President Trump announced this week that Jeffrey Gerrish would serve as the acting President of the U.S. Export-Import Bank (“EXIM”). Mr. Gerrish was confirmed by the Senate on March 5, 2018 as Deputy United States Trade Representative for Asia, Europe, the Middle East, and Industrial Competitiveness, and he will continue to serve in that role while acting as President of EXIM.
EXIM is the official export credit agency of the United States, with a mission of supporting American jobs by facilitating the export of U.S. goods and services by offering trade finance, export credit insurance, and working capital. Often criticized as crony capitalism because the vast majority of its financial aid goes to America’s largest corporations, EXIM has been unable to operate at full capacity since June 2015 because it lacks a quorum on its board. EXIM’s five-member board must have at least three spots filled for the agency to be able to approve transactions of more than $10 million. Naming Mr. Gerrish as acting President of EXIM does not remove this limitation, as the other board positions remain unfilled. In December, the Senate Banking Committee rejected President Trump’s choice of former Congressman Scott Garrett as EXIM President, but approved four other nominees to the EXIM board — Kimberly Reed, Spencer Bachus, Judith Pryor and Claudia Slacik. However, the Senate has yet to vote to confirm these nominees.
If EXIM ‘s board positions are filled and it returns to full operation, it will be interesting to see if the Bank goes back to its previous ways, which some believe included the bankrolling of corrupt foreign governments, widespread internal fraud, and the picking of winners and losers among U.S. industries. With respect to the latter of these – picking winners and losers among U.S. industries – the Bank’s Charter and Economic Impact Procedures include language that should prevent this, and should prevent EXIM from doing harm to U.S. industries, but in the recent past the Bank did not always adhere to these requirements. In particular, EXIM is prohibited from financing projects whose production either will contribute to a structural global oversupply or will compete with U.S. production, if this will substantially injure U.S. producers of the product.
In December 2013, EXIM voted to approve a $694.4 million loan to Roy Hill Holdings of Australia contingent upon the purchase of U.S. mining and rail equipment from Caterpillar, GE, and Atlas Copco.The Roy Hill project was expected to produce 55 million metric tons of iron ore annually — more than 100% of total U.S. iron ore production. This was a continuation of EXIM’s pattern of support for foreign iron ore producers (in the four years prior to approval of the Roy Hill financing, the Bank had helped bring on-line 124 million metric tons of new or expanded iron ore capacity).
Consistent with EXIM’s procedures, Cliffs Natural Resources, the United States’ largest producer of iron ore, submitted detailed comments and a substantial economic impact study to EXIM in June 2013, demonstrating that the nominal economic benefits accruing to U.S. exporters as a result of this proposed transaction would be far outweighed by the substantial injury imparted on domestic iron ore producers. It was estimated that as a result of the Roy Hill project, U.S. iron ore producers would lose $589.9M in export sales and $1.2B in domestic sales, for a total loss of nearly $1.8B in total sales over the proposed financing period. Roy Hill’s production would substantially injure U.S. iron ore producers by: causing global iron ore prices to fall by increasing the supply of iron ore; displacing U.S. iron ore exports from Asian markets; and reducing the U.S. domestic sales of U.S. iron ore producers due to depressed prices and additional displacement in the U.S. market. In addition, it was determined that Roy Hill’s production would substantially injure U.S. steel producers by: decreasing the price that their foreign steel producing competitors must pay for iron ore; and increasing U.S. steel producers’ reliance on foreign iron ore supplies.
Notwithstanding Cliffs’ extensive study demonstrating adverse economic impact on the U.S. iron ore industry, the Bank approved Roy Hill’s financing in December 2013 without ever releasing or acknowledging the outcome of its own Economic Impact Analysis (“EIA”) (which it is bound by its Charter to conduct). When a non-confidential summary of the Bank’s EIA was finally made available — only after the transaction was formally approved and Cliffs requested it — it was clear that the EIA was substantially flawed. The Bank’s EIA found an adverse economic impact to U.S. producers of only $25 million (compared to Cliffs’ finding of $1.8 billion in harm). In order to reach this outcome, EXIM made wildly unsupported claims. For example, the Bank deemed, without explanation, that 55 million metric tons per year would not change global supply/demand dynamics in the iron ore space.
In December 2013, when the Bank approved the Roy Hill financing, iron ore traded at $135 per ton. Since that time, iron ore prices have dipped as low as $40, and today sit at $69, due in large part to the global oversupply fueled by projects like Roy Hill. Due in part to EXIM’s actions, Cliffs and other U.S. iron ore producers are struggling for their survival.
In June 2015, Cliffs’ Executive Vice President of Business Development testified before the House Financial Services Committee at a hearing entitled “Examining the Export-Import Bank’s Reauthorization Request and the Government’s Role in Export Financing.” In detailing the severe shortcomings of EXIM’s analysis with respect to the Roy Hill project, Cliffs implored the Committee to require the Bank to be more transparent and accountable. If and when the nominees to EXIM’s board are appointed and the Bank is again able to attain a quorum and operate at full capacity, Congress may consider amending its charter to require greater transparency and accountability, or perhaps EXIM’s board members will simply demand greater accountability and transparency from themselves.