, AND they've returned $4 billion to the Treasury during the past decade or so. That's $4 billion MORE than the taxpayer paid to operate Eximbank.
-Tom Jeff, TFL commenter

Id suggest reading up on F.A. Hayeks concept of malinvestment here, Tom. In isolation, again, your case is strong. But consider the secondary and tertiary effects of government intervention, which is part of Hayeks point. Favoring exports by policy means that industry shifts resources away from what the market wants. Its impossible to quantify, as there are 300 million data points on any given day, signaling the market what their demands are. Suppliers react to those demands, unless government steps in. It may look good for the Treasury, but it doesnt look good for the national economy, which expresses its preferences privately and peacefully every second of every day.

-RC


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Comments

This cuts to the issue of whether or not one believes that promoting exports at all is a "good" thing. If you believe at all in the theory of comparative advantage, you probably would think that it is.

There is a lot of contention in the WTO related to both Boeing and Airbus -- with both sides accusing the other of unfairly subsidizing their own national champions -- any targeted corporate tax breaks for Boeing will inevitably entail some sort of countervailing duty being slapped on US products in the EU. And that sort of protectionism is certainly not a boon for free trade. I largely share your views on corporate taxation, however.

Your argument that Ex-Im Bank somehow contributes to "malinvestment" is forced -- it's not like this is some sort of socialist entity that doles out subsidies to projects like the useless infrastructure built by Japan in the 1990's due to the BOJ's "quantitative easing" policy or the Soviet military industrial complex in the 20th century -- we're talking about mostly one-off commercial transactions that directly impact the U.S. balance of payments, which (at least for the moment and the medium-term future) is widening and clearly unsustainable long-term (Google "global macroeconomic imbalances" if you don't know what I'm talking about). Nor are resources just magically being shifted out of production of other goods a la Soviet arms factories eschewing consumer durables especially in a case like Boeing -- its natural market is going to be made up of international actors by default. This is a disjunction between freemarket economic theory and economic reality, which is never as clear cut as the models that are made to simulate it remember the Phillips Curve? Ever wonder why they dont teach the IS-LM model, otherwise so perfectly elegant, in graduate econ courses? All of your assumptions basically discount the effects of international political economy and the nasty effects that sometimes misconceived legal systems, sometimes inspired by populism, can have on economic incentives. I'd suggest that you read up on Herman M. Schwartz's book, States Versus Markets; promoting economic growth through exportation supported by statist economic policies worked brilliantly for Japan and South Korea, while recklessly executed (but well conceived) free market policies wrecked Latin American countries nascent domestic industries and played no small roll in contributing toward that regions slide into the leftist economic nationalism, spawning such harebrained crocks as dependency theory and world systems theory. What a joke.

Ill reiterate that it is not fair to compare Ex-Im Bank to a politically motivated ethanol subsidy (which IS an example of malinvestment or misdevelopment); it's a largely apolitical reinsurance agency -- it's not actively cramming insurance policies down the throats of commercial lenders that fuel speculative asset bubbles, it's a passive risk-bearer of last resort that facilitates international transactions, the likes of which being economically viable (hence the relatively low default rate) but politically risky (which is highly subjective and difficult to quantify) and it even makes money for the taxpayer doing so. Moreover, if problems arise as they sometimes do, it's often in a better position than the private sector to get negotiation leverage in foreign countries were the government itself is heavily involved in the transaction (it helps to have the negotiating leverage of the 800 pound gorilla that is Uncle Sam because it gets pretty nasty trying to litigate your way out of a dispute with a sovereign state). Its all about barriers to trade Ex-Im Bank and other ECAs seek to lower transaction costs to an acceptible threshold so that trade may occur, through removing ideosyncratic and often unquantifiable components of risk.

# posted at by a concerned citizen

Let me underline the voluntary nature of ExImBank. No exporter or importer is required to use its services. Unless we are having a real bad year, tax revenue is not needed to run it (and if we are having that bad a year, funding ExImBank is the least of our worries). The mandatory-governmental aspect of ExImBank is that it provides protection to U.S. interests, which is a good thing as well.

And one other point to add to what Michael says... Exim is known as an export credit agency... and all of the developed nations and many developing countries have export credit agencies to support their exporters... without the last-resort financing available from Exim Bank other country's exporters would enjoy a competitive advantage over our exporters... Exim Bank helps level the playing field so that we can compete on the quality and price of our goods and services, not on cutthroat financing (such as the Chinese offer since they're not a member of the OECD and hence don't have to abide by their financing agreements spelling out minimum interest rates to be charged and other terms).

# posted at by Tom Jeff