As the US hopes for an export-driven recovery, some doubt remains on whether the country can meet the objectives set out by President Obama, writes Shannon Manders.
America’s plan for spurring exports is certainly off to a good start. Since bottoming out a year ago, total exports of goods and services were up 17.7% for the first six months of the year compared to 2009.
But June’s US trade statistics have shed doubt on the efficacy of President Obama’s national export initiative (NEI) which, launched in February, aims to support jobs and double US exports by 2015.
“It’s no secret that the US economy has been an underachiever in export volumes historically,” says Gordon Hough, senior vice-president, structured trade finance at Wells Fargo in New York, commenting on the increased resources that have been dedicated to US exporters as part of government initiatives. “Will exports rise? Yes. Will they double? I’m not sure.”
But Fred Hochberg, president and chairman of the Export-Import Bank of the United States (US Ex-Im) believes that if the solid gains in exports continue, the US is indeed likely to meet Obama’s objective.
And as America slowly gets the message that it needs to look beyond its 50 states to fund its recovery, Hochberg asserts that exposure to new export markets is becoming increasingly important.
“We cannot rely on the American consumer to power the global economy, as it has for many years,” he said, speaking at a media roundtable event in London.
For many US businesses, the booming Asia market has become a top priority. “We’re not going to sell a lot of grain to Argentina or a lot of computers to Germany. But the growing middle class in Asia is going to be a big market for many of the exports from the US,” says Bruce Proctor, senior vice-president, trade and supply chain product executive at Bank of America Merrill Lynch (BAML).
Michael Schmittlein, executive vice-president and east region head of Wells Fargo’s global banking group, echoes this sentiment, adding that Wells Fargo is building its strategy around this growth trend. “Look at how many companies just export to one country as opposed to multiple countries. If you look at the statistics that way, there is substantial growth to increase US export activity, particularly among middle-market companies.”
US Ex-Im boosts exports
In the current fiscal year to date, US Ex-Im has authorised US$20.8bn in export financing to support American exporters.
The bank closed a number of deals in mid-2010 including a US$500mn deal with the Vietnam Development Bank to help speed up approvals to build infrastructure, and a US$1bn credit facility in Indonesia to help SMEs purchase US exports.
A number of bankers believe that as a result of its innovative ideas and solutions, US Ex-Im has been at the forefront of other ECAs during the crisis period.
To help facilitate Obama’s NEI goal, the US Ex-Im initiated a marketing strategy targeting nine priority countries that are growing in industrial sectors where US exporters have a comparative advantage. Indonesia, Vietnam, India, Mexico, Colombia, Brazil, South Africa and Nigeria have been identified as having the greatest export opportunity. US trade representatives are also lobbying for the removal of trade barriers on exports to these nine markets.
Although the US Ex-Im had previously been criticised for only scratching the surface with short-term exposures and traditional approaches, banks now report that the feedback from exporters suggests that the bank has become more engaged, aggressive and creative when it comes to financing their sales offshore.
“Now, banks are coming out of the woodwork trying to get US Ex-Im deals,” says Astar Saleh, head of structured trade finance at JP Morgan. “It’s amazing. When banks were never there before, now they are eager to finance US Ex-Im guaranteed loans.
“And US Ex-Im has moved forward faster than any other ECA to help the small and medium-sized suppliers. Now you’ll see more of them getting the full support of US Ex-Im – not just the Boeings.”
Business is picking up for US banks too, with the majority of bankers reporting that they are seeing an improved demand for trade finance and a steady increase in transactions in relation to this time last year.
According to Howard Bascom, managing director, trade finance services at BNY Mellon, there have been some “interesting shifts” in the business, in that while dollar volumes have indeed picked up, actual unit volumes have not yet recovered.
And, while pricing is down significantly, is has not yet returned to pre-crisis levels. “I don’t think it will,” says Bascom. “For a variety of reasons: first, there’s a better appreciation for the risks associated with trade finance and trade credit; second, and even more important, is Basel II. Many European banks talk about how they are in an uncompetitive situation with US banks that haven’t moved toward Basel II compliance yet.”
