Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss issues concerning the reauthorization of the U.S. Export-Import Bank (Eximbank). My statement today will focus on four key factors that the Congress might consider in debating Eximbank reauthorization:
My comments are based on the results from our current and past reviews of the Eximbank and governmentwide export promotion issues. (A listing of related GAO products is at the end of this statement.)
Proponents and opponents continue to debate the economic benefits of Eximbank activity to the U.S. economy and the extent to which it helps achieve U.S. trade and foreign policy objectives. The most compelling case that can be made for these programs is that they help "level the international playing field" for U.S. exporters and provide leverage to induce foreign governments to reduce export subsidies. Their overall contribution to U.S. economic performance is less certain.
Seventy-three countries have export credit agencies. However, about half of all export credit support world-wide is extended by the seven largest (Group of 7 (G-7)) industrial nations, each of which maintains various types of export finance assistance programs. Although considerable differences exist among these programs, they all help exporters compete for market share in developing markets by providing loans, guarantees, and insurance. The Eximbank provides similar types of assistance. The Eximbank also administers a tied aid capital projects fund (known as the "war chest") as part of its programs to counter other countries' trade-distorting tied aid practices. Tied aid is concessionary (low interest rate) financing that is linked to the procurement of goods and services from the donor country. During 1994-1996, the Eximbank board of directors approved the use of war chest funds in 40 cases. Overall, the Eximbank financed about 2 percent of total U.S. exports in fiscal year 1995, the lowest level of support provided by G-7 nations' export credit agencies.
The Eximbank's programs require substantial levels of taxpayer support (about $4 billion over the last 5 years). We recently completed a review of Eximbank activities and concluded that it could possibly achieve budgetary savings by raising fees or reducing program risks while still maintaining a competitive position relative to other export credit agencies. These options would not require a change in law because they fall within Eximbank's present authority. However, we recognize that such changes should be considered within the full context of their trade and foreign policy implications and Eximbank's other statutory obligations.
The U.S. government's ultimate objectives continue to be reducing and eliminating export financing subsidies--allowing exporters to compete on the basis of price, quality, and service--not subsidized financing. The U.S. government continues to use international forums such as the Organization for Economic Cooperation and Development (OECD) in its efforts to reduce and eventually eliminate subsidized export finance programs. We are encouraged that the OECD recently reached agreement to standardize and set minimum fees (beginning in 1999) for all member export credit agencies. This agreement has the potential to reduce government subsidies for these programs. However, given the growing importance of exports to national economic performance, and the belief that government export finance programs contribute to this performance, achieving the ultimate objective of eliminating all financial subsidies may prove difficult.
Regarding the ways its financing assistance is distributed, during fiscal years 1994 to 1996, the top 15 users (lead U.S. exporters or contractors) of Eximbank financing accounted for about 38 percent of the value of the Eximbank's financing commitments. While about 80 percent of its assistance went to support large and medium-sized companies, the Eximbank also reported that 20 percent of its assistance went to support small business during the same period. The Eximbank believes that these small business transactions would not otherwise have been financed by private lenders. In geographical terms, China, Indonesia, and Mexico were Eximbank's top three markets in fiscal year 1996.
The Eximbank also supports the sale of dual-use (military and civilian) export items provided that the items are non-lethal and for primarily civilian use. The report that we are releasing today shows that dual-use exports constitute a small share of Eximbank's financing activities and remains well under the 10 percent cap established by law. In fiscal years 1995-97, the Eximbank made financing commitments totaling $226 million--less than 1 percent of its total financing commitments made during that period--to support 10 dual-use exports to 4 countries. Our review indicated that the Eximbank appears to have established procedures that should provide a sound basis for determining whether these exports are nonlethal and primarily used for civilian purposes, as required by law.
Created in 1934, the Eximbank is an independent U.S. government agency that operates under a renewable congressional charter that expires on September 30, 1997. In conducting its operations, the Eximbank must comply with several statutory requirements. The Eximbank is required to
Eximbank financing programs include
- - loans to foreign buyers of U.S. exports,
- - loan guarantees to commercial lenders,
- - export credit insurance to U.S. exporters and lenders, and
- - working capital guarantees for pre-export production.
Reflecting the growing move toward privatization in the developing world, the Eximbank has recently expanded its activities to include project finance. Project finance involves financing where repayment is provided through the project's anticipated future revenues rather than through sovereign (government) or other forms of guarantee.
