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Looming exit of US Ex-Im Bank – questions for Australian companies

"Ex-Im bank funding amounted to less than 1% of the total value of US exports."

The Ex-Im bank, as it is commonly known, helps support US exporters and the buyers of US goods. But it will cease its financing operations in June unless its charter is extended by US Congress, amid opposition from some Republicans who believe it helps foreign firms at the expense of local ones, and who want the current restrictions on its funding of coal-fired power stations to be lifted.

While the main impact would be felt by US companies, it would also affect Australian companies which have benefited from importing from them. One of its most high-profile customers is Gina Rinehart’s Hancock Prospecting, which last year received US$694.4 million for acquisition of equipment from US companies.

What do Ex-Im banks do?

An Ex-Im bank is the official provider of export credits by the government of a country to support its companies in exporting. At least 40 countries are known to have Ex-Im banks which make low or no interest loans, or effectively grants to their exporting firms. The funding assists the importing company in another country to finance the purchase of the exports.

Part of the rationale is that exporting is a risky business relative to domestic sale. It is more difficult to access finance and markets for exports. It is more costly to facilitate the sale and delivery of products across borders.

The Ex-Im bank fills the gap and provides a guarantee of payment to the exporter through financing a line of credit to the importer. In effect the Ex-Im bank’s funding is a grant or subsidy to both the exporting company and the importing company in another country. It amounts to a form of foreign aid to the importing country. Another part of the rationale is of course the exporting country’s geopolitical strategic considerations.

What are the effects of Ex-Im bank funding?

Policy arguments for export funding from the Ex-Im bank include increased company profits, employment and growth in the economy of the exporting country, as well as promoting technological advance in export industries. Costs may include increasing market concentration as some favoured companies are able to grab bigger shares of the market and extract monopoly type profits, as US debate around its Ex-Im bank indicates. The ability of Ex-Im bank finance to increase employment depends on its ability to stimulate activity in the exporting and importing countries.

But here we’re interested in the potential benefits and costs accruing in the economy of the importing country. These include benefits and costs as described above for exporting countries. In addition, the costs to importing countries may include tying trade to the countries from which Ex-Im bank credits have been obtained and limiting opportunities with other trading partners.

Foreign subsidies may be directed toward activities with negative side effects such as environmentally damaging, carbon or resource intensive activities in the importing country. Hence the complaints coming from the US oil industry about the proposed Ex-Im bank closure. And the US Ex-Im bank grants to Australian companies would seem to favour resource and energy intensive companies, such as mining, transport and aviation. This reflects the resource and manufacturing slant in the US companies which receive the Ex-Im bank funding.

Scale of US Ex-Imbank funding

The proposed closure of the US Ex-Im bank would put at stake funding which was US$20.5 billion in 2014, supporting the US$27.5 billion worth of US exports selected by the Ex-Im bank. This is 75% of the value of those exports. This suggests a highly corporatist relationship between government and company in the supposed bastion of the free market.

However the funding itself is small beer. Based on the most recently available figures on US export value in 2013, Ex-Im bank funding amounted to less than 1% of the total value of US exports, US$2.3 trillion dollars. Of course as a loan instrument, much larger ongoing values remain on the books of the Ex-Im bank. However US$162 billion in existing total authorisations in 2015 is still not enormous, although the effects on employment in US politically marginal regions may be substantial. Other forms of domestic subsidy in the US since the global financial crisis have been much greater.

The US Ex-Im bank and companies in Australia

US Ex-Im bank funding toward companies in Australia for importing from the US was US$297 million in 2013, an even smaller percentage of Australian import value, at less than one tenth of 1% of the value of Australian imports in 2013. While Ex-Im bank funding of US exports to Australian companies is volatile, it is still small in the scheme of things. It appears that a handful of large companies operating in Australia would be affected. As well as Hancock Prospecting, these have included Qantas, Australia Pacific LNG Processing and the Jabiru Satellite Program.

A lot of questions remain unanswered. Whether the Ex-Im bank funding is on a scale sufficient to affect the business decisions of the importing companies warrants further investigation, particularly in relation to employment impacts. How does the decision to import from the US impact on the industries related to those companies’ activities?

We also don’t know whether the Australian companies could have otherwise obtained the sought-after equipment elsewhere possibly more cheaply, and that includes sourcing domestically or from other countries.

It is possible that the US Ex-Im bank grants have tempted companies here to locate imports from the US, rather than importing from somewhere else or producing for those requirements here. This raises questions of efficiency as well as geopolitical concerns. Nevertheless we would expect the overall effects at the economy-wide level to be limited.

In the case of Hancock Prospecting, it was reported the US Ex-Im bank funding included trains from GE and trucks from Caterpillar for the US$10 billion Roy Hill project. The Japanese and Korean Ex-Im banks also provided more than US$1 billion each for the project. Even if costs were increased by obtaining the US imports elsewhere, it is doubtful this would have held up the project.

Closer to home

Compare these figures with the scale of China’s Ex-Im bank and Development Bank activities, estimated by the Financial Times at more than US$110 billion for 2009 and 2010. China’s Ex-Im bank has also offered extensive support to Australian companies, for instance A$1.2 billion to Clive Palmer’s A$8 billion dollar mining and infrastructure project back in 2011. It has arrangements with at least two major Australian banks for facilitating trade between Australia and China. The US Ex-Im bank is not the only fish in the sea.

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