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Ex-Im Bank and Opic: Trade Promoters or Welfare Pariahs?
Date
In the larger scheme of U.S. trade, government financing agencies do not loom as large as fiscal and monetary policies, dollar exchange rates, the World Trade Organization (WTO), and the North American Free Trade Agreement (NAFTA). Yet, the acronym financial agencies—the Export–Import Bank (Ex–Im), Overseas Private Investment Corporation (OPIC), and Trade Development Agency (TDA) —are prominent in the current debates of what is needed to keep American exports competitive, especially in the most dynamic areas of U.S. trade growth—Asia and Latin America.
Ex–Im and OPIC particularly are being challenged as agents of "corporate welfare," 1 with critics recommending drastic cuts in their budgets—or even their elimination. When Congress and the administration are searching all possible ways for balancing the federal budget and the administration continues its aggressive "reinventing" of the executive branch, it is logical and appropriate that all federal activities be scrutinized. However, it would be prudent to dig below superficial slogans and review the facts before fundamentally changing the acronym agencies.
"Corporate welfare" is an easy slogan. But I received another perspective on the issue when I was negotiating with Europeans in the Organization for Economic Cooperation and Development (OECD) to reduce government subsidies to export financing. A senior French official told me, "It's very simple to us. We would rather give government subsidies to exports than use the budget for welfare to support unemployed workers."
The objective of this paper is to offer history and insights into the operations of Ex–Im and OPIC to facilitate a reasoned debate about the future of these agencies and their role in American commercial diplomacy. It will discuss TDA in the context of its cooperation with Ex–Im and OPIC, but will not examine three other agencies that finance exports—the Agency for International Development (AID), the U.S. Department of Agriculture (USDA), and the Maritime Administration of the U.S. Department of Transportation. These three agencies have unique charters, missions, programs, and rationales. Among them, only the USDA programs have historically supported significant volumes of exports (see companion paper by Robbin Johnson).
My discussion addresses the following topics with respect to Ex–Im and OPIC:
Basic Missions
Ex–Im supports export financing for the sale of U.S. goods and services to foreign buyers. It does not support financing for non–U.S. items or funding of equity investments by U.S. firms abroad. Its programs are designed to supplement, but not compete with, banks or other private financing. Ex–Im financing assistance may include:
OPIC supports financing to encourage private–sector investment overseas by U.S. companies. Its support is untied; that is, it is not limited to U.S. exports, and OPIC is available for supporting equity as well as debt. Like Ex–Im, its programs are designed to supplement, but not compete with, banks or other private financing sources. OPIC support may include:
TDA assists U.S. companies to export by funding feasibility studies, orientation visits, specialized training, business workshops, and technical assistance related to infrastructure and industrial projects in middle–income and developing countries. Funding is in the form of grants for part of the costs, and generally is in the range of $500,000 per transaction, with few exceptions for larger amounts to meet foreign government competition.
Current Rationale Ex–Im was created in 1934 by executive order and established on a statutory basis in 1945. The charter act of 1945 has been renewed periodically, most recently in 1997 for a four–year period ending September 30, 2001. Ex–Im today designs its operations to neutralize two basic problems in financing U.S. export sales: the limited capacity of commercial financing sources to absorb credit risks of foreign government and private–sector borrowers; and competition from official export credit agencies (ECAs) of foreign governments.
To economists, these "market imperfections" offer a legitimate rationale for government intervention. In an ideal world, exports would be financed only by private sources. Indeed, among developed countries, this is overwhelmingly the case. However, trade growth with developing countries would be greatly reduced if ECAs and other official financing institutions did not exist. Funded by developed world governments, these institutions can take a higher degree of risk, because they are not accountable to the same bottom–line loss limitations as private financial houses. However, the public institutions still must keep their portfolios within reasonable risks, as defined by their respective budget procedures.
As the currently emerging markets develop into less risky investing and lending environments, they will "graduate" to less reliance on national ECAs and multilateral finance sources, such as the World Bank. Historically the "Asian tigers" of Korea, Taiwan, Hong Kong, Singapore, Thailand, and Malaysia have been major recipients of financing from ECAs and multilateral banks. In recent years, they all attracted private equity and debt investors and relied much less on support from public financial institutions. However, the 1997 currency crises in Asia have at least temporarily reversed this process.
Commercial lenders are constrained by different types of international risks, which limit the amounts or length of repayment they can offer. In some countries, for example, private borrower commercial risks may be acceptable, but political risks, such as currency inconvertibility, may be excessive. Ex–Im programs can offset such risks through guarantees and insurance, for which the exporter or lending bank pays a premium.
Commercial lenders charge market interest rates, which vary according to market conditions. ECAs often provide fixed interest rates beyond market repayment terms as an enhancement to exports. While interest rate subsidies have been eliminated for ECAs based in OECD countries through multilateral agreements, the longer than market repayment term remains. So long as other governments continue to support exports through their ECAs, Ex–Im needs to provide similar loans for U.S. exporters. In this way, U.S. exporters can compete on the basis of price, quality, service, and technology—on a financial "level playing field."
OPIC's programs encourage U.S. private investment abroad. While Ex–Im's support is limited to sales of U.S. goods and services, OPIC's support is "untied"—it is not restricted to U.S. goods and services. OPIC's charter legislation in 1971 arose from a development objective in the Foreign Assistance Act, and supporting economic development of emerging nations and advancing U.S. foreign policy interests remain in the OPIC rationale.
OPIC also supplements, but does not compete with, the private sector. It shares equity risks with investors, developers, and lenders by offering political risk insurance, with the insured parties taking all the commercial risks. It also guarantees loans by commercial lenders, thereby absorbing both commercial and political risks, but not for the entire debt of the project.
Like Ex–Im Bank, OPIC helps to level the playing field, because other governments operate agencies similar to OPIC. Throughout its history, the loans and guarantees offered by OPIC have focused on nonrecourse or limited–recourse project financing: the loans will be repaid solely from cash flows of the project without guarantees from governments, banks, or established companies.
