For other versions of this document, see http://wikileaks.org/wiki/CRS-98-568 ------------------------------------------------------------------------------ ¡ ¢ ¢ Prepared for Members and Committees of Congress ¡ ¢ The Export-Import Bank is the chief U.S. government agency that helps finance American exports of manufactured goods and services. (For additional information, see the Bank's Internet site: http://www.exim.gov.) With a budget of around $200 million, the Bank finances less than 1% of U.S. exports a year. Eximbank provides guarantees and insurance to commercial banks to make trade credits available to U.S. exporters. The Bank also offers direct financing to U.S. exporters on a limited basis, primarily to counter subsidized trade credits offered to foreign exporters by their governments. On December 26, 2007, President Bush signed the Consolidated Appropriations Act of 2008 (P.L. 110-161), which provides $68 million for the Bank's subsidy costs and $78 million for administrative expenses. On December 20, 2006, President Bush signed P.L. 109-438, to reauthorize the Bank's authority through September 30, 2011. This report will be updated as events warrant. ¡ Background ..................................................................................................................................... 1 Programs.......................................................................................................................................... 1 Recent Developments...................................................................................................................... 4 International Agreements................................................................................................................. 4 Legislative Issues ............................................................................................................................ 5 Eximbank Debate ............................................................................................................................ 6 Table 1. Budget of the Export-Import Bank .................................................................................... 3 Author Contact Information ............................................................................................................ 6 ¡ The Export-Import Bank (Eximbank) is an independent U.S. government agency that is charged with financing and promoting exports of U.S. manufactured goods and services. To accomplish these goals, Eximbank uses its authority and resources to: assume commercial and political risks that exporters or private financial institutions are unwilling, or unable, to undertake alone; overcome maturity and other limitations in private sector export financing; assist U.S. exporters to meet foreign, officially sponsored, export credit competition; and provide guidance to U.S. exporters and commercial banks and foreign borrowers. Eximbank gears much assistance to small-and medium-sized enterprises. The Bank operates under a renewable charter, the Export- Import Bank Act of 1945, as amended, and has been authorized through September 30, 2011. When it was initially established, the Bank was capitalized by an appropriation of $1 billion from the U.S. Treasury. The Bank also is authorized to borrow up to $6 billion directly from the Treasury, and it may draw upon a substantial line of credit with the Federal Financing Bank (FFB). (The Federal Financing Bank is a part of the Department of the Treasury and obtains its funds from regular Treasury issues.) Eximbank uses its Treasury borrowings to finance its short- term needs, and repays the Treasury quarterly from loan repayments and by borrowing from the FFB on a medium-and long-term basis. The Bank's authority to lend, guarantee, and insure is limited to a total of $100 billion. Eximbank's direct loans are charged at their full value against the $100 billion limitation, while only 25% of guarantees and insurance are charged against the limit. Under the terms of the Budget Enforcement Act of 1990, Congress appropriates the estimated amount of subsidy the Bank expects to expend throughout all of its credit programs, including direct loans, guarantees, and insurance, as indicated in Table 1. Congress no longer sets separate limits on the amount of loans, guarantees, and insurance the Bank can authorize, but the Bank continues to provide estimates of the amounts of activity it expects to undertake. In its FY2008 and FY2009 budget requests, the Bush administration requested appropriations for Eximbank's subsidy and administrative expenses, but stated that offsetting collections would count against the appropriation from the General Fund and bring it down to $0. In essence, the administration requested approval for the level of expenses that Eximbank would cover on its own. In addition, offsetting collections of up to $50 million above the approved spending levels are to be available for use in the following fiscal year. Eximbank has three main programs it uses to finance U.S. exports: direct loans, export credit guarantees, and export credit