NAC files, lot 60 D 137, “Documents”
Memorandum Prepared in the Export-Import Bank of Washington1
Document No. 1466 (Revised)
Export-Import Bank Memorandum—Basic Policy Governing the Extension of Eximbank Credits
In a recent discussion at a Staff Committee meeting of the National Advisory Council, the representative of the Department of Commerce suggested that it would be helpful to the Staff Committee [Page 325] if the Export-Import Bank would furnish a brief statement of its policy in regard to the financing of U.S. exports. This memorandum is submitted in response to that request.
As stated in the Act of Congress,2 the purpose of the Export-Import Bank is “to aid in financing and to facilitate exports and imports and the exchange of commodities between the United States or any of its territories or insular possessions and any foreign country or the agencies or nationals thereof.” Every loan made by the Export-Import Bank is made for the purpose of facilitating the foreign trade of the United States. With only minor exceptions, all of the approximately $4 billion disbursed as loans by the Bank since 1934 have been expended in the United States for manufactured products, commodities or services of United States manufacturers, agriculturalists, and suppliers.
The questions to be considered at all times are:
What is the real problem confronting the foreign trade of the United States?
How can the Export-Import Bank best assist in meeting that problem?
To all who have analyzed this situation it is obvious that this country is not concerned primarily with the ability of the United States exporters to make sales of United States goods, except, perhaps, in special instances like surplus agricultural commodities. The real problem is the ability of the foreign countries to pay for these goods—to obtain enough dollars to buy as much from the United States as they desire. Generally since the first World War, the United States, as a creditor country with the greatest production capacity ever known in the world and with more than the average supply of natural resources basic to a strong economy, has exported more than it has imported. For many years the difference was made up principally through the shipment of gold until the United States had accumulated most of the world’s monetary gold stores. During and since the last war the difference has been met through gifts of one form or another or through dollar credits.
From the earliest days of the Bank it was recognized by the management that the alleviation of our trade problems does not lie in the mere extension of credit. We can solve nothing merely by inducing the rest of the world to expand “installment buying.” What is bought today on credit must be paid for tomorrow. If the equipment which is purchased abroad does not lead to increases in productive capacity of the borrowing country, the “trade base” for the future has not been expanded. The management of the Export-Import [Page 326] Bank is, therefore, following the policy of financing exports on a selective rather than on an overall basis. That is to say, it has restricted its assistance generally to the financing of those products of U.S. origin which will increase the productive capacity of the foreign country receiving them. In certain instances where the foreign country is suffering from a persistent and chronic dollar shortage an additional test may be necessary; that is, that the equipment should enable the foreign country to earn or save dollars. Even in this instance the dollar earning or saving effect need not be direct—it is sufficient that incorporation of such items into the economy of the country indirectly improves its foreign exchange position.
It might be pointed out that the problem of the United States in foreign trade is just the opposite of the problem of Great Britain. It is the constant problem of Great Britain to sell enough abroad to earn the foreign exchange with which to purchase the food, raw materials, and even certain manufactured products required to maintain its island economy. The more that Britain can sell on credit the stronger is the British trade and economy. Great Britain’s problem is to sell enough abroad. Our problem is to get paid for what we sell. There would be no end to the credit which the Export-Import Bank would have the opportunity to extend nor to the number of orders which United States exporters could write were the Export-Import Bank to abandon the policy of careful “selective” financing of exports in favor of making public credit easily available to all exporters who might find it possible to increase their sales by the extension of credit terms to their foreign customers.
The idea of “selective” financing of exports is not based on any premise or implication that it is more important to the United States to export one type of article than another. The manufacture and sale of gadgets and so-called luxury items is as important to the overall economy of the United States as the manufacture of capital equipment and the production of food and raw materials. If, however, the limited public funds available for such purpose through the Export-Import Bank are used to finance the export of that type of equipment which will increase basic productive facilities, the foreign country eventually will be able to buy not only capital equipment, but also the many other items that go to make up a higher standard of living. For example, the Export-Import Bank might be prepared to finance the sale of ore cars or freight cars to a particular country, but not prepared to finance the export of the latest passenger car equipment to the same country. If the ore or freight cars are used to transport to the seaboard products and minerals required in the United States then the country will [Page 327] create wealth not only to pay for those industrial purpose cars, but also sufficient to purchase such passenger equipment as it may need over the coming years. If, however, we should use up the credit of the other country through the sale of the latest type club cars and sleepers, the result is obvious, and can hardly be justified by the desire of the United States exporter to make the particular sale.
There can be no hard and fast rule. Basic economic conditions in the world change rapidly. The dollar problem harassing world trade today may be less severe tomorrow. Many countries have always been exceptions to any chronic and persistent dollar shortage rule. Equipment which serves a productive purpose in one country may not serve such a purpose in another. Equipment which would be only a luxury in one country may become a necessity to the economic life and productive capacity of another community. The management of the Export-Import Bank is convinced that its financing must be such as to improve trade between the United States and foreign countries rather than merely to make next year’s sale a year early.