Although President Obama has called the first few months of the NEI a “terrific” success, a US$49.9mn trade deficit in June suggests otherwise.
The US trade deficit with the rest of the world surged 18.8% over May’s number, with consumer goods from China accounting for a large portion of the figure. While the rise in imports suggests the US economy is growing, the drop in exports is a troubling sign for US manufacturers who rely on overseas markets. And, as non-oil and petroleum imports rise faster than exports, it is expected that the overall trade deficit will increase sharply when oil prices rebound.
The general view among US bankers is that while President’s Obama’s NEI goal is indeed admirable, US exporters are likely to face a long and challenging road before realising this success. And the US Ex-Im will need to step up its game in order to support US exporters’ initiatives.
US Ex-Im has been criticised for supporting a far lower percentage of trade than its peers. “It has a lot of changes to implement,” says one US banker. “It’s one of the most pure OECD consensus banks – all the others have moved to interest. It is also very rigid in terms of the way it sets pricing. That’s got to change.”
The bank has also been slammed for being too “aircraft-centric” and not focusing enough of their efforts on SMEs. “If you take out the aircraft, you have a very miniscule portion of the entire trade needs that are being addressed,” says GTR’s source.
“They took a step in the right direction by being the first to offer their guarantee in the capital markets. But then what? They just dropped it. Their effort is really only helping the aircraft business.
“They haven’t addressed foreign currency swaps, which is what they need to do. There is still a lot of room for improvement.”
Problems for SMEs
Despite SMEs being high on the list of priorities for the US Ex-Im, with Hochberg noting that the bank’s focus has “also been on small business in particular, because they have a much harder time accessing capital and credit”, US SME exporters are still encountering substantial barriers.
In January this year, a report issued by the US International Trade Commission (ITC) announced that while more than 99% of US businesses are SMEs, these firms account for only a relatively small share of US exports.
A second ITC report published in July found that some of the challenges that SMEs face include insufficient access to finance, problems with domestic and foreign regulations, high transportation costs, the small scale of SME production, tariff and non-tariff barriers, troublesome foreign custom procedures and lack of knowledge of foreign markets.
According to the ITC report, SMEs have difficulty obtaining both trade finance and working capital, which prevents them from financing purchases by foreign buyers and often encourages buyers to choose suppliers that are able to extend credit. Other finance-related barriers include a lack of pre-shipment financing to cover large orders, as well as a general lack of support from banks, who often regard start-up SMEs as a higher risk than larger firms.
But Kaoru Furuya, deputy general manager and regional head of the Americas at SMBC believes that demand for working capital solutions and supply chain financing is in fact diminishing. “Banks are criticised because they are highly selective in lending money.
But demand is coming down. It’s a deleveraging problem,” he explains, adding that the problem is SMEs’ attitudes towards their balance sheets. “All those who used to borrow money are now trying not to borrow money, so the balance sheet is shrinking. So, not only are banks unwilling to lend, but corporates are trying to shrink their balance sheets.”
The ITC report also found that SMEs in many sectors highlighted that domestic regulations maintained by the US federal and state governments also serve as barriers to exporting. The process for export controls was described as “too lengthy, cumbersome, costly, rigid, inflexible and bureaucratic”.
US SMEs also reported that transport costs significantly constrain exports, and noted that certain fixed costs place SMEs at a disadvantage in exporting compared to larger firms.
One key constraint cited by US SME exporters is container shortages. The report notes that “data for the Port of Portland alone show an annual shortage of approximately 70,000 containers in 2009”. According to SMEs, containers are often bottlenecked on the East Coast, and must be repositioned to West Coast ports for use in exports.
Earlier this year, a Wall Street Journal article reported that shipping carriers cut their services to the US when imports fell, making it harder for US exporters to get their goods shipped in a timely fashion.
“When ships carrying imports call less frequently at US ports, or even skip some ports they once went to, exporters have to wait longer or look harder to find a ride for their goods they want to export,” the article said, also noting the fact that carriers are now charging higher rates.
