There’s no level playing field underground

One of the world’s largest government-supported export development agencies has come out swinging, saying that competing agencies in developed and developing countries are moving underground to support their own domestic companies.

Fred Hochberg, president of the
U.S. Export-Import Bank

In a recent speech Fred Hochberg, president of the U.S. Export-Import Bank, said government-supported financing has recently become a game of “a wink and a nod — finance now for future benefits.”

“Export finance is increasingly like the Wild West, where rules are loosely followed, if at all,” he told the Center for American Progress in a speech entitled “A Wake-Up Call on American Competitiveness.”

American companies have what it takes to win in the global economy, Hochberg said. “But they can’t go head to head with another country bringing all kinds of financing resources – both visible and hidden – to support its own companies.”

Hochberg, who had struggled earlier this year to get refinancing from a skeptical Congress, despite providing $33 billion last year in export financing to support more than 3,600 American companies, said the profound world economic downturn has altered export financing.

“The international export finance landscape is changing dramatically and not in ways that necessarily benefit the United States,” he said, noting there are more than 60 export credit agencies (ECAs) around the world offering a wide variety of incentives to their domestic industries. And all of them are trying to expand their footprint and increase exports.

In an unusual move, the U.S. Export-Import Bank sent analysts to several markets, including Brazil, India, China and Mexico. “We found a stunning increase in the amount of ECA financing that is happening underground and in the dark,” he said.

“We found increased use of unregulated OECD programs, like direct investment and untied financing, as well as the growing presence of ECAs from Brazil, India and China, which are not part of the current export credit guidelines,” he said.

Some of the 34 OECD-member countries were also stretching the rules, Hochberg said. He specifically pointed to Canada – the United States’ largest trading partner, and Japan, also a key trade ally.

“Like when Canada’s export credit agency delivered a $100-million loan to Colombia’s Ecopetrol  – with the understanding that Canadian companies will get a first look in future investment and procurement decisions,” Hochberg said in his speech.

“Or when Japan’s ECA delivered $200 million to India to finance clean energy projects – with the expectation that more Japanese technologies will eventually be used by India,” he added.

Essentially, government-supported ECAs support their national exporters by providing credit to foreign buyers. The OECD rules, such as linking credit to a purchasing deal, are intended to level the playing field, so exporters can compete on price and quality versus favorable financial terms.

For its part, the Ottawa-based Export Development Corporation (EDC) insisted that while it does not usually respond to political rhetoric, it insisted it follows all the lending rules.

“EDC’s job is to help improve Canada’s trade performance, just as Ex-Im’s job is to support American exporters,” a spokesman said. “Given how closely connected Canadian and American companies and economies are, EDC and Ex-Im often work together on many projects, and a number of American companies have benefited from EDC’s global presence and financing.”

Most of Hochberg’s criticisms, however, were aimed at developing markets Brazil, India and China, which are seeing their growth rates slowing. They have been trying to offset stagnating domestic economies by expanding exports through government-supported programs.

“Our study estimated that there was roughly $100 billion in unregulated OECD export financing and an additional $60 billion from the BIC [Brazil, India, China] countries,” said Hochberg. “And my guess is that our estimate of BIC financing is still too low.”

Hochberg is working on what he calls a “new international architecture to bring more of this activity into the light.” He said the U.S. is determined to reduce trade-distorting export finance that ultimately creates a less efficient, less stable international trading system.

“This is the world we live in. And we’ve got to compete in the world as it is, not as we’d like it to be,” Hochberg said. To that end, he proposed two ways to improve America’s competitiveness: build a new, broader framework for export finance that includes more countries and more transparency; and reorganize the trade functions within the U.S. government.

>> Read the 170-page report to Congress, along with the press release and Hochberg’s speech