insurance. Prior to 1980, the Bank's direct lending program was its chief financing vehicle, which it used to finance such capital-intensive exports as commercial aircraft and nuclear power plants. Both the budget authority requested by the Administration and the level approved by the Congress for the Bank's direct lending were sharply reduced during the 1980s. Eximbank's direct lending program is used primarily to aid U.S. exporters in instances where they face a foreign competitor that is receiving officially subsidized financing by a foreign government, or when private sector financing is unavailable. These loans carry fixed interest rates ¡ and generally are made at terms that are the most attractive allowed under the provisions of international agreements. They are made primarily to counter attempts by foreign governments to sway purchases in favor of their exporters solely on the basis of subsidized financing, rather than on market conditions (price, quality, etc.), and to enforce internationally agreed upon terms and conditions for export financing. The Bank also has an Intermediary Credit Program it uses to offer medium-and long-term fixed-rate financing to buyers of U.S. exports, but U.S. exporters also must face officially subsidized foreign competition to qualify for this program. In FY2007 Eximbank made no direct loans, and in FY2006 it authorized only three. As part of its direct lending program, the Bank has a tied aid "war chest" it uses to counter specific projects that are receiving foreign officially subsidized export financing. Tied aid credits and mixed credits are two of the primary methods whereby governments provide their exporters with official assistance to promote exports. Tied aid credits include loans and grants which reduce financing costs below market rates for exporters and which are tied to the procurement of goods and services from the donor country. Mixed credits combine concessional government financing (funds at below market rates or terms) with commercial or near-commercial funds to produce an overall rate that is lower than market-based interest rates and carries more lenient loan terms. The United States does tie substantial amounts of its agricultural and military aid to U.S. goods, but it generally has avoided using such financing to promote American capital goods exports. Funds for the tied aid war chest are available to the Bank from the Treasury Department and are subtracted from the Bank's direct credit resources. Applications for the tied aid fund, however, are subject to review by the Treasury Department, which has not approved a single tied aid request by the Bank since 2002. ¡ knaB tropmI-tropxE eht fo tegduB .1 elbaT )sra llod fo snoillim ni( 30YF 40YF 50YF 60YF 70YF 80YF 90YF detseuqeR ydisbuS latoT 145$ 0$ 621$ 781$ 62$ 86$ 14$ detairporppA ydisbuS latoT 315 0 06 001 AN 86$ AN sesnepxE gnitarepO 334 385 166 353 663 226 041 ydisbuS naoL tceriD- 1 22 -- 1 ­­ 71 71 ydisbuS naoL eetnarauG- 713 742 722 581 15 63 73 snoitacifidoM naoL- 3 01 41 5 8 2 -- sesnepxE evitartsinimdA- 86 37 37 37 37 87 28 stsoC ydisbuS fo setamitse-eR- 44 132 743 981 142 784 -- )ssorg( ytirohtuA tegduB 226 603 774 891 143 906 421 detairporppA- 775 27 231 901 99 52- -- rehtO- 54 432 543 98 242 436 421 secruoseR tegduB 862,1 092,1 252,1 218 217 559 754 )ssorg( ytirohtuA tegduB- 226 603 774 881 143 906 421 sraey suoiverp morf seirevoceR- 98 941 07 22 -- -- -- raey fo trats secruoser detagilbonU- 755 538 507 295 173 643 333 raey fo dne secruoser detagilbonU- 538 507 195 173 643 333 713 )ten( ytirohtuA tegduB 126 503 674 891 043 264 14- )ten( syaltuO 546 817 186 813 054 455 44 tnemnrevoG setatS detinU eht fo tegduB .tegduB dna tnemeganaM fo eciffO :ecruoS ,notgnihsaW .seussi suoirav , .ffO .tnirP .tvoG .S.U .stnuoma detamitse ro ,detseuqer era 9002YF dna 8002YF rof ataD :etoN Guarantees and insurance are the main programs the Bank uses to assist American exporters. Both programs reduce some of the risks involved in exporting by insuring against commercial or political uncertainty. There is an important distinction, however, between the two programs. Insurance coverage carries with it various conditions that must be met by the insured before the Bank will pay off a claim. A guarantee is an ironclad commitment made to a commercial bank by the Export-Import Bank that promises full repayment with few, if any, conditions attached. In addition, Eximbank has a Working Capital Guarantee Program that it uses to aid small-and medium-sized businesses. Businesses that qualify have exporting potential but need working capital funds to produce or market their goods or services for export. Guarantees are offered to qualified lenders (primarily commercial banks) in order to facilitate loans to small businesses. In FY2007, the Bank authorized $12.57 billion in loans and guarantees to support an estimated $16.04 billion in U.S. exports. According to the Bank, this represents 2,793 transactions of which 86% directly benefitted small business. About 27% of the total value of Eximbank transactions went toward assisting small business. ¡ In 