The Ex-Im Files
WASHINGTON D.C.
AS THE NATION’S SALESMAN IN chief, Bill Clinton looks like a smashing success. When Clinton came to office, his long-term strategy for restoring American prosperity had many facets, but the core of the plan could be summarized in one word: exports. The U.S. economy would boom or stagnate, it was assumed, depending on how American goods fared in global markets. So the president mobilized the government in pursuit of sales.
Flying squads of Cabinet officers, sometimes accompanied by corporate CEOs, were dispatched to forage for buyers in foreign capitals from Beijing to Jakarta. The Commerce Department targeted 10 nations – India, Mexico and Brazil among them – as the “big emerging markets.” Trade negotiators hammered on Japan and China to buy more American stuff. And two new agreements were completed – GATT and NAFTA – to reduce foreign tariffs.
U.S. industrial exports have soared in the Clinton years, from $396 billion during the recessionary trough of 1992 to around $520 billion last year. And as this administration has said time and again, more exports means more jobs – usually good jobs with higher wages. In his fierce commitment to trade, Clinton is not much different from Ronald Reagan, who (notwithstanding his laissezfaire pretensions) also played hardball on trade deals and, in some cases, intervened with more effective results. George Bush, too, bargained on behalf of corporate interests and played globe-trotting salesman. Promoting exports and foreign investment is not a new idea; it has enjoyed a bipartisan political consensus for decades.
What does seem to be new in American politics are the thickening doubts among citizens and a rising chorus of critics, informed and uninformed, who question Washington’s assumptions about exports. The conventional strategy, the critics argue, may help the multinational companies turn profits, but does it really serve American workers and the broad public interest? The new realities of globalized production play havoc with the old logic of exports-equal-jobs. Sometimes it is the jobs that are exported, too.
This contradiction, usually covered up with platitudes and doublespeak in political debate, becomes powerfully clear when you look closely at the dealings of an obscure federal agency located just across Lafayette Park from the White House: the U.S. Export-Import Bank, with only 440 civil servants and a budget of less than $1 billion – small change as Washington bureaucracies go.
Yet America’s most important multinational corporations devote solicitous attention to the Ex-Im Bank. Their lobbyists shepherd its appropriation through Congress every year and defend the agency against occasional attacks. Why? The Ex-Im Bank provides U.S. corporations with hundreds of millions of dollars each year in financial grease that smooths their trade deals in the new global economy.
This year, Ex-Im will pump out $744 million in taxpayer subsidies to America’s export producers, financing the below-market loans and loan guarantees that help U.S. companies sell aircraft, telecommunications equipment, electricpower turbines and other products – sometimes even entire factories – to foreign markets. Since the biggest subsidies always go to the largest corporations, skeptics in Congress sometimes refer to Ex-Im as the Bank of Boeing. It might as well be called the Bank of General Electric – or AT&T, IBM, Caterpillar or other leading producers. Ex-Im’s senior officers call these firms “the customers.”
But the banker-bureaucrats at Ex-Im see their main mission as fostering American employment. “Our motto is, Jobs through exports,” says James C. Cruse, vice president for policy planning. “Exports are not the end in itself, so we don’t care about the company and the company profits.” That was indeed the purpose when the bank was chartered as a federal agency back in 1945 and the reason it has always enjoyed broad support, including that of organized labor.
At this moment, the tiny agency is under intense pressure from influential U.S. multinationals to change the rules of the game. Specifically, the companies want taxpayer money to subsidize the sale of products that aren’t actually manufactured in America. They want subsidies for products that are not really U.S. exports, since companies ship them from their factories abroad to buyers in other foreign countries. If the rules aren’t changed, the exporters warn, they will lose major deals in the fierce global competition and may be compelled to move still more of their production offshore.
“Global competitiveness, multinational sourcing and the deindustrialization of the U.S.,” wrote Cruse in a policy memo for the bank, “were the three most common factors that exporters cited as reasons to revise Ex-Im Bank’s foreign content policy. …. . .U.S. companies need multisourcing to be able to compete with foreign companies. Foreign buyers are becoming more sophisticated, and they are expressing certain preferences for a particular item to be sourced foreign . . .… [and] U.S. suppliers may not always exist for a particular good.”
