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Report to Congressional Requesters:
United States Government Accountability Office:
GAO:
September 2007:
Export-Import Bank:
Improvements Needed in Assessment of Economic Impact:
Export-Import Bank:
GAO-07-1071:
GAO Highlights:
Highlights of GAO-07-1071, a report to congressional requesters.
Why GAO Did This Study:
Congress established the Export-Import Bank of the United States (Ex-
Im) to encourage U.S. exports. Congress has directed Ex-Im to consider
the economic impact of its work and not to fund activities that will
adversely affect U.S. industry. In this context, GAO reviewed (1) Ex-
Im’s policies and procedures for determining economic impact, (2) the
extent to which Ex-Im appropriately identifies and analyzes projects
that could cause adverse economic impact, and (3) the extent to which
Ex-Im’s process is transparent. To conduct this work, GAO reviewed Ex-
Im’s procedures, data on projects applicable for the economic impact
process, and detailed economic impact analyses. GAO also interviewed Ex-
Im and reviewing agency officials and industry representatives.
What GAO Found:
Congress requires Ex-Im to assess whether a project requesting its
financial support will negatively impact U.S. industry. Ex-Im uses a
screening process to identify projects with the most potential to have
an adverse economic impact, and then subjects the identified projects
to detailed analysis. A negative finding could result in a denial of Ex-
Im support. The screens—either explicitly required by Ex-Im’s charter
or introduced under the bank’s statutory authority—include whether (1)
the financed project will increase foreign production, (2) there are
trade measures against the resulting product, (3) the resulting product
is “undersupplied,” (4) the requested financing is over $10 million,
and (5) the financed project will increase foreign production by 1
percent or more of U.S. production. Between fiscal years 2003 and 2005,
this screening process identified 20 projects (out of 771 applicable)
that required a detailed economic impact analysis. In the detailed
analysis, Ex-Im assesses whether the resulting product would be in
surplus on world markets or in competition with U.S. production.
Between fiscal years 2003 and 2005, Ex-Im approved most projects
applicable for economic impact analysis, totaling approximately $6.1
billion in approved financing.
GAO found challenges and areas for improvement in the screening and
detailed analysis of projects for economic impact. The effectiveness of
the $10 million screen, introduced under Ex-Im’s statutory authority,
is uncertain. Ex-Im has not determined whether it removes from review
those projects that could meet the statutory definition of substantial
injury (producing 1 percent or more of U.S. production in an industry).
For example, a $9.9 million financing request that would allow a
foreign company to produce an estimated 3.5 percent of U.S. production
was screened out of the analysis. GAO also found that Ex-Im could
improve some methods it uses in its detailed analyses, such as how it
estimates displaced production. In addition, GAO found that Ex-Im could
clarify how it characterizes the effect of its financing on the U.S.
trade balance. Finally, GAO found that Ex-Im could strengthen the
internal controls it uses to ensure that the screening process and
detailed analysis are conducted consistently and accurately.
GAO also found limitations in the transparency of Ex-Im’s economic
impact process. While Ex-Im publicly posts its procedures, they contain
areas of ambiguity. For example, the procedures do not define the term
“oversupply.” Also, Ex-Im has not provided all public comments to the
board of directors. GAO identified two practices—referencing in the
procedures the list of sectors likely to require extra scrutiny and
publicizing final economic impact conclusions—that would increase the
predictability of the process.
What GAO Recommends:
To improve the identification and analysis of applications for economic
impact, GAO recommends that Ex-Im review the $10 million threshold,
create better methodological guidelines, and strengthen its internal
controls. To improve transparency, GAO recommends that Ex-Im clarify
its procedures for conducting economic impact analyses. Ex-Im generally
concurred with GAO’s recommendations and stated that it will explore
feasible ways to improve the economic impact process and make it more
consistent and user-friendly.
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-1071].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Loren Yager, 202-512-
4347, YagerL@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
Economic Impact Analysis Screening Process Identifies Projects for
Detailed Analysis:
Challenges and Limitations Exist in Identifying and Analyzing Projects
for Economic Impact:
Transparency of Economic Impact Procedures Has Limitations:
Conclusions:
Recommendations:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: List of Detailed Economic Impact Analyses That Ex-Im Began
between Fiscal Years 2002 and 2006:
Appendix III: Comments from the Export-Import Bank of the United
States:
Appendix IV: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Detailed Economic Impact Analyses and Board of Directors'
Financing Decisions:
Table 2: Detailed Economic Impact Analyses, with No Final Board of
Directors' Decision Because of Transaction Withdrawal:
Table 3: Detailed Economic Impact Analysis Conducted Postauthorization
at the Request of the Credit Committee:
Table 4: Detailed Economic Impact Analysis Conducted Postauthorization
Pursuant to the Consolidated Appropriations Act of 2004:
Table 5: Unfinished Detailed Economic Impact Analyses:
Figures:
Figure 1: A Conceptual Illustration of How Ex-Im Provides Financing to
Foreign Companies but Risks Creating a Negative Impact on U.S.
Producers:
Figure 2: Ex-Im's Process for Screening Applications, Assigning
Economic Impact Codes, and Selecting Projects for Detailed Economic
Impact Analysis:
Figure 3: Economic Impact Categorization of Ex-Im Applications That
Were Acted Upon, by Number and Value (Fiscal Years 2003-2005):
Figure 4: Comparison of Number and Dollar Value by each Economic Impact
Code for the 525 Approved Applicable Projects (Fiscal Years 2003-2005):
Abbreviations:
Ex-Im: Export-Import Bank of the United States:
ITA: International Trade Administration:
ITC: U.S. International Trade Commission:
OECD: Organisation for Economic Cooperation and Development:
OMB: Office of Management and Budget:
USTR: Office of the U.S. Trade Representative:
United States Government Accountability Office:
Washington, DC 20548:
September 12, 2007:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
The Honorable Michael Crapo:
United States Senate:
Congress established the Export-Import Bank of the United States (Ex-
Im) in 1934 to support U.S. exports and create jobs for Americans. Over
time, Congress has recognized that Ex-Im's support of exports by U.S.
firms in certain sectors could potentially adversely impact U.S. firms
in other sectors.[Footnote 1] Congress requires Ex-Im to assess whether
its financial support for a project would likely cause substantial
injury to U.S. industry or would result in the production of a good
that is subject to a relevant trade measure. A finding that would lead
to either of these outcomes could result in a denial of Ex-Im support.
In reauthorizing Ex-Im in 2002, Congress reiterated its concerns about
potential adverse economic impacts on U.S. producers by increasing the
bank's economic impact assessment requirements. Although Ex-Im created
a multistep process to determine what impact the projects it finances
could have on the U.S. economy, Congress continued to be concerned that
these procedures did not ensure that projects were adequately
identified, analyzed, or disclosed. In December 2006,[Footnote 2]
Congress again revised the economic impact assessment to require more
information disclosure. Congress remains interested in how Ex-Im
assesses the impact that its services have on the competitiveness of
U.S. producers.
In this context, we reviewed (1) Ex-Im's overall policies and
procedures for determining economic impact; (2) the extent to which Ex-
Im's procedures provide for the identification and appropriate analysis
of projects that could potentially cause adverse economic impact; and
(3) the extent to which its policies, procedures, and decisions are
transparent to interested and affected parties.
To assess Ex-Im's policies and procedures for identifying applications
for a detailed economic impact analysis, we obtained and analyzed data
on applications that were applicable for economic impact analysis from
fiscal years 2003 through 2005, and discussed these data and Ex-Im's
screening process with Ex-Im officials. To describe Ex-Im's process for
conducting detailed economic analyses, we reviewed the 17 economic
impact analyses that Ex-Im completed between fiscal years 2002 and 2006
in light of their procedures as they were written in response to the
2002 reauthorization. We chose 5 detailed analyses to review in greater
depth, reflecting a range of countries, industries, and economic
issues. We discussed those analyses with officials from Ex-Im and other
U.S. government agencies. We also reviewed Ex-Im's updated procedures,
created in April 2007 in response to the 2006 reauthorization. To
assess the transparency of Ex-Im's economic impact assessment process,
we reviewed relevant documentation and interviewed officials from
agencies that provide comments on Ex-Im's draft economic impact
analyses and representatives from affected industries. We conducted our
work from September 2006 through August 2007 in accordance with
generally accepted government auditing standards. Appendix I contains a
more detailed description of our objectives, scope, and methodology.
Results in Brief:
Ex-Im has established procedures to identify applications for projects
that have the greatest potential to adversely affect U.S. industry and
to subsequently conduct detailed analyses of those identified projects.
All applications are screened for economic impact on the basis of a
number of criteria either explicitly mentioned in the Export-Import
Bank Act of 1945, as amended (also referred to as Ex-Im's
charter)[Footnote 3] or introduced by the bank in the exercise of its
discretion under the charter. Ex-Im's first screen removes from further
review applications that do not increase foreign production of an
exportable good. Then, it screens out applications that would support a
product subject to trade sanctions, or goods that Ex-Im has deemed to
be "undersupplied" (oil and gas or diamonds). Next, Ex-Im removes from
the process applications requesting financing of $10 million or less;
these projects are reviewed for economic impact in the aggregate after
the financing is authorized. Finally, Ex-Im conducts a "1 percent test"
to determine whether financed projects are likely to result in
"substantial injury." Ex-Im removes from the economic impact process
those requests to finance projects that would increase foreign
production by less than 1 percent of U.S. production. Requests to
finance projects that would increase foreign production by 1 percent or
more of U.S. production are held for detailed analysis. Between fiscal
years 2003 and 2005, this screening process identified 20 applications
for detailed economic impact analysis. In the detailed analysis, Ex-Im
assesses whether the product that will result from the financing will
be in surplus on world markets or in competition with U.S. production,
and estimates a net impact of the transaction on U.S. trade flows. Ex-
Im also solicits comments from the public and certain U.S. government
agencies. Between fiscal years 2003 and 2005, Ex-Im ultimately approved
financing for 525 (or about two-thirds) of the 771 applications that it
determined through the first screen were applicable for further review,
totaling approximately $6.1 billion.
We identified challenges and areas for improvement in Ex-Imís economic
impact process. Determining the economic impact of financing a project
is an inherently challenging process that requires defining which
products and geographic markets will be affected and projecting future
market trends. Among the screens Ex-Im introduced to identify
applications for detailed analysis, we found that the screen that
removes projects involving oil and gas or diamonds from further
analysis has been effective. However, the effectiveness of Ex-Imís $10
million screen is uncertain because Ex-Im has not conducted an analysis
to determine the extent to which the screen identified applications
whose projects could meet the statutory definition of substantial
injury (producing 1 percent or more of U.S. production in an industry).
For example, we learned of a $9.9 million transaction screened out of
the analysis that would allow a foreign company to produce an estimated
3.5 percent of U.S. production.[Footnote 4] We also identified areas
that could be improved in the methods Ex-Im used in its detailed
analyses. These areas include inconsistencies and limitations in how Ex-
Im has estimated potential costs to U.S. producers from increased
foreign competition, which can significantly affect estimates of
negative effects on those producers. In addition, Ex-Imís
characterization of its financing effect on the U.S. trade balance can
be clarified. Finally, the internal controls Ex-Im uses to ensure that
the screening process and the detailed analysis are conducted
consistently and accurately could be strengthened.
We found that the transparency of Ex-Im's economic impact process is
limited.[Footnote 5] While Ex-Im does publicly post its procedures,
they contain areas of ambiguity. For example, the procedures do not
define the term "oversupply"--a key factor in the analysis--or when it
would apply the concept of "proportionality."[Footnote 6] In addition,
Ex-Im has not provided to the board of directors all public comments
that it received concerning applications analyzed for economic impact.
