Emergency Committee For American Trade - Publications

SECTION III.7: EXPORT PROMOTION AND FINANCING AND DEVELOPMENT ASSISTANCE

Export promotion and financing, as well as development assistance, make significant contributions to fostering international trade and investment. U.S. export credit agencies play an important role in promoting U.S. export growth. The Export-Import (Ex-Im) Bank, the Overseas Private Investment Corporation (OPIC), and the Trade and Development Agency (TDA) have distinct and important export-promotion functions. Ex-Im Bank provides financing to respond to market distortions that would put U.S. exports at a competitive disadvantage and has played a significant role in promoting the recovery of Asian economies. OPIC and TDA encourage trade and investment by providing investment insurance and feasibility-study financing of overseas development projects with potential to benefit U.S. trade.

Development assistance through the Millennium Challenge Corporation as well as the multilateral development banks also provides important resources to develop infrastructure, transportation and economic policies that expand the trade capacity of developing countries.

The outlook for funding for each of these agencies is described below.

Export-Import Bank

The Ex-Im Bank is an independent federal agency that is chartered by Congress. The bank’s charter was renewed in December, 2006, for a period through September 30, 2011, pursuant to the Export-Import Bank Reauthorization Act of 2006 (Pub. L. 109-438). The Ex-Im Bank was established in 1934 as the official export credit agency of the United States government. It promotes exports by providing short- and long-term export financing to small, medium-size, and large U.S. exporters.

Ex-Im’s export financing (loans, guarantees, and export credit insurance), supported thousands of transactions supporting billions of dollars in U.S. exports to markets around the world. Exporters pay fees, interest and premiums for the use of Ex-Im’s financing. Fees typically range from 5-to-17 percent of the financing obtained.

In FY 2006, Ex-Im provided $12.1 billion in financing, supporting $16.1 billion in U.S. exports, which support economic growth and higher paying jobs in the United States. Most of Ex-Im’s financing is provided to small and medium-size companies.

In addition to reauthorizing the Ex-Im Bank through FY 2011, the Export-Import Bank Reauthorization Act of 2006 included the following key provisions:

Requires Ex-Im to submit to Congress a list of sensitive commercial sectors/ products for which Ex-Im financing is deemed unlikely due to a potentially adverse effect on the U.S. economy.

Includes several provisions to expand Ex-Im’s work with small businesses, especially disadvantaged or minority or women-run businesses. Establishes a Small Business Division in Ex-Im and a Small Business Committee within Ex-Im’s management committee.

Requires Ex-Im to expand credit and loan guarantees with respect to medium-term transactions for small business concerns and make available related lines of credit.

In making a loan or guarantee, requires Ex-Im determine whether loan application will produce products that may cause substantial injury to a competing U.S. producer and prohibit loans/guarantees if they would facilitate circumvention of a trade-law order or determination.

Requires Ex-Im notification through the Federal Register of economic-impact analysis and seek comments from specified federal agencies and Congress on possible effects and provide Board of Directors with written statement of any adversely affected person submitting comments.

Requires a revised notice of intent if a material change is made to the amounts in an application for a loan or guarantee.

Extends through FY2011 the aggregate loan, guarantee, and insurance authority of Ex-Im.

Revises procedures for processing individual applications involving the use or potential use of the Tied Aid Credit Fund, authorizes the use of the Tied Aid Credit Fund to match an offer of tied aid in more circumstances, and urges the establishment of a tied aid program. Also requires an annual competitiveness report to Congress on tied aid issues.

Requires that not less than two appointed members of Ex-Im’s Advisory Committee be from environmental non-governmental organizations.

Since its creation, Ex-Im has supported more than $400 billion in U.S. exports. Ex-Im also plays a critical role in helping to offset the competitive disadvantage many U.S. companies face as the result of export-finance subsidies by foreign governments and their export credit agencies, which are increasingly active overseas. More than 80 countries provide financial assistance to their exporters. Japan, Canada, and many European countries supplement their export credit assistance with foreign assistance funds that allow them to offer financing at low rates with favorable terms. Foreign government export financing on favorable terms is causing U.S. companies to lose business. A U.S. government study tracking 200 projects over eight years found that foreign government financing played a role in diverting $25 billion in contracts away from U.S. companies.

The FY 2008 budget does not seek new funding for Ex-Im, except for the necessary expenses of the Office of the Inspector General. Rather the Administration is seeking to allow Ex-Im to use its reserves for administrative expenses and the loan-loss reserve.

ECAT Position: ECAT welcomes the reauthorization of Ex-Im Bank through 2011.

Overs eas Private Investment Corporation

OPIC was founded in 1971 to sell risk insurance and provide loans to help American companies compete in emerging markets. OPIC insurance covers political risks such as currency inconvertibility, expropriation, and political violence. OPIC also provides loans and loan guarantees that would otherwise be unavailable or only available at a high cost in high-risk emerging markets. As discussed below, OPIC’s charter has been extended through fiscal year 2007.

OPIC is financially self-sustaining and operates at no cost to taxpayers. Since its founding, OPIC has supported over $150 billion worth of investments that have helped generate approximately $66 billion in U.S. exports, which supported over 257,000 jobs.

In 2003, OPIC established a new Small Business Center to assist companies with revenues under $35 million with streamlined application procedures. In 2004, OPIC provided loans, guarantees or insurance for 95 projects in which small businesses were involved. OPIC also created the Small and Medium Enterprise Finance Department to assist small and medium-sized businesses with greater revenues. In 2006, OPIC initiated an Anti-Corruption and Transparency Initiative.

