The path to more U.S. exports?

For most of its 80-year existence, the U.S. Export-Import Bank was a government program decidedly out of the spotlight. But over the past several years the bank has been front and center in debates about the role of the federal government in the U.S. economy. Proponents of the bank argue that the credit it provides is an important service that the free market won’t supply on its own. Opponents argue that the bank just acts as a subsidy for economic activity that would happen anyway in the free market. But in thinking about the program, it might be worthwhile to step back and think about broader macroeconomic conditions given the bank’s potential expiration at the end of June.

The bank, as you can guess from its name, is focused on financing U.S. business activity in international markets. According to the agency’s website, the bank’s mission is to help businesses “turn export opportunities into sales” and “get what they need to sell abroad and be competitive in international markets.” In other words, the bank is all about increasing U.S. exports.

But for anyone who’s taken an economics course on international trade knows, the level of exports really isn’t driven by credit financing. As Veronique de Rugy at George Mason University’s Mercatus Center points out, the bank only supports about 2 percent of all U.S. exports. Rather, much larger macroeconomic factors such as exchange rates and national savings play a decidedly bigger role. So what does determine the trade balance between two countries?

The first country, say China, consumes less than it produces, which means the country has net savings overall. The second country, say the United States, would like to consume more than it produces and in particular wants to buy goods or services from the first country. The result is that the United States ends up borrowing money from China to buy these goods. That’s one reason why China is running a trade surplus while United States is running a trade deficit. After a while, the United States will have to pay back China so it’ll reduce consumption, save more, and the roles will be reversed.

Of course, this process can be interrupted if the exchange rate is altered in some way. Say one of the countries has a currency, such as the U.S. dollar, that a lot of people want to hold to facilitate financial transactions. China, meanwhile, generally sets the exchange rate for its currency to make its exports more competitive in the international market. That means the United States will end up receiving a lot of savings from the rest of the world, including from China, allowing it to consume more than it otherwise would be able to purchase. And the currency will be stronger than it would have been otherwise. The result: a trade deficit with imports exceeding exports.

Whether or not exporters get financing from the U.S. Export-Import Bank, its existence would probably only have a marginal effect on net exports.

April 16, 2015

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