We also identified two practices--referencing the list of sectors
likely to receive extra scrutiny in the procedures and publicizing
final economic impact conclusions--that could increase the
predictability of the process.
To improve Ex-Im's identification and analysis of applications for
economic impact, we recommend in this report that the Chairman of the
Export-Import Bank of the United States (1) review the $10 million
threshold to determine whether additional steps are needed to mitigate
the risk of exempting from more detailed review applications that could
meet the definition of substantial injury (e.g., these steps could
include selectively reviewing transactions that would affect relatively
small U.S. industries or sensitive sectors); (2) create specific
methodological guidelines for staff analyzing applications for economic
impact, bearing in mind relevant Office of Management and Budget (OMB)
guidance where appropriate; and (3) improve Ex-Im's internal controls.
To improve the public transparency of the economic impact process for
interested and affected parties, we also recommend that the chairman
(1) clarify publicly available procedures, (2) cite the list of
sensitive sectors in the economic impact procedures, and (3) publicize
final economic impact decisions. We provided a draft of this report to
the Export-Import Bank of the United States. Ex-Im generally concurred
with our recommendations and stated that it will continue to explore
feasible ways to improve the economic impact procedures and make the
process more consistent and user-friendly.
Background:
Ex-Im is the official export credit agency[Footnote 7] of the United
States, and operates under the authority of the Export-Import Bank Act
of 1945, as amended. It operates as an independent agency of the U.S.
government with a staff of approximately 370 full-time permanent
employees. Ex-Im's core mission is to support U.S. exports and jobs by
providing export financing that is competitive with the official export
financing support offered by other governments. To accomplish its
mission, Ex-Im offers a variety of financing instruments, including
loan guarantees, export credit insurance, and working capital
guarantees for preexport financing.[Footnote 8] Between fiscal years
2003 and 2005, Ex-Im processed a yearly average of 3,055 requests for
loans, guarantees, and insurance.[Footnote 9] Of the processed
applications, Ex-Im approved an average of 2,981 applications (or 98
percent) per year.
In general, Ex-Im's charter prohibits the bank from extending financing
for a project if doing so will adversely affect U.S. industry.[Footnote
10] Ex-Im tests for adverse effects by (1) reviewing projects for
applicable trade sanctions and (2) conducting its own economic impact
analysis. For this economic impact analysis, the charter provides that,
if a commodity for export resulting from Ex-Im financing will compete
with U.S. production of the same, similar, or competing commodity, or
will be in surplus on world markets at the time of first production, Ex-
Im must determine whether extending the financing will cause
substantial injury to U.S. producers. (The charter defines "substantial
injury" as the establishment or expansion of foreign production
capacity equal to or exceeding 1 percent of U.S. production.) However,
under its charter, Ex-Im may fund a project if, in the judgment of the
board of directors, the short-and long-term benefits to industry and
employment in the United States are likely to outweigh the injury to
U.S. producers and employment of the same, similar, or competing
commodity. This can put Ex-Im in the challenging position of balancing
the interests of two different industries--the industry of the U.S.
exporter it is financing and the industry that may face additional
competition as a result of the initial export (see fig. 1).
Figure 1: A Conceptual Illustration of How Ex-Im Provides Financing to
Foreign Companies but Risks Creating a Negative Impact on U.S.
Producers:
[See PDF for image]
Source: GAO, Map Resources (map); and Nova Development (clip art).
[End of figure]
Economic impact is one of many factors Ex-Im considers when determining
whether to finance a project. Other factors that Ex-Im must weigh
include the project's feasibility from an engineering point of view,
the project's possible environmental impact, whether the project
involves small business, and the borrower's creditworthiness.
Other countries, such as Japan and the United Kingdom, also have export
credit agencies with broad mandates to finance projects that benefit
their domestic economies. However, unlike Ex-Im, these export credit
agencies are not required to weigh the potential economic costs to
domestic industries against the benefits associated with a specific
financed export. Furthermore, these agencies do not consider the
relevance of trade measures to a project, as Ex-Im is required to do.
In its 2005 competitiveness report,[Footnote 11] Ex-Im states that
having to consider these additional elements, such as the economic
impact, when deciding whether to finance a project puts Ex-Im at a
disadvantage compared with other export credit agencies.
Economic Impact Analysis Screening Process Identifies Projects for
Detailed Analysis:
Ex-Im's economic impact analysis screening process is designed to
identify projects with the most potential to adversely impact U.S.
industry; Ex-Im then conducts a detailed analysis of those projects.
Applications are sequentially screened on the basis of criteria
specified in Ex-Im's charter or established by Ex-Im in the exercise of
its discretion under the charter. For the applications that receive a
detailed analysis, Ex-Im assesses whether the products that will result
from its financing will be in surplus on world markets or in
competition with U.S. production, and it estimates the net impact of
the projects on U.S. trade flows. Ex-Im also solicits public and agency
comments on the potential projects. Between fiscal years 2003 and 2005,
Ex-Im approved most of the 771 requests to finance projects that
involved increasing foreign production of an exportable good, and that,
therefore, passed the first screen and were deemed applicable for
further economic impact review.
Ex-Im Uses a Screening Process to Identify Projects for Detailed
Analysis:
Ex-Im's economic impact analysis screening process consists of a series
of rules used to sequentially remove from further economic impact
review applications for projects it deems unlikely to adversely impact
U.S. industry. Ex-Im's charter explicitly requires certain screens and
Ex-Im introduced others, using its discretion under the charter.
Between fiscal years 2003 and 2005, the screens identified 20
applications that required a detailed analysis. The screens remove most
requests from the process because they involve financing of $10 million
or less; however, Ex-Im reviews those projects postauthorization in its
Annual Review of Economic Impact.
Ex-Im's Charter Specifies Some Analytic Screens, Ex-Im Introduced
Others:
Ex-Im screens applications for economic impact on the basis of several
characteristics, some that Ex-Im's charter explicitly requires, others
that Ex-Im established exercising its discretion under the charter.
During the screening process, Ex-Im staff in the Policy Analysis
Division assign an economic impact code to each application. These
screens are as follows:
* Foreign production of an exportable commodity. Ex-Im's charter
requires it to review for economic impact those requests to finance
projects that would result in increased foreign production. Under Ex-
Im's procedures, only requests financing the export of capital goods or
services from the United States that might allow a foreign company to
increase production of an exportable good are subject to further
scrutiny. This screen removes the bulk of applications from economic
impact analysis. (Ex-Im codes requests to finance projects that do not
increase foreign production as "not applicable," or NA.)
* Trade measures. Ex-Im's charter requires it to consider whether trade
measures--antidumping or countervailing duty orders[Footnote 12] and
section 201 injury determinations[Footnote 13]--apply to products that
would result from Ex-Im financing. According to Ex-Im officials, Ex-Im
does not fund projects directly subject to trade measures as a matter
of practice, although it has the authority to do so if the board
determines that a project's benefits outweigh its costs. This screen
removes applications whose projects are subject to trade measures not
just from further economic impact analysis, but from eligibility for Ex-
Im financing. (Ex-Im codes these requests as "trade sanctions," or TS.)
* Foreign production of oil and gas or diamonds-- "undersupplied"
products. Ex-Im has determined, with input from other agencies, that
all projects increasing the foreign production of oil and gas or
diamonds are unlikely to adversely impact the U.S. economy. This screen
removes requests to finance projects involving oil and gas or diamonds
from further economic impact analysis. (Ex-Im codes these requests as
"undersupplied," or US.)
* Financing threshold of $10 million. Ex-Im presumes that projects
requesting financing of $10 million or less are too small to adversely
impact the U.S. economy. According to a senior Ex-Im official, Ex-Im
selected $10 million as the threshold because that figure is used for a
variety of other bank purposes, including whether applications should
be reviewed by the board of directors or should receive an
environmental assessment. The official also stated that the use of this
threshold is reasonable for the economic impact process because $10
million financing is likely to result in little foreign production and,
therefore, is not likely to adversely impact the U.S. economy. This
screen removes applications requesting financing of $10 million or less
from further economic impact analysis prior to final financing
decisions (although these requests are subject to an annual review
after authorization, which we describe later). (Ex-Im codes these
requests as "annual review," or AR.)[Footnote 14]
* One percent substantial injury test. Ex-Im's charter requires it to
conduct a detailed economic impact analysis when a project will cause
"substantial injury," defined as an increase in foreign production
greater than or equal to 1 percent of U.S. production of the same or a
similar good. To conduct this test, Ex-Im calculates a simple ratio of
the expected increase in foreign production resulting from the project
to current U.S. production in that industry. Ex-Im's procedures also
allow for the use of "proportionality" in conducting the 1 percent
test, which Ex-Im defines as the relation of the dollar value of the Ex-
Im-financed U.S. component of the project to its overall cost.[Footnote
15] This screen removes applications whose projects would increase
foreign production by less than 1 percent from further economic impact
analysis. (Ex-Im codes these requests as "no substantial injury," or
NSI.)
The remaining applications are subject to detailed analysis. (Ex-Im
codes these requests as "hold for analysis," or HA.) See figure 2 for
information on how Ex-Im categorizes applications throughout the
screening process.
Figure 2: Ex-Im's Process for Screening Applications, Assigning
Economic Impact Codes, and Selecting Projects for Detailed Economic
Impact Analysis:
[See PDF for image]
Source: GAO analysis of Ex-Im Bank data; Nova Development (clip art).
[A] Numbers are based on Ex-Im data for applications during fiscal
years 2003 through 2005; procedures are based on the Ex-Im charter
reauthorized in 2002.
[B] Ex-Im also codes Credit Guarantee Facilities and Medium Term Risk
transactions as "annual review," regardless of the transaction's value.
[End of figure]
Few Applications Receive a Detailed Analysis:
The screens Ex-Im uses in its economic impact analysis identify a small
share of applications for detailed analysis. Between fiscal years 2003
and 2005, the vast majority of applications was determined not to
support foreign production of exportable goods and, therefore, was not
applicable for economic impact analysis. Of the 771 requests that
involved foreign production of an exportable good and that, therefore,
were applicable for economic impact analysis, 679 were eliminated from
the process because they were $10 million or less. Of the remaining 92
applications, 72 were eliminated by other screens and 20 were held for
detailed analysis.[Footnote 16] Figure 3 illustrates the composition of
applications by screening category, both in terms of the number of
projects and the dollar value of applications.
Figure 3: Economic Impact Categorization of Ex-Im Applications That
Were Acted Upon, by Number and Value (Fiscal Years 2003-2005):
[See PDF for image]
Source: GAO analysis of Ex-Im Bank data.
[End of figure]
Projects Financed for $10 Million or Less Are Reviewed
Postauthorization:
At the end of every fiscal year, Ex-Im aggregates projects it financed
for less than $10 million by foreign buyer, and then by product, to
determine if, collectively, a buyer's portfolio of projects meets the
definition of substantial injury.[Footnote 17] Ex-Im staff report their
findings in a document entitled Annual Review of Economic Impact Cases.
Ex-Im cannot rescind funding if it finds after the review that a
buyer's projects collectively meet the definition of substantial
injury.
When Congress reauthorized Ex-Im's charter in 2006, it introduced a new
process to ensure that smaller projects do not collectively meet the
definition of substantial injury. The new legislation requires Ex-Im to
review a foreign borrower's requests on an ongoing basis, aggregating
its applications over the previous 24 months to ensure that its
financed portfolio does not surpass $10 million. If the aggregate
financing does exceed $10 million, the bank must subject the entire
aggregate production from the proposed project and relevant projects
approved during the preceding 24-month period to further economic
impact analysis. According to Ex-Im's revised procedures, only the most
recent, proposed project will be affected by the results of this
economic impact scrutiny.
