Summary

Tied aid refers to foreign assistance that is linked to the purchase of exports from the country extending the assistance. Tied aid can consist of foreign aid grants alone, grants mixed with commercial financing or official export credits, or low-interest loans. Competitors' tied aid practices can put U.S. exporters at a competitive disadvantage in bidding on overseas projects. GAO estimates the potential loss of U.S. capital goods exports due to these tied aid practices to be as high as $1.8 billion annually. Although most countries provide tied aid, significant differences exist between U.S. tied aid programs and those of its competitors: most U.S. tied aid is linked to programs meeting basic human needs, such as education, health, and food aid, while other countries' tied aid programs focus on capital projects. Donor countries obtain greater economic benefits from tying aid to capital projects because they usually involve importing large quantities of high-value-added goods. Capital projects also involve follow-on sales in later years. This report discusses (1) the amounts of tied aid provided by the United States and six of its competitors, (2) the types of tied aid programs of each country, (3) the potential impact on U.S. exports of U.S. competitors' tied aid practices, (4) the Organization for Economic Cooperation and Development's 1992 agreement on tied aid, and (5) the Trade Promotion Coordinating Committee's new Tied Aid Capital Projects Fund. GAO summarized this report in testimony before Congress; see: International Trade: Combating U.S. Competitors' Tied Aid Practices, by Allan I. Mendelowitz, Director of International Trade, Finance, and Competitiveness Issues, before the Subcommittee on Economic Policy, Trade, and the Environment, House Committee on Foreign Affairs. GAO/T-GGD-94-156, May 25, 1994 (16 pages).

GAO found that: (1) the amount of tied aid the United States and its competitors have supplied has generally increased; (2) Italy provided the highest percentage of bilateral tied aid; (3) Japan and the United States provided the lowest lowest percentages of tied aid; (4) while the number of tied aid notifications to the Organization for Economic Cooperation (OECD) has decreased, the number of untied aid notifications has increased; (5) France and the United States offered the most tied aid; (6) although U.S. tied aid programs focus mainly on human needs, its competitors' tied aid programs focus on capital projects; (7) capital aid projects are thought to accrue greater economic benefits than human aid projects because capital projects can improve high-value-added trade and follow-on sales in later years; (8) U.S. competitors dedicated between 45 and 91 percent of their tied aid toward capital projects, while the United States provided 17 percent of its tied aid for capital projects; (9) the United States does not have adequate business-government cooperation to facilitate capital projects; (10) estimated U.S. export losses due to competitors' tied aid practices totalled between $500 million and $1.8 billion from 1984 through 1987; (11) the 1992 OECD tied aid agreement is operated by Export-Import Bank funds and tries to minimize trade distortions that arise from tied aid usage; and (12) limitations to the OECD agreement include escape clauses and a lack of enforcement mechanisms.