I would first like to briefly discuss the various rationales that have been advanced for and against government involvement in export finance. They provide a useful framework for evaluating whether Eximbank should be reauthorized. Supporters of the Eximbank export finance programs say that this assistance provides leverage in trade policy negotiations while helping to "level the international playing field" for U.S. business, corrects "market failures," and helps to increase exports and employment. Opponents say that the Eximbank's programs result in no net increase in national employment and output, misallocate resources, and are a form of corporate welfare.
Trade Policy Leverage
Supporters believe that the Eximbank helps U.S. companies compete against foreign companies that receive government support and provide leverage in trade policy negotiations. As already noted, the Eximbank is required to seek international agreements to reduce government-subsidized export financing. OECD nations, including the United States, have made gradual progress since the late 1970s in negotiating reductions in officially supported export subsidies, including a June 1997 agreement that requires export credit agencies to establish minimum fees based on country risk ratings. U.S. Treasury officials who participate in these negotiations told us that the Eximbank's programs have provided them with leverage in negotiating subsidy reductions.
Another case that proponents make is that markets do not always lead to an optimal allocation of resources and that so-called "market failures" provide an additional justification for government export finance programs.
The Eximbank claims that the following are examples of market failures:
-- -- Private financial institutions may be unwilling to support exports to emerging markets even when the risk is correctly priced.
-- -- Foreign buyers in certain markets may be unable to secure long-term financing for capital equipment.
-- -- Finally, and probably the most often-cited example, is that small business exporters may have difficulty in obtaining export financing.
Opponents hold that there is no credible evidence that private capital markets do not function efficiently and that government intervention can potentially distort markets.
Employment and Trade Effects
According to the Eximbank, the exports it financed in fiscal year 1996 "supported or maintained" nearly 300,000 jobs. It is generally recognized some jobs are directly supported through the Eximbank's programs. However, economists and policymakers recognize that employment levels are substantially influenced by macroeconomic policies, including actions of the Federal Reserve. At the national level, under conditions of full employment, government export finance assistance programs may largely shift production among sectors within the economy rather than raise the overall level of employment in the economy. Hence, the jobs figure that the Eximbank reports may not represent net job gains in a period of full employment.
Eximbank programs cannot produce a substantial change in the U.S. trade balance. The trade balance is largely determined by macroeconomic conditions, such as savings and investment and the government budget deficit. According to the President's Council of Economic Advisers, significantly reducing the trade deficit will require macroeconomic policy measures, such as eliminating the federal budget deficit.
The six G-7 countries we studied--Canada, France, Germany, Italy, Japan, and the United Kingdom (U.K.)--all have export credit agencies, each with different roles and structures (see table I.1 in app. I). According to Euromoney, a total of 73 export credit agencies now exist worldwide. The support the G-7 export credit agencies provide for their exporters can be measured in various ways.
In terms of the share of financing commitments extended by export credit agencies in 1995, the Eximbank ranks fourth: Japan, France, and Germany accounted for the largest shares. Japan extended over half (56 percent), followed by France (20 percent), and Germany (9 percent). The United States and Canada extended smaller shares--5 percent each--followed by the United Kingdom (3 percent) and Italy (2 percent).
In terms of the percentage of national exports these export credit agencies have financed, the Eximbank is tied for last. In 1995, the Eximbank supported 2 percent of total U.S. exports (the latest year for which comparative data are available). This figure is at the bottom of the range of support provided by the other G-7 nations. In contrast, Japan's export credit agencies supported 32 percent of its country's exports in that year. France was second, with 18 percent. The support provided by Canada, Germany, the United Kingdom, and Italy ranged from 7 to 2 percent.
Comparing export credit agency programs is difficult for a number of reasons:
- - Each nation has structured its export financing differently--there is no single export finance model. Export credit agencies in the six nations we studied function as independent government agencies, sections of ministries, or private institutions operating under an agreement with the government. Most of the countries we studied offered overseas investment insurance through their export credit agency. However, in the United States, in addition to the Eximbank insurance program, overseas investment insurance is offered through a separate agency, the Overseas Private Investment Corporation. (Table I.1 in app. I provides a summary of the principal differences between the Eximbank and the six export credit agencies we studied.)