Detailed Economic Impact Analysis Assesses Oversupply, Competition, and
Net Trade Impacts:
For applications that remain after the screening process, Ex-Im
conducts a detailed analysis. The detailed analysis's components are
designed to address specific legislative requirements, including
comments solicited from the public and relevant U.S. government
agencies. Ex-Im compiles its findings, along with its conclusion
regarding whether the project will negatively impact the U.S. economy,
in a memorandum to the board of directors. (See app. II for a list of
applications for which Ex-Im began a detailed economic impact analysis
between fiscal years 2002 and 2006.)
In its detailed economic impact assessments, Ex-Im addresses the
specific statutory requirements concerning the assessment of whether a
foreign product will be in surplus in world markets or in competition
with U.S. production, and estimates an overall impact on trade flows.
The components of this analysis include (1) an assessment of whether
the foreign product potentially supported by Ex-Im financing will be in
surplus on world markets--which Ex-Im terms as being "in oversupply,"
(2) an estimate of U.S. production that could be displaced by
competition with the increased foreign production, and (3) the net
impact on U.S. trade flows. According to its procedures, Ex-Im assesses
whether the product to be produced by the foreign buyer is in
oversupply using a set of indicators that include trade measures, such
as antidumping duties on related products, and stagnating global
prices.[Footnote 18] Finally, Ex-Im estimates the net effect on the
U.S. economy by comparing the trade flows associated with the initial
U.S. export and any follow-on, spare-part sales with the potential
displaced production. This net economic impact assessment provides the
type of analysis that, according to a senior Ex-Im official, could be
informative to a board of directors' decision to exercise its
discretion in approving applications where, for example, foreign
production could compete with U.S. producers and represents 1 percent
or more of U.S. production.
Ex-Im's charter also requires it to solicit public comments. Ex-Im
publishes a public notice in the Federal Register when beginning a
detailed analysis and allows for a 14-day public comment period. For
the applications we reviewed, Ex-Im's public notices contained (1) the
project's value, (2) the country where the foreign borrower was
located, (3) the goods to be produced, (4) the expected resulting
amount of increased production of that good, and (5) the potential
areas where the end product would be marketed. We found that Ex-Im
consistently posted Federal Register notices containing the requisite
information. The 2006 reauthorization codifies that practice and also
requires Ex-Im to include information about the amount of the financing
involved. In addition, the new legislation requires the bank to publish
a revised public notice and allow for another comment period if a
project changes materially[Footnote 19]. Ex-Im also consistently
solicited comments on draft analyses from relevant U.S. government
agencies: the Departments of Commerce, State, and the Treasury and the
Office of the U.S. Trade Representative (USTR). The 2006
reauthorization codifies that practice and additionally requires Ex-Im
to notify relevant congressional committees that it is conducting a
detailed economic impact analysis.[Footnote 20]
Ex-Im staff create an economic impact memorandum that is used to
describe their findings, along with their conclusion regarding whether
the project is likely to have a positive or negative impact on the U.S.
economy.
Ex-Im Approved Most Projects Applicable for Economic Impact Review
between Fiscal Years 2003 and 2005:
Between fiscal years 2003 and 2005, Ex-Im approved financing for about
two-thirds of the projects that involved foreign production of a
exportable good, and that, therefore, were applicable for economic
impact review. When reviewing applications, Ex-Im's board of directors
considers economic impact and other factors. Ex-Im's 2006
reauthorization requires the bank to provide a nonconfidential summary
of the facts found and conclusions reached in any detailed economic
impact analysis to the affected party, when requested.
Ex-Im considered 771 applications applicable for economic impact review
between fiscal years 2003 and 2005 and approved 525 projects, or 67
percent, which represented approximately $6.1 billion in financing. Of
the approved projects, most had been removed from the economic impact
process because the financing value was $10 million or less; however,
these projects represented a relatively small portion of the approved
financing ($615 million). Conversely, applications removed from the
economic impact process because the project involved an "undersupplied"
sector comprised a small number of approved projects (49) but the
majority of approved financing ($3.8 billion). Of the 20 applications
held for detailed analysis, Ex-Im approved 11, representing $1.7
billion. Figure 4 compares the number of approved projects by each
economic impact code with the respective dollar value.
Figure 4: Comparison of Number and Dollar Value by each Economic Impact
Code for the 525 Approved Applicable Projects (Fiscal Years 2003-2005):
[See PDF for image]
Source: GAO analysis of Ex-Im Bank data.
[End of figure]
The board or its designee[Footnote 21] decides whether to approve or
deny any application on the basis of the economic impact designation in
conjunction with many factors, including several other evaluations,
such as an engineering feasibility study, an environmental impact
assessment, and credit information about the applicant and the project.
For those applications that undergo a detailed analysis, Ex-Im's
charter provides an exception that allows the board to approve the
application if it finds that the short-and long-term benefits to
industry and employment in the United States outweigh the costs to U.S.
producers of a competing good. Under this authority, the board of
directors could approve an application even if the staff concluded that
the project would create a negative economic impact.
The 2006 reauthorization requires Ex-Im to provide affected parties
with a nonconfidential summary of the facts and conclusions of any
detailed economic impact analysis within 30 days of receiving a written
request. Prior to the reauthorization, Ex-Im published the board of
directors' financing decisions, but not information on whether the bank
had conducted an economic impact analysis or the analysis's findings.
Challenges and Limitations Exist in Identifying and Analyzing Projects
for Economic Impact:
We identified substantial challenges and certain limitations in Ex-Imís
economic impact process. Determining the economic impact of a project
is an inherently challenging process that requires defining which
products and geographic markets will be affected and projecting future
market trends. With respect to Ex-Imís screening of applications to
identify those for detailed analysis, we found varying effectiveness;
the effectiveness of the $10 million threshold used by Ex-Im is
uncertain and has not been analyzed by Ex-Im. We identified certain
methods used in the detailed analysis that could be improved. These
methods featured inconsistencies and limitations in how Ex-Im has
estimated potential costs to U.S. producers related to their production
being displaced over time by increased foreign competition. Also, how
Ex-Im characterizes the net effect of its financing on the U.S. trade
balance can be clarified. In addition, Ex-Imís internal controls could
be strengthened to better ensure that the identification process and
analysis is conducted consistently and accurately.
Screens Used to Identify Applications for Detailed Analysis Vary in
Effectiveness:
While the number of applications for financing received by Ex-Im
annually creates challenges in assessing all potential applications for
economic impact, we found that the screens Ex-Im established using its
discretion under the charter varied in effectiveness. Excluding
requests to finance projects in the oil and gas sector and the diamond
sector from detailed economic impact analysis because they are
undersupplied has been an effective screen; however, the effectiveness
of the $10 million screen is uncertain.
Volume of Applications Creates Challenges in Screening for Economic
Impact:
The number of applications for financing received by Ex-Im annually
creates challenges in assessing all potential applications for economic
impact. As we have previously discussed, Ex-Im processed 9,255 requests
for financing from fiscal years 2003 through 2005, 771 of which
involved foreign production of an exportable good and, therefore, were
applicable for economic impact review. While Ex-Im reviews all
applications for potential economic impact, the additional procedures
it has introduced to screen out projects that are unlikely to have an
adverse impact on U.S. producers are also intended to more effectively
allocate Ex-Imís limited resources.
Exemption of "Undersupplied" Sectors from Analysis Has Been Effective:
Ex-Im's exclusion of the oil and gas sector and the diamond sector from
detailed analysis because they are "undersupplied" has been an
effective tool developed with input from other agencies and previous
analyses in those sectors. Ex-Im initially developed a list of 31
natural resource sectors for which imports accounted for more than 50
percent of U.S. consumption as potentially "undersupplied." Ex-Im
reduced the list to 2 sectors (Ex-Im designated oil and gas as a single
sector) with input from the U.S. government agencies that review the
detailed analyses and the Department of Energy. Importantly, Ex-Im
officials stated that, in the past, economic impact analyses of
applications for projects in these sectors had always yielded a
positive impact on the U.S. economy, and that, because these sectors
were natural resources, the United States had limited ability to expand
production domestically. Ex-Im created the undersupplied list to more
effectively allocate its resources.
Effectiveness of the $10 Million Threshold Has Not Been Determined:
The $10 million thresholdís effectiveness as a screen is uncertain
because Ex-Im has not determined the extent to which it identifies
projects that could meet the statutory definition of substantial
injury. As we have previously discussed, the threshold was chosen, in
part, on the basis of other Ex-Im practices that are triggered at $10
million, such as a board review and an environmental impact assessment.
Ex-Im officials stated that requests for financing $10 million or less
would generally be too small to increase foreign production by 1
percent or more of U.S. production. However, Ex-Im has not conducted an
analysis to support that the $10 million threshold captures the
appropriate projects. In theory, even a relatively small export of
capital goods or services could be used to produce 1 percent or more of
production in a small U.S. industry.[Footnote 22] More generally, the
dollar value of a capital good project can be an imperfect signal of
the size of the project in terms of its production as a percentage of
the corresponding U.S. industry. For example, Ex-Im estimated that a
$14 million export of equipment to Russia would allow production of
polystyrene to expand by 1.4 percent of U.S. polystyrene production. In
contrast, Ex-Im estimated that a $16.25 million export of mining
equipment to Japan would allow a foreign company to produce roughly
14.6 percent of annual titanium production in the United States.
We learned of or identified two requests for financing less than $10
million whose projects were associated with estimated foreign
production of over 1 percent of U.S. production in an industry; data
limitations did not allow us to do a thorough review of projects with a
financed value of $10 million or less. First, an export of $9.9 million
of ethanol dehydration equipment to Trinidad would allow a foreign
company to produce an estimated 3.5 percent of U.S. production of
anhydrous ethanol. We learned of the ethanol project because Congress
required Ex-Im to conduct a postapproval detailed analysis in the
Consolidated Appropriations Act of 2004. Second, we identified a $9.8
million export of mining equipment that would allow a foreign company
to produce an estimated 1.73 percent of production in a U.S. industry.
We identified the mining project when we attempted to sample 10
applications requesting financing for $10 million or less, from a
universe of 80 applications between $5 and $10 million, to examine
whether they resulted in foreign production equal to or greater than 1
percent of U.S. production in an industry.[Footnote 23] Of the 10
capital good exports in our sample, Ex-Im could provide information on
the amount of production for 2ó1 of which was the $9.8 million mining
project that we have previously described.[Footnote 24] Thus, we were
largely unable to determine the extent to which Ex-Im's $10 million
threshold screened out applications that would have met the 1 percent
substantial injury test. The mining project and the ethanol project,
while treated in accordance with Ex-Im's procedure to exclude requests
for financing $10 million or less from detailed economic impact
analysis, indicate that requests of $10 million or less can be
associated with production of over 1 percent of a corresponding U.S.
industry. As we have previously noted, the 1 percent threshold is an
important legislative criterion because it establishes whether a
project meets the definition of substantial injury.
Detailed Analysis Has Challenges and Certain Limitations:
Determining the economic impact of a project is an inherently
challenging process; however, we identified limitations in certain
assumptions Ex-Im makes to estimate potential costs to U.S. producers,
and in how it characterizes the net effect of its financing on the
trade balance.
Detailed Analysis Has Inherent Challenges:
The modeling of international economic markets to determine the impact
of government decisions and policies, including Ex-Im financing
decisions, features a number of inherent challenges. Simplifications
are always necessary to model complex economic interactions, and, even
under simplified assumptions, precise data may not exist to address the
question at hand.
