:: June 2014 Letter ::
Remember the Airbus/EU-Boeing/US WTO case? It never really went away, but whenever we hear echoes of both sides pleading their side, we’ve mostly learned to tune them out. But this summer we’re in for a similar controversy with the Export-Import Bank reauthorization debate. As with WTO, we can expect grandstanding politicians, millions of gallons of spilled ink, exaggerated damage claims by both sides, and no possible way to satisfy either side without greatly annoying the other side.
The trouble started a few weeks back when Eric Cantor suffered a surprise defeat by Dave Brat in a Virginia House Republican primary. Cantor was an Ex-Im champion; Brat is fervently opposed to the bank, a key player in financing Boeing and General Electric exports. Since then, the political winds seem to have shifted violently against Ex-Im reauthorization, which the agency needs to continue its work after September 30. I’m here to help, with a guide to all the players in this debate:
Boeing. Ex-Im has been called the Bank of Boeing by its opponents, and while Ex-Im finances a variety of US exports, Boeing customers have received $40 billion in loans or loan guarantees over the past five years, making Boeing the biggest single beneficiary. Boeing makes the very reasonable point that Airbus jet sales received similar support through Europe’s export credit agencies (ECAs), and that a level playing field is essential.
Yet Boeing needs to be careful about messaging on this issue. After years of insisting that there were few risks to the market, and that conservative forecasters had it wrong, it now claims that certain doom would follow after just one exogenous political event (perhaps they’d say, “We said there were no risks to the market. We didn’t say there were no risks to government support for the market.”). When Boeing talks about “tens of thousands of jobs” being at stake, the company also risks implying that its aircraft aren’t sufficiently competitive to overcome a relatively small public finance disadvantage, particularly with today’s very low interest rates. Though, to be fair, nobody knows what interest rates will be in five years. Also, the spread between government-backed rates and market rates could widen.
Ex-Im. This Washington institution says it has returned over $1 billion to the US Government in 2012 and 2013, after covering its expenses, and over $2 billion over the last five years. Profitability, of course, can turn on a dime, particularly if interest rates rise. Ex-Im’s better argument, like Boeing’s, is that most other countries provide public support for export financing, and without it, US companies would be at a disadvantage in global markets.
The Tea Party. Originally, the Tea Party was a somewhat astroturf creation of business interests, harnessing the anger of middle class conservatives to help fight taxes, environmental regulations, and other things businesses hate. But today it is a far more grassroots group, moving in an unpredictably populist direction. Today’s Tea Party is far less likely to support defense spending, Ex-Im, and other things corporations like. Memo to business interests: when creating a monster, make sure to install an off-switch.
The mainstream Republicans. Cantor and other traditional GOP politicians were Ex-Im’s core supporters. AIA’s Marion Blakey put it best in her pro-Ex-Im June 16 Aviation Week Viewpoint: What Would Reagan Do? But the Tea Party has them running scared, afraid to do what Reagan would have done. After Cantor’s defeat, House Majority Speaker John Boehner declined to say whether he supported reauthorization, even though he had been a supporter in the past. Cantor’s replacement as House Majority Leader, Kevin McCarthy, has completely switched. He formerly voted in favor of Ex-Im, and now says, “...it's something that the private sector can be able to do.” Most of the other mainstream GOP leaders, including Senate Minority Leader Mitch McConnell and party Whip John Cornyn, have also declined to express an opinion on reauthorization. The Tea Party may be losing in the polls – Thad Cochran and other mainstream Republicans have staved off defeat in recent weeks. But within the GOP, the Tea Party is winning the ideological war.
Delta Air Lines. The healthiest US major claims that Ex-Im helps its foreign competitors compete against them by letting them buy planes on superior credit terms. That too is a very reasonable complaint. They’ve seen the future, and it looks like Europe, where Mideast carriers are grabbing market share using A380s financed with ECA help (see my June 2010 letter for more on this).
At first Delta looked like they were pulling the Tea Party’s strings on this issue, and as a company with strong political support in the South, they might play a role here. But this month they smartly announced that they were not ideologically opposed to Ex-Im; they merely wanted its portfolio restricted. This might imply limiting Ex-Im finance guarantees to single aisle planes, as opposed to twin aisles that foreign airlines use to compete with US carriers. Delta looks good in this debate. In fact, Boeing and Delta both look like they just want a level playing field. But only one of them can win this fight. And in terms of economic impact, the Boeing crowd may have the stronger argument, particularly since this is the last issue in the world where Boeing and its unions are on the same side.
In addition to a single aisle compromise, another solution would be Means Testing. This would involve determining whether an Ex-Im financing recipient really needed it, or if they were simply locking in low rates while someone else takes the risk. Either of these two approaches makes sense, and they’re probably what I’d advocate. Ex-Im supporters (Boeing included) need to have compromise solutions, and I don’t think they’ve prepared some kind of middle ground position that moderates could adopt.
But there may be no way (or time) to debate compromise solutions. As a political debate, Ex-Im reauthorization might be binary. Congress might be forced to choose between re-authorizing Ex-Im funding or letting it lapse. In that case, I would definitely advocate reauthorization.
Which way will this debate go? I can’t say. But right now it doesn’t look great for Ex-Im reauthorization. Unlike the WTO debate, this issue has a clear expiration date (September 30). What will happen if it isn’t re-authorized? Again, I can’t say. It probably won’t be anywhere near as bad as Boeing claims, but there might be some damage to the company’s market share and output (or profits). There’s no way to know the impact of the US unilaterally disarming in the great export bank market battle. Until now, nobody has wanted to find out.
And while we’re waiting to find out, Teal June Aircraft reports include the Trainer overview, HAL’s LCA and ALH, the Learjets, Tornado, Rooivalk, AMX, and MD-80. Have a great summer.
Yours, ‘Til Ex-Im Provides Finance For A320s Built In Mobile,
© Richard Aboulafia 1997-2006, All rights reserved.