Before proceeding to a further analysis of the reasons for the relatively low figures for exporter credit financing this memorandum will take up— Definition of exporter credit financing. Function of the Export-Import Bank. Reasons for import financing being relatively unneeded. Exporter credits defined The expression "exporter credit," as used at the Export-Import Bank, refers to financing, on the application of an American manufacturer, for his export sales of capital goods to specific user-buyers, i. e. (not for his sales to foreign distributors for resale by them). In banking terms this financing consists essentially of the purchase by the bank from the manufacturer, without recourse to him, of some major portion of the serial note or notes of the buyer given by the latter in payment for the equipment. Typical conditions for these notes would be that they would be payable in semi-annual installments during a 3- to 5-year period (or longer as the character of the goods financed might dictate) preceded by a waiting period long enough to cover the shipment, installation and initial operation of the equipment. As the purchase of the notes would be on a without-recourse basis, the bank's consideration of such an application is necessarily concerned, among other things, (1) with the financial responsibility of the buyer, (2) with the value of the guaranties which he offers, and (3) with the self-liquidating character of the loan. The bank has traditionally been concerned, furthermore, with assuring itself that the end-use or product of the equipment is such as to be helpful to the economy of the buyer's country, and that, preferably, it should be self-liquidating not only in terms of local currency but also in terms of dollars saved or earned for that country. Over-emphasis on these latter factors, as has sometimes occurred in the past, may operate to obscure the purpose of assisting United States production and employment. Nevertheless, the economic, financial and exchange situation of the country of the purchaser must be considered. It is entirely possible for some country to get its affairs into such condition that financing of exports to it must be suspended. FIELD AND FUNCTION OF THE EXPORT-IMPORT BANK IN FINANCING INTERNATIONAL TRADE The directive to the bank in the Export-Import Bank Act of 1945-that it shall finance and facilitate exports and imports-has already been quoted at the outset of this memorandum. It may be helpful to supplement the legal definition with the observation that the Export-Import Bank came into being for the purpose of bridging those gaps and surmounting those impediments that had occurred in the availability of commercial financing facilities for United States international trade-whatever may have been the origin of those gaps and impediments. It should, perhaps, be stressed that the reason for the existence of the Export-Import Bank as a trade-financing institution was and is that it was the United States economy that was suffering and would suffer from the breakdown of traditional financing facilities and only secondarily that the economies of other countries also suffered from this situation. The basic warrant for Eximbank engaging in the financing of exports is that Eximbank assistance brings business to United States plants and work forces, which, without such assistance, would go elsewhere or lapse. If, at the same time as is usually the case-the financing serves a useful purpose in the country of the obligor, and serves to cement good relations with that country, that is a valuable and advantageous result, but the basic motivation should be that worthwhile business results for United States industry-entailing, of course, employment for United States workers. These basic considerations have been too much disregarded in attempts to define the respective fields of operation of the Export-Import Bank and the International Bank. There is a need, therefore, to repeat that the primary justi fication for the Export-Import Bank undertaking sound financing abroad is that it will make possible production in the United States-production that, without such assistance, would not occur in our country. This, then, is the governing factor in determining as between the two lending institutions if proposed business is eligible for Eximbank assistance and not such factitious considerations as whether the foreign obligor or guarantor is a government or private entity, or whether the obligations are long-term or short-term. Accordingly, the suggestion that financing which is offered on the strength of the obligations or the guaranty of a government should not be considered by the Export-Import Bank is preposterous. Be it said, therefore, that what is material to a decision with respect to suitability for the Export-Import Bank consideration is whether the Export-Import Bank financing will bring business to this country's producers which otherwise would either be taken elsewhere, or would have to be foregone altogether for the lack of such financing. RELATIVE UNAVAILABILITY OF OTHER FINANCING FOR EXPORT SALES ON CREDIT It is entirely in harmony with the purposes of the Export-Import Bank that it should be enjoined by statute not to engage in the financing of business for which financing from private sources is available on a practicable basis. The ExportImport Bank reviews this point with all applicants. The almost invariable answer and one that is documented by supporting evidence-is that financing on a feasible basis is not available from private sources in those cases where the extension of credit to the foreign buyer for any considerable period is involved. The general situation is that if medium- or long-term credit is essential to the sale, the alternatives available to an exporting manufacturer are meager and, as a rule, not such as would make it possible for the business to be done. These limited, and usually unacceptable, alternatives comprise: (1) With-recourse financing at the manufacturer's commercial bank.