In some analyses, Ex-Im has found it challenging to define the
industries that would be affected by Ex-Im-supported production, both
in terms of products and geographic extent, a determination that will
also influence estimates of the costs to U.S. producers. To calculate
displaced production, Ex-Im must define the relevant industry,
determine the regional or global markets in which there could be
competition with U.S. producers, and collect trade and consumption data
that are based on those markets. One case where Ex-Im officials noted
challenges in obtaining the appropriate product data concerned a
project supporting a denim plant in Turkey. To estimate potential
displacement of U.S. denim exports, Ex-Im used data on U.S. exports of
high-cotton-content denim (to reflect the Turkish manufacturer's plan
to produce "high-end" jeans). However, Ex-Im stated there was a lack of
data on broader supply-and-demand factors for this denim--such as
global capacity utilization for denim plants--and, thus, Ex-Im relied
on projections for the price of jeans because 85 percent of all denim
is used to produce jeans. In addition, an analysis of a semiconductor
production facility in Singapore also illustrates market definition
challenges. Ex-Im identified a type of ìleading edgeî semiconductor as
the relevant product market, but also noted that because of the on-
demand nature of production in the facility, it was difficult to
conduct a trade flow analysis or determine potential displacement of
semiconductors made in the United States.[Footnote 25] Defining the
industry appropriately and collecting data to match that definition is
an inherent challenge in conducting an analysis of this kind.
More broadly, the full economic impact on U.S. industries of projects
financed by Ex-Im depends on determinations or assumptions regarding
what would happen in the absence of the financing. For Ex-Im,
predicting these effects can involve determining or making assumptions
regarding (1) what would happen to U.S. productive resources if Ex-Imís
financing for a project did not exist or (2) how global prices would
evolve if new capacity were not added. Foreign competition for
financing could also have implications for what would happen in the
absence of Ex-Im financing. For example, if Ex-Im denied financing, the
borrower might seek financing from another country's export credit
agency, resulting in similar capacity being added abroad without the
use of U.S. goods or services. However, because foreign competition for
financing can exist for many projects, a senior Ex-Im official noted
that the application of this rationale would risk undercutting other
economic impact provisions. In contrast, if a particular U.S. exporter
would supply a foreign producer whether Ex-Im financed the project or
not, then those exports would not be in addition to what would happen
without Ex-Im support.
Calculation and Presentation of Some Potential Costs Could Be Improved:
There are limitations in certain assumptions that Ex-Im has made to
estimate potential costs to U.S. producers related to displaced
production that is spread over time or lower prices for U.S.
competitors, which are important elements of the detailed economic
impact analyses.
Calculation of Displaced U.S. Production:
There are limitations and inconsistencies in how Ex-Im has calculated
displaced U.S. production that is spread out over time. In measuring
the potential cost of Ex-Im financing to U.S. industries, Ex-Im staff
generally begin by estimating the annual level of displaced production
in specific countries where U.S. production is expected to compete with
the production supported by the Ex-Im loan or guarantee. This estimate
is based on how much of the increased foreign production will be sold
to countries that U.S. producers also supply, and on the current U.S.
market share in those countries. While Ex-Im rightly considers both the
present and future costs and benefits of its projects, we identified
limitations and inconsistencies in its estimates--including its
assumptions regarding (1) whether displacement, when it occurs, will
happen every year or every other year and (2) how Ex-Im accounts for
expected growth in global demand for a product in its estimates of
displaced production--that can reduce or eliminate the amount of
displaced production as initially estimated. These assumptions can, in
some cases, significantly affect estimates of displaced production and,
hence, net economic impact. Importantly, OMB notes that in cost-benefit
analyses, major assumptions should be varied to determine how sensitive
outcomes are to changes in the assumptions.
Ex-Im has sometimes used an every-other-year method of calculating
displaced production that occurs over time. Assuming that U.S.
production would be displaced only every other year can significantly
reduce estimates of displaced production as compared with an annual
approach; it can reduce the estimated displaced production by close to
half. In one 2005 case where Ex-Im used this approach, it estimated a
net-positive trade impact with increased exports of $14.9 million and
displaced production of $9.8 million over 8.5 years. Assuming every
year displacement would have yielded a net negative impact. In a 2006
analysis, estimated costs were reduced from $221,000 to $123,000 by
assuming that displacement would occur every other year, although in
that case the estimated value of exports was substantially higher than
the estimated displacement, so the assumption did not change the net
trade effect estimate. Ex-Im has explained the use of every-other-year
discounting on varying grounds, including normal supply-and-demand
cycles and regular cyclical fluctuations in the industry. However, such
cyclical fluctuations are not likely to reduce the level of displaced
production relative to what would occur without Ex-Im's financing,
because the cyclical variation is not induced by the additional
capacity supported by Ex-Im. In contrast, Ex-Im did not use an every-
other-year approach to displaced production in a case where it
characterized the industry as cyclical.
Ex-Im has assumed in some analyses that growing demand for the
commodities it is analyzing would eliminate the initial amount of
displaced production it estimated. For example, in an analysis of a
potential facility to increase foreign production of polypropylene, Ex-
Im assumed that an estimated $83 million in displaced U.S. production
over 8 years would not actually be displaced because of growing global
demand for polypropylene. However, this implicitly assumes that, in the
absence of Ex-Im support for the larger facility, U.S. production would
not have expanded on its own to take advantage of that growing
demand.[Footnote 26] Therefore, Ex-Imís estimate of displaced
production will be highly sensitive to assumptions regarding how U.S.
producers would meet growing world demand if new Ex-Im-supported
capacity did not exist. Ex-Im made similar assumptions--that growing
demand would offset potential displaced production--in an analysis of
flat glass production in Mexico.[Footnote 27] Officials at one agency
from which Ex-Im solicits comments stated that these assumptions were
very optimistic, and that a sensitivity analysis would be appropriate.
Potential Costs Related to Lower Prices:
Ex-Imís method of estimating displaced production does not adequately
acknowledge the potential costs to U.S. producers in some cases as a
result of lower global prices. Ex-Imís methodology for estimating the
economic losses to U.S. competitors does not capture indirect costs
that are transmitted through changes in global market prices. As we
have previously noted, the estimate of displaced production is focused
on specific countries in which U.S. firms are expected to directly
compete with the new foreign production. However, some costs to U.S.
firms may come in the form of lower prices for homogeneous globally
traded commodities, instead of directly displaced production.[Footnote
28] These price changes could occur even in markets where there is no
direct competition with the Ex-Im-supported foreign production, and
should be acknowledged even if they cannot be calculated precisely. An
official from one of the agencies that Ex-Im consults on economic
impact also stated that one cannot necessarily assume that an increase
in production in a single region will not affect global prices.
For example, in a detailed analysis of the economic impact of a plant
in Egypt that would produce ammonia, Ex-Imís estimate of the costs to
domestic producers may not have captured the potential effect of lower
global prices on those producers. Ex-Im stated that output from this
plant was not expected to directly compete with U.S. ammonia exports.
However, the United States procures ammonia globally and, therefore, is
not insulated from even distant changes in market conditions. In
comments provided to Ex-Im, industry officials also noted that because
ammonia is a commodity, any increase in global supply would drive down
prices. Similarly, in a detailed analysis of the economic impact of a
plant in Israel that would produce polypropylene, Ex-Im focused on
potential losses to U.S. producers in specific export markets. However,
Ex-Im also noted in the analysis that polypropylene is a ìbulk
commodity that is widely traded and can easily be transported
worldwide.î This suggests that additional polypropylene capacity abroad
could reduce the polypropylene prices faced by U.S. producers, even if
they are not in direct regional competition with the new production.
There are a number of potential techniques, which vary in complexity,
to estimate or characterize the potential impact of certain types of Ex-
Im financing on global prices. The United States International Trade
Commission often uses sophisticated and resource-intensive economic
models to estimate an array of effects of changes in U.S. trade
policies on, among other things, the prices faced by U.S. producers.
However, other less complicated and less resource-intensive techniques
could be used to approximate the impact of global supply changes on
prices.[Footnote 29] According to OMB guidance, an enumeration of the
different types of costs and benefits can be helpful in identifying the
full range of potential effects, and, in addition, analyses should
include a statement of the strengths and weaknesses of assumptions. Ex-
Im officials stated that the separate assessment of oversupply should
address some of these price effects. However, while the oversupply
analysis may indicate the overall direction of global prices, it is not
intended to measure the impact of Ex-Im-supported production on global
prices or the potential effect of relatively lower prices on U.S.
producers.
Characterization of Financing Effect on Trade Balance Can Be Clarified:
Ex-Imís characterization of its net trade flow analysis as reflecting
impacts on the overall U.S. trade balance is misleading and can be
clarified. As we have previously noted, a net comparison of how trade
in two industries--the exporting industry and U.S. producers of the
foreign-produced good--would be affected by Ex-Im financing is a key
component of the detailed analyses. In its economic impact memorandums
concerning its detailed analyses, Ex-Im generally presents the amount
of this estimated net impact as a change in the U.S. trade balance,
stating that the trade balance will ìimproveî by the full dollar value
of the exports it finances, less lost production. This characterization
is misleading because the incremental impact of Ex-Im financing is
likely to be less than the total value of those exports.[Footnote 30]
Economists generally agree that the aggregate trade balance is largely
determined by macroeconomic factors, especially the domestic balance
between savings and investment. Thus, the incremental impact of Ex-Im
financing is likely to be much smaller than the total value of U.S.
exports supported by Ex-Im or the total value of displaced production.
However, while the size of the impact on the U.S. balance of trade is
overstated, Ex-Im's conclusions about net economic impact are likely to
have been unaffected by this practice because these cost and benefits
are both overstated.
Controls on Ex-Im's Economic Impact Process Could Be Strengthened:
We found that the internal controls Ex-Im uses to ensure the accuracy
of its economic impact identification and analysis process could be
strengthened. According to the Standards for Internal Control of the
Federal Government,[Footnote 31] internal controls should reasonably
ensure the effectiveness and efficiency of operations and the
compliance with applicable laws and regulations. Control activities
include a wide range of diverse activities, such as training, approvals
and verifications, and the creation and maintenance of related records
that provide evidence of execution of these activities as well as
appropriate documentation. The manner in which Ex-Im conducts at least
three control activities does not reasonably ensure effective analyses.
First, Ex-Im did not provide the employees conducting the analyses with
formal training or guidance on how to conduct the analysis. Second, Ex-
Im did not consistently document internal review of the analysts' work.
Third, Ex-Im does not maintain documentation of certain important
pieces of information. Without strong internal controls, Ex-Im cannot
ensure that all requests for financing are appropriately analyzed.
Limited Training or Systematic Guidance Was Provided on How to Conduct
a Detailed Analysis:
Although appropriate training is a key internal control, Ex-Im provided
the analysts with whom we spoke[Footnote 32] with limited training or
systematic guidance on how to conduct an economic impact analysis.
According to the Standards for Internal Control of the Federal
Government, management should ensure that employees have the required
skills to achieve organizational goals. Training should be aimed at
developing and retaining employee skill levels to meet changing
organizational needs. According to the five analysts with whom we
spoke, Ex-Im's training includes reading the economic impact procedures
and previously conducted analyses and informal mentoring from
coworkers. One analyst relied on a notebook compiled by his predecessor
and another analyst relied on a template; however, according to bank
officials, neither of these documents had been sanctioned by Ex-Im.
