During the Cold War when the United States and the former Soviet Union built up massive stockpiles of nuclear armaments a military strategy and national security policy embraced by both sides was that each had such a compelling deterrent that neither would use these heinous weapons of mass destruction. The Mutually Assured Destruction (MAD) policy has held the world in a tense equilibrium for decades and even when both sides have agreed to reduce their nuclear weapons, it was done symmetrically with neither side disarming unilaterally to give the other an unfair advantage. As perverse as this doctrine seems, it has served the world well even as other powers acquired nuclear capabilities and essentially signed onto this delicate arrangement. Unfortunately, U.S. government economic policy makers have not used the same strategic thinking when it comes to another equally important geopolitical competition: international trade.
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Unilaterally, over the last several decades, America has lowered trade barriers and essentially underfunded — and, in some cases, defunded — its offensive capabilities when competing in the international marketplace. This has left the United States vulnerable to economic exploitation and the government capabilities and resources of our competitors frequently overwhelm American companies. In previous essays at The Daily Caller, I have addressed the systematic and asymmetrical dismantling of our country’s trade barriers to project the American ideal of free trade. With unparalleled economic clout in the latter half of the 20th century the U.S. attempted to force this ideology on a world that didn’t necessarily agree, but felt compelled to go along — at least in appearance — without truly changing their underlying behavior. The focus here will be America’s neglect and unilateral disarmament of our offensive economic capabilities to the detriment of our balance of trade.
Even as our stature in the world has demonstrably diminished economically, the U.S. continues to be by far the world’s largest donor of government foreign aid (approximately $45 billion in 2017, including military aid). By comparison the next largest donors are Germany ($24 billion), Britain ($19 billion), and the European Union ($16 billion). However, when the U.S. expenditures on promoting its own business interests overseas are compared to those of our competitors we aren’t even playing in the same league. Take for example the U.S. Export-Import Bank (ExIm Bank), one of America’s primary tools used to promote exports by providing critical financing support, and compare its annual loan commitments with those of our competitors. Before it partially closed for political reasons three years ago it generated $100 billion in export loan commitments between 200 and -2012 versus $260 billion from China.
For smaller countries like Germany, an economy one-fifth the size of the U.S., they committed $90 billion during that same period and even smaller France $80 billion. When comparing the funding commitments from the U.S. government to help U.S. companies expand overseas into emerging markets through another agency, the Overseas Private Investment Corporation (OPIC), we perform somewhat better but well below our peers in relative terms to the size of their economies: OPIC made a little over $18 billion of commitments from 2012-2016 compared to similar organizations in Europe like the Netherlands’ FMO ($8 billion) and France’s Proparco ($6 billion) – both countries one tenth the size of the U.S. Emerging markets now account for more than half the world’s GDP, but in Africa and Asia, China and India dominate the economic landscape. In Latin America, China has arguably become as dominant as the U.S. Without government support to mitigate risks American private capital and exports are less likely to flow into these important and growing markets.
A small U.S. government agency that helps American companies secure a role in large infrastructure projects overseas by providing seed money called Trade Development Agency (TDA) had a budget of $60 million in 2016 year. This pales in comparison to the hundreds of millions of dollars of soft money from countries like China. Compounding our lackluster support, American companies are frequently at a competitive disadvantage because of the very real potential fines they face in violating the Foreign Corrupt Practices Act. To be sure this law is a laudable attempt to limit corporate corruption, but like most regulation, American companies are held to a much higher standard. (Ask Walmart about its $300 million fine in Mexico.) A few years ago our firm helped satellite company Orbital ATK obtain a $672,000 grant from TDA to try and convince the Brazilian government to buy American to replace an aging Lockheed satellite. The French competition spent several times that amount to win the business for their satellite maker, including providing new Mercedes for all the decision makers! No contest, France won the $100+ million of business and America lost.
Our firm currently manages a forward looking renewable energy fund for the German government and the European Union in order to encourage the development of environmentally friendly geothermal power in Latin America. The initial investment by both governments was €55 million. Since geothermal power is an important source of base load renewable energy the goal is to be a catalyst to 350 MW of utility scale geothermal power in the region representing billions of dollars of follow on investment.
Currently the U.S. has the largest installed base of geothermal power and traditionally has been an important source of technology and investment. When we approached the U.S. government to participate in this important initiative (under the Obama Administration) there was essentially no interest. We did receive a vague indication that a few hundred thousand dollars might be used to support a specific geothermal project. While this early stage geothermal fund is not tied to sourcing product or investors/developers from Germany or Europe, the fact that the U.S government is completely missing in anything other than a cheerleading role is disturbing. And does anybody really believe that manufacturers and service providers that are closely aligned with this source of capital won’t have a better chance in winning the follow-on business? Indeed, the German government with great foresight has pledged hundreds of millions of dollars more beyond the early stage development of geothermal in Latin America to provide funding for the ultimate deployment of power generation equipment and transmission lines.
Power Africa was launched with a lot of fanfare a few years ago to admirably provide Africa with renewable power from American companies. It was also seen as a counterweight to the growing influence of China on that continent. Very little new resources were provided to actually fund this initiative with essentially the U.S. government rebranding existing programs from ExIm Bank, OPIC, TDA and U.S. Agency for International Development to focus on a specific region and vertical market. Meanwhile the Chinese funded an estimated $50 billion of energy in Africa. I could go on with the litany of small-ball America plays versus our competitors, most notably China.
With $21 trillion of debt and no political will to have the U.S. government play a more active role in meeting our international economic competition, it is hard to see how we won’t continue to lose world economic market share, particularly in the more rapidly growing emerging markets. In fact, ExIm Bank has essentially been shuttered for three years putting our largest exporters at a competitive disadvantage even while the likes of Airbus continue to enjoy increased support from European counterparts. In defending our homeland against hostile forces we wouldn’t think of unilaterally dismantling our nuclear deterrent. Yet with our economic security and the tools that help American business compete overseas, that is essentially what we are doing. We have unilaterally disinvested or ignored updating our hardware (i.e., government programs) to effectively allow American companies to compete with the same tools as our competitors on the international playing field. Hiding behind the post-World War II Bretton Woods framework of organizations like the World Bank, the United Nations, Inter-American Development Bank, etc. we naively believe the private sector should and can compete by itself even while our competition does not. Like our blind adherence to free trade we hold on to these outdated, negligent and deeply flawed strategies at our economic peril.
Alan Beard is managing director of Interlink Capital Strategies a Washington, D.C.-based financial advisory firm focused on exporting and foreign direct investment in emerging markets. He has written several books and articles on international finance, been an adjunct professor at Georgetown University and advised various government agencies on international finance issues.