Some in Congress inserted a provision into the Export Import Bank reauthorization bill to re-examine the domestic content rules governing the Bank’s lending.  I blogged about this previously here.

CPA members met with Ex-Im Bank officials three weeks ago, requesting that they do not relax the domestic content rules.  We submitted official comments Friday.  Those comments are below.

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Comments of Michael Stumo, CEO

The Coalition for a Prosperous America

Regarding the 

Export-Import Bank of the United States 

MEDIUM AND LONG TERM CONTENT REVIEW OF 2013

The Coalition for a Prosperous America (CPA) is a national, nonpartisan organization representing American producers of food and goods.  Our members are agriculture, manufacturing and labor organizations, companies and individuals.  Our members are U.S. based and produce primarily for the domestic market but also export.  We represent the interests of 2.6 million households through our organizational and company members.  Our mission is to eliminate the U.S. trade deficit and achieve a national strategy to produce more in the United States.

We support the work of the U.S. Export Import Bank to help finance exports of American products.  CPA opposes any effort to weaken the Bank’s domestic content rules.  Instead, CPA supports strengthening these rules by excluding factors not sufficiently related to the value of the content.  Such factors include executive compensation, profits, etc.

CPA supports the Bank’s mission: “The Bank’s objective in authorizing loans, guarantees, insurance, and credits shall be to contribute to maintaining or increasing employment of United States workers.” 12 USC sec. 635(a)(1).  That core objective is further supplemented by these statutory words.

It is the policy of the United States to foster expansion of exports of manufactured goods, agricultural products, and other goods and services, thereby contributing to the promotion and maintenance of high levels of employment and real income, a commitment to reinvestment and job creation, and the increased development of the productive resources of the United States.

12 USC sec. 635(b)(1)(A)

Relaxing domestic content rules is inconsistent, and violative, of the Bank’s mission to both maintain and increase U.S. employment. There is no data to support the proposition that more foreign content produces more U.S. jobs.

Many of our members come from the tooling, machining, copper, steel, electronics and other industries.  They are primarily domestic supply chain participants.  CPA members produce components for final products sold in the aviation, auto and other industries.  But our members face tremendous unfair trade competition from state-owned and private companies in other countries benefiting from foreign government mercantilism.  That mercantilism includes currency manipulation, foreign value added tax rebates upon export, state-owned or controlled industry subsidies, and many other tactics.

As a result, while CPA members produce tremendous volumes of component products to the American industrial supply chain, many of the products they previously produced have moved offshore.  Our members, and industry in general, have the capacity and expertise to produce many products that have fully moved offshore.  If they receive requests to design and produce these products, they can do so.  Ex Im Bank financing can provide the incentive for these any fully offshored products to again be produced in the U.S.

The U.S. trade deficit in goods reached $730 billion last year, which was a new record.  Manufacturing as a percentage of the economy continues to decrease to 50% of the level which is should be, in our judgment and in the economic judgment of other experts.  Our trade deficit with China was over $300 billion in 2012.  Successful trading nations like Germany and China have comprehensive plans to not only maintain, but increase, the products produced and the size of their industries.  The U.S. has no such plan, and has suffered as a result.

CPA includes primarily small and medium domestic manufacturers that comprise the domestic supply chain.  These companies connect their slow growth or actual decline directly to the failed trade liberalization actions of the U.S.  They generally support the expansion of international trade that results in balanced trade or net exports.  Our members are dying a death of a thousand cuts as a result of trade policies that are focused only on exports while ignoring the greater volume of unfairly low-priced imports on the domestic supply chain.  Weakening the domestic content requirements of the ExIm Bank would be one more cut.

The Ex Im Bank authorizing statute is unique in requiring both maintaining and increasing employment.  The Ex Im Bank’s goal is not to simply make more loans.  Its policies should be calculated to maximize the impact on job creation.