- - Unlike the Eximbank, which is prohibited by law from competing with private sources of capital, other export credit agencies appear to compete to varying degrees with private sources of export financing. For example, the Japanese government's export insurance provider is Japan's only export insurer. It reported that it insured about 28 percent ($124 billion) of all Japanese trade transactions in 1995--the highest level of trade and investment insurance underwriting in the world (private or public). Similarly, Canada's Export Development Corporation does not function as a lender of last resort.
- - Other export credit agencies we studied cover different amounts of political and commercial risks. Currently, the Eximbank provides 100-percent, unconditional political and commercial risk protection on most of the medium- and long-term coverage (coverage over 5 years) it issues. European export credit agencies (with the exception of the U.K.) generally require exporters and banks to assume a portion of the risks (usually 5 to 10 percent) associated with such support. This concept of risk-sharing is a fundamental difference between the Eximbank and these export credit agencies.
- - Finally, export credit agencies use different budgetary and reporting standards, thus making it difficult to directly compare the Eximbank's program costs. The 1990 Federal Credit Reform Act (P.L. 101-508, Nov. 5, 1990) requires the Eximbank to estimate and budget annually for the total long-term costs of its credit programs on a net present value basis. Other nations operate on a cash basis and are not subject to similar budget requirements. Under this cash approach, a government reimburses an export credit agency for total cash losses sustained on its operations during the year. Moreover, costs reported may not always represent total expenses to the government. For example, Canada's Export Development Corporation uses a separate national interest account ("Canada Account") to support some export finance activity. The costs of this support are accounted for separately in its year-end reports. (Table I.2 in app. I provides information on the costs of the G-7 nations' export-financing programs.)
Export Credit Agency Costs Are Difficult to Compare
Although direct cost comparisons between Eximbank and other national programs are difficult to make, the available cost data we reviewed suggests that several export credit agencies in the six countries we studied have reported improved financial results. France, Germany, and the United Kingdom all reported positive financial results for their export credit agencies in 1995, the most recent year for which complete information was available. The Berne Union reported that among its member countries there was an aggregate loss of $501 million in 1995 compared with $6.5 billion in 1994. According to the Berne Union, this change was attributed to an improved global debt scenario and tighter export credit agency underwriting standards.
As part of the reauthorization debate, the Congress may wish to focus on ways to achieve greater Eximbank operating efficiencies. In our recent report, we identified two options for reducing the cost of the Eximbank's programs while allowing it to remain competitive with other export credit agencies: (1) raising the fees charged for Eximbank financing; and (2) reducing the risk of its programs by, for example, limiting program availability in higher-risk markets or offering less than 100-percent risk protection. These options fall within its present authority and would not require a change in the Export-Import Bank Act of 1945, as amended.
Both of these options could result in significant reductions in the Eximbank's subsidy costs. To illustrate the potential savings associated with fee increases, we estimated that the Eximbank could have saved about $84 million in fiscal year 1995 if had raised its fees to the mid-range of those charged by other export credit agencies. The second option, reducing program risks, would have resulted in larger subsidy savings in the same year--up to $157 million--with only a slight effect on the overall level of U.S. exports supported with Eximbank financing. The Congressional Budget Office concurs with our assessment that subsidy savings could occur. Their work concluded that (1) increasing fees could save the Eximbank up to $450 million over 5 years and (2) reducing program risks could save up to $1.2 billion over 5 years.
In our report, we acknowledged that these options could raise several trade and foreign policy issues that decisionmakers would need to address before making any changes in the Eximbank's programs. For example, a large share of the Eximbank's subsidy budget is spent supporting transactions to high-risk markets, such as the newly independent states of the former Soviet Union, that exhibit promising long-term potential. In fiscal year 1996, financing commitments for high-risk markets represented about one-fourth of total financing commitments yet absorbed almost three-fourths of the Eximbank's total subsidy budget.
Our report also stated that any proposed fee increases should be considered in the broader context of ongoing OECD efforts to negotiate minimum fee schedules and that the magnitude and timing of such an increase should take into account progress in these negotiations. Thus, we are encouraged by the recent progress made in OECD to establish minimum fees across all major export credit agencies. These new rules will take effect on April 1, 1999, and should help eliminate some of the trade distorting effects of subsidized export financing. Although many details of the new agreement have yet to be worked out, these new rules will likely require the Eximbank to raise its fees for many transactions and could allow it to operate at reduced taxpayer cost.
