<DOC>
[109 Senate Hearings]
[From the U.S. Government Printing Office via GPO Access]
[DOCID: f:35432.wais]
S. Hrg. 109 - 895
ECONOMIC IMPACT ISSUES IN
EXPORT-IMPORT BANK REAUTHORIZATION
=======================================================================
HEARINGS
before the
SUBCOMMITTEE ON
INTERNATIONAL TRADE AND FINANCE
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED NINTH CONGRESS
SECOND SESSION
ON
THE REAUTHORIZATION OF THE U.S. EXPORT-IMPORT BANK, FOCUSING ON WAYS TO
IMPROVE THE BANK'S ECONOMIC IMPACT PROCEDURES
__________
MARCH 8 AND MARCH 29, 2006
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
Available at: http: //www.access.gpo.gov /senate /senate05sh.html
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
RICHARD C. SHELBY, Alabama, Chairman
ROBERT F. BENNETT, Utah PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky EVAN BAYH, Indiana
MIKE CRAPO, Idaho ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina DEBBIE STABENOW, Michigan
MEL MARTINEZ, Florida ROBERT MENENDEZ, New Jersey
Kathleen L. Casey, Staff Director and Counsel
Steven B. Harris, Democratic Staff Director and Chief Counsel
Andrew Olmem, Counsel
Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator
George E. Whittle, Editor
______
Subcommittee on International Trade and Finance
MIKE CRAPO, Idaho, Chairman
EVAN BAYH, Indiana, Ranking Member
CHUCK HAGEL, Nebraska TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming ROBERT MENENDEZ, New Jersey
JOHN E. SUNUNU, New Hampshire
ELIZABETH DOLE, North Carolina
Gregg Richard, Staff Director
Catherine Cruz Wojtasik, Minority Staff Director
(ii)
C O N T E N T S
----------
WEDNESDAY, MARCH 8, 2006
Page
Opening statement of Senator Crapo............................... 1
Opening statements, comments, or prepared statements of:
Senator Sarbanes............................................. 8
Senator Enzi................................................. 23
WITNESSES
James H. Lambright, Acting Chairman and President, Export-Import
Bank of the United States...................................... 2
Prepared statement........................................... 23
Gerald F. Rama, Senior Vice President and Deputy Group Head
Global, PNC Bank on behalf of the Bankers' Association for
Finance and Trade.............................................. 12
Prepared statement........................................... 30
James ``Al'' Merritt, President and CEO, MD International, Inc.
Miami, FL...................................................... 14
Prepared statement........................................... 35
John Matthews, Managing Director, Boeing Capital Corporation, on
behalf of the National Association of Manufacturers, the
National Foreign Trade Council, and the Coalition for
Employment Through Exports..................................... 16
Prepared statement........................................... 45
Additional Material Supplied for the Record
Statement of John W. Douglass, President and Chief Executive
Officer, Aerospace Industries Association of America dated
March 20, 2006................................................. 47
----------
WEDNESDAY, MARCH 29, 2006
Opening statement of Senator Crapo............................... 51
Opening statements, comments, or prepared statements of:
Senator Enzi................................................. 75
WITNESSES
James H. Lambright, Acting Chairman and President, Export-Import
Bank of the United States...................................... 52
Prepared statement........................................... 75
Steven R. Appleton, Chairman of the Board, Chief Executive
Officer, and President, Micron Technology, Inc................. 63
Prepared statement........................................... 78
Thomas M. Sneeringer, Director, Federal Governmental Affairs,
United States Steel Corporation on behalf of the American Iron
and Steel Institute............................................ 64
Prepared statement........................................... 81
Additional Material Supplied for the Record
Letter from Barbara Cubin, a U.S. Representative in Congress from
the State of Wyoming, Michael B. Enzi, a U.S. Senator from the
State of Wyoming, and Craig Thomas, a U.S. Senator from the
State of Wyoming to James H. Lambright, Acting Chairman and
President, Export-Import Bank of the United States dated March
20, 2006....................................................... 91
REAUTHORIZATION OF THE EXPORT-IMPORT
BANK OF THE UNITED STATES
----------
WEDNESDAY, MARCH 8, 2006
U.S. Senate,
Subcommittee on International Trade and Finance,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee met at 10:03 a.m., in room 538, Dirksen
Senate Office Building, Senator Mike Crapo (Chairman of the
Subcommittee) presiding.