--Commercial banks are generally restricted to commercial maturities of not over 2 years, and would prefer shorter term paper than that. Accordingly, even when the commercial bank will take some of the paper with recourse, the manufacturer would probably be left with the longer maturities. When maturities of no longer than 2 years are involved, the with-recourse feature still places a sharp limitation on the business the manufacturer can do abroad. With-recourse financing is, of course, done on the credit of the manufacturer and he odinarily has to reserve his commercial bank lines of credit for his usual seasonal or other requirements. Most manufacturers therefore simply forego such foreign business as cannot be done on the basis of the buyer providing a letter-of-credit as they cannot afford to remain liable (in the case of with-recourse financing, or of loans collateralized with foreign power) for defaults of the purchaser that may occur over a period of several years. They also do not feel able to take the risk of interference by the purchaser's government, within that period, with his right to remit payments when they become due. The end result of insistence on letter-of-credit terms is, of course, that much worthwhile export business is lost. (2) Without-recourse sale of the buyer's notes to a "factor".-Sales to a factor are ordinarily possible to a limited extent in the case of the notes of good foreign obligors, as the factor's informed estimate of the possibilities of payment, even under conditions of "exchange shortage", may induce him to "take on" the proposed purchase more or less as a speculation. But the usual difficulty is that his charges are very high-for example, around 30 percent on Brazilian paper in 1952-53. Furthermore, the factor would not ordinarily be inclined to buy paper with a longer maturity on its face than 1 year. This automatically eliminates the type of business that would usually be handled by the Export-Import Bank. Most manufacturers make use of the sort of financing extended by factors in the foreign field only as a last resort. Generally speaking, this is not the sort of financing that will facilitate United States export trade. At best it may be conceded a certain utility under normal trade and exchange conditions, when the rates charged by factors would be lower, but its relatively high cost would tend to handicap United States exporters in competing for foreign business. (3) The manufacturer may carry some export sales with his own funds, but this, again, as in (1) above, places a distinct limitation on the business that can be done and is not practicable for more than a small percentage of the manufacturer's total business. For example, if 25 percent of a manufacturer's business is normally foreign and if 5-year terms must be granted to foreign buyers—(at present Brazil admits many types of capital goods only if 5-year financing can be secured abroad)-the manufacturer would before long have the equivalent of a year's sales, (including domestic,) tied up in credits to foreign buyers. The manufacturer says, and quite properly, "We are manufacturers, not bankers." Carrying more than a very small percentage of his foreign sales on medium or long-term credit is clearly impossible for almost any manufacturer. It might properly be asked in this connection: "How much residential building would be possible in this country in the absence of financing-in other words, if the house builder had to "carry" all buyers who could not pay cash?" In the exceptional circumstance, that the foreign paper offered is already favorably known in this market, a commercial bank may be willing to buy it without recourse to the seller. Even so, it would ordinarily have to be the notes of the nearer maturities only, and the commercial bank would expect a higher rate of interest than it would in domestic business. Usually, however, the commercial banks are only willing to engage in foreign-connected financing on the credit of the manufacturer, as noted above. These alternatives are described here at this length in order to emphasize that it is only as an exception that there are any practicable credit facilities available to the American exporting manufacturer for sales involving the extension of longor medium-term credit to the foreign buyer except at the Export-Import Bank. That being the case, it would seem reasonable to expect that, if the bank is the only source of such financing in this country, its administrators would have felt over the years a very considerable responsibility for the foreign financing needs of the American manufacturer on the manufacturer's own application. REASONS WHY FINANCING OF IMPORTS IS NOT ORDINARILY SOUGHT FROM THE BANK The reason that financing is not ordinarily desired or needed for imports is that the financing of staple imports is something in which the commercial