Subsidize first-time exporters, not big companies.

Photographer: Patrick T. Fall/Bloomberg

Reinvent the Export-Import Bank

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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The Export-Import Bank is probably dead. Yes, technically, it's only temporarily out of action because a handful of Republicans are preventing a floor vote on its reauthorization. But the Republican crusade against the government-run trade credit provider has demonstrated to U.S. exporters that they won't be able to rely on Ex-Im funding in the future. That means they won't budget Ex-Im funding into their plans, making the agency somewhat superfluous even if it does manage to survive. Once again, conservatives have managed to smash a U.S. government institution. 

I'm sad that this has happened, because it shows the power of conservative activists -- and the willingness of some politicians -- to wreck institutions they don't fully understand. But unlike the examples where this destruction really matters -- infrastructure and research funding -- the Ex-Im bank is small potatoes. 

QuickTake U.S. Export-Import Bank

First, the amount of trade credit that Ex-Im extends to customers of U.S. exporters is microscopic compared with the amount provided by, say, China. Even if you believe that Ex-Im cancels out the market distortions created by the Chinese government, the U.S.'s $27 billion a year isn't going to do much against China's $400 billion. 

Second, the bank doesn't subsidize service exports, which are an increasingly important part of the U.S. trade picture. And third, the large companies Ex-Im subsidizes have deep-enough pockets that they can probably muddle through in most of their markets without Ex-Im assistance. Some of their suppliers will suffer, but many of them are located in other countries. 

The slow, shameful death of Ex-Im can serve a useful purpose, however, if it draws attention to the problem of export promotion. The U.S., as we all know by now, has a very large and persistent trade deficit. This deficit persists even after the rebalancing spurred by the global financial crisis in 2008. It persists despite the shale boom, which dramatically reduced the U.S.'s dependence on imported oil. 

The trade deficit, of course, means that the U.S. is buying things from other countries -- mostly manufactured goods -- with IOUs, which will eventually have to be paid back with interest. That trade deficit is making life harder on future generations. In essence, we're getting Chinese people to do work for us today in exchange for promising that our descendants will do work for them sometime down the line. 

But the burden on our kids and grandkids isn't the only reason to worry about the trade deficit. After decades in which economists pooh-poohed any form of industrial policy as unacceptable government intrusion into the market, a few economists are starting to take a second look at the idea that export promotion can be good for a country's industrial development. 

Harvard economists Ricardo Hausmann and Dani Rodrik made the case in 2004. They observed that successful cases of economic development -- East Asian countries like Taiwan and South Korea, for example -- focused especially on exports. Why would this be a good idea? Hausmann and Rodrik hypothesize that companies have difficulty discovering what they are good at. If that's the case, companies will invest too little and diversify too much. Hausmann and Rodrik say that since exporting incurs a larger fixed cost than serving the domestic market, export subsidies can help companies more quickly discover their comparative advantage by competing in large international markets. 

Keep in mind that Hausmann and Rodrik's theory applies to developing countries, not to rich ones like the U.S. But in an age of rapid technological change, every country is a little like a developing country. Old industries are dying and new ones are emerging, as the information-technology revolution disrupts the status quo. American startups simply don't know where their comparative advantage lies. If they can't pay the initial cost of entering foreign markets, they may never find out. 

This implies we could use a new, improved Export-Import Bank. Instead of focusing on large, established companies, a new U.S. trade promotion agency would focus on providing temporary boosts for first-time exporters. The goal would be to get more American firms exporting, not to support established exporters. In effect, the U.S. government would be acting not like a bank but like a venture capitalist, providing a bit of venture funding to a large array of companies looking to expand overseas. 

Of course, this new export-promotion agency would again fall under the attack of the same conservative activists who brought down Ex-Im. And since it wouldn't have corporate lobbying powerhouses on its side, it's probably doomed. But policy makers should keep this idea in mind for the future, when we hopefully live in a less bitter, contentious age.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor on this story:
Paula Dwyer at pdwyer11@bloomberg.net