Export-Import Bank: Background and Legislative Issues

This report discusses the Export-Import Bank (Ex-In Bank), the chief U.S. government agency that helps finance American exports of manufactured goods and services with the objective of contributing to the employment of U.S. workers.

Order Code 98-568 E Updated March 10, 2003 CRS Report for Congress Received through the CRS Web Export-Import Bank: Background and Legislative Issues James K. Jackson Specialist in International Trade and Finance Foreign Affairs, Defense, and Trade Division Summary The Export-Import Bank is the chief U.S. government agency that helps finance American exports.1 With a budget of around $600 million, the Bank finances about 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 February 20, 2003, President Bush signed P.L. 108-007 (H.J.Res. 2), which appropriated $541 million for the Bank’s subsidy costs, or 25% below the $727 million appropriated in FY2002, and $68 million in administrative expenses. For FY2004, the President’s budget recommends appropriating no additional funds for the Bank’s subsidy costs, relying instead on using the Bank’s unexpended balances from previous years, and $75,394,668 for administrative expenses. The Bank’s authority was renewed through September 2006 when President Bush signed P.L. 107-189 on June 14, 2002. This report will be updated as events warrant. Additional information on this and other trade-related issues is available from the CRS Electronic Briefing Book on Trade at: [http://www.congress.gov/brbk/html/ebtra1.html]. Background The Export-Import Bank (Eximbank) is an independent U.S. government agency that is charged with financing and promoting exports of U.S. 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 and advice to U.S. exporters and commercial banks and foreign borrowers. The Bank operates under a renewable charter, the Export-Import Bank Act of 1945, as amended, and has been authorized through September 30, 2006. 1 For additional information, see the Bank’s Internet address: [http://www.exim.gov] Congressional Research Service ˜ The Library of Congress CRS-2 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 $80 billion in 2002, but will increase by $5 billion a year to reach $100 billion in 2006. Eximbank’s direct loans are charged at their full value against the $75 billion limitation, while only 25% of guarantees and insurance are charged against the limit. Before the Budget Enforcement Act of 1990, Congress set annual authorization limits on the maximum amount of new loans, insurance, and guarantees the Bank could extend, and appropriated funds only for Eximbank direct credits. Under the terms of the new budget rules imposed by the 1990 Act, 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. Programs 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 capitalintensive exports as commercial aircraft and nuclear power plants. Both the budget authority requested by the Administration and the limitation approved by the Congress for the Bank’s direct lending were sharply curtailed 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. 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. CRS-3 Table 1. Budget of the Export-Import Bank (in millions of dollars) FY98 FY99 FY00 FY01 FY02 FY03 FY04 Total Subsidy Requested 632 808 839 963 633 541 0 Total Subsidy Appropriated 683 765 865 865 727 541 NA – – – – – Operating Expenses 775 727 2,656 1,815 1,256 364 534 Direct Loan Subsidy 16 53 12 95 48 25 18 701 603 890 732 678 188 422 Loan Modifications 12 21 35 5 26 19 19 Administrative Expenses 46 50 55 62 63 68 75 – – 1,663 668 441 64 -- 732 825 2,474 1,848 1,182 654 76 683 765 865 928 740 609 75 49 60 1,609 919 442 45 1 1,155 1,207 2,999 2,331 1,838 1,007 Budget Authority (gross) 732 825 2,474 1,848 1,182 654 76 Recoveries from previous years 124 48 45 118 118 90 90 Expired resources -46 – – – – – -- Unobligated resources start of year 299 334 480 358 514 557 955 Unobligated resources end of year 334 480 358 514 557 955 586 Budget Authority (net) 732 825 2,474 1,847 1,181 653 75 Outlays (net) 686 746 2,539 1,655 1,245 906 640 Guarantee Loan Subsidy Re-estimates of Subsidy Costs Budget Authority (gross) Appropriated Other Budget Resources * Indicates requested, or estimated amount Source: Office of Management and Budget. Budget of the United States Government, various issues. Washington, U.S. Govt. Print. Off. 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. As part of its CRS-4 “Reinventing Ex-Im Bank” process, the Bank has become more aggressive in matching foreign tied aid credits in foreign markets and in offering greater choices of financing for exporters to counter foreign offers of tied aid. Under this initiative, the Bank intends to intervene at an earlier stage in the negotiating process to counter financing offers made by foreign competitors. The Bank has also extended its tied aid support to help small businesses that face foreign tied aid competition. 