banks can and will engage. There is, for example, no problem in securing financing for 10,000 bags of coffee ready for shipment at a Brazilian port. That is a commercial bank function in which the commercial banks are entirely ready to play their part. A letter of credit in favor of the foreign shipper takes care of the matter. (If the American buyer needs financial aid to carry his purchase of a staple import, that also is within the normal field of the domestic banks.) The bank's experience indicates that there is an opening for Export-Import Bank financing in effective assistance of imports only through the indirect method of financing a project for producing in a foreign country some product which the United States can import-for example, a project for iron ore, or manganese development abroad. Such financing would take the form of a project credit, and, as a rule, it covers the cost of the United States equipment and services needed. This financing of the production of a potential import usually has ranked high in priority at the bank and this is as it should be. It may be noted that the funds advanced by the Export-Import Bank in these cases are usually expended largely or entirely for United States goods-therefore, their immediate result is to finance and increase United States exports. Everything considered, the type of financing which is ordinarily suitable and possible for Export-Import Bank is, therefore, the financing of exports, and it is only indirectly through project financing that the bank can aid imports. REASONS FOR PAST SMALL VOLUME OF EXPORTER CREDIT FINANCING In discussing the reasons for the past small volume of exporter credit financing it should be said parenthetically that there is no attempt to suggest here that the bank should do less project financing—which, no less than exporter credit financing, brings business to United States plants that would otherwise go to foreign competitors, or would lapse for lack of financing from any source. But there is one important difference in the impact of the two types of financing on the United States industrial community. In the case of the project financing, the United States manufacturer receives his order from the foreign borrower and in many cases, may scarcely be aware that the Export-Import Bank financing is involved. When, however, the manufacturer secures financing from the bank for an order that his selling organization has worked for abroad, he is very conscious of the Export-Import Bank help. On the other hand, he is adversely conscious of the bank when he fails to get financing to which he believes he is entitled, and especially so if the refusal is based on reasons which are not fully understood. But, taking up the reasons for the past small exporter credit volume, the first place may properly be given to a mistaken philosophy which results in a widely held prejudice against such financing. Surprising as it may seem, considering the statutory purposes of the bank, and the relative unavailability of other financing for exports requiring term credits, the opinion has been widely held in Government circles, and at times perhaps in the bank itself, that it is wrong for the bank to finance exports as such. This extraordinary position is derived from the following fallacious reasoning: (a) Current international financial problems arise largely from trade imbalance. (b) United States international trade is ordinarily heavily overbalanced on the export side. (c) Therefore, United States exports beyond the point of balance are an evil; and (inasmuch as they are already beyond that point) anything done to assist United States exports is economic sin. (Corollary: As the trade of European countries is generally overbalanced on the import wide, it is virtuous, economically speaking, to assist them to export.) Of these, (a) is valid; (b) has very real limitations; while (c) is altogether mistaken. Nevertheless, this reasoning has carried great weight in and outside the bank. While it is correct to say that the United States has typically exported more (including economic and military aid) than it imports, the balance of international payments has been running against the United States for years. For the year 1953 alone (as cited in the Foreign Commerce Weekly of Mar. 29, 1954, p. 5) foreign countries increased their gold and dollar assets in the United States by about $2.3 billion. The source cited says: "Total liquid dollar assets and gold holdings by foreign countries outside the Soviet bloc, and excluding the International Bank and International Monetary Fund, amounted to about $23 billion by the end of the year, representing a new high.' This foreign accumulation of assets in the United States is not mentioned as anything deplorable, but merely to indicate that, as a matter of fact, the flow of international payments, from whatever cause, is against the United States and has been for years. It is perfectly plain, therefore, that, contrary to popularly held theory, the United States has needed more exports to uphold its end of the interchange with the rest of the world. The other countries have been piling up claims against us and not we against them. The theory that it is meritorious to assist the European producer, but not the American, has presumably never had a following in Export-Import Bank circles. It has, nevertheless, been a factor with which the bank's representatives have had to contend at