2007, several individuals were charged with scheming to defraud Eximbank. In one case, an exporter, buyer, and broker all allegedly conspired to misappropriate loan proceeds from an Eximbank-supported loan.1 Fraud can waste Bank resources and undermine the Bank's programs. In response to concerns about fraud, Eximbank adopted new guidelines for its transaction partners (lenders, brokers, and exporters) in January 2008 to reduce the risk of fraud, "Transaction Due Diligence Best Practices." These guidelines consist of a series of questions to help transaction partners undertake effective due diligence and assess the risk of fraud in their transactions. Applicants for Eximbank assistance are under no legal obligation to follow the guidelines, but they are written to help the applicants prevent financial and legal losses as well as to help Eximbank prevent fraud. In addition to reducing the risk of fraud, these guidelines aim to decrease the processing time for applications, which has been a concern in the business community. The United States generally opposes subsidies for exports of commercial products. (Nevertheless, like most countries, the United States has in place procurement policies that seek to assure that most U.S. foreign assistance funds are spent by the recipients on U.S. goods and services.) Since the 1970s, the United States has led efforts within the Organization for Economic Cooperation and Development (OECD) to adopt international protocols which reduce the subsidy level in export credits by raising the interest rates on government-provided export credits to market levels. Countries that signed the OECD Arrangement on export finance, concluded in November 1991, agreed to tighten further restrictions on the use of tied-aid. The participants agreed that projects that would be financially viable, and commercial credits would be prohibited from using tied or partially untied aid credits, except for credits to the least developed countries where per capita income is below $2,465. Moreover, the agreement sets up tests and consultation procedures to distinguish between projects that should be financed on market or official export credit terms, and those that legitimately require such aid funds. In addition to agreements on credit terms, OECD member countries have agreed to other guidelines for official export credit. In 2007, OECD member countries agreed to guidelines on environmental rules and sustainable lending principles. The environmental rules call for member governments to review projects for potential environmental impacts and assess them against international standards, such as those of the World Bank. They also call for more public disclosure for environmentally sensitive projects. The new guidelines on sustainable lending principles aim to help developing countries avoid a renewed build-up of debt after receiving debt relief. U.S. exporters and others have expressed doubts about the effectiveness of international efforts to stem officially subsidized trade financing. While the OECD agreement appears to be reducing most direct government subsidies to trade financing, a number of countries have found a way around the agreement through market windows, or subsidized trade financing through ostensibly private financial institutions that are not subject to the agreement. The agreement also has a number of limitations, including the difficulty of defining commercially viable projects; and the 1 "Eight Charged in Connection with $80 million Scheme to Defraud Ex-Im Bank," U.S. Fed News, October 11, 2007. ¡ presence of an "escape clause" that allows countries to proceed with a tied aid offer, despite objections by other participants, if that country claims that the project is in its national interest. Moreover, the Agreement contains no explicit enforcement mechanism. The effectiveness of the Agreement also depends on the accuracy and openness of tied aid offers reported to the OECD, but the OECD does not confirm or verify the accuracy of the data provided by its members.2 Another issue of concern is that some countries outside of the OECD, such as China, are becoming major providers of official export credit finance. It may be difficult for Eximbank to compete with such export credit programs. Congress does not directly approve individual Eximbank transactions, but has a number of oversight responsibilities concerning the Bank and its activities. The Senate confirms Presidential appointments to the Bank's Board of Directors and Congress authorizes the Bank's legal charter for a period of time chosen by Congress. At times, Congress has required an annual reauthorization of the Bank's legal charter, and at other times has authorized the Bank for periods that have varied from two to four years. Congress also approves an annual appropriation for the Bank that sets an upper limit on the level of the Bank's financial activities. In addition, Congress can always amend or alter the Bank's governing legislation as it deems appropriate. Members of Congress and Congressional Committees can request that the Bank's President consult with