OPIC in recent years has responded to high–priority foreign policy goals by establishing investment funds. Of its current 24 funds, several were established at times and for areas of high foreign policy interest:
Through its loan and guarantee facilities, OPIC supports the capitalization and operation of these privately owned and managed direct investment funds. These funds invest in a diversified portfolio of new or expanding private enterprises that involve U.S. companies in their operations.
TDA, set up in 1981, originally operated under AID as a technical assistance vehicle for developing countries, particularly for project feasibility studies. Subsequently, in 1992, it became an independent agency. With growing budgets, its role has focused more on offsetting competition from the more aggressive programs of other governments. In the competitive marketplace, winning a feasibility study often yields a significant advantage for exporters from that same country to win follow–on contracts. Technical specifications may be geared to one supplier country, and the engineering company doing the study may have close ties with suppliers of the same nationality.
Legislative Mandates In its current charter, certain key mandates define the scope and constraints of Ex–Im operations:
Policy Mandates
Operating Mandates
Ex–Im operations are affected also by legislation other than the Ex–Im charter. For example, there is a requirement to ship on U.S. vessels items supported by Ex–Im long–term financing; there are prohibitions on support to countries that act contrary to U.S. law in such areas as freedom of emigration, missing personnel in Southeast Asia, chemical and biological weapons control, international narcotics, and terrorism; and there are sanctions on Iran, Iraq, and Libya.
Clearly, some of these mandates create "dynamic tension" between conflicting objectives. Ex–Im must follow banking principles but also must be "fully competitive" against ECAs of other governments. It must find "reasonable assurance of repayment," but other government ECAs may be willing to take certain risks in certain countries or cases where Ex–Im would not find "reasonable assurance." Ex–Im must judge cases on financial and commercial merits, but it is often pressured to act in countries or cases that advance U.S. foreign policy objectives. On this issue Ex–Im has developed a practice that parallels some grandfatherly advice from my youth: "Don't marry for money, but there is no harm in letting your heart go where money is." Ex–Im's pragmatic parallel is: "Don't lend for foreign policy reasons, but there is no harm in presenting a loan of acceptable risk for Ex–Im in coordination with a priority foreign policy action."
OPIC was established as an independent agency by amendment to the Foreign Assistance Act in 1969, and began operations in 1971. Its antecedents first appeared as government guarantees against currency inconvertibility in the Marshall Plan (the 1948 Foreign Assistance Act) to foster private investment in postwar Europe. In the 1950s, the guarantees were expanded to cover losses from war and expropriation, and project financing was added. During the 1960s, activity expanded to reach more developing countries, primarily administered by the Agency for International Development. When beginning operations in 1971, OPIC inherited a portfolio of $8.4 billion in outstanding insurance to U.S. investors against political risks and a loan guarantee portfolio of $169 million.
The current OPIC charter, which was renewed for two years in 1997, is embodied in the Foreign Assistance Act of 1961, as amended, and includes key operating mandates in the following areas:
Like Ex–Im, OPIC is subject to other legislative prohibitions with respect to denial of financing for countries violating certain treaties or at war with the United States, or for countries subject to U.S. sanctions related to nuclear proliferation, international terrorism, or narcotics trafficking. In addition, OPIC has adopted its own major policy guidelines, such as the action in 1994 to expand its transaction limits from $50 million to $200 million for a financing guarantee ($30 million remains the loan limit), and from $150 million to $400 million combined support for insurance and financing to a single project.
International Agreements
Ex–Im, OPIC, and other U.S. finance agencies, such as TDA, USDA, and the Maritime Administration, must operate their programs within the guidelines of international agreements. The most comprehensive is the Arrangement on Guidelines for Officially Supported Export Credits (OECD Arrangement). USDA and Maritime programs have only recently come under the scope of OECD discipline.
The Arrangement is an executive agreement among the United States, the European Commission (representing 15 European Union [EU] members), Japan, Australia, Canada, Norway, and Switzerland. It has evolved since 1975, largely from U.S. initiatives, through a series of negotiated packages, which are designed to lower financial subsidies provided by ECAs to support their exporters, reduce trade distortions caused by the use of tied aid, and level the export finance playing field through guidelines about terms and conditions that ECAs may offer. The Agreement is self–enforcing through the practice of required notifications and the right of any participant to match an offer outside the Arrangement guidelines.
The Arrangement has steadily increased its scope, as reflected by its changing name from "Gentleman's Agreement" to "Consensus" to "Arrangement." It sets standards in such areas as down payment, maximum repayment term, minimum interest rate, local cost support, capitalized interest, contract eligibility, and rules for tied aid financing. It also spells out notification procedures among participants, matching offers, and consultations. Annexes set special terms for aircraft, nuclear power, and ship transactions.
The Arrangement deals only with financing tied to an offering country's exports. It does not cover untied financing. The "transparency" of untied financing to assure open eligibility to suppliers from all countries remains a difficult issue. Untied financing usually is related to country aid programs, and the largest amounts and greatest transparency issues relate to France, Germany, and Japan. OPIC's financing is untied with respect to procurement, although applicants for insurance or financing (loans or guarantees) are restricted to U.S–owned companies. Being untied, OPIC's finance terms do not need to follow OECD guidelines; nor does the comparable untied investment finance support from other governments.
In the past two years a number of OECD participants have become concerned that the agencies financing investments may be indirectly linking their support to exports from their country. The issue has been compounded by the rising number of large investment projects in emerging markets, particularly in electric power and other infrastructure sectors. This has led to increasing numbers of cofinancing operations that combine the tied export credit and untied investment credit support of the same country, or combine the tied export credit of one country with untied investment credit of another country. These practices are prompting a new look at added discipline under the Arrangement.
To avoid undermining the Arrangement, Ex–Im and OPIC have temporarily agreed that when they combine their support to a single project, both agencies will abide by the Arrangement rules. However, if other countries do not comply in the same way, the United States may need to negotiate new OECD guidelines.
