Does the US EXIM Bank really promote US exports?

• Published date: 01 May 2018
• DOI: http://doi.org/10.1111/twec.12537
• Author: Zheng Wang,Natasha Agarwal
• Date: 01 May 2018

ORIGINAL ARTICLE

Does the US EXIM Bank really promote US

exports?

Natasha Agarwal

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Zheng Wang

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1

World Education Foundation, Oslo, Norway

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Faculty of Business and Law, De Montfort University, Leicester, UK

3

GEP, University of Nottingham, Nottingham, UK

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INTRODUCTION

The positive role of trade financing in facilitating international trade is ubiquitously agreed and

confirmed by researchers (e.g., Chor & Manova, 2012; Manova, 2013). Nevertheless, the impact

of trade financing provided by national export credit agencies (ECAs) is much less in the clear.

While one camp advocates ECA financing and endorses its positive effect on a country’s exports

and jobs, the other camp doubts the efficiency of ECAs' financing and raises concerns.

1

In the

US, this debate reached its climax when its Export-Import Bank (EXIM), the official export

credit agency (ECA) of the country, closed to new business after 30 June 2015.

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Despite the

sharp controversy around the functions of the EXIM Bank, surprisingly no systematic evidence

exists in the academic literature regarding the effectiveness of the US EXIM Bank in promoting

trade.

In this paper, we attempt to steer this debate into clarity by investigating whether and how—if

any—support (in the form of authorisations) provided by the US EXIM Bank affect s US exports.

We try to uncover the heterogeneity under this potential export-promoting effect of EXIM authori-

sation across various dimensions including industries, regions and size of American companies that

received EXIM support.

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We then move on to examining whether the potential export-promoting

effect of EXIM authorisation is affected by competition from other countries’ECA-financed

exporting activities particularly in the wake of international institutional arrangements such as the

OECD Arrangement on Officially Supported Export Credits (the Arrangement hereafter).

Using panel data on US export flows disaggregated by receiving country, industry and year,

our first set of results provide no detectable evidence on the export-promoting effects of EXIM

authorisation. However, further inspection reveals that this insignificant effect masks hetero-

geneities: EXIM authorisations to all sectors, except for aerospace products and parts (NAICS

3364), have a significantly positive, albeit small effect on US exports, and that this effect is only

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See James (2011) for a review of the viewpoints of both camps.

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On 4 December 2015, the Bank was reauthorised by the Congress for business as usual.

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We look at these dimensions because of its explicit focus in the US EXIM Bank Charter.

DOI: 10.1111/twec.12537

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©2017 John Wiley & Sons Ltd wileyonlinelibrary.com/journal/twec World Econ. 2018;41:1378–1414.

observable for American companies that are not classified as small by the Bank.

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Furthermore, we

find that the positive average export-promoting effect of EXIM authorisation is not affected by

competition from exporting activities financed by foreign governments’ECAs, and that this effect

is neither influenced by foreign governments’accession to the arrangement nor by the size of

American companies that received EXIM assistance. In addition, the general ineffectiveness of

EXIM authorisation is robust when taking into account the heterogeneity with an industry’s posi-

tion in the value chain, and when accounting for the possibility of influences that may spill over

across sectors.

The above results have important policy implications for policymakers in the US as well as in

other countries. Our research highlights the importance of going beyond evaluating a general

export-promoting effect of ECA financing, and of exploring the heterogeneity behind this general

effect that is related to country and industry characteristics. It calls attention to the significance of

ECAs in offsetting competition from other countries’ECA-financed exporting activities. Conse-

quently, it revives the political debate on whether resorting to domestic institutions is the answer

to improving trade competitiveness without leading to protectionism and market distortions domes-

tically and internationally. It also rekindles the debate on countries’binding constraints under vari-

ous international institutional arrangements, and the countering effect on countries’international

commitments as a result of their accession to these arrangements.

Our analysis extends the existing studies that establish a positive and significant impact of ECA

financing on ECA country’s exports. In a pioneering study, Egger and Url (2006) analyse Austrian

export flows disaggregated by receiving country and 2-digit industry, and show that export credi t

guarantees extended by Austria’s ECA, Oesterreichische Kontrollbank (OeKB), indeed foster econ-

omic activity, resulting in a multiplier effect of 2.8. Furthermore, OeKB financing not only results

in the broadening of trade partners towards high-risk regions but also leaves the goods structure of

foreign trade almost unchanged. Moser, Nestmann, and Wedow (2008) analyse German export

flows, disaggregated by receiving country and year, and show that export credit guarantees

extended by Germany’s official ECA, Euler Hermes (Hermes), do lead to higher German export s

with a multiplier effect of about 1.7. The effectiveness of ECA financing crucially hinges on both

the sample of countries and the time period considered. Both studies above show a more than pro-

portional effect of export credit guarantees on export volumes with short-run effects of ECA

financing on export volumes being smaller than long-run effects. This is argued to be largely

because of the lag between the day when a guarantee is authorised and the actual shipment of the

good.