them or testify before committees, with some qualifications. Three bills have been introduced in the 110th Congress which would affect the Export-Import Bank if they were passed. The New Apollo Energy Act of 2007 (H.R. 2809), introduced on June 21, 2007, would require Eximbank to limit its support for fossil fuel-related projects to less than 85%, and increase its support for renewable energy and energy efficiency projects to at least 15% of its available resources for supporting transactions. This bill would also create a commission and an Office of Renewable Energy Promotion within the Bank to help achieve these targets. Eximbank would also be required to report to Congress on its energy efficiency activities and its overall effect on greenhouse gasses. S. 876, introduced on March 14, 2007, would prohibit the Export-Import Bank from providing services to any individual who has invested $1 million or more in any project that contributes to enhancing Cuba's ability to develop petroleum resources off its northern coast. A similar bill, H.R. 1679, was introduced in the House on July 26, 2007. H.R. 1886 was introduced on April 17, 2007, and it would prohibit the Export-Import Bank from providing its services to any activity connected with an oil or gas project. President Bush signed P.L. 109-438, the Export-Import Bank Reauthorization Act of 2006, on December 20, 2006. This act reauthorizes the Bank through September 30, 2011, and creates a Small Business Division within the Bank that is responsible for conducting research, tailoring products to small business needs, and increasing loans to small business concerns. The measure also extends the authority of the Advisory Committee on Sub-Saharan Africa through FY2011. In addition, the measure directs the Bank to submit annually to Congress a list of U.S. commercial sectors and products that would suffer "adverse economic impact" due to Eximbank support of projects abroad. The measure encourages the Bank to make greater use of its "tied aid" facility, but also provides a mechanism for the Secretary of the Treasury to oppose decisions made by the 2 Competitor's Tied Aid Practices Affect U.S. Exports. General Accounting Office. Report No. GGD-94-81. May 1994. p. 19-21. ¡ Bank's board of Directors to match an offer of tied aid by a foreign entity. The measure also requires that the Bank determine whether an entity receiving Eximbank support could produce goods other than those specified on its application in order to circumvent prohibitions on supporting projects abroad that could compete with U.S. firms. ¡ One rationale for the Export-Import Bank is the acknowledged competition among nations' official export financing agencies, but most economists doubt that a nation can improve its welfare or level of employment over the long run by subsidizing exports. Economists generally maintain that economic policies within individual countries are the prime factors which determine interest rates, capital flows, and exchange rates, and the overall level of a nation's exports. As a result, they hold that subsidizing export financing merely shifts production among sectors within the economy, but does not add to the overall level of economic activity, and subsidizes foreign consumption at the expense of the domestic economy. From this point of view, promoting exports through subsidized financing or through government-backed insurance and guarantees will not permanently raise the level of employment in the economy, but alters the composition of employment among the various sectors of the economy. Some opponents further argue that, by providing financing or insurance for exporters that the market seems unwilling, or unable, to provide, Eximbank's activities draw from the financial resources within the economy that would be available for other uses. Such "opportunity costs," while impossible to estimate, could be potentially significant. Another opposition argument is that subsidized export financing raises financing costs for all borrowers by drawing on financial resources that otherwise would be available for other uses, thereby possibly crowding out some borrowers from the financial markets. Critics assert that this crowding-out effect might nullify any positive impact subsidized export financing may have on the economy. Some Eximbank supporters maintain that the Bank's programs are necessary for U.S. exporters to compete with foreign subsidized export financing and also to pressure foreign governments to eliminate concessionary financing. Eximbank is required in the Bank's Act to provide U.S. exporters with financing terms that are "competitive" with those offered by other official trade financing institutions. These, and other supporters of the Bank, also stress that deficiencies in financial markets bias those markets against exports of high value, long-term assets. Danielle Langton Analyst in International Trade and Finance dlangton@crs.loc.gov, 7-5448 ------------------------------------------------------------------------------ For other versions of this document, see http://wikileaks.org/wiki/CRS-98-568