Nor should the rule be applied with absolute rigidity. Certain United States producers and manufacturers are constantly dependent upon foreign markets to maintain operations. Our cotton and wheat growers consistently have an exportable surplus. Manufacturers of such items as machine tools, farm implements, and textile machinery depend upon foreign markets for the sale of from 30% to 50% of their annual production. From the standpoint of the importing country such products and equipment often supply a legitimate economic need even though they may not represent a first priority capital development.
In these instances in which the particular foreign order is of more than ordinary importance to the United States suppliers, or serves some more general important U.S. interest, the Bank takes such considerations into account, although it is still required that importation of the product or item serve a useful economic purpose and lay no undue burden upon the exchange position of the importing country.
In carrying out these principles the Bank has extended loans generally of the following types:
- The Bank has participated with United States suppliers and exporters in the financing of a particular order for goods of a productive character. By participation we mean that the Bank has agreed to carry anywhere from 50% to 90% of the credit extended to the foreign purchaser—either private or public—without recourse to the United States supplier, who will himself carry the remaining portion of the credit on his own or with the assistance of [Page 328] his commercial bank. Such credits are necessary to fill the void existing in private capital markets for the financing of foreign trade. They serve to place American exporters on an equal footing with the exporters of those foreign countries whose governments have taken steps through export credit insurance or similar devices, to fill this gap in private credit facilities. The sale of heavy capital equipment generally creates a future market for the supplier in the form of spare parts, replacements, and additions. By requesting the supplier to participate, the Bank is assured that the order is one of importance to the supplier, that the supplier has been careful in selecting a foreign purchaser who is credit worthy and that the supplier continues to be interested in the successful operation of his product during the period that the foreign purchaser is making payment.
- The Export-Import Bank has consistently financed the exportation of cotton and other agricultural commodities and certain types of equipment and machinery produced in the United States which are dependent upon foreign markets and which are important to the continued economic life of the foreign country.
- The Bank has extended credits to United States companies, to private interests abroad and to Governments abroad to assist in financing high priority investment projects which will improve the basic productive capacity of the importing country. Of most direct benefit to foreign trade is the financing of the development of minerals and other strategic materials and commodities which are required in the United States and will find a ready market in dollars. For example, a group of strategic material credits authorized in Latin America during the past 2 years will require loans of less than $100 million, but will result eventually in earnings to the countries concerned of approximately $50 million per year, all of which may be used for the purchase of United States products, after the repayment of the loans. Of more indirect, but equally important benefit has been the financing of roads, harbors, electric power installations, irrigation projects and a few basic and secondary industries. It is only after a country has been opened up by the presence of such basic installations that its resources can be brought into world trade and private investors can be induced to establish new businesses and industries. Again it should be pointed out that credits made available abroad to finance such projects are made for the purpose of meeting dollar requirements of such projects, i.e., the funds are available for the acquisition of the equipment and services which are to be purchased in the United States. There are few United States suppliers and manufacturers, large or small, that have not benefited through the sale of material of one type or another, as the result of credits of this type heretofore extended by the Export-Import Bank. Such sales were made without the necessity of the United States exporter incurring any credit risk abroad and in many cases without his knowledge that the sale resulted from Export-Import Bank financing.
- The Bank has extended credits in special circumstances to meet temporary exchange situations which constitute an impediment to continued United States foreign trade. The recent $300 million credit authorized in favor of the Bank of Brazil was of this [Page 329] nature. Also the Bank in 1952 made an advance to the Republic of France against the assignment of the proceeds of military orders placed in France by the Defense Department of the United States, thus making exchange available to France for the continued importation of raw materials and equipment from the United States.
- The Bank has also extended credits the main purpose of which has been to further political objectives of the U.S. Government. In no such instance, however, can the Bank overlook the requirements of its legislation and policies that the loan be economically justifiable and conducive to sound international trade.
All of the foregoing is subject to the policy of the Bank—expressed in its Act as the policy of the Congress—that the Bank in the exercise of its functions would supplement and encourage and not compete with private capital, and that loans so far as possible consistent with carrying out the purposes of the Act, shall generally be for specific purposes and in the judgment of the Board of Directors offer reasonable assurance of repayment.
In addition to making the finding with respect to reasonable assurance of repayment, the management of the Bank must reach a conclusion that private financing is not available for the accomplishment of the purposes before a credit is approved. Numerous requests which would otherwise qualify for loans from the Bank have been rejected for the reason that the utilization of public funds for the purpose could not be justified.
- An earlier version of this memorandum, dated May 29, 1953, was transmitted to the members of the NAC on June 5 as Document No. 1466. That draft was revised by the Export-Import Bank following NAC Staff Committee discussion on June 8, and recirculated to the NAC under cover of a memorandum by the Council’s Secretary, dated June 10, 1953, not printed.↩
- Reference is to the Export-Import Bank Act of 1945 (Public Law 173), approved July 31, 1945; for text, see 59 Stat. 526.↩