The Mercantilists Are Marching onto War

Senator Lindsey Graham likes to march onto war, and off into economic swamps, as well. Recently, Senator Graham mounted a counter attack on fellow Republicans who opposed the reauthorization of the Export-Import Bank. Indeed, the Senator said “…I’m not going to unilaterally disarm.” Yes, it is clear that the senator has mounted a surge.

The Export-Import Bank (Ex-Im) provides financing and loan guarantees at below-market rates to foreign purchasers looking to buy products from American exporters. For example, if Emirates Air wants to buy planes from Boeing, Ex-Im can provide a loan guarantee, reducing the interest rate Emirates will pay, and thus incentivizing Emirates to buy from Boeing rather than Airbus.

Ex-Im’s supporters claim that these subsidies create jobs and finance domestic economic growth. But, they fail to consider the ensuing downstream effects. As Cato scholar Daniel Ikenson makes clear, every dollar Ex-Im provides to subsidize foreign purchasers of U.S.-produced products discriminates against U.S. consumers of the same products. For example, when Emirates receives a subsidy for planes because it is a foreign company, Emirates gets a leg up on Delta.

An edifying account of how this system works was presented many years ago by the late Prof. Yale Brozen in his foreword to Prof. Leland Yeager’s classic Proposals for Government Credit Allocation (1977):

Whom you know and with whom you have influence becomes more important in obtaining capital than how productively you can use it. Capital is diverted from more productive uses to politically determined applications […]. The national income pie shrinks as an increasing proportion of our capital is allocated by the political process – not only because of its diversion from more productive uses but also because more and more of our resources are devoted to winning political influence, as that becomes the road to access to available capital and subsidies.

For the record, Ex-Im isn’t small potatoes. In FY 2015, Ex-Im’s loans and loan guarantees will total $30.9 billion, or 6.7% of all non-housing federal credit programs. The Ex-Im’s total cumulative loans and guarantees outstanding (read: credit exposure) currently sits at $112 billion. Because the loans are granted at below-market rates, the Ex-Im does not receive fair compensation for the $112 billion of risk it takes on.

Instead of adopting a policy that makes a few U.S. exporters winners at the expense of many losers, there is a way to make all U.S. firms more competitive: just lower the grueling corporate tax rate. Yes, according to the Organization for Economic Co-operation and Development (OECD), the U.S. has the highest corporate tax rate of the 34 OECD member countries.

There is clearly a better way to unburden U.S. corporations and make them more competitive internationally than to sponsor a “bank” in which politicians and bureaucrats, not capital markets, choose winners and losers. It is time to move away from a mercantilist view of trade towards one that puts the market back in control.