In plainer language, foreign is usually cheaper – often because the wages are much lower – and sometimes better. As U.S. producers have begun to buy more hardware and machinery overseas, the capacity to make the same components in the United States has diminished or even disappeared. What the companies want, in Cruse’s bureaucratic parlance, is “broadly based support for foreign-sourced components.”
As the complaints from American firms swelled in the last few years, Ex-Im officials agreed to convene the Foreign Content Policy Review Group to explore how the U.S. financing rules might be relaxed. The review group’s members include II major exporters (General Electric, AT&T, Boeing, Caterpillar, Raytheon, McDonnell Douglas and others) plus several labor representatives from the AFL-CIO and the machinists’ and textile-workers’ unions.
The Ex-Im Bank must decide who wins and who loses – a fundamental argument over what is in the national interest, given globalized business. The review groups discussions are couched in polite policy talk, but they speak directly to the economic anxieties of Americans. If young workers worried about their livelihoods could hear what these powerful American companies are saying in private, there would be many more sleepless nights in manufacturing towns across this nation. The information below is taken from confidential Ex-Im Bank memos that were recently leaked to me. What these executives have to say is not reassuring, but it is at least a more accurate vision of the future than anything you are likely to hear from this year’s political candidates.
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THE EX-IM FILES
A DECADE AGO, THE RULE WAS simple: Ex-Im would not underwrite any trade package that was not 100 percent U.S.-made. Then and now, Ex-Im scrutinizes the content of very large export projects, item by item, to establish the national origin of subcomponents. Any subcomponents produced offshore must be shipped back to American factories to be incorporated into the final assembly. If Caterpillar sells 10 earthmoving machines to Indonesia, all 10 of them have to come out of a U.S. factory to get a U.S. subsidy, even if the axles or engines were made abroad.
By the late 1980s, however, as major manufacturers pursued globalization strategies that moved more of their production offshore, Ex-Im, with labor approval, opened the door. In 1987 it agreed to finance deals with 15 percent foreign-made content. Partial financing would also be provided for export deals that involved at least 50 percent U.S. content.
Now the multinationals are back at the table again, demanding still more latitude. The bank’s rules, they complain, have created a bureaucratic snarl that threatens U.S. sales. These regulations are oblivious to the complexities of modern trade in which multinationals routinely “export” and “import” huge volumes of goods internally – that is, among their own far-flung subsidiaries or foreign joint ventures.
The flavor of the company complaints is revealed in Ex-Im Bank minutes of the review group’s first meeting last year, where various company managers sounded off about the new global realities. David Wallbaum, from Caterpillar, urged the bank to be “more flexible in supporting foreign content,” according to the minutes. General Electric’s Selig S. Merber said GE needs “access [to] worldwide pricing.” Merber proposed that instead of insisting on American content item by item, Ex-Im look only at the U.S. aggregate.
Lisa DeSoto of Fluor Daniel, one of America’s largest construction-engineering firms, suggested in a follow-up memo that Ex-Im subsidize “procurement from the NAFTA countries,” Mexico and Canada as if the goods were from the U.S.
But it was Angel Torres, a representative for AT&T, who spoke more bluntly than the others. AT&T’s foreign content has grown in the last 10 years because the U.S. is becoming a “service-oriented society,” Torres said, according to the minutes. “AT&T’s priority,” he declared, “is to increase the allowable percentage of foreign content.”
When I rang up these corporate managers and some others to ask them to elaborate on their views, all of them ducked my questions. The one exception was David L. Thornton, a manager from Boeing, whose newest jetliner, the 777, actually involves 30 percent foreign content in the manufacturing process (mostly from Japan). It still qualifies for full Ex-Im financing, Thornton explained, because Boeing’s original investment in research and development also counts in the sales price. “Our general view of 15 percent is we can live with it for the time being,” Thornton said, “but over time it probably won’t be adequate.”
The labor-union representatives, not surprisingly, choked at the ominous implications of such comments – especially the matter-of-fact references to America’s deindustrialization. Corporate leaders and politicians, after all, have been celebrating the “comeback” of American manufacturing in the 1990s. Exports are booming, and U.S. competitiveness has supposedly been restored, thanks to the corporate restructurings and downsizings. Stock prices are rising, and shareholders are happy again.