DISTRIBUTION OF EXIMBANK FINANCING
During fiscal years 1994-96, the Eximbank provided an annual average of $12.8 billion in export financing commitments (loans, guarantees, and insurance) at an annual average program cost of $877 million. The Eximbank projects that it will provide about $16.5 billion of export finance support in fiscal year 1997, an all-time high. (See table II.1 for a more detailed description of Eximbank's past and projected financing commitments and program costs.)
In fiscal year 1996, China was the Eximbank's top export market ($1.2 billion), followed by Indonesia ($825 million), Mexico ($753 million), Trinidad and Tobago ($632 million), and Brazil ($488 million). (See fig. II.1 in app. II for a list of the Eximbank's top 10 markets and their associated program costs for fiscal year 1996.) Relative to total U.S. goods exported to these markets, the Eximbank supported about 11 percent of U.S. exports to China, about 22 percent of U.S. exports to Indonesia, about 1 percent of U.S. exports to Mexico, about 93 percent of U.S. exports to Trinidad and Tobago, and about 4 percent of U.S. exports to Brazil.
During fiscal years 1994 through 1996, the 15 most frequent users (lead U.S. exporters or contractors) of Eximbank financing accounted for about $14.4 billion, or about 38 percent, of the Eximbank's total export-financing commitments made during that period. (see fig. II.2 in app. II). The export finance transactions involving these companies absorbed about 27 percent of the Eximbank's total program budget, or about $682 million over the same period. These data do not capture the full range of U.S. companies associated with Eximbank-financed deals such as subcontractors and other suppliers.
While about 80 percent of the Eximbank's assistance was provided to large and medium-sized companies, about 20 percent ($7.5 billion) of the Eximbank's financing commitments--about 79 percent of its total transactions--went to small business, primarily through its insurance programs. (See table II.2 in app. II.)
The Eximbank has participated in international (OECD) negotiations to limit the use of tied aid and has used its tied aid capital projects fund (also known as the "war chest") to counter foreign countries' use of tied aid. The OECD efforts have resulted in a decrease in reported international levels of tied aid--the annual average level of tied aid decreased from about $10 billion in 1992 to approximately $4 billion in 1995. During 1994-96, the Eximbank board of directors approved the use of war chest funds in 40 instances. (See app. III. for a list of transactions in which tied aid funds were actually used.) The balance in the tied aid war chest was $343 million as of June 30, 1997.
The Eximbank also supports the sale of dual-use (military and civilian) export items provided that the items are non-lethal and for primarily civilian use (See app. IV). The report that we are releasing today shows that dual-use exports constitute a small share of Eximbank's financing activities and remains well under the 10 percent cap established by law. In fiscal years 1995-97, the Eximbank made financing commitments totaling $226 million--less than 1 percent of its total financing commitments made during that period--to support 10 dual-use exports to 4 countries. Only one of these exports--involving aircraft parts and services to Indonesia--has actually been delivered overseas. Our review indicated that the Eximbank appears to have established procedures that should provide a sound basis for determining whether these exports are nonlethal and primarily used for civilian purposes, as required by law. In the spring of 1997, for the one dual-use export that has taken place, Eximbank officials, assisted by other U.S. government officials, were able to verify that it was primarily used for civilian purposes.
Since fiscal year 1993, the Eximbank has issued guarantees related to 25 project finance deals totaling $6.4 billion (the estimated value of these projects was $22.6 billion). In fiscal year 1997, the Eximbank estimates project-financing deals will account for about 30 percent of its total financing commitments (these deals accounted for about 14 percent of its assistance in 1996). (See table V.1 of app. V.) Because these projects tend to be large, the Eximbank often shares project risk with other export credit agencies, the Overseas Private Investment Corporation, or multilateral institutions such as the International Finance Corporation.
In sum, the Congress may wish to consider Eximbank's reauthorization within the context of the international competition. While the export credit agencies we identified operate under different mandates and are subject to different budgeting and reporting standards than the Eximbank, they all help their exporters compete for contracts in the world market. The costs of the Eximbank's programs need to be weighed against their benefits to exporters and the leverage they provide in international negotiations to reduce foreign government support for these types of programs. Our recent work identified some options--raising fees and reducing program risks--that the Congress may wish to consider in reducing the cost of these programs while still allowing the Eximbank to assist U.S. exporters and support efforts to reach additional international agreements to reduce export subsidies.
Mr. Chairman and Members of the Subcommittee, that concludes my prepared statement. I will be happy to answer any questions you may have.
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