But for now, only a small handful of US bankers are aware of such problems impeding their exporting clients. The majority are more aware of a vast idle capacity of bulk carriers as a result of the crisis.
Bradley Hardy, senior vice-president of the global banking team at Wells Fargo in New York believes that the problem is not lack of shipping capacity, but the nature of the capacity. “There’s still capacity, but you’ve got to ship entire containers,” he says, adding that one of his clients, who was able to ship smaller quantities some three years ago and now faces the possibility of completely changing his business.
“He made a business off of hundreds of smaller shipments at higher margins, but now realises that in order to get capacity he must ship full containers; so he has to do six big shipments a year.
“It has a complete implication for how he finances business. Before, a small bank line that he could cycle through many, many times a year would be sufficient. But now, he no longer needs a US$1mn line but a US$5mn line.”
US Ex-Im falters
But perhaps one of the greatest restriction US exporters face is one that the US Ex-Im itself imposes. The bank stipulates that those exporters accessing its medium and long-term loans and guarantee programmes be required to make use of US vessels exclusively or acquire a waiver, which can be difficult to obtain.
“This creates tremendous costs for US exporters and buyers of US exports using long-term financing,” says Mini Roy, senior vice-president of SMBC’s export and agency finance group. “There isn’t a lot of capacity on US flag vessels, and US exporters are basically prohibited from using cheaper options with foreign flag ships.”
Indeed, US Ex-Im’s Hochberg concedes that this is the requirement for transactions over US$20mn, unless a waiver is obtained from the US Maritime Administration (Marad). “It’s not the easiest process, but it’s not an impossible process,” Hochberg says.
“It’s part of our overall public policy regarding encouraging jobs. Therefore if there’s American support from the ECA, we want to make sure the American carriers are involved as well.”
But bankers maintain that this specific policy is especially detrimental to US exporters. “Everybody from top to bottom in US Ex-Im will tell you that it’s terrible. But it hasn’t been fixed in years,” a US banker tells GTR.
“I can tell you there are buyers around the world who will not buy US product financed by US Ex-Im because of that restriction. It actually increases the contract price – by sometimes as 15-20% – which is the difference between making a sale and not.”
Another of the bank’s restrictive policies is its 85% requirement for US content on the exports that it finances.
At a conference in Houston, Texas this year, Pat Crilley regional director of the US Ex-Im’s southwest regional office explained that it there is now an allowance for some foreign content, but added that the restriction does “eliminate US Ex-Im as a solution” on some sales.
According to Crilley, the bank has already eased its restrictions on US content in that now, if exporters go below 85%, US Ex-Im is limited to just financing the US content, instead of the lender receiving the full 100%.
Also, in larger transactions, US Ex-Im implements co-insurance agreements with other ECAs. “So, for example, if you have a field that may be part Canadian and part US, we’ll lay off the Canadian risk for the Canadians. We’ve done that for the Brits, the Germans and the Italians. We fund solutions, but as a government agency, it’s difficult to move the needle that far,” Crilley argued. GTR
Merging the physical and the financial
As part of their efforts to better equip their clients to deal with these challenges, a few banks are becoming increasingly involved in providing logistical support. This move into the physical supply chain was one that JP Morgan championed with its acquisition of trade management solutions provider Vastera in 2005.
Many bankers now believe that similar consolidations are now inevitable, and that banks will partner up to offer an integrated service.
“I think over time it’ll be something that we do because it makes sense, and it’s an area where we are seeing rising competition,”
says Bruce Proctor, at Bank of America Merrill Lynch. “I don’t see us buying a shipping company or warehouses, but what I think we do need is to be a lot more attuned to how some of those physical requirements really do shape our customers’ business.”
Since JP Morgan’s entry, various banks have made some forays into software and logistics companies, says Michael Quinn, managing director, global trade services at JP Morgan. But they’ve not yet been particularly active in the market. “For some, business waned when they didn’t see an immediate business proposition. Others got distracted by the financial crisis.” GTR