The private corporate view is not so cheery for the employees. A memo from one multinational corporation (its identity whited-out by Ex-Im bureaucrats) made it sound like the demise of American manufacturing is already inevitable: “We believe the current policy does not reflect the de-industrialization of the U.S. economy and the rise of the Western European and Asian capabilities to produce high-tech quality equipment . . .” the memo states. “Location is no longer important in the competitive equation, and where the suppliers of components will be [is] wherever the competitive advantage lies.”
The more that labor heard from the companies, the more hostile it became to any revision. “We have been presented with no credible evidence that current bank policies have cost companies sales, thereby reducing U.S. employment,” the labor representatives fired back in a jointly signed letter in April. “While we understand that global corporations might prefer fewer restrictions – even the provision of financing regardless of the effect on jobs in the United States – that desire simply ignores the very purpose of extending taxpayer-based credit.”
If Ex-Im agrees to finance more foreign content, the labor reps asked, won’t that simply encourage the multinationals to move still more U.S. jobs overseas, thus accelerating deindustrialization? When I put this question no Ex-Im officials and corporate spokesmen, their answer was a limp assurance that this isn’t what the bank or the companies have in mind.
But can anyone trust these assurances? The massive corporate layoffs have sown general suspicions of the companies’ national loyalties, and the “outsourcing” of high-wage jobs has already boiled up as a strike issue in major labor-management confrontations. The United Auto Workers shut down General Motors earlier this year over that question. The UAW lost a long, bitter strike at Caterpillar when it demanded wage cutbacks, threatening to relocate production if the union didn’t yield. The International Association of Machinists and Aerosoace Workers closed down Boeing’s assembly lines for two months last fall. demanding a stronger guarantee of job security as Boeing globalizes more of its supplier base.
“Ex-Im financing is corporate welfare with a fig leaf of U.S. jobs, and now they want to take away the fig leaf,” says Mark A. Anderson, director of the AFL’s task force on trade. “They want to be able to ship stuff from Indonesia to China and use U.S. financing. I said to them, ‘You’re nuts. If you go ahead with this, you’re going to be eaten alive in Congress.’ “
George J. Kourpias, president of the machinists’ union whose members make aircraft at Boeing and McDonnell Douglas, and jet engines at GE and Pratt & Whitney, put it more starkly: “The American people aren’t financing that bank to take work away from us. If the foreign content gets bigger, then we’re using the bank to destroy ourselves.”
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EXPORTS = JOBS?
ACCORDING TO THE GOVERNMENT’S dubious rule of thumb, each $1 billion in new exports generates 16,000 jobs. By that measure, Bill Clinton’s traveling salesmen brought home 2 million good jobs. So why is there not greater celebration? The first, most-obvious explanation is imports. Foreign imports soared, too, albeit at a slower rate of growth, and so America’s trade deficit with other nations actually doubled in size under Clinton, despite his aggressive export strategy. Thus a critic might apply the government’s own equation to Clinton’s trade deficit and argue that there was actually a net loss of 1.1 million good jobs.
Bickering over the trade arithmetic, however, does not get to the heart of what’s happening and what really bothers people: the spectre of continued downsizing among the nation’s leading industrial firms. In fact, globalization has created a disturbing anomaly. U.S. exports multiply robustly, yet meanwhile, the largest multinationals that do most of the exporting are shrinking dramatically as employers. Its important to note that about half of U.S. manufacturing exports come from only 100 companies, and 80 percent from some 250 firms, according to Ex-Im’s executive vice president, Allan I. Mendelowitz. The top 15 exporters – names like GM, GE, Boeing, IBM – account for nearly one quarter of all U.S.-manufactured exports. Yet these same firms are shedding American employees in alarming dimensions. The 15 largest export producers, with few exceptions, have steadily reduced their U.S. work forces during the past 10 years – some of them quite drastically – even though their export sales nearly doubled.
GE is a prime example because the company is widely emulated in business circles for its tough-minded corporate strategies. In 1985, GE employed 243,000 Americans and, 10 years later, only 150,000. GE became stronger, then Executive Vice President Frank P. Doyle said. But, he conceded, “We did a lot of violence to the expectations of the American work force.”
So, too, did GM, the top U.S. exporter in dollar volume (though the auto companies are not big users of Ex-Im financing). GM has shrunk its U.S. work force from 559,000 to 314,000. IBM shed more than half of its U.S. workers during the past decade (about 132,000 people). By 1995, Big Blue had become a truly global firm – with more employees abroad than at home (116,000 to 111,000). Even Intel, a thriving semiconductor maker, shrank U.S. employment last year from 22,000 to 17,000. Motorola has grown, but its work force is now only 56 percent American.
