These are trying times for U.S. exporters and their bankers.
President Trump, playing off the populist agenda from his campaign, is threatening to pull the U.S. out of the North American Free Trade Agreement.
He’s already withdrawn the U.S. from the Trans-Pacific Partnership trade agreement, which was intended to smooth trade between the U.S. and 11 Asian nations.
He recently imposed tariffs on imported solar panels and washing machines, a move that could lead to retaliatory tariffs from China and imperil trade with one of the country’s largest trading partners.
Meanwhile, the U.S. Export-Import Bank continues to operate without a permanent director or a full board of directors. Banks rely heavily on the Ex-Im Bank’s loan guarantees to fill gaps in financing, and with the agency operating at just partial capacity, trade deals that might have been completed months ago instead remain on hold, said Tod Burwell, the CEO of BAFT, a trade group that represents banks in the business of trade finance.
“There is a substantial amount of business that U.S. companies can’t get involved with,” said Burwell. “It remains an issue because it’s business that’s not getting done.”
Turmoil at the Ex-Im Bank is nothing new — the agency has not operated at full capacity since 2014 as congressional Republicans opposed to its mission have at times cut off its funding.
But its relevance has waned significantly over the past year, as the search for a permanent director has dragged on. In the fiscal year that ended Sept. 30, it authorized just $3.4 billion of loans or loan guarantees, compared with $12.4 billion two years earlier and nearly $36 billion in 2012.
The uncertainty at the Ex-Im Bank is causing bankers a fair amount of anxiety, and the protectionist stance taken by the Trump administration is only making matters worse, said Burwell.
“If the U.S. is not part of these competitive trade mechanisms, we could be at a disadvantage,” he said.
That’s not to say all banks engaged in trade finance are losing sleep over the tariffs or the Ex-Im Bank’s lack of leadership.
Jonathan Byron, the senior vice president of corporate finance and export credit at the $13 billion-asset Apple Bank for Savings in New York, said that worries about the vacancies at the Ex-Im Bank are overblown because, in many instances, the private sector has been able to step in and fill the gaps.
“With the absence of Ex-Im Bank support, we have still been quite active in supporting Boeing on the commercial side,” Byron said.
The $37 billion-asset East West Bancorp in Los Angeles is active in financing exports to China, but Chairman and CEO Dominic Ng said on a Jan. 25 conference call that his bank would not be hurt by a potential trade war with the country.
“We look at digital media, health care, entertainment and things like that,” Ng said. “We don’t get into the old industries, the old manufacturers, the potential places that may be hit by the tariff.”
Nonetheless, bankers say that the U.S. should look to strengthen relationships with trading partners, not put up roadblocks.
On Nafta, for example, some have argued that if the U.S. leaves the 24-year pact, other countries in Latin America will gladly step in and fill the trading void.
Jane Fraser, the CEO of Latin America for Citigroup, said in a Jan. 8 interview with American Banker that Brazil, Argentina, Colombia and other Latin American countries have abandoned their earlier protectionist instincts and are now eager to trade.
“It’s almost the opposite of what we’re seeing in the States and in parts of Europe, which are going more protectionist,” Fraser said. “They’re really embracing globalization … and open market economics.”
Trump’s threats may simply be bluster and an attempt to wring concessions from Mexico and Canada on Nafta to the benefit of American workers, said Brian Gardner, an analyst at Keefe, Bruyette & Woods. And even if the U.S. withdraws from Nafta, it can still rejoin the pact later, he said.
For now, the bigger worry for bankers is Trump’s decision to impose tariffs — driven by his pledge to reduce the trade deficit between the U.S. and China. If China or other countries follow suit with their own tariffs on U.S. imports, it would reduce the flow of business and provide fewer trade finance opportunities for banks, Burwell said.
“Trade wars are not good for anyone,” Burwell said. “The higher the costs of imports and exports, the bigger the effect on trade. It would hurt the companies involved and their banks.”
Many expect that China would target the U.S. exporting of agricultural products like sorghum, soybeans or beef. Earlier this month, Chinese officials launched an anti-dumping probe into U.S. sorghum exports, a move that many see as a precursor to a wider dispute between the two countries. It’s estimated that the U.S. ships roughly $20 billion of agricultural products a year to China, with soybeans being the most in-demand crop.
“Agriculture is certainly vulnerable” to a potential trade dispute with China, said John Blanchfield, director of Agricultural Banking Advisory Services in Damascus, Md. If China imposes tariffs on U.S. goods, “there are other countries that produce agricultural commodities and they would be more than happy to take our markets,” he said.
Total agricultural exports from the U.S. stood at roughly $140 billion in the fourth quarter, according to the Federal Reserve Bank of St. Louis.
Steve Rice, the executive vice president of commercial banking at the $26 billion-asset Umpqua Holdings Corp. in Portland, Ore., said he worries that if ag producers’ profits begin to decline, even temporarily, they will need to seek larger bank loans to cover their costs.
“Anytime you restrict revenues and cannot shrink overhead to keep up with declining revenues, both parties end up losing money,” Rice said. “Increased lending activity due to a tariff is not healthy for banks or borrowers.”