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. Recent Developments In September, 2002, Eximbank Vice Chairman, Eduardo Aguirre, announced that the Bank had adopted major changes in its internal organizational structure to improve its customer service. The Bank created three new divisions: a Export Finance group; a Credit and Risk Management group; and a Communications group. The Export Finance group will have complete responsibility for all of the Bank’s programs from development to disbursement, providing the Bank’s customers with a “streamlined process regardless of which product is being sought.” The Credit and Risk Management group is expected to provide consistent standards for risk management, including credit standards and underwriting, credit review and compliance, country risk and economic analysis, and engineering and environmental analysis. The Communications group is expected to tailor information to the specific needs of various segments of the Bank’s users. International Agreements 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 foreign assistance funds are spent 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 governmentprovided export credits to market levels. Countries that signed the OECD Arrangement (all OECD countries except Turkey and Iceland) 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 with commercial credits will be prohibited from using tied or partially untied aid credits, except for credits to the least developed countries where per capita CRS-5 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. 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 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 Legislative Issues On June 14, 2002, President Bush signed P.L. 107-189 , the Export-Import Bank Reauthorization Act of 2002. In contrast to attempts during previous Congresses to eliminate the Bank, the 2002 Act likely will strengthen the Bank in a number of ways and increase its role, both domestically and internationally, in promoting U.S. exports. Two of the most important provisions of the Act include a sense of Congress that requires the Bank to prepare a human rights impact assessment for any project over $10 million, and a prohibition on supporting any project that is subject to import relief measures or countervailing duty orders. On September 6, 2002, the Bank published a draft proposal of the procedures that it expects to follow in order to abide by the provisions of the Act. Other provisions of the Reauthorization Act include: designating assisting U.S. job growth as the purpose of the Bank’s programs; extending Eximbank’s authority through 2006; authorizing the appropriation of $80 million in administrative expense to upgrade the Bank’s technological infrastructure; increasing the Bank’s overall credit limitation; extending the Office on Africa through September 30, 2006; requiring the Bank to coordinate with the Secretary of the Treasury to adopt a set of principals for approving uses of its tied aid fund, with transactions subject to review by the President; expanding the Bank’s authority to use its tied aid fund to counter untied aid and market windows activities; directing the Secretary of the Treasury to explore international negotiations on untied aid and requiring an assessment of the impact of market windows and prospects for negotiations within the OECD; increasing from 10% to 20% the share of Bank financing for “socially and economically disadvantaged” small businesses; clarifying the Bank’s definition of human rights to include the Universal Declaration of Human Rights adopted by the United Nations General assembly; in considering an application for Eximbank programs the Bank can consider the extent to which a nation has been helpful 2 Competitor’s Tied Aid Practices Affect U.S. Exports. General Accounting Office. Report No. GGD-94-81. May 1994. p. 19-21. CRS-6 in eradicating terrorism; appointing an Inspector General; and expanding the Bank’s authority to promote goods and services related to renewable energy sources. Eximbank Debate 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. 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. This means that, at the national level, subsidized export financing merely shifts production among sectors within the economy, rather than adding to the overall level of economic activity, and subsidizes foreign consumption at the expense of the domestic economy. This also means that promoting exports through subsidized financing or through government-backed insurance and guarantees will not permanently raise the level of employment in the economy, but it will alter 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 consideration 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. 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. As a result, 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.