By M. Ulric Killion
Photo Source: “Trade and aid are expected to top discussions during the China-Africa Summit...”; “Export-Import Bank of China extended $12.5 billion more in loans to sub-Saharan Africa in the past decade than the World Bank, Fitch Ratings said. State-owned EXIM lent about $67.2 billion to the world’s poorest region between 2001 and 2010 compared with the World Bank’s $54.7 billion…,” Mike Cohen, China’s EXIM Lends More to Sub-Sahara Africa Than World Bank, Bloomberg, December 28, 2011; cnsphoto/defensepak.forum.
The U.S. Congress is presently struggling with the issue of whether to renew the charter of the Export-Import Bank (Ex-Im Bank). Since its inception in 1934, the issue of renewing the charter of the Ex-Im Bank has hardly been a controversial one, as the U.S. Congress routinely and without controversy would renew its charter. This year, however, the renewal issue is causing a controversy, though surprisingly not along partisan lines. Rather, the center of the controversy is a division within the Republican Party.
According to the Associated Press, “In the House, Republicans are torn between their business allies who are strong Ex-Im backers and conservative groups which say the agency should be eliminated.” This controversy and division within the Republican Party also parallels diverging positions in the aircraft industry or trade in large civil aircraft, as seen in the difference between The Boeing Company (Boeing), which is a beneficiary of Ex-Im Bank financing, and Delta Air Lines that maintains Ex-Im Bank financing adversely affects its bottom line.
For those unaware, the Ex-Im Bank generally serves the critical role of helping to finance American companies’ overseas sales such as trade in large civil aircraft. In terms of global trade, the complaints of Delta Air Lines notwithstanding, for the U.S. economy, the renewal of the bank’s charter presents an economic imperative that will ultimately foster economic growth, productivity in manufacturing, jobs, and other positive amenities.
The role of the Ex-Im Bank and its potential to aid in the financing of overseas sales is important, as especially seen in the case of the European Union (EU) and its aircraft industry (i.e., trade in large civil aircraft). As Boeing earlier warned, as reported by the Financial Times, “Airlines will have to make greater use of the bond markets to pay for aircraft because European banks are pulling back from commercial aircraft financing.”
The reality of the present crisis of the large civil aircraft industry, as noted by Boeing Capital Corporation, which is the U.S. aircraft manufacture’s financial arm, airlines are now more likely to lease, rather than buy, new large civil aircraft, which is a direct consequence owing to a reduction in the availability of bank lending. According to Boeing Capital Corporation,
BCC expects that 10 per cent – or $10bn – of the financing for the 2012 deliveries will come from airlines and lessors tapping capital markets, mainly though bond rather than equity issuance. BCC estimates only 5 per cent of financing will have come from capital markets in 2011.
Meanwhile, BCC expects commercial bank lending for aircraft purchases to shrink as a proportion of aircraft financing, from 25 per cent in 2011 to 21 per cent in 2012. The absolute amount is due to increase slightly, from $19bn in 2011 to $20bn in 2012.
The benefits of an export-import bank, however, are subject to the world trading system and its rules, such as the World Trade Organization (WTO), Agreement on Subsidies and Countervailing Measures (SCM Agreement). It is notably that both Boeing and the EU’s Airbus have been subject to charges of violating the WTO’s SCM agreement, by receiving unfair subsidies.
For example, in March 2012, the WTO upheld a ruling that Boeing received “at least” $5.3 billion of unfair subsidies between 1989 and 2006, while also agreeing with Airbus that the effect of these subsidies or financial support was greater than their face value, as measurable in light of their “particularly pervasive” nature. There is also the pending WTO case against Airbus and its unfair subsidies. In April 2012, a WTO dispute panel agreed to further examine the EU’s compliance in the Airbus case, including an issue of new unfair subsidies.
While aircraft industry trending leans toward leasing rather than buying large civil aircraft, there are, however, exceptions to the rule such as the Development Bank of Japan (DBJ or Kabushiki-gaisha Nippon-seisaku-toshi-ginko), which is not pulling back from aircraft financing as seen with some European banks, and a growing participation in the market by some insurance companies.
Then there is the often overlooked potential role of the Ex-Im Bank in both international financing and international diplomacy. An exemplary example of such a role is the case of China and its export-import bank, which is the Export Import Bank of China (China Eximbank or Zhongguo Jinchukou Yinhang).
For instance, and quoting from an earlier article, China’s Eximbank earlier granted Belgrade a billion euro ($1.3 billon) loan to upgrade two power plants and, in the spring of 2010, commence the construction of a bride over the Danube River. Dusan Reljib, from the EU External Relations division of the German Institute for International and Security Affairs, described the Chinese presence as “gathering momentum right across the region. ‘The Chinese are in Slovenia, in Macedonia, they’re exporting buses to Skopje, they’re talking to Croatia about transport facilities, harbors, airports, railway connections,’ he said ‘and they’ve been talking to the Greeks about leasing possibilities in Athens harbor.’”
As Reljib also observed,
“With very little direct foreign investment coming into the region, tight government budgets and unemployment rates on the rise again, he says Balkan states need and welcome China’s money, which comes with grace periods, generously low interest rates and very few strings attached. ‘The Chinese do not attach economic or political conditions to their loans,’ Reljic said. ‘In a way, cheap Chinese money is an alternative to commercially expensive Western money or politically expensive money from the International Monetary Fund or the World Bank.’”
China’s creative international financing employs in many parts of the world, such as the regions of the Asia-Pacific, Latin America, Eastern Europe, and Africa.
In this respect, and demonstrating a broader importance of export-import banks, it may simply be an issue of a Beijing-form of creative international financing rather than a familiar Washington-form of capitalism.
In the end, a crisis looms because the charter of the Ex-Im Bank is set to expire at the end of this month, and there is also the issue of the Ex-Im Bank’s statutory lending cap of $100 billion. One reasonably suspects that the U.S. Congress will renew the Ex-Im Bank’s charter, and attempt to adjust its lending cap. This is because the role of the Ex-Im Bank rightly enjoys bi-partisan support, as it also actually aids in the promotion of competitiveness in manufacturing, economic growth, and world trade.
Jim Abrams, Ex-Im’s Future Caught Up in Congressional Fight, Associated Press, May 7, 2012.
Andrew Parker, Banks withdraw from aircraft financing, Financial Times, December 6, 2011.
Cathy Buyck, WTO upholds Boeing subsidies ruling: Airbus & Boeing both claim victory, Air Transport World, March 13, 2012.
World Trade Organization, Dispute Settlement - Dispute panel to examine EU compliance in Airbus case, WTO News, April 13, 2012.
World Trade Organization, SUBSIDIES AND COUNTERVAILING MEASURES: OVERVIEW - Agreement on Subsidies and Countervailing Measures (“SCM Agreement”); May 7, 2012.
M. Ulric Killion, Post-global Financial crisis: The measure of the “Beijing consensus” as a variety of capitalisms, MPRA Paper 26382, University Library of Munich, Germany, 2010.
See also The Republican Conundrum
All Rights Reserved M. Ulric Killion, 2012.