Delta vs Boeing and the Larger Impact of Export Subsidies

Delta Airlines and Boeing are in the news in a fight over the role of the U.S. Export-Import Bank, which despite its name, only seems to fund export activity. A quick summary of the current issue from the WSJ:

The bank—overseen by a White House appointee and funded by customer fees and interest payments—has doubled its financial support in the past four years to $41 billion annually. But without congressional action, the bank may soon hit its limit.
. . .
Boeing, the bank's top beneficiary, which is leading the corporate charge in support of the administration's efforts to renew and expand lending. The bank has helped finance billions of dollars in sales of Boeing aircraft to foreign customers.

One of those customers is Air India, which until 2008, competed directly with Delta on the New York to Mumbai route. But Delta stopped flying the route, which it had switched to Atlanta, saying it couldn't compete with Air India's fares.

In summary, the good faith and credit of the United States provides loans to foreign customers of U.S. products. What could go wrong?

We could start with the crony capitalism angle, but that's too obvious. We will assume that our readers recognize how the politics of the bank's decisions could cause donations to flow to particular candidates for office. Let's talk about the basic economic unfairness of allowing foreigners subsidies to purchase U.S. made products. Glad to know that you're on the hook for a loan to Air India? But wait, say the defenders of the bank, it never loses money. So what? There is real risk that it will.

Second, given that economics is about the study of comparative, not absolute advantage, this means that corporations' sales abroad are subsidized through lower interest payments by their customers. To the extent that this shift productive capacity towards those customers, it has an impact, albeit small on domestic customers, who pay a higher price for goods intended for domestic consumption.

Back to the crony capitalism issue, once again Obama shows himself to be in thrall to the big corporations he routinely pillories. Boeing couldn't swing the loan to Air India itself? Well no, because Boeing would have to pay the market risk for the loan in the form of higher interest rates. Less money for Boeing to pay its somewhat unionized work force.

U.S. companies that buy planes and other goods don't have access to assistance from the U.S. Export-Import Bank, but they often turn to similar institutions in other countries. Delta acknowledges that it benefits from export financing when it purchases airplanes from Canada's Bombardier Inc. or Brazil's Embraer S.A.

What stupidity. The net effect is just to shift risk of borrowing to various national governments and make it more desirable for airlines to buy from foreign competitors, even if there would be higher costs associated with such transactions.

Pictured at top is a Boeing 737-800.