In a similar vein, Felbermayr and Yalcin (2013) study German export flows disaggregated also

by receiving country and 2-digit industry, and document that a 1% increase in export credit guaran-

tees extended by Hermes, boosts exports on average by about 0.012%. Moreover, they show that

the effectiveness of Hermes in increasing exports varies across sectors, regions and income groups.

In particular, Hermes effect is large in a small number of sectors, which are aviation, shipbuilding

and transportation sector. Characterised by high time-to-build lags and large external financial

dependence, these sectors indicate that Hermes’guarantees alleviate sectoral financial frictions.

Lastly, they show that Hermes does not play a strong role in reducing the impact of financial

4

The US EXIM Bank adopts the qualifying criteria for “small business”from the US Small Business Administration (SBA)

definition. SBA has established a “Table for Small Business Size Standards”for industries in the North American Industry

Classification System, where the size standards are based on either annual sales or average employment. The latest table

updated on 26 February 2016 can be accessed from the SBA website at https://www.sba.gov/sites/default/files/files/Size_Sta

ndards_Table.pdf.

AGARWAL AND WANG

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frictions in importing countries on German exports. Likewise, the positive Hermes effect becomes

smaller for less vulnerable sectors in terms of credit constraints. Additionally, they show that Her-

mes have helped contain export collapse during the recent financial crisis of 2008, particularly in

sectors with higher credit constraints. At a more disaggregated level, Badinger and Url (2013)

analyse a cross-section of 178 firms for the year 2008, and show that export credit guarantees

extended by OeKB increase firm-exports from some 80% to 100%. More so, the effect of export

credit guarantees is larger for exports to countries with higher credit risk. The generally positive

pro-trade impact of trade credits is confirmed in some other studies with data collected either from

Berne Union or individual export credit insurer (Auboin & Engemann, 2014; Korinek, Cocguic, &

Sourdin, 2010; van der Veer, 2015).

Our study is also broadly related to the literature which shows that negative shocks to bank-

intermediated trade finance, particularly at times of financial distress at the banks, reduce the

volume of exports for firms that continue exporting to a given product-destination market

(i.e., intensive margin), and have no impact on the probability that a firm exists or enters new pro-

duct or destination markets (i.e., extensive margin) (Amiti & Weinstein, 2011; Paravisini,

Rappoport, Schnabl, & Wolfenzon, 2014; Prete & Federico, 2014). They argue that lack in bank-

intermediated trade finance reduces exports through raising the variable cost of production rather

than the sunk cost of entry investments.

Last, our research is linked to an increasing body of literature on the impact of trade finance on a

country’level and pattern of international trade, both at the macro and microlevel (e.g., Chor & Man-

ova, 2012; Manova, 2013; Manova, Wei, & Zhang, 2015). This line of research argues that financial

comparative advantage alleviates the substantial sunk, fixed, and variable costs of trade such that

financially developed economies export more, especially in financially vulnerable sectors, through

entering more markets, shipping more products to each destination, and selling more of each product.

While our empirical approach is closed related to Egger and Url (2006), Felbermayr and Yalcin

(2013), and Moser et al. (2008), we make several distinctive extensions and contributions to this

growing body of literature. First, to the best of our knowledge, we provide the first rigorous evalu-

ation of the effectiveness of US EXIM Bank, a dominant player in the world EXIM financing.

Second, this is the first paper that provides evidence on whether EXIM authorisation enables

domestic exporters to overcome the competition emanating from foreign government ECA financ-

ing, particularly in cases where foreign government ECAs are acceded to the OECD Arrangement.

Finally, we investigate whether and how EXIM financing enables exporters to move up the indus-

trial chain and evolve itself in the global value chain, offering the first evidence of its kind in the

context of global production networks.

The rest of the paper is structured as follows. Section 2 sets out the conceptual framework elab-

orating the possible channels and directions in which ECA financing would affect aggregate

exports. Section 3 proposes an empirical gravity model for the estimation of the effect of EXIM

support. Section 4 provides an institutional background on the US EXIM Bank. Section 5

describes the data and offers descriptive evidence. Section 6 presents our results and analysis of

the possible influencing channels. Section 7 concludes this paper with a discussion on the limita-

tions and possibilities of future research.

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CONCEPTUAL FRAMEWORK

To export is not cost free. It requires substantial upfront costs in the form of sunk, fixed, and vari-

able costs. While export-related sunk and fixed costs could include learning about the profitability

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