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SUCCESS SEEN FOR U.S. POLICY OF COUNTERING TIED AID: Testimony by Eximbank Chairman to U.S. House of Representatives

7 September 1995

Washington -- The Clinton administration policy of aggressively matching offers of tied aid by France, Germany and other wealthy countries has achieved some success and should be extended, says Kenneth Brody, Chairman of the Export-Import Bank of the United States (Ex-Im Bank). Brody testified September 7 before a House of Representatives Banking subcommittee in support of extending for two years legislative authority for the U.S. tied-aid program, which is scheduled to lapse September 30. Tied aid is the practice of countries donating money to poorer countries on condition that the money go to buy products from the donor country. Even though a 1992 international agreement cut tied-aid offers by half, they still amount to $8,000 million a year. France and Germany are the biggest donors, China and Indonesia the biggest recipients.

While the United States remains opposed to initiating tied aid, the Clinton administration uses it reactively, not only to counter violations of the agreement, but also to match and defeat legitimate foreign offers when they place competitive U.S. companies at an unfair advantage. "While it is not realistic to believe that other governments will eliminate this practice," Brody said, "we do have indications that our countering activities have caused frustration within some foreign governments."

Following is an excerpt of Brody's testimony, as prepared for delivery:

First, let me say that I believe U.S. tied aid policy is producing positive results. We have been able to discourage the general use of tied aid credits in certain types of situations; and on certain projects, we have discouraged our competitors from providing tied aid credits; and on others, we have precluded our foreign competitors from concluding deals. I will elaborate more on these points later in my statement. But, none of these outcomes will be sustained unless the authority to use the Tied Aid Capital Projects Fund is renewed. For without tied aid credit authority, Ex-Im Bank will not be able to provide competitive financing for U.S. exporters in these types of situations.

Over the years, our competitors' use of tied aid to win key, market-opening export contacts in important developing countries, has posed a serious competitive disadvantage for U.S. exporters, unable to offer matching finance terms. Historically, the U.S. has sought to negotiate reductions in the use of tied aid, rather than match the financing activities of our competitors case-by-case. In fact, the Warchest was originally authorized as a tool for Treasury and the Ex-Im Bank to hasten multilateral negotiations in the Organization for Economic Cooperation and Development (OECD) to eliminate or reduce this practice. These negotiations produced a system for advance notification of tied aid credits, as well as a system whereby any government could request any other governments to accept "no-aid common lines", that is, agreement that particular projects should not receive aid terms.

There still remains about $8 billion per year in foreign tied aid credit offers. These offers include projects in the transportation infrastructure and environmental projects areas, such as airports, air traffic control, metro systems, ports and navigation, rural communications, and geothermal power plants. These projects are extremely attractive to U.S. exporters and their overseas competitors in representing important market opening opportunities and follow-on sales. By winning sales contracts, firms secure market footholds for future sales expansion.

In the past, the U.S. was only able to counter foreign competition when there was a violation of an OECD requirement. The Tied Aid Capital Projects Fund (the Fund) was established by President Clinton in late 1993 in conjunction with a more aggressive tied aid policy, under the TPCC's "National Export Strategy." The Fund is to be used for matching or countering foreign tied aid credit offers, but not for initiating tied aid credits into export competitions. Ex-Im Bank administers the Fund and carefully considers the merits of each U.S. exporter's request for tied aid credit matching.

Under this new policy, Ex-Im Bank still matches violations of the OECD rules -- which are few and far between -- but our primary focus is to preclude or counter foreign tied aid credit offers that are still permitted. This is accomplished by seeking "no aid common lines," and by issuing early offers of our willingness to match tied aid credits, before specific notifications are filed with the OECD. By precluding and countering tied aid credit offers, we are engaged in an effort to frustrate the efforts of our foreign competitors to use subsidized financing to close off markets for U.S. exports in developing countries. Thus, the Fund is a vital market-opening tool. While it is not realistic to believe that other governments will eliminate this practice, we do have indications that our countering activities have caused frustration within some foreign governments. We believe that such frustrations have translated into a greater reluctance by our competitors to initiate tied aid credits for projects where U.S. firms have demonstrated a commercial interest.