This training and guidance may not be sufficient to ensure the use of
the same fundamental, methodological approach across analyses,
particularly given that the Policy Analysis Division, which is
responsible for conducting the analyses, has had a lot of turnover
since 2002.[Footnote 33]
Approvals and Verification Were Not Systematically Obtained:
Officials from the Policy Analysis Division stated that the economic
impact analysts always consult with the engineers when conducting a
detailed analysis because they provide important technical expertise;
however, the engineers do not consistently approve final analyses.
According to the Standards for Internal Control of the Federal
Government, key duties and responsibilities need to be divided or
segregated among different people to reduce the risk of error. This
includes separating the responsibilities for reviewing the analyses.
The Ex-Im policy division relies on the engineering division for
industry-specific information. For example, the Engineering and
Environment Division generally calculates the 1 percent tests for all
applications and helps the analysts define the appropriate commodity
markets. In addition, engineers contact the exporters and borrowers to
gather the technical information necessary to make those
determinations. However, while the employee who conducted the analysis
and the head of the policy division always signed the final economic
impact analyses to denote their concurrence with the analysis, the
engineers did not. Engineers signed only 6 of the 14 economic impact
analyses for which the board of directors made final financing
decisions. Ex-Im officials acknowledged that, although the policy
division does consult with engineers for every detailed analysis, Ex-Im
does not have any rigorous procedures prescribing when an engineer
should sign an analysis. Without the consistent signatures denoting
engineer review, Ex-Im loses an important layer of assurance that their
analyses were accurately conducted.
Ex-Im Does Not Maintain Some Important Documentation:
We also found that Ex-Im does not maintain documentation of important
information concerning its detailed analyses. According to the
Standards for Internal Control of the Federal Government, all
transactions and other significant events need to be clearly
documented, and the documentation should be readily available for
examination. The policy division does not maintain records of the
underlying data sources for its 1 percent test calculations, just the
results of the calculations. Without the underlying data, the test
cannot be replicated. The policy division also does not keep copies of
draft analyses that it circulates to the reviewing agencies for their
comments. The policy division also does not keep records of projects
for which it began a detailed analysis, but which the applicants
withdrew prior to the board making a final financing decision. A senior
bank official noted that it probably would be a good idea for the
policy division to start keeping files on the withdrawn data.
U.S. Government Agencies Have Provided an Important Review Function:
Commerce, State, Treasury, and USTR have played an important role in
the quality assurance process regarding Ex-Im transactions that undergo
a detailed economic analysis. In addition to specifically notifying
these agencies when it begins a detailed analysis, Ex-Im provides them
with a copy of the draft detailed analysis and asks that they provide
their analytic and policy opinions. An Ex-Im official noted that the
bank has voluntarily circulated the draft analyses to be as inclusive
as possible, but it is not required to do so by its charter. Each of
the four agencies reviews the detailed economic impact analysis in
light of larger U.S. government policies, laws, and economic
principles. The agencies often provided Ex-Im with important quality
assurance feedback through informal dialogue. For example, when
reviewing a draft of a transaction concerning denim, USTR noted in an e-
mail to Ex-Im that the analysis had not considered how the end of
textile quotas, which had happened just prior to the transaction's
application for financing, would impact the global supply of textiles,
including denim. Ex-Im modified its analysis to incorporate this
consideration.
In addition to providing quality assurance, the agencies' comments can
influence a transaction's outcome. For example, when agencies expressed
the opinion that steel production was in overcapacity, Ex-Im's staff
changed their conclusion that the transaction would have a "net
positive impact" to that the transaction would have a "net negative
impact." In an early draft of a detailed analysis concerning direct
reduced iron production, Ex-Im staff concluded that steel would not be
in oversupply when the foreign buyer's factory came on-line. However,
three of the four agencies disagreed with this assessment. According to
the economic impact memorandum for this transaction, Ex-Im staff
deferred to the collective expertise among the agencies and changed its
conclusion.
Ex-Im generally requests the agencies' comments 1 week after it
circulates the draft detailed analysis to them. Several agency
officials stated that 1 week is not enough time to thoroughly review an
analysis because of the complexity of the analysis and the need to get
the views of those in official, senior-level positions on the analysis.
However, some agency officials noted that Ex-Im does try to accommodate
their requests for additional information and review time.
Transparency of Economic Impact Procedures Has Limitations:
We found that some aspects of Ex-Im's economic impact process lacked
transparency. While Ex-Im publicly posts their procedures, the
procedures are difficult to understand and contain undefined terms. In
addition, Ex-Im does not provide all public comments to its board of
directors as required by its procedures.
Publicly Available Procedures Contain Areas of Ambiguity:
Ex-Im's publicly available procedures do not clearly lay out how it
analyzes applications for economic impact; therefore, interested
parties are unable to reasonably assess their project's viability. In
addition, Ex-Im could increase the process's transparency by
referencing its list of sensitive sectors in its procedures and
publishing the detailed analyses' outcomes.
Economic Impact Process Is Not Easily Understood:
Ex-Im's procedures for analyzing applications are unclear to lenders
and exporters directly involved in those projects, other industry
officials, and U.S. government officials. According to Ex-Im's annual
competitiveness report,[Footnote 34] many lenders and exporters
involved in projects requesting the bank's financial support expressed
particular concern that the economic impact issue needs greater
transparency and predictability. One exporter who participated in Ex-
Im's annual competitiveness survey noted that, because the economic
impact process is unpredictable, project sponsors may consider finding
an alternative to the U.S. product and financing if the project would
be subject to economic impact analysis. Industry officials with whom we
spoke also generally noted that the process was not clear. One industry
official called the process "a black box." Similarly, officials from
one U.S. government agency with whom we spoke noted that Ex-Im's
criteria and methodological assumptions were unclear.
Ex-Im's Procedures Do Not Provide a Clear Basis for the Assessment of
Oversupply:
Ex-Imís oversupply assessment--which can be a key factor in determining
economic impact--lacks a clear basis because Ex-Im has not defined
oversupply or matched the list of oversupply indicators in its
procedures with those that they actually use. As we have previously
noted, a determination of oversupply--Ex-Im's interpretation of the
statutory consideration of whether production is in surplus on world
markets--can be a basis for denial of an application. Ex-Im has also
referred to information gathered in its assessment of oversupply in its
determination of potential displaced production and, thus, its estimate
of net economic impact. There is no generally accepted definition of
oversupply, which Ex-Im's procedures and staff both acknowledge. In
fact, the excess supply of a good over demand is not likely to be a
persistent condition because, in most markets, prices will adjust to
bring the supply of the good in balance with the demand. However,
various indicators can provide perspectives on the outlook for supply
and demand, and on whether expansions in capacity might come at a time
of falling prices.
Ex-Im officials stated that they have not created an operational
definition of oversupply to guide their assessment of it in detailed
economic impact analyses. Instead, according to its procedures, Ex-Im
analyzes transactions on a case-by-case basis and assesses oversupply
according to a series of possible indicators. These indicators are as
follows:
* Final antidumping and countervailing duty orders on similar products
elsewhere.[Footnote 35]
* Section 201 investigations.
* Stagnating or falling global prices.
* Falling gross margins of domestic producers.
* Industry bankruptcy and unemployment trends.
* Trade Adjustment Assistance petitions.
* Preliminary antidumping and countervailing duty determinations.
* Multilateral production limitation agreements.
Ex-Im has not generally used the more domestically focused indicators
listed in its procedures to support conclusions regarding oversupply,
and the procedures do not include a key indicator that it has used. Ex-
Im officials stated that the oversupply assessment is made on a global
basis. (Ex-Im's charter refers to surplus on "world markets.") However,
most of the indicators listed in Ex-Im's procedures refer to laws,
programs, or conditions in the United States that are not necessarily
reflective of conditions on global markets. These include, for example,
trade measures used by U.S. firms to mitigate the adverse effects of
competition from foreign imports. While Ex-Im's economic impact
memorandums often contained information on these trade measures in a
separate section, the presence or absence of these measures is not
generally identified as the basis for support of oversupply
determinations. Furthermore, an indicator that has been important to Ex-
Im's determinations, capacity utilization, is not listed among the
indicators of oversupply in its procedures. Ex-Im's conclusions about
oversupply are typically supported by information related to prices,
capacity utilization, and direct measures or forecasts of global supply
and demand.
Differences in criteria considered important for determining oversupply
have been the basis for disagreements regarding whether Ex-Im should
deny an application on economic impact grounds. An Ex-Im official
stated that the lack of a definition for oversupply has been
problematic because individuals may differ regarding whether a
commodity is in oversupply, depending on the factors they consider. As
a result of such disagreements, some transactions at Ex-Im have
"stopped in their tracks," according to the Ex-Im official. This was
illustrated in the case of a transaction that would have increased
steel capacity in Saudi Arabia. Ex-Im and several agencies initially
disagreed regarding oversupply on the steel project. Ex-Im's final
economic impact assessment concluded that the transaction would likely
have a net negative impact on the U.S. economy, and Ex-Im's board
denied the transaction. An official with one of the agencies from which
Ex-Im solicits comments also stated that oversupply has been an area of
disagreement.
Procedures Do Not Have Criteria for when to Use Proportionality:
Similarly, Ex-Im does not clearly define when the concept of
"proportionality" would be used. An Ex-Im official noted that the bank
included proportionality in its procedures after the 2002
reauthorization to retain some flexibility in how it analyzed the
applications.[Footnote 36] A senior official stated that, in some
cases, it is not reasonable for the bank to assume responsibility for
all of a project's increased production when it only finances a portion
of the overall project. Instead, the concept of proportionality allows
the bank to measure the potential for its financing to displace the
production of U.S. competitors in proportion to its funding. Applying
proportionality would reduce the estimated costs to U.S. producers. For
example, if Ex-Im financed $100 million worth of U.S. exports
associated with a larger $2 billion project, the bank would be
supplying 5 percent of the total project cost. If the $2 billion
facility produced 10,000 metric tons of an exportable good, Ex-Im would
assess the impact of its financial support on U.S. competitors on the
basis of only 5 percent of the output--in proportion with its funding-
-or 500 metric tons.
Using proportionality can change a net negative determination to a net
positive determination. For example, Ex-Im applied the proportionality
concept to the estimate of displaced production regarding a project
that would allow a Chinese company to increase production of
petrochemicals. According to documents provided by other government
officials, Ex-Im's analysis of a petrochemical project noted
approximately $170 million in expected benefits from the U.S. export
sale, but approximately $750 million in potential indirect "lost
opportunity" costs. Using standard calculations, the analysis would
have yielded a net negative impact of over $580 million. However, Ex-Im
applied proportionality and found that its share of the project
financing equaled only 4.5 percent of project costs--therefore, Ex-Im
financing was associated with about $34 million in potential indirect
lost opportunity costs. This use of proportionality yielded a net
positive impact of $134 million.[Footnote 37] Ex-Im approved the
project in fiscal year 2003.
Ex-Im also has not systematically used the proportionality concept or
specified when it would be applicable. For example, in an application
to finance an ethanol facility in Trinidad,[Footnote 38] Ex-Im argued
that the equipment they financed did not allow the company to produce
ethanol, but rather to introduce a "simple refinement step"--that is,
dehydration. At that time, the price of hydrous ethanol (the input) was
10 percent lower than anhydrous ethanol (the end product). Therefore,
using the proportionality approach, Ex-Im asserted that its financing
was only responsible for 10 percent of the output. Using
proportionality, Ex-Im concluded that the project would increase
foreign production by 0.35 percent of U.S. production. Using standard
calculations, foreign production would have increased by 3.5 percent of
U.S. production. Ex-Im asserts that its decision to use proportionality
when equipment refines a product rather than produces a new product is
fair and reasonable. However, in a similar project involving the
refinement of hot-rolled steel to galvanized steel, Ex-Im did not apply
proportionality.