Ex–Im and OPIC also participate in the Berne Union, an association of 43 private and government export credit and investment insurers founded in 1934. Membership is more extensive geographically than OECD countries and involves private insurers as well as government agencies. The Berne Union seeks international voluntary acceptance (with great success) by its members of sound underwriting principles for export credit and investment insurance. The members seek to follow common practices for transactions, generally under five years repayment, in such areas as cash payment, repayment term, and contract eligibility. Technical studies and workshops also enhance common underwriting practices.
Roles in U.S. Commercial Diplomacy and Interagency Coordination
Ex–Im and OPIC traditionally have reacted to transaction initiatives from the private sector, rather than set "export strategy" priorities.
At the macro–policy level, their charters are mandated by Congress, and their program character and budget resources are guided by the Office of Management and Budget and congressional oversight. When national security or foreign policy priorities embrace U.S. government financing capabilities, special working groups chaired by the National Security Council (NSC) or Department of State or Treasury may be formed to coordinate U.S. agency programs, and Ex–Im and OPIC may be asked to participate. The key word is "coordination," because Ex–Im and OPIC always retain their independence as to what financing risks and commitments they can absorb.
Recent examples of special interagency groups include:
In addition to these traditional macro– and micro–coordination procedures, two significant committees established by law have oversight and coordination responsibilities for Ex–Im and OPIC: The National Advisory Council on International Monetary and Financial Policies and the Trade Promotion Coordinating Committee. The National Advisory Council (NAC) was established under the Bretton Woods Agreements Act in 1945 and by Executive Order in 1965. Chaired by the secretary of treasury, members include officials from State, the U.S. Trade Representative, Commerce, Ex–Im, the Federal Reserve, USDA, and AID. OPIC and Maritime Administration officials attend when their items are considered. The NAC coordinates the policies and operations of U.S. representatives to the International Monetary Fund (IMF), World Bank, and other multilateral development banks, as well as any U.S. agencies participating in credit or financial transactions. This includes Ex–Im, OPIC, AID, TDA, USDA, and Maritime Administration. The NAC has established working procedures that enable its members to review financing offers of other U.S. agencies before these are issued, and to develop coordinated U.S. positions for U.S. representatives to the international financial agencies.
In practice, the NAC meets only rarely at the assistant secretary or higher level to resolve agency differences or to set policy guidelines. It is primarily an information–sharing channel at the staff level on agency financial transactions, and a vehicle for Treasury to coordinate guidance that it initiates for U.S. representatives to international financial institutions.
The Trade Promotion Coordinating Committee (TPCC) was established by the Export Enhancement Act of 1992. Chaired by the secretary of commerce, members include officials from AID, Environmental Protection Agency, Agriculture, Labor, State, Treasury, Defense, Ex–Im, Council of Economic Advisers, Energy, U.S. Information Agency, National Economic Council, TDA, U.S. Trade Representative, Office of Management and Budget, OPIC, Small Business Administration, and Transportation. The primary missions of the TPCC are to develop central sources of information for the U.S. business community on government export promotion and financing programs; identify, evaluate, and recommend solutions to gaps in the programs; and assess the appropriate allocation of resources among U.S. trade agencies.
In its first report, in 1993, the TPCC laid out 65 recommendations embodied in a National Export Strategy. In its 1996 report, the TPCC describes the status and new directions for agency efforts in trade finance, advocacy, and small business assistance. It also addresses U.S. approaches to major new commercial policy issues—bribery and corruption, international standards, technical assistance to promote exports, and defense offset agreements. Recommendations are driven by the need to meet foreign competition in the global marketplace.
So far as Ex–Im, OPIC, and TDA are concerned, the effects of the TPCC have occurred in the following areas:
Factual Base of Ex–Im and Opic Activity in Asia
Ex–Im is most important to U.S. exports in the area of medium– and long–term financing. Of Ex–Im's annual commitments, about one–third are for short–term insurance to exporters offering up to 180 days' repayment. However, it is in the medium– to long–term repayment range (5 to 12 years) that OPIC also operates, and it is in that range that U.S. exporters face their greatest competition from foreign ECAs.
Export financing competition arises particularly in the large emerging markets, where suppliers from all over the world are trying to establish market share. This led to the U.S. government's Big Emerging Market Initiative (BEMs) in its national export strategy developed by the TPCC. Between 1990 and 1995 the BEMs accounted for 30 percent of global import shares and 44 percent of growth in world imports. U.S. government estimates place the BEMs at 43 to 48 percent of the world market in 2020, and infrastructure projects in the BEMs at over $1 trillion in the next ten years. 2 The BEMs with the largest economies and the most dynamic growth are in Asia: the Chinese economic area (China, Hong Kong, Taiwan), Association of Southeast Asian Nations (Brunei, the Philippines, Malaysia, Singapore, Thailand, Indonesia), India, and South Korea. Asian countries represented about 30 percent of U.S. exports in 1995.
Export growth accounted for one–third of U.S. output growth since 1990, and capital goods exports to developing countries increased from 40 to 51 percent of total capital goods exports. In key markets for the United States, Ex–Im financing was linked to significant shares of U.S. capital goods exports over the past five years: 3 Argentina, 18 percent; Brazil, 20 percent; China, 13 percent; India, 45 percent; Indonesia, 45 percent; the Philippines, 18 percent; Russia, 40 percent.
The annual activity of Ex–Im supported $11.5 billion in U.S. exports in FY 1996, translating into over 200,000 U.S. jobs directly and another 1 to 2 million indirectly. 4 OPIC FY 1996 activity supported $9.6 billion in U.S. exports and 30,000 jobs. 5 In export manufacturing industries wages are on average 15 percent higher than in nonexporting plants, according to a 1995 study. Moreover, employee benefits are significantly higher, as are productivity and employment growth and stability. 6
Over 80 percent by number of all Ex–Im transactions in FY 1996 were for small business, and amounted to 20 percent in value of total new financing commitments. Over half of all suppliers identified to OPIC projects are small businesses. More than 40 percent of TDA awards in 1996 were won by small businesses.