OPENING STATEMENT OF SENATOR MIKE CRAPO
Senator Crapo. This hearing will come to order. The
Subcommittee on International Trade and Finance meets here
today to discuss the reauthorization of the Export-Import Bank.
The Export-Import Bank is operated under a renewable charter
that expires on September 30, 2006. As the Subcommittee with
jurisdiction over the Ex-Im Bank, this hearing is the first
step in that important reauthorization process.
The Ex-Im Bank was established in 1934 as the official
Export Credit Agency of the United States and it helps the U.S.
companies, small and large, by providing loans, guarantees, and
insurance to finance the sale of U.S. exports.
Last year, Ex-Im Bank supported close to $18 billion in
U.S. export sales and these exports include airplanes,
tractors, medical equipment, and agricultural equipment, to
name just a few.
There are three issues which are important to our
reauthorization process, among others, that I intend to explore
with our witnesses today. One, why has not the Bank met it is
20 percent small business mandate and what steps are necessary
to fix this? Are additional steps necessary? Two, what are the
issues surrounding implementation of the economic impact
procedures? And what can be done to improve that process? And
three, are the principles, process, and standards governing the
use of tied aid credit funds appropriate?
I am sure there are going to be other issues and I do not
want to discourage our panelists from raising issues that they
think we need to address, but those are three that I am aware
of that I am sure that we need to address.
For our first panel today, we welcome James H. Lambright,
the Acting Chairman and President of the Export-Import Bank.
President Bush recently nominated James Lambright to be
Chairman and President of the Import Bank and I cannot think of
a better choice. I am hopeful that we can expedite your
nomination and I am looking forward to getting that process
concluded, as well. James Lambright's experience and expertise
will be a great help to this Bank and to the Committee as we go
forward.
Our second panel today includes Mr. Gerald Rama, Senior
Vice President and Deputy Group Head of Global PNC Bank; Mr. Al
Merritt, the President of MD International, Inc.; and Mr. John
Matthews, the Managing Director of Boeing Capital Corporation.
We welcome all of you here with us today.
I hope that you have all gotten the instructions, and I try
to run kind of a tight ship here, and that is that you are
asked to keep your oral presentation to 5 minutes. There is a
clock in front of you and right up here, as well, that will
turn yellow with one minute left and turn red when your time is
up. And I ask you that you try to keep your remarks to the 5
minutes. It is always tough. I know for me that I cannot
exactly tell when 5 minutes is up. It seems to go faster when I
am talking.
So please keep your eye on that so we can have time for
give and take during our exchange. And if there is something
that you did not get to say that you really wanted to, do not
worry, there will be plenty of questions and discussion really
between us so that you can get your points in.
Why don't we proceed then and we will start out with you,
Mr. Chairman. Please proceed.
STATEMENT OF JAMES H. LAMBRIGHT
ACTING CHAIRMAN AND PRESIDENT,
EXPORT-IMPORT BANK OF THE UNITED STATES
Mr. Lambright. Thank you very much, Mr. Chairman.
I am pleased to be here today to testify on the 2006
reauthorization of the Export-Import Bank of the United States.
The mandate of the Bank, as expressed in our charter is to
create and sustain U.S. jobs by supporting U.S. exports that
otherwise would not go forward, either because of use of
government supported competition or because the private sector
is unwilling or unable to assume that risk. We do this through
loans, guarantees and insurance. That mandate remains at the
core of why the Bank exists and why it should be reauthorized.