In addition, several reviewing agencies have expressed concerns about
the use of proportionality when determining a project's economic
impact. Without knowing the conditions under which Ex-Im would apply
proportionality, interested parties do not have a sense of the
viability of their proposed project.
Ex-Im acknowledged that both the oversupply and proportionality
language in the procedures is confusing. A senior Ex-Im official also
noted that the bank struggles with determining when to use the
proportionality concept. The bank also acknowledged that it should
create more specific guidelines in their procedures for defining
oversupply and proportionality. Specific criteria would make the
process more transparent. However, Ex-Im has not altered the language
in its most recent procedures.
Public Comments Are Not Fully Included in Board Memorandums:
Ex-Im does not regularly include the full text of the public comments
that they receive. Ex-Im's economic impact procedures require it to
attach the full set of comments as an appendix to the economic impact
memorandums. In some cases, staff members attached selected
communications. There were seven cases that received public comments
and went to the board for decision but only two included copies of all
of the comments received. According to Ex-Im, the Policy Analysis
Division does not append copies of all public comments received because
they are sometimes too numerous. Instead, the policy division
summarizes the main arguments and often includes a representative
letter. An Ex-Im official noted that the division retains all public
comments and would make them available to the directors if requested.
However, Ex-Im does not note in its procedures what criteria it uses
for deciding which comments not to include, nor does it note in the
memorandums that the letters were available for perusal upon request.
The 2006 reauthorization now requires Ex-Im to provide in writing the
views of all people who submit comments.
Incorporating New Practices Would Increase Process's Predictability:
We identified two practices that Ex-Im does not currently incorporate
into their economic impact procedures that would increase the
predictability of the process's outcomes--namely, referencing the
sensitive sector list and publishing detailed analyses results. First,
in its revised procedures, Ex-Im does not reference its list of
industries unlikely to be financed for economic impact reasons. In the
2006 reauthorization legislation, Congress required Ex-Im to create a
"sensitive sectors list" denoting sectors that are unlikely to receive
Ex-Im financing. Ex-Im has created this list and makes it publicly
available on its Web site. However, Ex-Im's updated procedures do not
specify the list's implications and indicate that requests for
financing projects in sectors on the list will receive close scrutiny
during the economic impact process. In contrast, the procedures do list
"undersupplied" sectors (oil and gas and diamonds) that will not be
denied on economic impact grounds. A direct reference to the sensitive
sectors list would enable interested parties to quickly identify
whether their projects were viable. Second, Ex-Im does not currently
publicize the results of its detailed economic impact analyses. Ex-Im
publicly announces when it begins a detailed analysis. It also posts
minutes of board meetings on its Web site that announce ultimate
financing decisions. However, the financing decisions do not include
statements regarding whether the project was subject to an economic
impact analysis, or the determination regarding whether there would be
a net negative or net positive impact on the economy. Publicizing such
information would provide interested parties with a record of what
types of projects passed the detailed analysis.
Conclusions:
While many requests for Ex-Im's financing do not require economic
impact analysis, the bank often faces the difficult task of balancing
the interests of different industries while working to achieve its
broad mission to promote U.S. exports and increase U.S. jobs. Ex-Im's
board of directors must consider the economic impact of proposed
projects while also weighing other factors, such as creditworthiness,
environmental impact, and small business participation. Congress has
given Ex-Im's board wide discretion in how it implements the economic
impact requirements specified in the bank's charter. It directs Ex-Im
to examine certain factors, such as whether products are in surplus on
global markets (or in "oversupply," according to Ex-Im), but gives the
board the authority to approve applications that it believes will have
an overall benefit on U.S. production and employment, despite some
negative impacts. Determining the various economic impact aspects that
weigh into the board's decision can be challenging, requiring Ex-Im to
identify what international markets are likely to be involved and to
quantify how economic trends may play out in the future. While Ex-Im's
board of directors may sometimes have to consider economic impact in
the face of imperfect information, it needs to be able to rely on a
process that involves sound methodology and consistent application of
procedures, and to understand key assumptions and areas of uncertainty.
Moreover, Ex-Im clients and affected U.S. industries need a process
that is transparent and, where possible, predictable.
Although Ex-Im generally follows its broad economic impact procedures,
we identified several areas for improvement related to the screening of
applications for economic impact, the analysis methodology, and the
transparency of the overall process. First, while Ex-Im has the
discretion to use screens to identify applications for further review
and to allocate its staff resources effectively, the effectiveness of
Ex-Im's $10 million screen is uncertain because Ex-Im has not conducted
an analysis to determine the extent to which it identifies projects
that could meet the statutory definition of substantial injury. Next,
we identified limitations in certain assumptions Ex-Im makes to
estimate economic impact in its detailed analyses. In some cases, these
limitations had not been adequately disclosed nor had the sensitivity
of economic impact conclusions to these assumptions been explored. In
addition, while Ex-Im makes the economic impact procedures publicly
available, the procedures do not provide adequate transparency and
predictability. This has been noted by exporters, industry, and U.S.
government agency officials. Ex-Im's own competitiveness survey cites
one respondent as saying that the unpredictability of the economic
impact process hurts U.S. sourcing in projects.
Congress demonstrated in Ex-Im's 2006 reauthorization its continuing
interest in Ex-Im having a sound and transparent economic impact
process, and addressed certain transparency concerns. We believe that
several improvements in Ex-Im's process are still needed to ensure that
its decisions stand up to the inevitable scrutiny of interested and
affected parties.
Recommendations:
To improve Ex-Im's identification and analysis of applications for
economic impact, we recommend that the Chairman of the Export-Import
Bank of the United States take the following three steps:
* Review the $10 million threshold to determine whether additional
steps are needed to mitigate the risk of exempting from more detailed
review applications that could meet the definition of substantial
injury. The additional steps could include, for example, selectively
reviewing transactions that would affect relatively small U.S.
industries or sensitive sectors.
* Create specific methodological guidelines for staff analyzing
applications for economic impact, bearing in mind relevant OMB guidance
where appropriate.
* Review and strengthen internal controls concerning the economic
impact analysis to ensure, for example, that staff members conducting
the analyses have sufficient training and guidance in Ex-Im's economic
impact methodology, that relevant Ex-Im staff verify and approve the
analyses, and that sufficient documentation is maintained to record key
information.
To improve the public transparency of the economic impact process for
interested and affected parties, we also recommend that the Chairman of
the Export-Import Bank of the United States take the following three
steps:
* Clarify publicly available procedures by including more information
regarding Ex-Im's methodology for analyzing applications, such as
defining how it incorporates "oversupply" determinations in its
analysis and what measures it uses and specifying under what conditions
"proportionality" would be used.
* Inform interested parties about the sensitive sector list by
including a reference to the list in the economic impact procedures.
* Publish either individually, or in the publicly available board
minutes, the final determinations regarding whether a project would
have a positive or negative impact.
Agency Comments and Our Evaluation:
We provided a draft of this report to the Export-Import Bank of the
United States. Ex-Im generally concurred with our recommendations and
stated that it will continue to explore feasible ways to improve the
economic impact procedures and make the process more consistent and
user-friendly. Ex-Im stated that it will (1) review the $10 million
threshold to ensure that it satisfies its intended function; (2)
enhance existing quality assurance measures by attempting to
standardize staff training and to expand document maintenance; and (3)
clarify the basis for an assessment of "oversupply," and create
criteria for using "proportionality." In addition, Ex-Im agreed to seek
to incorporate our suggestions as it refines its analytic methodology,
but the bank noted that a single approach would not address the
diversity of transactions it considers. We acknowledge that a single
approach is not necessarily appropriate for all analyses, but we
believe that a consistent set of methodological principles, such as
those embodied in OMB guidance, would nevertheless enhance the economic
impact analysis process. Lastly, Ex-Im agreed that increased
transparency and predictability will improve the economic impact
process and notes that it has amended its economic impact procedures to
reflect increased transparency requirements laid out in the Export-
Import Bank Reauthorization Act of 2006. We believe that the process's
transparency and predictability can be further improved by several
practices, such as referring to the sensitive sector list in the
procedures and publishing the bank's determination regarding whether a
project will have a positive or negative net impact. Ex-Im also
provided technical comments, which we have incorporated where
appropriate. Ex-Im's official comments are reprinted in appendix III.
As agreed with your offices, unless you publicly announce the contents
of this report, we plan no further distribution until 30 days from the
report date. At that time, we will send copies of this report to other
interested congressional committees. We also will provide copies of
this report to the Chairman of the Export-Import Bank of the United
States. In addition, this report will be available at no charge on the
GAO Web site at [hyperlink, http://www.gao.gov].
If you or your staff members have any questions about this report,
please contact me at (202) 512-4347 or YagerL@gao.gov. Contact points
for our Offices of Congressional Relations and Public Affairs may be
found on the last page of this report. Other GAO contacts and staff
acknowledgments are listed in appendix IV.
Signed by:
Loren Yager:
Director, International Affairs and Trade:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
The Ranking Member of the Senate Committee on Finance and a member of
the Senate Committee on Banking, Housing, and Urban Affairs requested
that we review the Export-Import Bank of the United States' (Ex-Im)
economic impact analysis process. In this report, we reviewed (1) Ex-
Im's overall policies and procedures for determining economic impact;
(2) the extent to which Ex-Im's procedures provide for the
identification and appropriate analysis of applications that could
potentially cause adverse economic impact; and (3) the extent to which
its policies, procedures, and decisions are transparent to interested
and affected parties.
We reviewed the 17 economic impact memorandums that Ex-Im finalized
between fiscal years 2002 and 2006. We chose this time frame because
all analyses were conducted using the same procedures, and were adapted
after the 2002 reauthorization but before the 2006 reauthorization. Of
those cases, we chose 5 to review in greater depth: Russia/polystyrene,
Egypt/ammonia, Singapore/semiconductors, Turkey/denim, and Saudi
Arabia/direct reduced iron. We selected case studies that would provide
a broad representation of elements in the following categories:
* Country.
* Type of industry/commodity.
* Finance amount.
* Final board decision.
* Staff members conducting analyses.
* Methodological issues.[Footnote 39]
Given the small universe (17) of detailed economic impact analyses
conducted by Ex-Im from fiscal years 2002 through 2006, we determined
that selecting a random sample would not be necessary or appropriate.
While we used these 5 case studies to guide some of our work, we
reviewed all 17 detailed analyses because findings that are based
solely on a judgmental sample would not necessarily be generalizable to
all detailed economic impact analyses conducted.
To describe Ex-Im's legal interpretation of its statutory economic
impact analysis mandate, we reviewed the statutory provision as it was
written in the bank's 2002 reauthorizing legislation; reviewed other
relevant legal documents; and interviewed Ex-Im legal staff, including
the General Counsel, regarding their interpretation. To describe Ex-
Im's economic impact analysis process, we reviewed Ex-Im's economic
impact analyses procedures published in March 2003 and compared them
with the 2002 reauthorization legislation for consistency. To describe
how Ex-Im's 2006 reauthorization will impact the economic impact
procedures, we reviewed the relevant legislation and the revised
economic impact procedures, and spoke with cognizant Ex-Im officials.
To describe how Ex-Im implements the economic impact procedures, we
spoke with the analysts who analyzed our 5 case studies, the engineers
who assisted with the analysis, and the supervising officials.