Of Ex–Im's total commitments in FY 1996, 30 percent were for exports to Asia. About 10 percent of OPIC's total commitments in FY 1996 were for projects in Asia. The two main reasons for OPIC's lower presence in Asia are that China is closed for OPIC owing to congressional sanctions following the Tiananmen Square massacre, and Latin America has traditionally been the largest area of activity by U.S. investors.
In terms of cumulative outstanding exposure, Asia represents 36 percent of Ex–Im's portfolio, about the same as Latin America. Its largest exposure in Asia in sequential order is in China, Indonesia, the Philippines, and India. In terms of sectors, Ex–Im's commitments are in electric power, aircraft, telecommunications, and oil and gas projects, in that order.
For OPIC, its largest cumulative outstanding exposure lies in Latin America, with 4 percent. Asia is next, with about 20 percent. OPIC's major markets in Asia (not in rank order) include India, Indonesia, Malaysia, the Philippines, Taiwan, and Thailand. In terms of sectors, OPIC's portfolio lies, in sequential order, in electric power, financial services (largely equity funds), manufacturing, telecommunications, and oil and gas projects. (See Tables 5 and 6 in Additional Tables for more detail about about Ex–Im and OPIC activity.)
Comparisons with European and Japanese Government Finance Agencies
In the OECD countries that are the larger U.S. competitors, governments sponsor export credit systems that are able to provide two principal forms of support: insurance or guarantees against repayment risk; and support for fixed interest rates. These support systems have different structures, which makes exact comparisons difficult in terms of operations. However, the OECD Arrangement keeps the types of government finance support roughly comparable. Countries do vary considerably in the volumes of trade receiving government finance support and related budget resources. In recent years, U.S. government support to export financing has been near the bottom. (See Table 1.)
One reason for the high Japanese percentage is the Japan ECA requirement that exporters purchase "whole turnover" risk insurance, so that the insurer, EID/MITI, is assured diversified risk. That means that Japanese exporters insure their large export volumes to developed countries as well as to weaker markets.
Looking at the direction of commitments by the major export credit agencies, one notes a major focus on Asia in recent years. About 40 percent of global export credits committed and outstanding on a medium– and long–term basis are for seven Asian markets—an indication of the targeting by their exporters to China, India, Indonesia, Philippines, Malaysia, Thailand, and Pakistan.
Medium– to long–term finance is the area of intense competition among capital goods exporters. For most of these seven recipient countries, six nations were the primary sources of their total outstanding export credit. About 85 percent of their new commitments came from France, Germany, Italy, Japan, the United Kingdom, and the United States.
France was highest in China, Malaysia, and Pakistan and second in India. Germany was highest in India and Indonesia and second in China, Thailand, and Pakistan. Japan was highest in Thailand and second in Indonesia and Philippines. The United States was generally third or fourth across the board, except where it was first, in the Philippines. (See Table 7 in Additional Tables for greater detail.)
Special comment is necessary about Japan. The rankings presented above for new risk–taking commitments in 1996 included only the insurance issued by EID/MITI. Japanese exports also are assisted by the Export–Import Bank of Japan (JEx–Im). JEx–Im offers several forms of support:
The volume of JEx–Im activity in its various programs has moved away from tied export credit increasingly to untied loans and guarantees. However, the data on procurement benefits to non– Japanese companies are just beginning to emerge. In Table 2, data in the JEx–Im annual report of 1996 show the following procurement shares from JEx–Im untied loans as of December 1995.
| United States | 18.0 | United Kingdom | 3.7 |
| Japan | 17.7 | Switzerland | 3.7 |
| Germany | 10.2 | Sweden | 3.5 |
| Italy | 6.3 | Canada | 0.9 |
| France | 6.3 | Spain | 0.9 |
| Source: JEx–Im, Annual Report 1996. | |||
SOURCE: JEx–Im, Annual Report 1996.
The supporting data need to be clarified in future reports.
Both the new commitments for JEx–Im in its FY 1995 (ending March 31, 1996) and its cumulative activity since 1950 show Asia as the largest portfolio share, 53 percent of new commitment volume and 37 percent of cumulative activity. China and Indonesia are the largest single credit recipients, with 50 percent and 15 percent, respectively, of new commitments and 20 percent and 25 percent, respectively, of cumulative exposure.
In China, of the 450 billion yen ($4.5 billion) in new commitments, about two–thirds were untied (resource loans and untied loans and guarantees). The balance were tied investment loans and export loans. In Indonesia about 80 percent of the 150 billion yen ($1.5 billion) in new commitments was for tied investment loans. The sectors emphasized in China were resources for Japan, infrastructure (including electric power, transportation, and pipelines for gas and oil), and general manufacturing. In Indonesia, key sectors were liquified natural gas (LNG) for Japan, electric power, and general manufacturing. (See Table 8 in Additional Tables for more detail about JEx–Im and EID/MITI activity.)
Another Japanese institution that brings large financing to Asia is the Overseas Economic Cooperation Fund (OECF). It provides development loans in yen on soft terms, i.e., long repayment and low interest. For loans committed in JFY 1995, the average interest rate was 2.54 percent and the average repayment term was 29 years. OECF has steadily increased the share of its new project commitments that allow procurement to be untied (from 67 percent to 97 percent over the past ten years). As a result the share of procurement supply from Japan has declined. (See Table 3.)
| Japan | LDCs | OECD | |
| 1986 | 67 | 24 | 9 |
| 1995 | 27 | 60 | 13 |
| Source: OECF, Annual Report 1996. | |||
However, the "transparency" of these data continues to need clarification in the eyes of many observers.
The importance to non–Japanese suppliers of a truly untied procurement policy lies with the large annual volumes of OECF activity. In JFY 1996, it made new project commitments of 1,093 billion yen ($10 billion), and 81 percent went to Asia. In Asia, 16 percent were for Indonesia, 13 percent for China, 13 percent for the Philippines, and 12 percent for India—all large importers of major interest to U.S. suppliers. The major sectors of OECF activity have been electric power and transportation, and more recently social services. China and Indonesia have been the largest cumulative recipients.