CPA objects to the questions proffered by the Bank in its Medium and Long Term Content Review 2013 because they are directed only to exporters.  The jobs and growth power is captured in the supply chain.  Small and medium sized enterprises, like CPA member companies, do not rely upon exports because they are part of the supply chain.  Any anecdotal evidence received in response to the Bank’s questions from exporters are merely anecdotal, not quantitative data and not reflective of true economic dynamics.  Further, the incentive is for the exporters to unrealistically overestimate the jobs impact because they want easier and more voluminous Bank funding.  As a result, the responses to the Bank’s questions are highly likely to be skewed.

For example:

Question 1.1.  Do the costs that comprise the Net Contract Price1  capture all of the relevant costs and related U.S. jobs associated with your firm’s exports?  Please indicate “Yes” or “No”. 

Question 1.2.  If “No”, what costs are not included in the current content policy?

These questions are directed to exporters only.  Not supply chain participants who do not export with Bank financing.  Exporters are a small portion of the supply chain, and often merely assemble components produced by other firms.

The other questions are similarly not tailored to gain an accurate picture of whether relaxation of domestic content rules will lead to more American industrial production and more employment.  Instead, they seek self serving answers and anecdotes from exporters whose goals are to obtain more taxpayer backed financing while offshoring more content.  Exporters who sell products with higher levels of foreign content should rely upon non-government financing and free markets to succeed.

The Bank does recognize, however, the role of small businesses sub-suppliers in its statements following the questions.

Statement 1: “Insourcing” (Returning or establishing manufacturing production capacity to the U.S.) 

Given the Administration’s focus on providing incentives to support manufacturing, the Bank could explore options for supporting the return of manufacturing production to the U.S.  For example, the Bank could allow for a lower U.S. content threshold (25% below standard, for example) to qualify for maximum support when a company is in the process of returning or moving export-oriented production to the U.S. This approach would leverage potential flexibilities in the content policy and reinforce the Bank’s job mission.

CPA would support rules to encourage insourcing so long as they were carefully tailored to have that effect and included penalties for breach.  We are skeptical, however, of mere claims and representations of insourcing which are overblown or abandoned.

Statement 2: Incentivizing Small Business Sub-Suppliers 

Small businesses help drive the U.S. economy and play a significant role in U.S. employment.  However, not all small businesses export. While Ex-Im works to enable more small businesses to export, there may be content related approaches that could help incentivize the use of small business sub-suppliers by medium and large manufacturers.

CPA supports the maintenance of existing domestic content rules even where foreign products are more expensive or the domestic components do not exist.  As stated above, foreign price differences are often the result of mercantilism.  Exporters that buy foreign components that exceed the Bank’s domestic content thresholds have, in our view, opted out of the framework of job creation which deserve or allow government financing support.  They have fully opted in to the general marketplace for financing and sales.

Further, many domestic industries do not produce a component because exporters have purchased offshore causing the domestic business to cease production.  American industry has the capacity and skills to produce hundreds of thousands of products if they receive orders to do so.  Maintaining domestic content requirements provides an incentive for such orders to re-create those markets here.

Illustrative Content Suggestions from U.S. Exporters

CPA disagrees with the suggestions listed from U.S. exporters.  Each of the suggestions provides a creative way to continue the offshoring trend and prevent an insourcing trend.  The Ex Im Bank role is not to finance all exports, but to finance exports that maintain and create jobs in America.  The Bank has had no problem finding demand for its loan capacity under current rules, as last year was another record breaking year.

Additionally, CPA has read the comments submitted by Owen Herrnstadt (Director of Trade and Globalization, The International Association of Machinists and Aerospace Workers) and joins in those comments.

Relaxation of domestic content rules is unwarranted under virtually any analysis.  Given the high demand for the Bank’s loan capacity, the Bank is in a position to optimize the job creation impact of its lending.  Not relax it.

Thank you.

Michael Stumo, CEO

Coalition for a Prosperous America