To determine how many applications Ex-Im coded for economic impact, we
reviewed data on all projects processed between fiscal years 2003 and
2005. Ex-Im did not use the same set of economic impact procedures when
reviewing applications in fiscal year 2002; therefore, we did not use
data from that fiscal year. In addition, Ex-Im did not have complete
data for fiscal year 2006 projects at the time of our review. These
data have some limitations that could result in small deviations from
the values and quantities that we reported. Despite limitations, we
determined that the transaction data provided by Ex-Im were
sufficiently reliable for our purposes.
To determine whether the exportable goods in each of our five case
studies were subject to antidumping orders and countervailing duty
orders, we reviewed the United States International Trade Commission's
(ITC) list of current antidumping and countervailing duty orders in
place as of October 23, 2006, and February 15, 2007; the Federal
Register from 1997 to the present for notices posted by ITC or the
Department of Commerce's International Trade Administration (ITA); and
ITA's AD/CVD Investigations Federal Register History. To determine
whether the exportable goods in our five case studies were subject to
"safeguards," we searched the Federal Register from 1997 up to the date
of the case for notices posted by ITC or ITA that mentioned the name of
the product involved in our cases.
To assess the extent to which Ex-Im's procedures provide for the
identification and appropriate analysis of requests to finance projects
that could potentially cause adverse economic impact, we reviewed the
economic impact provisions of Ex-Im's charter and the procedures
implementing those provisions. To determine the effectiveness of the
$10 million threshold, we attempted to judgmentally sample 10
applications that requested financing for capital good exports between
$5 and $10 million. However, our ability to do so was limited because
Ex-Im could provide the relevant information for only 2 of the 10
projects. We reviewed 17 detailed economic impact analyses and
documentation related to some applications that had not received a
detailed analysis, and conducted interviews with Ex-Im officials on the
5 analyses that we chose as case studies. We also reviewed the case
studies within a panel of Ph.D. economists in GAO. In addition, we
interviewed officials from agencies that conduct similar analyses at
the ITC and the Overseas Private Investment Corporation, and reviewed
cost-benefit analysis guidance from the Office of Management and
Budget. We also reviewed relevant reports from GAO, the Congressional
Budget Office, and the Congressional Research Service.
To assess the economic impact analysis process's transparency, we
reviewed the Federal Register to confirm that Ex-Im posted public
notices for all detailed analyses it began. We reviewed Ex-Im's Web
site to establish what information Ex-Im made public (including current
procedures and final transaction decisions). We also reviewed internal
Ex-Im documents. We interviewed agency officials from the Departments
of Commerce, State, and the Treasury and from the Office of the U.S.
Trade Representative who formally review the economic impact
memorandums. We compared draft analyses that the agencies received from
Ex-Im with final analyses and reviewed communications between the
agencies and Ex-Im. We also interviewed representatives from companies
whose exports relied on Ex-Im financing, and representatives from
organizations that expressed concern over the projects' potential
impact on the industries they represent. We used our 5 cases to
determine which agency officials, exporters, and industry officials to
interview.
We conducted our work from October 2006 through August 2007 in
accordance with generally accepted government auditing standards.
[End of section]
Appendix II: List of Detailed Economic Impact Analyses That Ex-Im Began
between Fiscal Years 2002 and 2006:
We requested and received copies of all detailed economic impact
analyses Ex-Im conducted in fiscal years 2002 through 2006. We also
requested data on all transactions processed during the same fiscal
years. However, Ex-Im only had complete and reliable data for fiscal
years 2003 though 2005. Transactions processed in fiscal years 2002
were governed by a different charter than the other fiscal years, and
data for transactions processed in 2006 were not available at the time
of our review. Thus, the number of detailed analyses presented in this
appendix does not correspond exactly with numbers cited in the report
text.
Table 1: Detailed Economic Impact Analyses and Board of Directors'
Financing Decisions:
Dollars in millions.
1;
Country: Japan;
Commodity: Titanium (electron beam furnace);
Net contract price: $16.3;
Finding: Net positive;
Final board decision: Approved;
Final action: Date: 08/22/06;
Final action: Fiscal year[A]: 2006.
2;
Country: Saudi Arabia;
Commodity: Direct Reduced Iron Facility;
Net contract price: 74.3;
Finding: Net negative;
Final board decision: Denied;
Final action: Date: 03/09/06;
Final action: Fiscal year[A]: 2006.
3;
Country: Turkey;
Commodity: Denim (equipment);
Net contract price: 21.5;
Finding: Net positive;
Final board decision: Approved;
Final action: Date: 09/08/ 05;
Final action: Fiscal year[A]: 2005.
4;
Country: Qatar;
Commodity: Petrochemicals (equipment and services);
Net contract price: 235.0;
Finding: Net positive;
Final board decision: Approved;
Final action: Date: 07/14/05;
Final action: Fiscal year[A]: 2005.
5;
Country: Egypt;
Commodity: Ammonia;
Net contract price: 186.9;
Finding: Net positive;
Final board decision: Approved;
Final action: Date: 02/03/05;
Final action: Fiscal year[A]: 2005.
6;
Country: Israel;
Commodity: Polypropylene;
Net contract price: 35.4;
Finding: Net positive;
Final board decision: Approved;
Final action: Date: 02/03/ 05;
Final action: Fiscal year[A]: 2005.
7;
Country: Russia;
Commodity: Polystyrene (production equipment);
Net contract price: 17.3;
Finding: Net positive;
Final board decision: Approved;
Final action: Date: 12/22/04;
Final action: Fiscal year[A]: 2005.
8;
Country: Singapore;
Commodity: Semiconductors;
Net contract price: 757.5;
Finding: Net positive;
Final board decision: Approved;
Final action: Date: 11/12/ 04;
Final action: Fiscal year[A]: 2005.
9;
Country: Ukraine;
Commodity: Galvanizing line (steel);
Net contract price: 18.5;
Finding: Net positive;
Final board decision: Effective denial (split vote);
Final action: Date: 05/24/04;
Final action: Fiscal year[A]: 2004.
10;
Country: Argentina;
Commodity: Gold and silver;
Net contract price: 72.4;
Finding: Net positive;
Final board decision: Approved;
Final action: Date: 03/26/ 04;
Final action: Fiscal year[A]: 2004.
11;
Country: India;
Commodity: Pure Terephthalic Acid;
Net contract price: 83.6;
Finding: Net positive;
Final board decision: Approved;
Final action: Date: 06/05/03;
Final action: Fiscal year[A]: 2003.
12;
Country: Russia;
Commodity: Mettallurgical coal;
Net contract price: 25.0;
Finding: Net positive;
Final board decision: Approved;
Final action: Date: 04/03/03;
Final action: Fiscal year[A]: 2003.
13;
Country: Uzbekistan;
Commodity: Gold mine;
Net contract price: 78.0;
Finding: Net positive;
Final board decision: Approved;
Final action: Date: 01/30/ 03;
Final action: Fiscal year[A]: 2003.
14;
Country: China;
Commodity: Petrochemical production;
Net contract price: 200.0;
Finding: Net positive;
Final board decision: Approved;
Final action: Date: 10/25/02;
Final action: Fiscal year[A]: 2003.
Source: GAO analysis of Ex-Im data.
[A] The U.S. government fiscal year runs from October 1st through
September 30th. The fiscal year is named by the calendar year in which
it ends.
[End of table]
Table 2: Detailed Economic Impact Analyses, with No Final Board of
Directors' Decision Because of Transaction Withdrawal:
Dollars in millions.
1;
Country: Portugal;
Commodity: Photovoltaics modules;
Amount: $14.9;
Finding: Net positive;
No final board decision made: Withdrawn;
Final action: Date: 03/20/06;
Final action: Fiscal year: 2006.
2;
Country: Greece;
Commodity: Photovoltaics modules;
Amount: 38.0;
Finding: Net positive;
No final board decision made: Withdrawn;
Final action: Date: 08/03/05;
Final action: Fiscal year: 2005.
3;
Country: Mexico;
Commodity: Flat glass;
Amount: 24.0;
Finding: Net positive;
No final board decision made: Withdrawn;
Final action: Date: 11/02/04;
Final action: Fiscal year: 2005.
Source: GAO analysis of Ex-Im data.
[End of table]
Table 3: Detailed Economic Impact Analysis Conducted Postauthorization
at the Request of the Credit Committee:
Dollars in millions.
1;
Country: Russia;
Commodity: Mettallurgical coal;
Amount: $9.8;
Finding: Net positive;
Final board decision: Approved;
Final action: Date: 09/21/04;
Final action: Fiscal year: 2004.
Source: GAO analysis of Ex-Im data.
[End of table]
Table 4: Detailed Economic Impact Analysis Conducted Postauthorization
Pursuant to the Consolidated Appropriations Act of 2004:
Dollars in millions.
1;
Country: Trinidad and Tobago;
Commodity: Ethanol;
Amount: $9.9;
Finding: No definitive finding[A];
Final board decision: Approved;
Final action: Date: 03/26/04;
Final action: Fiscal year: 2004.
Source: GAO analysis of Ex-Im data.
Note: Title I, Division D, of Pub. L. No. 108-447.
[A] In its analysis, Ex-Im concluded the following: "whether Ex-Im Bank
support for this project will be associated with a positive or negative
impact on the U.S. balance of trade largely depends on the outcome of
the pending proposal to limit duty-free CBI ethanol imports to 90-
million gallons per year. If the '7% cap' remains in place, then it is
likely that Ex-Im support will be associated with a net negative trade
flow. If the pending '90-million gallon cap' gets enacted, then it is
likely that Ex-Im support will be associated with a net positive trade
flow."
[End of table]
Table 5: Unfinished Detailed Economic Impact Analyses:
Dollars in millions.
1;
Country: Saudi Arabia;
Commodity: Petrochemicals (equipment and services);
Amount: $480.0;
Federal Register posting: Date: 07/25/06;
Federal Register posting: Fiscal year: 2006.
2;
Country: Kenya;
Commodity: Soda ash (locomotives for transport);
Amount: 14.0;
Federal Register posting: Date: 02/09/06;
Federal Register posting: Fiscal year: 2006.
3;
Country: China;
Commodity: Semiconductors;
Amount: 1,200.0;
Federal Register posting: Date: 12/23/04;
Federal Register posting: Fiscal year: 2005.
3;
Country: China;
Commodity: Semiconductors;
Amount: 500.0;
Federal Register posting: Date: 08/05/04;
Federal Register posting: Fiscal year: 2004.
4;
Country: Turkey;
Commodity: Soda ash production;
Amount: 50.0;
Federal Register posting: Date: 07/19/04;
Federal Register posting: Fiscal year: 2004.
5;
Country: Mexico;
Commodity: Aluminum engine blocks;
Amount: 14.0;
Federal Register posting: Date: 05/23/02;
Federal Register posting: Fiscal year: 2002.
6;
Country: Mexico;
Commodity: Automotive crankshaft (equipment);
Amount: 35.0;
Federal Register posting: Date: 03/04/02;
Federal Register posting: Fiscal year: 2002.
7;
Country: South Africa;
Commodity: Phosphate fertilizers;
Amount: 12.5;
Federal Register posting: Date: 03/04/02;
Federal Register posting: Fiscal year: 2002.
Source: GAO analysis of Ex-Im data and Federal Register notices.
Note: Ex-Im posts Federal Register announcements when it begins
detailed economic impact analyses. Ex-Im made no final financing
decisions on these transactions.