The untied loans of Japan remain a highly sensitive issue with non–Japanese suppliers. Aside from questioning the statistics—for example, whether Japanese joint ventures in less developed countries are classified as LDC firms—they mainly seek full transparency through early alerts of bidding opportunities and a fair bidding process. They urge Japan to monitor the bidding reviews by the recipient countries and to publish all contract awards.
A further concern is the very large volume of Japanese tied funds that are provided for feasibility studies by Japanese agencies—about five times the level of the U.S. TDA annual budget of $40 million. When a country's engineering companies design projects, they often lock in standards and specifications, as well as their relationships with national suppliers, which link the follow–on business to their own country's suppliers. Since these tied feasibility studies frequently are required before borrowing governments can qualify for an untied Japanese project loan from JEx–Im or OECF, non–Japanese firms may not really have a competitive opportunity at the project bid stage.
The 1992 OECD rules tightening the use of tied aid have increased non–Japanese supplier focus on difficulties in competing for projects funded by untied aid. Before the OECD 1992 "Helsinki Agreements," tied aid commitments were at the level of $10 billion annually, and they have dropped to a $4 billion annual level. The major recipients continue to be China and Indonesia, although annual amounts to those markets have dropped about $1 billion each. Moreover, the rules now channel tied aid primarily to aid–type projects in social sectors and rural areas, rather than to commercially viable projects, as in the past.
As the economic growth of less–developed Asian countries, like the Philippines, Indonesia, India, and China, accelerated in the 1980s and 1990s, U.S. suppliers complained about their rejected bids in these growing economies, owing to the use of tied aid by other governments. Tied aid for an entry contract in a burgeoning growth sector like transportation, telecommunications, or electric power could help to lock up multiples in follow–on sales. The U.S. Treasury responded with initiatives to negotiate tighter OECD rules over tied aid; and the U.S. Ex–Im started matching offers from other ECAs in significant demonstration cases. At the same time Congress debated the establishment of a "war chest" of up to $5 billion to offset the aggressive use of tied aid by other countries. This carrot–and–stick approach helped win acceptance of the tighter Helsinki rules in the OECD Arrangement.
While the Helsinki rules are an important improvement, the United States needs to sustain adequate funding to match tied aid offers by other ECAs as a discipline to reinforce the OECD Arrangement and to secure the presence of U.S. suppliers at key market openings. Although reduced in total volume, tied aid continues to be a major commercial effort by certain countries. France and Germany made 28 percent of the commitments in 1992, and 38 percent during 1993—95. Japan remains by far the largest aid donor, but it claims most of the aid is untied.
Responding to congressional legislation and a mandate from the TPCC, in 1994 Ex–Im set up a Tied Aid Capital Projects Fund to operate an aggressive tied aid matching program. It has received special appropriations at annual levels of $100 million to $150 million, which leverage into financing volumes of $300 million to $450 million annually if needed. During 1994—96 Ex–Im used the fund to counter over $2.5 billion of actual and potential foreign tied aid credits. American suppliers received indications of possible Ex–Im matching support as early in the negotiating process as another country offered possible tied aid. U.S. Ex–Im does not initiate tied aid, because it does not want to expand its use globally and because it faces budget constraints. However, the potential availability of Ex–Im support has had good results:
The carrot–and–stick approach used to enforce the Helsinki agreements also could be useful in achieving greater discipline in the untied aid arena. In fact, Ex–Im has stated to suppliers that it will use its current Tied Aid Fund to match offers by others that, while allegedly untied, are demonstrably tied in practice. However, this intention has not yet been transformed with the U.S. Treasury into a broader negotiating strategy.
Another issue that complicates the transparency of untied aid is the action by Germany in 1994 to introduce a new untied aid facility through its government–owned bank, Kreditanstalt fur Wiederaufbau (KfW). This agency has operated since 1950, originally to rebuild the German economy after World War II. It has evolved to operate in three realms: as a commercial bank taking its own risks; as an official export credit agency to support tied procurement within the framework of the OECD Arrangement; and as an arm of the German government to administer tied aid credits. By adding an untied facility with partial but significant budget support from the government, KfW operations could become far more opaque. Other competitors will have a hard time knowing when KfW is acting strictly in an untied capacity, rather than combining its lending windows to advance German exports. Other OECD members need more information and assurance that transaction by transaction the tied and untied operations will be kept strictly separate.
Legislation Issues
Major political struggles evolved in Congress in 1997 for both Ex–Im and OPIC. After a heated battle, the charters of both agencies were renewed when they expired on September 30, 1997, Ex–Im for four years and OPIC for two, and each received barely adequate budgets for FY 1998. Both agencies will face major budget challenges in future years. A coalition of conservative "smaller government" representatives, social welfare supporters, and nongovernmental organizations concerned with environmental, labor, and human rights effects of Ex–Im and OPIC have mobilized broad support for sharp budget cuts for both agencies. The rallying cry is "Cut back corporate welfare." The opposition coalition is led by John Kasich (R–Ohio), chairman of the House Budget Committee, who almost won a battle in September 1996 to eliminate OPIC.
Ex–Im authorizations and oversight come under the jurisdiction of the Subcommittee on Domestic and International Monetary Policy of the House Banking Committee, and the Subcommittee on International Finance of the Senate Banking Committee. Appropriations for both Ex–Im and OPIC are controlled by the Foreign Operations Subcommittees of both the House and the Senate appropriations committees. OPIC authorizations and oversight come under the jurisdiction of the Subcommittee on International Economic Policy and Trade of the House International Relations Committee, and under the Subcommittee on International Economic Policy, Exports, and Trade Promotion of the Senate Foreign Relations Committee. Other committees become involved from time to time with the agencies on special issues, such as recently with government reform and reorganization.