Since January of 1994, we have offered to match actual foreign tied aid credit offers in 33 cases, involving almost $2 billion of potential export sales in Indonesia, China, the Philippines, Turkey and Morocco. Thirty-one of these offers are in the Big Emerging Markets, and 28 involve Asia, where foreign tied aid credits are concentrated. Twenty of these offers involve U.S. small business exporters as the lead applicants for Ex-Im Bank's support. While some of these actions were aimed at matching firm foreign tied aid offers, a number of our actions were designed to preclude foreign tied aid offers at an early date, before they became firm, by signalling a U.S. willingness to match. I should emphasize that in each case we reviewed the circumstances of the competition, to ensure that we were not offering to support one-shot or long-shot sales, but rather that we were targeting our support to critical sales by competitive U.S. firms with significant following sales and market penetration possibilities.

In three cases to date, U.S. exporters have won contracts. In only one case so far has it been necessary for Ex-Im Bank to draw on the Fund. This involved financing to support the U.S. export sale of $20MM of dredges to Indonesia by a small business in Maryland, EllicottĀ® Machine Corporation International. Ex-Im Bank's tied aid financing enabled EllicottĀ® to displace a Norwegian competitor enjoying tied aid support and to regain a foothold in a market where in recent years they had been frustrated by foreign tied aid credits.

Thus, we are seeing results from this new aggressive matching policy. Our hope is that our preclusive counteroffers in other cases will lead others to forego consideration of tied aid offers. However, if other governments persist in going forward with the tied aid credit offers, we stand ready to support our exporters.

The number of tied aid offers provided by foreign governments are still significant at $8 billion. According to OECD 1994 notification statistics, about $6 billion of this total involved grant elements in the range of 35%-50%, the kind we find most trade distorting. This $6 billion is generally targeted by our competitors at medium-income, fast-growth countries, including "Big Emerging Markets" which remain eligible for tied aid. This is the kind of tied aid we are countering.

The remaining $2 billion in high grant-element tied aid was mostly for lower-income, lower-growth countries, which are extremely dependent on foreign aid. Of the $6 billion in low grant-element tied aid offers, about $3 billion in offers was extended to just two "Big Emerging Markets," China and Indonesia. The remaining $3 billion of low grant-element tied aid offers was distributed among a large number of developing countries, including countries such as the Philippines, Turkey, Tunisia, Pakistan, Morocco, India, and Peru.

The two largest tied aid markets, China and Indonesia, attract the majority of these offers. Both of these dynamically growing economies actively solicit tied aid packages from France and Germany, two of the largest tied aid providers. And since China and Indonesia are the principal recipients of our competitors' tied aid, it follows that these are the markets where we do the bulk of our tied aid matching. The Chinese and particularly the Indonesian central authorities would prefer that Ex-Im Bank not match others' tied aid credits, but rather provide large direct tied aid lines-of-credit, which the planner could then allocate among projects on a noncompetitive basis. The French would get theirs, the Germans theirs, and the Americans theirs. However, Americans seeking to compete for projects receiving French or German tied aid credit would still be out of luck. While a few U.S. companies with influence on the central authorities would win contracts on the basis of such noncompetitive lines of credit, we would be abandoning those less influential exporters who are trying to win competitive deals against foreign tied aid out in the field.

We have explained to the Chinese and Indonesian central authorities the economic advantages of receiving matching tied aid offers, in that they can truly compare projects on the basis of price, technology, quality, delivery and service. The purchasing ministries, who are more familiar with projects, already understand that tied aid is often used as a substitute for high prices or poor quality, and welcome a leveling of the financial playing field. We are willing to work with either the central authorities or the purchasing ministries to ensure that U.S. suppliers, with Ex-Im Bank matching offers, are truly considered.

Congress has fortunately recognized the importance of the tied aid credit market reality -- today's early matching actions can potentially lead to significant financing commitments in future years -- by permitting tied aid carryover authority from year to year. At this point, we have $264.4 million in budget authority for leveraging our tied aid matching operations. This includes $93-million from FY '95 tied aid appropriations that we can carry over into future fiscal years. When we match others' low-grant-element tied aid, our subsidy percentages are between 25% and 40%. The current authority could cover Ex-Im Bank tied aid credit budget calls for actual financing of between $600 and $900 million of signed U.S. export contracts requiring concrete tied aid credit financing. We need these carryover funds to maintain a credible commitment in the eyes of our foreign competitors. This is the only way the Fund can act as a deterrent.

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