[End of table]
[End of section]
Appendix III: Comments from the Export-Import Bank of the United
States:
Export-Import Bank Of The United States:
811 Vermont Avenue, N.W.:
Washington, D.C. 20571:
Phone: (202) 565-3500:
Fax: (202) 565-3513:
James II. Lambright:
Chairman And President:
September 5, 2007:
Mr. Loren Yager:
Director, International Affairs and Trade:
United States Government Accountability Office:
Washington, DC 20548:
Dear Mr. Yager,
Thank you for providing the Export-Import Bank of the United States
("Ex-Im Bank" or the "Bank") a draft of the United States Government
Accountability Office ("GAO") report entitled "Export- Import Bank:
Improvements Needed in Assessment of Economic Impact." We appreciate
GAO's efforts to understand and analyze Ex-Im Bank's economic impact
policies and procedures, and we welcome the opportunity to share our
thoughts on the proposed recommendations.
Transactions involving economic impact issues are among the most
difficult cases the Bank considers. As the GAO report underscores,
determining the economic impact of a project is an inherently complex
process. GAO correctly notes the Bank's challenge in attempting to
balance the often times competing economic interests of two different
U.S. industries: the industry represented by the exporter and the
industry affected by new foreign competition. This challenge involves
the examination of a vast array of industries, the attendant difficulty
of information accessibility, and the consideration of diverse industry
expertise.
The GAO report examines the Bank's $10 million threshold for economic
impact case review. Ex- Im Bank has utilized this threshold for the
past 17 years without any adjustment for inflation. GAO recognizes the
Bank's discretion to establish the threshold, but recommends that the
Bank review its effectiveness and whether the threshold satisfies its
intended function. Ex-Im Bank appreciates the importance of an
effective threshold and agrees with the GAO recommendation.
The GAO report also recommends that Ex-Im Bank create better
methodological guidelines for analyzing economic impact. Ex-Im Bank
transactions represent a broad spectrum of U.S. industries, and this
diversity can be incompatible with a single methodological approach. As
a result, over the years, the Bank has identified, developed and
employed various reasonable and appropriate methodologies for
evaluating economic impact on a case and industry specific basis.
Within this context, Ex-Im Bank will seek to incorporate GAO's
suggestions as we continue to refine our methodological approach.
GAO further recommends that Ex-Im Bank review and strengthen economic
impact analysis internal controls. Senior economic impact officers are
substantively involved in and consistently review all detailed economic
impact analyses and staff members retain extensive records. Ex-Im Bank
will, however, attempt to standardize staff training and expand
document maintenance.
GAO also advises that the Bank's procedures clarify the basis for an
assessment of "oversupply" and set forth criteria for the use of
"proportionality." Ex-Im Bank agrees that the economic impact process
would benefit from these changes and will reexamine these areas.
Finally, Ex-Im Bank agrees with GAO that increased transparency and
predictability will improve the Bank's economic impact process. In the
December 2006 Export-Import Bank Reauthorization Act, Congress passed
legislation with the goal of creating more efficient, transparent and
predictable economic impact procedures to serve the collective
interests of exporters, industry and other interested parties. As the
GAO report notes, Ex-Im Bank has amended its economic impact procedures
to reflect this legislation, and we are optimistic that the changes
will result in greater transparency and predictability.
Ex-Im Bank has steadfastly responded to the challenging undertaking of
our economic impact mandate. We will continue to explore feasible ways
to improve our procedures and make the economic impact process more
consistent and user-friendly.
Sincerely,
Signed by:
James H. Lambright:
Chairman and President:
[End of section]
Appendix IV: GAO Contact and Staff Acknowledgments:
Contact:
Loren Yager, (202) 512-4347 or YagerL@gao.gov:
Staff Acknowledgments:
In addition to the person named above, the following people made key
contributions to this report: Celia Thomas, Assistant Director; Miriam
A. Carroll; Michael Hoffman; and Amber Simco. The following people
provided technical assistance: Karen Deans, David Dornisch, Etana
Finkler, Ernie Jackson, and Mark Speight.
[End of section]
Footnotes:
[1] As an illustrative example, the concern has been that if Ex-Im
provided favorable financing to a steel plant in Asia to expand
capacity, using exported U.S. goods in building the plant, the project
could potentially have a negative impact on U.S. steel producers
through increased foreign competition.
[2] Export-Import Bank Reauthorization Act of 2006 (Pub. L. No. 109-
438).
[3] 12 U.S.C. 635, et seq.
[4] Limitations in data supplied by Ex-Im did not allow us to do a
thorough review of requests for financing below $10 million.
[5] We use the term "transparency" to mean the full, accurate, and
timely disclosure of information.
[6] Under proportionality, Ex-Im calculates economic impacts on the
basis of the proportion of its financing related to the overall project
value.
[7] According to the Organisation of Economic Cooperation and
Development (OECD), export credit agencies provide export credits in
support of national exporters competing for overseas sales. Export
credit agencies provide credits to foreign buyers either directly or
via private financial institutions benefiting from their insurance or
guarantee cover. Export credit agencies can be government institutions
or private companies operating on behalf of the government. Many other
OECD member countries also have export credit agencies, such as Canada,
France, Germany, Japan, and the United Kingdom.
[8] Ex-Im also provides a small number of direct loans, which are
primarily used to offer concessionary financing to U.S. exporters to
match concessionary financing by other countries' export credit
agencies. For additional information regarding Ex-Im products, see Ex-
Im's official Web site at [hyperlink, http://www.exim.gov].
[9] Ex-Im defines a transaction as "processed" if an application has
been received and then authorized, denied, or withdrawn or if funds
have been disbursed.
[10] An economic impact consideration was first incorporated into Ex-
Im's charter in 1968 and has been subsequently modified.
[11] Ex-Im, Report to the U.S. Congress on Export Credit Competition
and the Export Import Bank of the United States (Jan. 1, 2005, through
Dec. 31, 2005).
[12] As defined in Title VII of the Tariff Act of 1930.
[13] As defined in Title II of the Trade Act of 1974. This legislation
requires Ex-Im to consider final and preliminary determinations that
may apply to the foreign production.
[14] Ex-Im also codes Credit Guarantee Facilities and Medium Term Risk
transactions as "annual review," regardless of the transaction's value.
[15] Ex-Im's procedures note that proportionality "shall not be the
only element used to avoid a full economic analysis."
[16] Ex-Im identified and began a detailed analysis for 20 applications
between fiscal years 2003 and 2005. Three applications were withdrawn
by the applicants before the detailed analyses were completed. Three
applications were withdrawn by the applicants after the detailed
analyses were completed, but before the board of directors made a final
financing decision. Fourteen applications received a complete detailed
analysis and a final board decision. We also reviewed some applications
that received a detailed analysis in fiscal years 2002 and 2006;
appendix II contains a list of all analyses begun during fiscal years
2002 through 2006.
[17] Between fiscal years 2002 and 2006, Ex-Im only identified one such
buyer whose portfolio on financed projects exceeded the $10 million
dollar threshold in a single fiscal year. The bank conducted an
economic impact review and concluded these projects did not produce 1
percent or more of U.S. production.
[18] As we have previously mentioned, Ex-Im as a matter of policy does
not finance exports to produce products in countries where there are
current trade sanctions on those products. In its detailed economic
impact analyses, Ex-Im may consider trade measures on related products
or identical products in other countries.
[19] The term "material change," with respect to an application,
includes a change of at least 25 percent in the amount of Ex-Im
financing requested in the application and a change in the principal
product to be produced by the foreign buyer.
[20] Relevant congressional committees include the Senate Committee on
Banking, Housing, and Urban Affairs and the House Committee on
Financial Services.
[21] All authority to approve or deny applications stems from the board
of directors. The board generally reviews all applications over $10
million. It has delegated authority to the Credit Committee to approve
or deny medium-term transactions (generally speaking, those that are
less than $10 million). The board has also delegated decision authority
to individuals for certain categories of financing.
[22] For example, according to the Census Bureau's Survey of
Manufactures, roughly one-fourth of manufacturing industries at the
seven-digit NAICS level (one definition of industries based on the
North American Industrial Classification System) had annual shipments
of less than $300 million in 2005.
[23] We judgmentally selected a sample of 10 capital good projects
requesting financing of $10 million or less. All 10 applications in the
sample were between $5 and $10 million, and most were between $7 and
$10 million. The sample was drawn from 80 applications that were
approved, had funds disbursed, or were denied between fiscal years 2002
and 2005.
[24] An Ex-Im official stated that, in general, only large project
finance transactions require information on increased production
capacity for the bank's credit underwriting (since Ex-Im bases the
project's creditworthiness on the project's future potential). Credit
decisions for smaller projects are often based on criteria such as the
borrower's credit history, financial statements, and the bank's
experience with the exporter. There is no standard procedure for
collecting or capturing production data, particularly for small
applications (i.e., $10 million or less).
[25] According to Ex-Im, the semiconductors to be produced at the
facility would generally be Application Specific Integrated Circuits
for consumption in the sectors of communications, computers, and
consumer electronics.
[26] An Ex-Im official told us that the bank had not used this
assumption since the Israel polypropylene analysis in 2005.
[27] This application was withdrawn by the buyer after a draft economic
impact analysis was prepared but prior to board consideration.
[28] Prices would not necessarily fall in absolute terms, but they
might be lower than would be the case in the absence of Ex-Im
financing.
[29] For example, existing estimates of the price elasticity of demand
for an industry's product could be used to estimate the impact of
changes in global supply on prices.
[30] OMB guidance for cost-benefit analyses by federal agencies, for
example, states that calculations should be based on incremental
benefits and costs. In particular, OMB notes that ìanalyses should take
particular care to identify the extent to which a policy such as a
subsidy program promotes substitutes for activities of a similar nature
that would occur without the policy.î In this case, Ex-Im financing may
promote the use of productive capacity in the United States that could
find similar or alternative use even in the absence of Ex-Im support.
For example, the firm that owns the productive capacity would seek
other buyers for its products, although perhaps selling them later or
at less favorable prices.
[31] The Federal Managers' Financial Integrity Act of 1982 requires GAO
to issue standards for internal control in government. The Standards
for Internal Control of the Federal Government provide the overall
framework for establishing and maintaining internal control and for
identifying and addressing major performance and management challenges
and areas at greatest risk of fraud, waste, abuse, and mismanagement.
According to OMB, these standards are applicable to all executive
agencies.
[32] Between fiscal years 2002 and 2006, six Ex-Im staff members
conducted the detailed economic impact analyses.
[33] Of the 6 Ex-Im staff members who conducted the detailed economic
impact analyses, 1 no longer works at Ex-Im. One analyst has changed
positions within the bank and no longer works on detailed analyses. Two
analysts work on the analyses as a collateral, rather than a primary,
duty. Two analysts recently began working on the analyses.
[34] Ex-Im, Report to the U.S. Congress on Export Credit Competition
and the Export Import Bank of the United States (June 2006).
[35] As we have indicated in a previous section of this report, when
the foreign-produced good is directly subject to a final antidumping or
countervailing duty order or a final section 201 determination, Ex-Im
eliminates it from consideration for financing through its screening
process.
[36] We identified two instances where Ex-Im applied proportionality
after the 2002 reauthorization.
[37] According to documentation we received from the reviewing
government agencies, two agencies objected to the use of
proportionality for this project; therefore, Ex-Im provided them an
alternative analysis supporting a net positive impact without using
proportionality. However, this alternate calculation was not included
in Ex-Im's final memorandum to the board of directors.
[38] This project was initially not screened for economic impact, given
that the finance value was less than $10 million. Ex-Im conducted this
analysis after authorizing the project as required pursuant to Title I,
Division D, of Pub. L. No. 108-447, the Consolidated Appropriations
Act, 2005.
[39] Methodological issues include determining "oversupply," estimating
displaced production or the impact on the trade balance, and case-
specific issues as noted in appendix II.
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