During the past year there have been revivals in Congress and the administration of various proposals to merge Ex–Im, OPIC, and TDA, and possibly incorporate them as a single agency into the Commerce Department. The most advanced proposal to merge the three agencies was rejected by a meeting of the National Economic Council just before the February 1997 submission of the president's proposed FY 1998 budget to Congress. Accordingly, separate budget proposals were submitted at slightly lower program levels for FY 1998 than FY 1997 for Ex–Im and OPIC and with a slight increase for TDA. (See Table 4.)
| FY 96 | FY 97 | FY 98 | |
| Ex–Im programs | 687 | 626 | 632 |
| Tied aid | 100 | 100 | 0 |
| Total Ex–Im | 787 | 726 | 632 |
| OPIC | 72 | 72 | 60 |
| TDA | 40 | 40 | 43 |
| Source: Fact Sheet, National Foreign Trade Council, Washington, DC. | |||
A major reason for not pushing ahead with the merger was political reality. At a time when "corporate welfare" was challenged by Congress, it would be a complicated effort to develop and justify new legislation for merging these agencies. It appeared more practical to renew each agency on its merits with reduced budgets. Also, past merger proposals sparked opposition from different congressional committees that want to retain jurisdiction. Indeed, both within the administration and in Congress, other issues have much higher priority.
Issues from Changing Dynamics of International Business
The roles of Ex–Im and OPIC in U.S. commercial diplomacy are evolving partly from the impact of international business dynamics. The expansion of multinational firms has led to new questions revolving around such issues as company eligibility for Ex–Im, OPIC, or TDA support (must the recipient be a U.S. company, and how is that defined?); transaction eligibility for support (must it be a U.S. export, and how is that defined?); how the U.S. job benefits are maximized (would support for a non–U.S. company yield significant U.S. jobs?).
Moreover, rising demand in emerging markets for nonrecourse and limited–recourse financing (including large electric power and other infrastructure projects) requires the U.S. acronym financing agencies to adapt. The pressure to do so is increased by the need to remain competitive with the finance agencies of other governments that are also adapting to the changing business world.
Today, Ex–Im does not require an applicant to be a U.S. company. Eligibility is based on evidence of exports of goods or services from the United States. In contrast, OPIC requires the applicant to be a U.S. company (OPIC's definition: more than 50 percent owned by U.S. citizens, or a foreign company at least 95 percent U.S.–owned). As with Ex–Im, TDA funding for a feasibility study is limited to services sourced from the United States. The company in the United States providing the services may be foreign–owned, but TDA will support the study only if it foresees major follow–on procurement from the United States. OPIC support is untied, so procurement from its financing can occur in or outside the United States. However, OPIC informally encourages substantial procurement from the United States, partly to satisfy Congress.
Just what a U.S. export is becomes more complicated as multinationals increasingly source their procurement globally and through diverse subassembly locations. While a final product may be shipped from the United States, it may contain extensive subassemblies ("foreign content") from non–U.S. plants. Today Ex–Im allows its full financing only to a U.S. export that contains no more than 15 percent "foreign content." For greater amounts, the amount of support is proportionately reduced; above 50 percent "foreign content," Ex–Im support is denied. Multinational firms have access to ECAs wherever they have manufacturing plants. If those ECAs are liberal in accepting of "foreign content" (and most are more liberal than Ex–Im) some multinationals have switched their main assemblies to those countries—with a consequent loss of U.S. jobs.
Other multinationals may have predominant non–U.S. ownership, but they have large export operations from the United States. Should they be denied OPIC support, even when they place the majority of their procurement from the United States? After all, foreign–owned companies are among some of the largest U.S. exporters with Ex–Im support.
In the nonrecourse and limited–recourse project finance area, both Ex–Im and OPIC have taken major steps to provide competitive support. OPIC greatly expanded its support in 1994, from $150 million maximum support per project (insurance and finance combined) to $400 million, with a subceiling of $200 million for finance. (In the finance area, loans remain a maximum of $30 million and usually are less, since they are limited to small business users). Also in 1994, Ex–Im established a separate division for project finance, hired two experienced executives from the private sector, and overhauled its program support for such projects.
Results have been extraordinary and place U.S. agencies in the forefront of project financing among ECAs. Ex–Im in the last two years has approved 15 projects supporting $3.8 billion of U.S. exports. OPIC in the same period has supported U.S. investors with $4 billion in project finance. Ex–Im and OPIC have joined together in a few projects.
However, problems remain to be addressed. Confusing and complicating are the different eligibility and procurement requirements. In some cases, applicants can benefit from combining their support; for example, for a large project use Ex–Im because of OPIC limits (Ex–Im has no size limit), or secure OPIC support for non–U.S. procurement because of Ex–Im restrictions. However, each agency has different credit procedures and standards, different documentation requirements, different management procedures, and different turnaround times. These differences add to the arguments for merging the two agencies, although there are arguments on the other side as well.
Key Issues and Recommendations
Philosophy/Rationale for Ex–Im, OPIC, TDA
Of the major countries with export financing agencies, only the United States stresses the need for "additionality" of export benefits from the government support. The U.S. agencies by statute and policy must design their programs so as not to compete with but supplement private financing. The government is not to do what the private sector can do. Moreover, the resulting exports should be "additional" to the economic benefits that would otherwise accrue to the economy if the government did not intervene through the financing agencies.
Various economic studies have addressed the additionality issue, but the basic rationale of these agencies' activities remains essentially the following: offset and neutralize competition from finance agencies of other governments to allow U.S. exporters to compete on a level playing field; assume risks beyond those that can be absorbed by the private sector to finance exports that otherwise would not occur.
Other ECAs mostly operate on an entitlement basis: if they are open in the market, an exporter can count on support. However, Ex–Im seeks, on a transaction–by–transaction basis, evidence of need before extending medium– or long–term support.
Recommendation
U.S. agencies should retain the underlying philosophy of additionality: it is important for keeping budget requests at a minimum and for ensuring congressional support. Wherever possible, additionality should be applied on a generic rather than transactional basis. For example, when commercial banks clearly are not offering term financing in a market, or to types of borrowers, Ex–Im should be open for business. At the same time, the United States should maintain a strong negotiating posture in the OECD to refine fixed interest rate rules and to achieve comparability in risk premium rates.