Previous proposals to privatize OPIC have been demonstrated to be costly and self-defeating. A 1997 J.P. Morgan study revealed that privatizing OPIC would result in a net loss to the U.S. government and deprive the government of an important source of funding to offset foreign assistance spending. The study also found that private banks and insurance companies could not duplicate OPIC’s leverage in recovering insurance claims, ensuring that overseas projects produce U.S. benefits, and maintaining U.S. investor confidence.

Along with Ex-Im Bank financing, OPIC insurance is critical to the ability of U.S. exporters to take advantage of opportunities in high-risk emerging markets. OPIC has played a major role in supporting infrastructure projects in Russia and Eastern Europe, Asia, and more recently in Afghanistan. It also has had a prominent role in project finance in Latin America and Africa.

In December, 2003, the Overseas Private Investment Corporation Amendments Act of 2003 was enacted to extend through fiscal year 2007 OPIC’s authority to issue investment insurance and guarantees. This statute also made several other changes to OPIC’s operations including the following:

Authorizes OPIC to make transfers from its noncredit activities to pay for administrative costs of its investment guarantees and direct loan programs.
Extends OPIC coverage to loss of investment in an approved project due to expropriation or confiscation by any political subdivision of, or a corporation owned or controlled by, a foreign government (not just the foreign government itself).
Authorizes OPIC to issue loan guarantees: (1) denominated in currencies other than U.S. dollars (local currencies), and (2) to local financial institutions.
Requires OPIC to collect and report to Congress annually data on the involvement of minority- and women-owned businesses in OPIC-supported projects.

The FY 2008 budget seeks no new credit funding for OPIC, given the funds already available based on collections and carryovers. The FY 2008 budget does include $47.5 million for administrative expenses.

Trade and Development Agency

The Trade and Development Agency (TDA) is part of the United States’ foreign assistance apparatus that is focused on helping countries establish favorable trading environments and a modern infrastructure that promotes sustainable economic development. TDA plays a significant role in promoting the international competitiveness of U.S. firms by enabling them to be involved in the initial development stage of major infrastructure projects in emerging markets.

TDA’s major focus is on trade capacity building and support for major infrastructure development. In particular, TDA provides funding for feasibility studies, orientation visits, specialized training, and business workshops, which allow U.S. companies to be in a better position to be chosen to design and construct the final project. TDA also provides technical training and assistance in the use of U.S. technologies and equipment in overseas projects. TDA exposes foreign government officials to U.S. technologies and products during "reverse" trade missions that provide them the opportunity to meet with American companies and learn about their products. This support is particularly critical since foreign government financing of feasibility studies is far more extensive than U.S. funding, further disadvantaging U.S. exporters competing against foreign firms that benefit from subsidized export financing.

Since 1981, TDA programs have helped to promote $25 billion in U.S. exports, approximately $43 in exports for every TDA dollar expended. In FY 2006, TDA obligated funds for U.S. firms in more than 50 developing and middle-income countries in the following regions: Africa/Middle East, Asia/Pacific, Central and Eastern Europe, Latin America and the Caribbean, and Eurasia. TDA provides support in numerous sectors, including energy, environment, health care, information technology, mining and minerals development, telecommunications, transportation, and water resources.

The President’s budget for FY 2008 seeks $50.4 million for TDA.

Millennium Challenge Corporation

The Millennium Challenge Corporation (MCC) was established in January 2004 to administer the Millennium Challenge Account (MCA) – a development program to provide more significant financial contributions to countries that adopt good policies in governance and economic growth. Since its inception, MCA compacts have been reached with eight countries, several of which seek to promote economic growth policies in tandem with trade-expansion opportunities.

MCA compacts with Honduras and Nicaragua, in particular, are intended to bolster the opportunities created by the U.S.-Central America Free Trade Agreement (CAFTA). The $215 million compact with Honduras will focus on increasing productivity of small and medium-size farms and reducing transportation costs between production centers and national, regional and global markets. The $175 million compact with Nicaragua is focused on reducing transportation costs, promoting rural productivity and promoting strengthened respect for property rights.

The President’s budget for FY 2008 seeks $3 billion for MCC.

Multilateral Development Banks and International Monetary Fund

ECAT believes that the United States should meet its commitments to support international lending agencies. U.S. support of international lending agencies is a vital part of maintaining U.S. leadership in promoting global growth and stability. It is also critical to ensuring the growth of U.S. exports and the expansion of world export markets. The multilateral development banks also represent another avenue for the United States to help promote trade and investment liberalization. For example, the World Bank has played a valuable role in providing technical assistance to countries during previous WTO sector-specific services negotiations, and the Inter-American Development Bank has provided assistance to the negotiations to form a Free Trade Area of the Americas.

The World Bank and other international financial institutions should also play critical roles in helping to address human capital concerns in the areas of labor, the environment and health. Proposals have been made, for instance, to develop an international program to battle the HIV-AIDs crisis (and other health crises) in Africa through coordinated financial assistance for capacity building, prevention, and treatment. In this regard, the World Bank and other institutions could play an important role in providing financial support, as well as in coordinating and dispensing assistance to Africa and other parts of the world. Capacity-building programs regarding labor and environmental initiatives should also be pursued with these institutions as well.

ECAT Position: ECAT supports full funding for the Ex-Im Bank and the Overseas Private Investment Corporation, which help support the competitiveness of U.S. companies. ECAT also supports full funding for the Trade and Development Agency, which provides important project funding and trade technical assistance to developing countries in a manner that helps support U.S. exports. ECAT also supports full funding for the Millennium Challenge Corporation and the multilateral development banks and development funds, as well as efforts to use these organizations to address human capital issues, including health, labor and environmental matters.