The top exporters that increased their U.S. employment didn’t begin to offset the losses. The bottom line tells the story: The government’s great solicitude for America’s major multinational corporations has not been reciprocated, at least not for American workers. The contradiction is not quite as stark as the statistics make it appear, because the job shrinkage is more complicated than simply shipping jobs offshore. Some companies eliminated masses of employees both at home and abroad. Others, like Boeing, reduced payrolls primarily because global demand weakened in their sectors. Some jobs were wiped out by labor-saving technologies and reorganizations. But virtually all of these companies offloaded major elements of production to lower-cost independent suppliers, both in the U.S. and overseas. If the jobs did not disappear, the wages were downsized.
This dislocation poses an important question, which American politicians have not addressed. Does the success of America’s multinationals translate into general prosperity for the country or merely for the companies and their shareholders? The question is a killer for politicians – liberals and conservatives alike – because it challenges three generations of conventional wisdom. That’s why most Democrats or Republicans never ask it.
When these facts are mentioned, the exporters retreat to a few trusty justifications. First there is the “half a loaf” argument. Yes, it is unfortunately true that companies must disperse an increasing share of the production jobs abroad, either to reduce costs or to appease the foreign customers. But if this were not done, there might be no export sales at all and, thus, no jobs for Americans. Next, there is the “me, too” argument. All of the other advanced industrial nations have export banks that provide financing subsidies to their multinationals. The export banks in Europe do allow greater foreign content than the U.S. – but only if the goods originate from an allied nation in the European community. France supports German goods and vice versa, just as Michigan supports California. The U.S. Ex-Im Bank, as Mendelowitz has pointed out, actually provides greater risk protection and generally charges lower premiums.
Japan’s Ex-Im bank is, indeed, more flexible than America’s, but Japan’s industrial system also operates on a very different principle: Major Japanese corporations take responsibility for their employees. That understanding creates a mutual trust that allows both the government and the firms to pursue more sophisticated globalization strategies. Japanese jobs are regularly eliminated when Japan’s manufacturing is relocated offshore in Asia or in Europe (and sometimes in the U.S.), but the companies find new jobs for displaced employees and only rarely, reluctantly, lay off anyone.
“The situation that our companies see,” Ex-Im’s Cruse explains, “is that Japan is willing to finance as much as 50 percent foreign content, and [the companies] say to us, ‘You’re not competitive.’ But an important difference is that the Japanese government doesn’t have to worry about the workers because the Japanese companies worry about them. . . .… If GE subcontracts work to Indonesia, it tends to lay off a line of workers back in the U.S.”
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BAIT AND SWITCH
IN APRIL 1994, AT&T ANNOUNCED a $150 million joint venture with China’s Qingdao Telecommunications to build two new factories, in the Shandong province and in the city of Chengdu, in the Sichuan province, that will manufacture the high-capacity 5ESS switch, the heart of AT&T’s advanced telephone systems. AT&T’s chairman, Robert Allen, said that it will more than double its Chinese work force over the next two or three years.
Five months later, in September, the Ex-Im Bank in Washington approved the first of $87.6 million in loan guarantees to underwrite AT&T’s export sales to China – switching equipment that will modernize the phone systems in Qingdao and several other cities. AT&T won the contract in head-to-head competition with Canada’s Northern Telecom, Germany’s Siemens and France’s Alcatel Alsthom. The Clinton administration celebrated another big win for the home team.
But who actually won in this deal? A Telecom Publishing Group article provided a different version of what AT&T’s victory meant for the United States. “While some equipment for AT&T’s network projects in China will be built in this country,” the article reported, “the Chinese are demanding that eventually the bulk of the equipment in their system be built in their country, the carrier [AT&T] said.”
An AT&T public-affairs vice president, Christopher Padilla, denies this, but then Padilla also denies that AT&T is prodding the Ex-Im Bank to relax its foreign-content rules. Further, he assures me that despite their proximity, there was no explicit quid pro quo and no connection between the two transactions, the taxpayer-financed export sales and AT&T’s agreement to build new factories in China.
“It’s a reality of the marketplace,” Padilla says. “If we tried to pursue a strategy of just making everything in Oklahoma City” – where the 5ESS switch is now manufactured – “we wouldn’t have any market share at all.”