Trade Finance Linkage to Foreign Policy Objectives
Within the existing Ex–Im and OPIC charters are various congressional mandates to further certain foreign policy goals. These include human rights, labor rights, antinarcotics, and antinuclear proliferation among others. These agencies also are subject to sanctions in other legislation. While many of these objectives are worthwhile, how the United States pursues them can have disastrous consequences for U.S. exporters and investors.
When the Ex–Im charter severely limited amounts that Ex–Im could provide to the U.S.S.R. in 1973, and this was combined with the Jackson–Vanik amendment about freedom of emigration, the Soviet Union decided not to work with U.S. companies. Meanwhile, the Europeans and Japanese staked out new market shares. The Tiananmen Square sanctions in the Foreign Assistance Act preclude OPIC and TDA from operating in China, just at a time when U.S. investors need their maximum support to help win market share in the dynamic Chinese economy. (However, Ex–Im does not come under that act.) When U.S. drug–trafficking sanctions recently were applied to Colombia, investors and ECAs in other countries that were cooperating with their U.S. counterparts became alarmed and now hesitate. Similar situations have occurred in Indonesia and other markets.
Recommendation
The executive branch should retain flexibility, through presidential discretion, in implementing sanctions legislation. With this context, sanctions should be applied less frequently and less capriciously. U.S. "light–switch" diplomacy has damaged U.S. economic presence in the dynamic emerging markets and limits U.S. influence over political evolution in those countries.
Feasibility Studies
The significance of winning feasibility study contracts for success in winning follow–on procurement suggests the following actions.
Recommendation
A larger budget for TDA is needed than the $43 million recommended by the administration for FY 1998. This should be linked to an aggressive program to fund such studies for countries that are major recipients of untied aid and feasibility study support from other governments. Meanwhile, the United States should negotiate bilaterally with Japan (the largest source of tied funding for feasibility studies) to untie its funds, while simultaneously pursuing a similar agreement within the OECD.
Untied Aid
One key to U.S. companies' winning procurement contracts funded by other governments' untied aid is an early presence in the planning agencies and technical ministries of recipient countries, in order to influence projects and develop relationships. This is better than just bidding on projects at a later stage when competitors have already become involved. Another key is full transparency in the bidding process.
Recommendation
Increase the number of AID technical assistants made available in the planning and technical ministries of major emerging markets. Maximize links between Commerce attach,s abroad and these ministries, and introduce TDA studies and AID technical assistants on a timely basis. Intensify current efforts in the OECD and bilaterally with Japan, Germany, and France for full transparency in the bid process, including early notification with wide dissemination of bid opportunities, active supervision by the donor of the recipient bid review, and publication of all awards. Give special attention to clarifying the new KfW untied aid program. Incorporate in this strategy active use of the Ex–Im Tied Aid Capital Projects Fund to match untied aid offers with competitive financing when the allegedly untied offer is demonstrably tied.
Tied Aid
While the OECD Arrangement has made major progress in controlling tied aid, the United States needs to maintain maximum discipline over the process. Simultaneously, it needs to be sure that Ex–Im has ample funds to maintain an aggressive matching program, and that exporters are fully informed about how to use the Ex–Im facility. A large remaining problem is the use by some donor governments of "protocols" that offer a recipient country an annual amount of tied aid as an incentive to procure from the donor country.
Recommendation
Assure adequate funding for the Ex–Im tied aid "war chest" for matching other countries' offers after they are cleared by OECD review. Provide at least $150 million annual appropriation, including carryover authority from one fiscal year to the next, to convince other countries of U.S. capabilities to discipline practices in both tied and untied aid. Develop Ex–Im contingency "matching protocols" with the countries that receive the largest "offer protocols" from other governments. The recipient country should know in advance that it can rely on the United States to match any other offer under a "protocol," when the project has cleared the OECD eligibility procedure for tied aid funding and the U.S. supplier is competitive in its contract offer.
Organization of Ex–Im, OPIC, and TDA
These agencies have significant differences in several areas: charter mandates, missions, eligibility and procurement criteria, credit and documentation systems, and management structures. These differences are compounded by historic experience and staff perceptions.
Recommendation
Conduct an executive branch objective study of the merits of merging the three agencies, with outside participants from private business (and possibly the General Accounting Office or Library of Congress). An objective study would take the matter off the immediate political agenda but would enable legislative proposals during the present administration.
If the study does not recommend a merger, then special attention needs to be paid to the differing program support, credit analysis, documentation, and management decision cycles of the agencies. This is particularly important because of accelerating global use of project finance, an area where considerable confusion and complexity confront potential U.S. users of Ex–Im and OPIC.
