Credit Crunch Taking a Toll on U.S. Exports

Slumping world demand is bad enough, but now, many would-be buyers can’t get the financing they need.

By Andrew C. Schneider, Associate Editor, The Kiplinger Letter

January 14, 2009

The latest trade numbers are a harbinger of a bleak year. The November 2008 deficit of $40.4 billion was nearly 30% narrower than October's $56.7 billion gap. While that constitutes the smallest monthly trade gap in five years, no one should be cheering. The $8.7 billion decline in monthly exports points up the slumping demand for U.S. capital goods, industrial supplies and autos as the world recession deepens. The $25 billion drop in monthly imports, nearly half of which stemmed from plummeting crude oil prices, reflects the belt-tightening of U.S. consumers and businesses.

Overall, the U.S. exports are set to shrink by 2.5% in 2009 -- their worst performance since 2002. Imports will drop by 4%, their sharpest decline in six decades.

Among the problems: The credit crunch will continue choking off global trade financing. The worst hit will be emerging markets. Such countries have been the fastest-growing customers for U.S. exporters in recent years, buoyed by economic reforms and the high price of their own commodity exports. But as banks cut their risk exposure in the face of financial uncertainty, emerging markets are among the first to have their access to credit cut off.

The government takeover of AIG and Wells Fargo's swallowing of Wachovia complicate the picture, effectively pulling both companies out of the trade-financing business. "Thousands of companies in emerging markets are unable to get financing because the players are missing," says Adam Lerrick, a professor of economics at Carnegie Mellon University and a visiting fellow at the American Enterprise Institute.

As their foreign customers' credit lines dry up, U.S. exporters will feel increasingly parched as well. Sales of capital goods and infrastructure-related services will suffer most: civil aircraft, trains, earthmoving equipment, turbines and engineering -- the same sectors in which the U.S. is traditionally the most competitive. Few businesses have the resources to pay for such expensive imports up-front.

"It's a serious drag on our ability to maintain, let alone expand, export sales," says Edmund B. Rice, president of the Coalition of Employment through Exports, a trade advocacy organization made up of some of the leading U.S. and European multinationals.

Governments and multilateral lenders can't close the gap entirely, though they are trying. Since October, the World Bank has tripled its capacity for trade financing to $3 billion. As part of an agreement with China, the U.S. will provide an extra $12 billion to support exports of American goods and services to emerging markets, acting through its Export-Import Bank (Ex-Im). That's on top of a $2.9-billion country-specific facility Ex-Im put in place for South Korea -- the U.S.'s seventh-largest export market -- which relies heavily on letters of credit to finance its imports. China is adding $8 billion in financing to cover its own sales to emerging markets, as part of its agreement with the U.S. Germany, Japan and other countries are moving to grease the wheels as well.

Some credit agencies, including Ex-Im, are prepared to provide direct loans, and many are willing to reimburse private lenders for the bulk of a loan if the borrower proves unable to pay. But therein lies the problem. "What we're finding is that, even with the availability of insurance and guarantees from the government, commercial banks are not willing to play their usual roles in lending," says Rice. "It limits the ability of export credit agencies to fill anything more than a small part of the gap."

Rising tariffs also threaten global trade flows in the year ahead. No member of the World Trade Organization is likely to break its commitments to hold tariffs below levels locked in by previous agreements. For most developed economies and for latecomers to the WTO, most notably China, there's little difference between such "bound" rates and the "applied" rates they actually charge. But many developing economies have lowered their applied rates well below their bound ones, and they can hike import duties sharply without risking a WTO suit.

India, which faces a parliamentary election this year, is among the most likely to hike tariffs under the political guise of safeguarding jobs. States across South America, Africa and Southeast Asia will be under pressure to do the same. Russia, which has no WTO constraints, has already raised tariffs on cars. One exception that will help U.S. exports is Mexico. The U.S.'s second-largest export market is cutting duties on 5000 classes of industrial imports in order to reduce costs for its manufacturers.

As far as which sectors the U.S. faces tariff hikes on, that may depend largely on its own behavior. "If the U.S. mounts complaints against a country or an industry abroad, by way of antidumping or countervailing duty suits, U.S. exports to that country are going to be very vulnerable," says Gary Hufbauer, a trade expert at the Peter G. Peterson Institute for International Economics.

Nontariff trade barriers will climb, too. President Nicolas Sarkozy of France is pushing the creation of a sovereign wealth fund to block foreign acquisitions of French companies. China is raising export tax rebates for thousands of items. And the U.S. faces the prospect of a WTO suit from the European Union over the auto industry bailout. The EU alleges the deal is an illegal subsidy.

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