On Wednesday, the country’s official export credit agency, the U.S. Export-Import Bank (EXIM) announced that its Board of Directors has voted unanimously to renew its partnership with the Private Export Funding Corporation (PEFCO), which provides supplemental financing to exporters, for a term of 25 years.
The PEFCO deal marks a major step in leveraging private capital to support U.S. exporters competing with China, particularly in the sub-Saharan Africa and Latin American markets.
“A 25-year renewal of the Guarantee and Credit Agreement correlates with some of the longest transactions that EXIM can authorize – those with 18-year repayment terms and seven years of disbursement, resulting in 25-year deals. These transactions fall under sectors such as nuclear power and renewable energy, among others. In order to have PEFCO contribute to EXIM’s effort to counter China, whose programs can include 25-year terms, the market needs confidence that PEFCO will be able to fund these types of very long-term deals,” said Jim Cruse, Senior Vice President, EXIM’s Office of Policy Analysis and International Relations.
It also marks a new milestone in a long-delayed return to institutional health for EXIM, an independent federal agency which was knocked out of commission from 2015 to 2019.
Per its charter, a board quorum of three-fifths is required to authorize transactions of more than $10 million, or those with tenors longer than seven years.
Lack of quorum held EXIM back from supporting longer-term export transactions with larger ticket-sizes (primarily capital goods) during that four-year period. This, in turn, created a financing backlog of $40 billion, representing some 250,000 export-related jobs.
A Tool of Statecraft
An export credit agency (ECA) provides financing to support its home country’s international exports. This may be through loans, loan guarantees, or “official export credits,” financing commitments (such as a loan guarantee or loan) that an official government source provides to a foreign entity to help facilitate the export of a required amount of domestic goods to the foreign entity.
As U.S. Chamber of Commerce stated following the PEFCO deal, “Without the EXIM-PEFCO partnership, U.S. small and medium-sized exporters would be placed in a disadvantageous situation. In today’s highly competitive global markets, buyers overseas increasingly expect vendors to offer financing, and PEFCO – operating in partnership with EXIM – fills in this gap in a way that other entities simply do not.”
Not surprisingly, ECAs can be leveraged to promote a country’s geopolitical aspirations. EXIM has pointed China as the “most aggressive” exploiter of this capability, and a catalyst for other countries to use their own export financing agencies more assertively.
Per EXIM’s June 2020 Global Export Credit Competition report to the U.S. Congress, the world now has 115 known official export credit providers, up from 85 just four years earlier, and a 35-percent increase from 2015 to 2019.
During that same four-year period, when EXIM was unable to fund at large scale, China’s official medium- and long-term (MLT) export credit activity exceeded 90 percent of that by all G7 countries combined.
“In particular, Beijing is using its two official ECAs, along with a number of other state entities such as state-owned banks and state-owned enterprises, to expand influence and gain competitive advantages against the United States. This necessitates a robust and integrated U.S. response, and EXIM is a crucial element of statecraft in that regard,” EXIM writes.
Trade insiders noted that paralyzing the EXIM for those four years crucially undercut U.S. competitiveness abroad at a critical period, particularly against countries with fully functioning ECA’s. A spokesperson for Boeing, a longtime primary beneficiary of EXIM financing, told Global Trade Review last year that the lack of ECA support had cost the company at least three major satellite deals to date.
What about small businesses?
Critics have historically knocked EXIM as a “crony capitalist” institution that disproportionately few large corporations (like Boeing) at the expense of taxpayers and the free market. EXIM counters that the vast majority of its authorizations in recent years have directly supported small businesses, leveling the playing field for companies competing against government-subsidized competitors in foreign markets.
Per its own numbers for the 2019 fiscal year, EXIM authorized $8.2 billion in loan guarantees, export credit insurance, and direct loans across its short-, medium-, and long-term programs in support of $9.1 billion in U.S. export sales, supporting some 34,000 American jobs.
EXIM’s small business authorizations totaled nearly $2.3 billion, with 89 percent of total EXIM transactions providing direct benefit to small businesses during that year. The agency also reports that since 1992, EXIM has generated more than $9 billion for the U.S. Treasury for repayment of U.S. debt.
“Buyers overseas increasingly expect vendors to offer financing. Without EXIM’s accounts receivables insurance and lines of credit, many U.S. small businesses would be unable to extend terms to foreign buyers and would have to ask for cash-in-advance. In such a case, the business would most likely go to a firm from another country that benefits from foreign ECA support,” writes David Hinson, VP of Diversity and Emerging Business at the Department of Commerce in a report to the U.S. Congress in 2019.
“In addition, many small businesses depend on EXIM’s credit insurance to insure orders because local banks will not extend credit on uninsured accounts, and credit insurance is not generally available to small businesses from sources other than Ex-Im.”
Responding to a secondary charge against EXIM by its right-flank critics—namely that Chinese state-controlled companies like Air China have benefited disproportionately from the agency’s largesse, EXIM also announced key, China-specific reforms to its standard operating procedures (SOPs) vis-a-vis PEFCO.
Specifically, it will limit PEFCO’s support of EXIM-guarantee transactions over $25 million in which the government of China is the end user, lender, or obligator.”
EXIM will also add its new Congressional mandates on China and Transformational Exports—attempts to directly counter competition from China in critical areas like artificial intelligence, biotech and biomedicine, 5G, renewable energies, and other emerging technologies—to PEFCO’s own organizational goals.