USCC Says Possible Export Credit Deal w/ China Faces Pitfalls
China’s agreement to participate in negotiations on a deal to limit government financing for exports by 2014 is a potentially positive step, but such an agreement faces certain pitfalls and would likely not reverse the growing international inequities created by China’s aggressive government financing of its exports, said the U.S. China Commission in its staff backgrounder “Export Assistance and the China Challenge.”
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The backgrounder, released May 7, said a separate non-comprehensive deal could undermine the Organization for Economic Cooperation and Development’s (OECD) arrangement on export credit financing, and U.S. budgetary concerns constrain the ability of the Export-Import Bank to compete with the extraordinarily high level of export credit financing provided by China. USCC did say, however, that a deal would help the U.S. compete on a case-by-case basis if it greatly improves Chinese transparency.
(In February 2012, China agreed to participate in negotiations on an eventual deal to limit government financing for exports. According to the announcement, the goal is to establish an international working group and to conclude an agreement on export credit finance guidelines by 2014. The February agreement reiterates a previous bilateral agreement to discuss export credit financing, made during the May 2011 meeting of the Strategic and Economic Dialogue, but also adds a deadline for negotiations. See ITT’s Online Archives 11051128 for summary of the May 2011 S&ED.)
USCC Says Separate Export Credit Deal w/ China Could Erode OECD Arrangement
According to USCC, most export credit agencies (ECAs) of OECD members, especially the Ex-Im Bank, operate primarily or wholly as lenders of last resort in a free market context, in contrast to Chinese financing programs which incorporate broader government policy priorities. USCC said participants in the OECD’s Arrangement on Officially Supported Export Credits, a non-binding “gentleman’s agreement” first articulated in 1978 and updated periodically, are increasingly tempted to depart from the non-binding guidelines in order to compete with China’s practices.
USCC said China could see these negotiations as a way to reach a separate agreement with the U.S. outside the scope of the OECD arrangement, or even water down the OECD arrangement. According to USCC, Gary Hufbauer, a senior fellow at the Petersen Institute, said a separate agreement between the U.S. and China would be a “big step backwards” because it would erode OECD members’ trust in the U.S.
Even if Deal Concluded, U.S. Likely Cannot Compete w/ High Level of Chinese Financing
USCC said even if an agreement is reached, the volume of Chinese government financing easily outstrips the capacity of the Ex-Im Bank. According to USCC, Chinese export credit financing could total over $100 billion in new financing provided per year in aggregate, which dwarfs the average of about $20 billion in new financing provided per year by the Ex-Im Bank. USCC said even if Ex-Im Bank’s cap on total outstanding lending, insurance, and guarantees was doubled to $200 billion, the U.S. could not hope to out-subsidize China. Current proposals in Congress would raise the cap to $140 billion.
Chinese Transparency Could Help U.S. Compete on Case-by-Case Basis
USCC argued that a deal resulting in more Chinese transparency could facilitate Ex-Im Bank’s efforts to level the playing field for U.S. exporters by identifying and matching Chinese financing on a case-by-case basis. Ex-Im Bank has used its authority, granted by the Obama administration, to provide matching financing support for U.S. firms seeking to secure domestic or third-country sales when they are up against non-competitive official financing that fails to observe international disciplines. Ex-Im Bank has a “tied aid war chest” available for this purpose. Recently, USCC said, Ex-Im Bank used this authority by offering financing, outside of accepted international guidelines, in order to help General Electric successfully secure a contract to sell locomotive engines to Pakistan despite Chinese offers of loans at below-commercial rates to subsidize Pakistani purchases of Chinese locomotives.
Successful matching, however, will require not just improved transparency but a high level of transparency, said USCC. The backgrounder said that, according to Ex-Im Bank, in the General Electric case, it had precise information on the terms of the Chinese offer, confirmation that financing was a critical factor in the bid award, and had determined that exact matching of the Chinese terms would still provide a transaction-specific profit.
(See ITT’s Online Archives 12050723 for summary of recent House deal to reauthorize Ex-Im bank and raise the cap on financing to $140 billion, in advance of the impending expiration of the Bank’s charter on May 31, 2012.)