We are requesting an extension of this charter for 5 years
to September 30, 2011. We are also requesting that our existing
authority to approve dual-use transactions, as well as the life
of the sub-Saharan African Advisory Committee be extended to
that same date. Except for these changes, we at Ex-Im Bank
believe that the current charter language provides the
institution with sufficient powers and flexibility to meet the
challenges of the next 5 years.
Our charter provides guidance as to how to meet our
mandate. We then must set our course by those beacons, one
representing the aggressive support we provide workers and
exporters, and the other representing responsible stewardship
of taxpayer dollars.
Since our 2000 reauthorization, we have authorized over $47
billion in financing support of an estimated $63 billion in
U.S. exports. Some of those have been big-ticket items, such as
aircraft and power generation equipment, but over 80 percent of
those transactions have been made available to directly support
small business exports.
For fiscal year 2005, every taxpayer dollar invested in the
Bank's program and administrative budget has yielded financing
support of over $50 in exports.
Since I was appointed Acting President and Chairman about 8
months ago, no topic has received more attention at Ex-Im Bank
than small business. We have worked closely with Congress and
small business representatives on a number of changes in this
area, including the claims process, a new division for small
business outreach, small business specialists designated in
each division and expanding our online capabilities.
We have already laid a strong foundation for growing our
small business program. In fiscal year 2005, Ex-Im authorized
47 percent more in dollar volume than in fiscal year 2002 and
21 percent more in terms of transactions.
Another focus of the Bank has been economic impact. Through
the economic impact process, the Bank seeks to determine
whether a transaction under consideration will adversely affect
U.S. production and employment or result in the manufacture of
a good subject to specified trade measures.
In analyzing these cases, Ex-Im Bank must balance the
benefits associated with the U.S. export against the long-range
implications of increased foreign production. In recent years,
economic impact decisions have affected Ex-Im Bank financing
support for many exports, including steel-making equipment,
glassmaking equipment, greenhouses, microchip manufacturing
machinery, soda ash processing equipment and others. The
inescapable responsibility of having to choose the interests of
one set of U.S. workers over another makes these the most
challenging cases the Bank must assess.
In looking to the future, industrialized countries not part
of the OECD such as Brazil, India, and China are emerging as
significant exporters of capital goods. We have to decide what
Ex-Im Bank's response should be as those governments provide
aggressive financing. There is no more fundamental mandate than
leveling the playing field for our exporters and keeping their
jobs here in the United States. I have every confidence that
Ex-Im Bank will continue to serve American workers and preserve
American jobs for years to come.
I look forward, Mr. Chairman, to working with you on this
during the Bank's reauthorization process and I would be happy
to take any questions.
Thank you.
Senator Crapo. Thank you very much, Mr. Lambright.
Let us start out on the small business issue. Basically, I
appreciated your statement that although the Bank is making
progress, there is room for improvement on the small business
front. I also applaud for recently establishing the Ex-Im Small
Business Committee that I understand reports directly to you,
as the President and the Chairman.
Do you feel that more changes are needed? And should
Congress direct the Bank to delegate more medium-term financing
authority to commercial banks and export financial
institutions? I have been told that SBA and OPIC have been
successful in this delegation. And I am just curious as to
whether you feel that we have adequate procedures and processes
in place or whether we need to do something in addition, from
either your perspective or ours here?
Mr. Lambright. In terms of advancing the needs of small
businesses, there is a lot that we have done in the last few
months. Ex-Im Bank is demand driven and our charter directs us
not to compete with the private sector. And so we have never
turned down a small business transaction for budget reasons.
What we are doing right now then is focusing on increasing
awareness within the small business community so that they know
that our programs are available.
You mentioned the Small Business Committee that we also
developed recently to focus explicitly on outreach and
providing more awareness and education in the small business
community. And the Small Business Committee will serve a number
of needs of small businesses. We have designated specialists in
each business unit so that small businesses see familiar faces
when they come to the Bank and they are dealing with people
sensitive to the needs of small businesses.
