China and Europe hurt themselves with export subsidies; let's not emulate them

Reuters

President Barack Obama addresses the Export-Import Bank's Annual Conference in Washington March 11, 2010.

Article Highlights

  • Republican congressmen shouldn't try to make America more like China

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  • Republican congressmen should make America more like America

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  • Government subsidy programs don’t create wealth

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Smart people who otherwise believe in free enterprise are defending federal export subsidies on the grounds that other countries subsidize their exports.

Ending the U.S. Export-Import Bank would supposedly amount to “unilateral economic disarmament,” in the words of George Landrith, head of the nonprofit Frontiers of Freedom.

But what if the other guys are mostly shooting their own soldiers in the back, and you are, too? Then laying down your weapon is the right strategy.

Economist Frederic Bastiat used a different analogy when discussing Ex-Im's sister policy — protective tariffs: “It makes no more sense to be protectionist because other countries have tariffs than it would to block up our harbors because other countries have rocky coasts.”

Other countries, by subsidizing their exports, are harming their economies. We shouldn’t emulate them.

“If China were to stop using pure-exporter subsidies,” economists from the London School of Economics concluded in a paper presented in 2012, “it would experience a welfare gain of approximately 3 percent.” That is, China’s export subsidies are dragging down its national income by about 3 percent.

China’s export subsidies are much larger and are shaped differently from ours, but when it comes to impact, the difference is one of degree. America’s export subsidies hurt America.

How does this work?

Government subsidy programs don’t create wealth, they just shift incentives around in the economy. Loan guarantees for exports — Ex-Im’s biggest product — move private banks away from financing businesses that serve the domestic market, and toward businesses that export.

When exporters are subsidized, they use up more materials, real estate, financing, equipment, and services than they otherwise would. This increased demand means the unsubsidized businesses face higher prices for the same materials, real estate, financing, equipment, and services.

So export subsidies help some exporters and their suppliers, but they hurt nonexporters and unsubsidized exporters. This isn't a controversial argument. This is the consensus of economists.

The Congressional Research Service noted “most economists doubt ... that a nation can improve its welfare over the long run by subsidizing exports.”

CRS explained: "Subsidized export financing merely shifts production among sectors within the economy, rather than adding to the overall level of economic activity, and subsidizes foreign consumption at the expense of the domestic economy.”

So, China, Europe, and the United States are hurting their overall economies in order to benefit the exporters. The other guy’s export subsidies don’t make our export subsidies any less harmful.

That’s not to say Europe’s and China’s export subsidies are harmless. Boeing is correct that Europe subsidizes its jet maker Airbus far more than the United States subsidizes Boeing. And subsidies for Airbus — while hurting Europe’s economy — also hurt Boeing.

Boeing, understandably, wants Uncle Sam to counter Airbus’ unfair advantage. We ought to escalate at the World Trade Organization in our battle against Airbus subsidies. But if you argue for Ex-Im as the right response, your argument in essence is this: "European governments are hurting their broader economy to benefit Airbus, and Boeing suffers, and so the U.S. government should hurt its broader economy to offset Europe’s harm to Boeing."

This is not an economic argument for U.S. export subsidies. It is ultimately a fairness argument. When you’re arguing that taxpayers ought to bear the risk for JPMorgan’s loans, and the U.S. economy ought to bear the loss, for the sake of Boeing, Caterpillar, and General Electric, it’s hard to lean heavily on a fairness argument.

Sometimes government is called on to act in the name of fairness despite harm to the economy — many programs to aid the needy fit into this category. Major U.S. exporters, however, do not qualify as needy.

Also, the “unilateral disarmament” defense of Ex-Im would hold more water if Ex-Im wasn’t arming the alleged enemy armies.

As I reported in a recent column, U.S. Ex-Im approved an $18.5 million loan guarantee to the Export-Import Bank of China, and extended a cut-rate $75 million direct loan to the state-owned Industrial and Commercial Bank of China. South Korea's export-import bank and Brazil's government-run development bank, which includes an export-import bank, have partnerships with U.S. Ex-Im.

Ex-Im's charter expires this fall. Exporters will tell Republican congressmen to suspend their free-market principles because Europe and China don't play by free-market rules. This argument is grounded in bad economics, though.

Republican congressmen shouldn't try to make America more like China. They should kill Ex-Im, and make America more like America.

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