Ex-Im Is Supposed to Help Us Compete against Chinese Companies, But It Also Helps Chinese Companies to the Tune of Billions

Export-Import Bank defenders often argue that the U.S. government must subsidize foreign companies because we need to fight back against competition from China. I wouldn’t be surprised if the argument came up today at the Senate’s hearing on Ex-Im. In particular, the argument goes, we have to subsidize our own exports because the Chinese government does too, through the Export-Import Bank of China.

But this assumes, for one, export subsidies are good for the country extending them. The academic literature is pretty clear that this assumption is incorrect. Heritage economist Salim Furth reviewed the literature last year; here’s how he summarized his findings:

However, ample research by academic economists found that in most cases, export subsidies reduce the total income of the country paying the subsidies. In all cases, export subsidies reduce global income, and benefits accrue only to those who are subsidized—at the expense of other exporters and taxpayers. Most of the arguments in favor of the Export-Import Bank recast the bank as having a primary function other than providing export subsidies—such as small-business lending or global diplomacy. But theory and practical reality both show that the bank does not, and should not, engage in other activities. Since the bank’s main function is harmful to the U.S. economy, and it is not designed to carry out other functions, its charter should not be renewed.

Over at the Cato Institute, K. William Watson has a great piece making the case that unilateral disarmament isn’t even really a thing. A tidbit:

Claiming that the United States should pursue any economic policy on the grounds that China is doing it strikes me as bordering on insanity.  Market intervention by the Chinese government has resulted in large-scale misallocation and is a serious liability for the stability of the Chinese economy.  It’s true that Chinese subsidies to domestic industries reduce opportunities for U.S. businesses, and it’s perfectly alright for the U.S. government to condemn those policies.  But should we really seek to emulate them?

Competitive metaphors about trade are generally bad, and martial ones are especially unhelpful.  The United States is simply not engaged in a metaphorical war with its trading partners.  Thinking of trade as a contest inevitably leads to bad policy by giving governments an excuse to intervene in the market for the benefit of crony constituencies.  The fact that some U.S. businesses would make more money if foreign governments pursued better policies is not a legitimate excuse to intervene in the market on their behalf.

But just as important, Chinese companies and – believe it or not — China’s export credit agency also happen to be beneficiaries of Ex-Im financing:

That is: We’re afraid of the competition from Chinese companies in part because of their own Ex-Im Bank, but we also have to extend billions in financing to enable Chinese firms to make purchases more cheaply. Doesn’t that seem like a weird way to treat the competition? (Tim Carney had a good piece on this paradox last year.)