As you mentioned, the Committee reports directly to me, as
does the new Senior Vice President for Small Business. So there
is a lot that we are doing in terms of future changes. I would
like to see how these changes play out in reaching small
businesses and boosting demand.
You mentioned medium-term delegated authority as a
particular mechanism, and that is something that I would be
happy to explore with you. We do use delegated authority in
other programs, particularly those used by small businesses and
the medium-term program is another place that we can explore
that.
Senator Crapo. I have been noticing, I was looking at the
statistics. The goal is, I guess, the lending mandate is now 20
percent. In the last 3 years, we have hit, if I am reading this
chart right, 19.8, 16.9, and 19.1 percent, respectively, which
means we are getting close. We are in the ballpark.
I did not fail to notice that you indicated that you have
not rejected a small business loan for budget reasons. That
seems to imply to me that Congress has set a pretty accurate
target. You are getting close to it.
If we are not, on a budgetary basis, rejecting loans it may
suggest that we allow you to continue with the processes that
you are using.
Mr. Lambright. I would appreciate the opportunity for the
Bank to continue along that path. The 20 percent measure was
raised from 10 percent in the last rechartering. And while we
since then have always been comfortably above the 10 percent,
we have been stretching and not meeting the 20 percent. As you
note, the number has been knocking around just below 20 percent
in the last few years. And I think that the measures that we
are taking now to increase outreach and improve some of our
systems such as roll out an online application system that will
make it easier for small businesses to work with the Bank. We
hope that it would reach and even exceed 20 percent.
I do not look at 20 percent as the end of the process. I
would like to do as much as we can for small business. But I
also do not think the 20 percent is the only measure against
which to think about the Bank's performance. Since rechartering
in 2002, each fiscal year we have shown a steady improvement in
the amount of dollars that we make available for small
businesses, as well as the number of transactions that serve
small business. So each year we are doing more for small
business and I would like to continue doing that.
Senator Crapo. Thank you very much.
I appreciate your focus on this, and we will look forward
to watching how it proceeds and working with you on it.
Let us move to the economic impact process. The last
reauthorization changed the economic impact procedures to
include the effect of outstanding trade orders, preliminary
injury determinations, and Section 201 investigations before
determining the Bank's financing of exports. This was an
attempt to ensure that the Bank support for transactions not
only helps U.S. exporters but also does not negatively impact
domestic companies.
The current system still has problems and tensions between
the companies on both sides of the issue. It is my intention to
hold a future hearing on this specific topic. But although the
vast majority of loan guarantees before the Bank should not be
slowed down, some of the larger and more controversial loan
guarantees do need to be better vetted, in my opinion.
Otherwise groups that believe they will be harmed by the loan
guarantee start coming to Congress and asking us for
intervention. We certainly would rather have you keep it all on
your plate if we possibly can.
To me a better approach than having it work that way would
be to establish a system or a process which is fair and
perceived to be fair by everybody, so that the facts are all
well-presented to the board and they can act accordingly.
I guess my first question is do you think that there are
changes that are necessary or could be helpful in accomplishing
that?
Mr. Lambright. Senator, I think your description is fair
that these cases are a challenge for the Bank to resolve
because they pit the interests of one set of workers against
another. They do generate a lot of interest from those who see
the benefits of the immediate export and from those who see the
potential longer-term implications to U.S. producers of the
same commodity. And that is a balance that we have to struggle
with.
We do have a rigorous analytical process. I think that
sometimes cases come to Congress's attention because this
process can take a long time. It is not particularly
predictable from the outset what the outcome will be because it
weighs a variety of factors, it involves a lot of analysis and
input from interested parties. We have a public notice and
comment period which allows people to give us their viewpoints
on the proper elements to be balancing.
But I do think that where we could improve it would be to
make it more predictable and transparent.
Senator Crapo. I am not going to hold you to this but
explain a little bit more about the transparency and
predictability, how we could change to improve that.