staff meetings of the body charged with setting the bank's policies where there have always been representatives of other agencies who objected to the usual proviso in the Export-Import Bank financing that the funds had to be expended only for United States goods and services. Export-Import Bank credits have been termed "tied loans"-something unpopular in some Government circles. Financing by the International Bank has been considered by these individuals to be on a more lofty plane than Export Import Bank's, as it did not have this sordid limitation. There was, therefore, a certain undercurrent of opposition to Export-Import Bank financing on that basis alone. It was precisely to exporter credit financing that the policy-making body, until comparatively recently was especially antipathetic-possibly influenced by the thinking represented by (c) above. In mid-June 1953, that body reluctantly gave its consent to the bank entering into two commitments with the Whitin Machine Works (credit Nos. 545 and 546) aggregating $850,000, covering its sales to Brazilian buyers. A feature of this consent was the setting of the interest rate for the business at 6 percent, which might be characterized as punitive. (Incidentally, these were the first new exporter credit commitments of the bank since March 1951). In giving its consent to this financing, a spokesman of the policymaking body is reported to have told the Export-Import Bank representative: "Do not consider this a precedent. Please do not ask us to approve any more exporter credits until we have had the opportunity of making a comprehensive study to determine whether the bank should engage in exporter credit financing at all." This position at the policymaking level was fortunately relaxed subsequently. It is only mentioned here because of the light which it sheds on what must otherwise be puzzling gaps in the bank's activity in the exporter-credit field. It is not surprising that this prejudice was a stumbling block for some of the bank's previous administrators to whatever extent they were under its influence and that they manifested a preference for project financing (on the application of the foreign borrower), a preference made sufficiently manifest by the $604 million project volume as compared with $124 million for exporter credits, as in project financing the circumstance that exports are being financed is more in the background, owing to the greater emphasis on the end results abroad. The bank's consideration of even exporter credit applications has also been focused to a great extent on the end results. Attention to the end result may be proper enough in itself, but overemphasis adds up to evidence of the existence of a feeling of guilt with regard to the financing of exports. Therefore, the bank has been in the anomalous position of having the purpose of financing international trade but being hesitant to finance exports as such without some other rationalization. Even if there were a condition of imbalance in our international payments on the side of exports--and we have already seen that the tide of payments for some years has been against us-it would be superficial to conclude that the remedy would be to curtail or discourage the side of the trade movement that was in excess; i. e., in this case assumed to be the exports. If the production of the exports is in itself a valuable element in the economy-if, in fact, it keeps plants occupied, provides employment, and results in activity and profits that pay taxes, while at the same time the exports are of a type suitable for financing as being self-liquidating-it would clearly be wrong to deny their producers such facilities as are reasonably within the power of the Government to grant short of subsidization. Export-Import Bank financing, judiciously granted for the export of self-liquidating capital goods, constitutes such a reasonable facility and is not subsidization, as the bank is not conducted at any net cost to the Public Treasury but rather to its financial advantage. If, then, the production of this type of goods for export is advantageous, while having an excess of exports were harmful, the remedy would obviously be to redress the balance by increasing imports, not by restricting or discouraging exports. Of course, if the exports were disadvantageous in themselves-for example, if their production were only carried on at a loss or if they only moved abroad by benefit of subsidy paid by the taxpayers (instead of their production paying taxes)-the attitude of looking askance at the financing of exports would be justified. As that is not the case, however, any corrective, if needed, should be applied to the building up of the import side of the equation. As already mentioned, the Export-Import Bank can be useful in building up imports by assisting foreign countries to produce goods that can be advantageously imported into the United States. This country is becoming increasingly dependent upon the importation of raw materials from abroad. There is, in any case, no justice and no logic in discouraging exports by withholding from the United States manufacturer Export-Import Bank financing which can be done on a sound basis. If it is withheld, valuable production will be lost, American workers will lose employment, and the United States Government will lose corporation tax income (normally greater in amount than any net profit that would remain to the manufacturer). |