The White House also led cheers for Boeing because Boeing was also stomping its competitors in the Chinese market. In 1994 alone, Boeing sold 21 737s and seven 757s to various Chinese airlines and obtained nearly $1 billion in Ex-Im loans to finance the deals. When President Clinton hailed the news, he did not mention that Boeing had agreed to consign selected elements of its production work to Chinese factories. The state-owned aircraft company at Xian, for instance, began making tail sections for the 737, work that is normally done at Boeing’s plant in Wichita, Kan. The first order for Xian was for 100 sets, but that was just the beginning. In March 1996, a China news agency boasted that Boeing had agreed to buy 1,500 tail sections from Chinese factories, both for the 737 and the 757. The deal was described as “the biggest contract in the history of China’s aviation industry.”
Unlike AT&T and some others, Boeing is relatively straightforward about acknowledging that it’s trading away jobs and technology for foreign sales. China intends to build its own world-class aircraft industry, and Boeing helps by giving China a piece of the action, relocating high wage production jobs from America to low-wage China, as well as relocating some elements of the advanced technology that made Boeing the world leader in commercial aircraft. Boeing has told its suppliers to do the same: Northrop Grumman, in Texas, is sharing production of 757 tail sections with Chengdu Aircraft, in China.
“What we’ve done with China,” says Lawrence W. Clarkson, Boeing’s vice president for international development, “we’ve done for the same reason we did it with Japan – to gain market access.” The two transactions – the export sales and job transfers – are legally separate but typically negotiated in tandem, Clarkson explains. China always insists upon a written acknowledgment of the job commitment in the export sales contract – the same sale to China submitted to the Ex-Im Bank for its financial assistance.
Until recently, the Ex-Im Bank’s operative policy on this issue could be described as “don’t ask, don’t tell”: The bank officials didn’t ask the companies if they were offloading jobs, and the companies didn’t tell them. When I asked various Ex-Im managers if they knew about AT&T’s new switch factories in China before they approved AT&T’s export financing, their answer was no. What about companies like Boeing doing similar deals?
“Yes, we’re aware of that,” Cruse says. “Its not that the companies tell us, but it’s not hard to read the newspapers.”
After prodding from labor officials, the bank last year began requiring exporters to reveal whether they dispersed U.S. jobs or technology in connection with the Ex-Im-financed sales. But the federal agency still approves these deals without weighing the potential impact on future employment. In fact, Ex-Im still pretends that the export sales and corporate decisions to relocate jobs are unrelated transactions, though every company knows otherwise.
The practice of swapping jobs for sales is widespread in global trade – deals are negotiated in secrecy because such practices ostensibly violate trade rules. But everyone knows the game, and most everyone plays it. If Boeing doesn’t swap jobs for Chinese sales, then its European competitor Airbus will. If AT&T doesn’t move its switch manufacturing to China, then Siemens or Alcatel will (in fact, Alcatel already has). The cliché at Boeing is “60 percent of something is better than 100 percent of nothing.”
The trouble is that nothing may be what many American workers wind up with anyway – especially if China eventually becomes a world-class aircraft producer itself. Officials at the Communications Workers of America, which represents AT&T workers, recall that Ma Bell once made all its home telephones in the U.S. and now makes none here.
Is the same migration under way now for the high-tech switches? The AT&T spokesman insists not. Anyway, he adds the assurance that the most valuable input in these switches is the software, not the hardware from the factories, and the design work is still American. This may reassure the techies, but it’s not much comfort to those who work on the assembly lines. Besides, AT&T plans to open a branch of Bell Laboratories in China.
The dilemma facing American multinationals is quite real, but the question remains: Why should American taxpayers subsidize export deas contingent on increased foreign production, or even offloading portions of the American industrial base? Americans are told repeatedly that they cannot exercise any influence over these global firms, but that claim is mistaken. The Ex-Im Bank is an important choke point in the bottom line of these multinationals. Americans should demand that the subsidies be turned off, at least for the largest companies, until the multinationals are willing to provide concrete commitments to their work forces.
The gut issue is not about economics but about national loyalty and mutual trust. “Every meeting we have in the union, we open it with the pledge of allegiance,” machinists’ union president George Kourpias muses. “Maybe the companies should start doing that at their board meetings.”