Additional Tables
| 1. New Commitments ($ millions) | ||||
| FY 95 | FY 96 | |||
| Total | Asia | Total | Asia | |
| Loans | $ 1,598 | $ 1,236 | ||
| Guarantees | 5,712 | 6,413< /td> | ||
| Insurance | 4,555 | 3,869 | ||
| Total | $11,865 | $3,671 (30%) | $11,518 | $3,428 (30%) |
| 2a. Current Exposure: Outstanding Commitments (medium and long term; amounts rounded) | ||||
| Geographic Area | ($ millions) | % | ||
| Asia | $16,700 | 36 | ||
| Latin America | 17,800 | 37 | ||
| NIS & Eastern Europe | 4,600 | 10 | ||
| Middle East | 1,750 | 4 | ||
| Africa | 6,000 | 13 | ||
| total | $46,850 | 100 | ||
| 2b. Largest U.S. Export Sectors Supported in Asia (highest 5 in rank order) | ||||
| Electric power, commercial aircraft, telecommunications, oil and gas projects | ||||
| 2c. Largest Markets in Asia (highest 4 in rank order) | ||||
| China, Indonesia, the Philippines, India | ||||
| Sources: Ex–Im Bank; commitments from FY 95 and FY 96 Annual Reports. Exposure data as of December 31, 1996. | ||||
| 1. New Commitments ($ millions) | ||||
| FY 95 | FY 96 | |||
| Total | Asia | Total | Asia | |
| Financing (Loans & Guarantees) |
$ 1,800 | $ 360 | $ 2,200 | $ 628 |
| Insurance | 10,000 | 748 | 16,500 | 1,095 |
| Total | $11,800 | $1,108 (9%) | $18,700 | $1,713 (9%) |
| 2. Current Exposure: Outstanding Commitments (medium and long term) | ||||
| 2a. Geographic Area | ||||
| Asia & Pacific 20%, The Americas 41%, NIS 18%, Central & Eastern Europe 10%, Africa & Middle East 11% | ||||
| 2b. Largest Sectors Supported Globally | ||||
| Electric power 29%, Telecommunications 11%, Financial services 20%, Oil & gas projects 9%, Manufacturing 16%, Mining 7% | ||||
| 2c. Largest Markets in Asia (not rank order) | ||||
| India, Indonesia, Malaysia, Philippines, Taiwan, Thailand | ||||
| Sources: OPIC; FY 95 and FY 96 Annual Reports. | ||||
|
Source |
China | India | Indonesia | Philippines | Malaysia | Thailand | Pakistan |
| France | 26% | 16% | 11% | 8% | 35% | 11% | 21% |
| Germany | 16 | 28 | 25 | 10 | 11 | 17 | 16 |
| Italy | 7 | 3 | 15 | ||||
| Japan | 11 | 8 | 17 | 17 | 17 | 26 | 11 |
| U.K. | 7 | 11 | 9 | 11 | 21 | 2 | 8 |
| U.S. | 11 | 12 | 10 | 20 | 10 | 12 | 12 |
| Spain | 5 | ||||||
| Sweden | 10 | ||||||
| Switzerland | 4 | ||||||
| Austria | 4 | ||||||
| Netherlands | 4 | 5 | |||||
| Korea | 16 | ||||||
| % of total export | 83 | 88 | 84 | 66 | 94 | 89 | 83 |
|
credits received from these sources Notes: Seven Asian markets account for 40% of global export credits committed and outstanding on a medium– and long–term basis. For these seven markets the chart shows, by recipient country, the percentage of its total outstanding export credits received from its major sources. The data are based on various reports from export credit agencies and insurers. Data are approximate for indicative purposes. Blank spaces indicate insignificant amounts. Japan: Reflects insurance issued by EID/MITI, and includes Japan Ex–Im Bank "export loans" extended as "supplier credits" but not other Japan Ex–Im Bank activity. |
|||||||
| 1. Major Countries and Regions (billion Yen), New Commitments Cumulative, FY 95 Commitments | ||||
| (53% of FY 95) | (37% of total) | |||
| Asia | 862 | 12,300 | ||
| Indonesia | 145 | 3,188 | ||
| China | 448 | 2,723 | ||
| Thailand | 72 | 987 | ||
| Philippines | 60 | 985 | ||
| India | 20 | 664 | ||
| Europe | 228 | 5,457 | ||
| Middle East | 194 | 1,923 | ||
| Africa | 76 | 3,277 | ||
| North America | 105 | 4,300 | ||
| Latin America | 172 | 4,679 | ||
| International Orgs. | 907 | |||
| total | 1,637 ($16 bil) | 32,894 ($328 bil) | ||
| 2. FY 95 New Commitments by Purpose (billion Yen) | ||||
| Asia | Global | Global Share | ||
| Export Loans | 83 | 82.8 | 11% | |
| Import Loans | 0.4 | 126.0 | 8 | |
| Overseas Investment Loans | 251.2 | 604.6 | 37 | |
| Untied Loans & Guarantees | 477.6 | 723.1 | 44 | |
| Total | 811.8 ($8.1 bil) | 1,636.5 ($16 bil) | 100% | |
| 3. Untied Loans and Guarantees (billion yen) | ||||
| Total 723.1; Asia 477.6, 65% of Total; China 235.1, 50% of Asia, 33% of Total Since 1950; not current outstandings. | ||||
| Note: Untied loans and guarantees in (3) are included in (2) above. Source: Japan Ex–Im Bank Annual Report 1996. Fiscal year ending March 31, 1996. Table 9. Japan: EID/MITI Activity Total JFY 94 Commitments: Operational Value of Commitments New Policies Outstanding Made Operational at March 31, 1995 | ||||
| Oceania | 768 | 4% | 175 | 2% |
| Asia | 6,960 | 35 | 5,922 | 65 |
| North & Central America | 7,766 | 40 | 1,371 | 15 |
| South America | 322 | 2 | 399 | 4 |
| Europe | 2,986 | 16 | 817 | 9 |
| Africa | 557 | 3 | 584 | |
| total | 19,359 | 100% | 8,684 | 100% |
| ($194 bil) | ($87 bil) | |||
|
Notes: Data include short–term policies for about 90–95% of the values. This means many 90–day policies could be issued and no longer be outstanding at the end of the year. Japanese companies must generally take whole turnover coverage, which means that they must include sales to the United States and other strong markets as well as weaker ones.
Source: EID/MITI Annual Report. (Fiscal year ending March 31, 1995) |
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Endnotes
Note 1: "Corporate welfare" is defined by the CATO Institute as "the use of government authority to confer specific benefits or privileges to specific firms or industries where there is no corresponding societal benefit." Back.
Note 2: "Toward the Next American Century: A U.S. Strategic Response to Foreign Competitive Practices," Fourth Annual Report to Congress, Trade Promotion Coordinating Committee, Department of Commerce, Washington, D.C., October 1996. Back.
Note 3: U.S. Ex–Im Bank Fact Sheet 1997. Back.
Note 4: U.S. Ex–Im Bank Annual Report to Congress, 1995, and 1996. Back.
Note 5: OPIC Annual Report to Congress, 1996. Back.
Note 6: J. David Richardson and Karin Rindal, "Why Exports Really Matter!" (Washington, D.C.: The Institute for International Economics and The Manufacturing Institute, July 1995). Back.
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