Mr. Lambright. We have a process that lays out a number of
steps and asks questions that the Bank must determine before we
can proceed with a transaction that implicates these
procedures.
And I guess the reason that it is not as transparent or
predictable from the outset is it involves compiling a lot of
information about our domestic industry but also about the
industry of the borrower who would be increasing this
production of a commodity. So that can take a long time to
generate that information and digest it and come up with the
answers to the questions laid out in our charter.
I think that is one way we might be able to make it more
predictable or transparent is to try to involve interested
stakeholders more quickly in the process. What we have been
trying to do is, through our homework, develop answers to these
questions and then put them out for comment.
I think that is an appropriate way to come to the right
outcome, but it is not necessarily the best way to let
interested parties know the likely outcome. So if we let people
come into the process earlier, that may be a way for us to get
all the issues on the table up front so that people see what is
at stake and can react accordingly.
Senator Crapo. Thank you.
In your opinion what are the most contentious aspects of
the economic impact procedures?
Mr. Lambright. There are a number of steps in the process,
from determining what is an exportable good to whether an item
is substantially the same as one that is subject to a trade
measure, asking then if the foreign production will lead to
substantial injury in the domestic market? Will the commodity
be in oversupply at the time the project comes on stream? Will
the foreign producer produce enough of the commodity to
displace American production?
With each step there are questions that need to be answered
and interested parties can weigh in on either side of any of
those questions.
Before getting you a more specific answer, and before we
would take a position on any of these issues, we would want to
work with you, your staff, and the rest of the Committee and
exporters, labor groups, and industry representatives as to
where they think perhaps there could be different
interpretations of some of these provisions.
Senator Crapo. Thank you. As a part of the economic
analysis, do you think that adequate focus is been made on a
foreign country providing subsidies or imposing some other kind
of trade distorting practice or barrier that could have a
negative impact on U.S. producers?
Mr. Lambright. We try to account for a wide variety of
elements that will end up increasing the displacement of
American production and consequently put American workers in
that industry at risk here in the United States. That is
something that we would look at.
Senator Crapo. Thank you very much. Let us go on to the
tied aid issue. I expect that, in fact, is already included in
the written testimony of some on the second panel.
There is a concern, and I am going to be kind of
paraphrasing or quoting here, that although the Bank's 2005
Report to Congress expressed the view that the OECD tied aid
rules have been a great success in reducing the level and
distorting influence of tied aid, there is a general perception
among American bankers and exporters that the use by other
countries of tied aid and implicitly tied aid is growing.
Are there principles, processes, and standards governing
the use of tied aid, of the tied aid credit fund, appropriate
use? And are they giving us an accurate picture?
Mr. Lambright. If you think about the U.S. Government's
efforts in this area over the last 15 years, there has been a
dramatic success in reducing the amount of trade distorting
tied aid that is seen globally through international
negotiations, to the use of tied aid funds. So the tied aid
funds that the Ex-Im Bank have are not meant to be a tool to be
used with great frequency. They are used to be a credible
deterrent against the use of tied aid by foreign governments
and should be used selectively.
As a result, the policy parameters surrounding the Ex-Im
Bank make for a very small strike zone in proving what cases
make the use of the war chest appropriate. And so while we
still do hear of other governments, we see other governments
doing this, we have pursued those cases on the transaction
level but also at the international negotiation level.
Senator Crapo. It is my understanding that no tied aid
deals have been approved since the last reauthorization. Can
you explain to me why?
Mr. Lambright. You are correct that since the last
reauthorization the Bank has had no approved transactions. We
have had about 20 requests that we have pursued and there are a
variety of reasons no approvals came to be.
As I mentioned, there are a lot of policy elements that
need to be proven. In some cases exporters decided to devote
their energies elsewhere. In others, exporters have withdrawn
for fear of the backlash from the buyer. Others, the market may
have been too rich or too poor to necessitate the use of the
funds. And some have had transactional elements fail, such as
credit or environmental reasons. But it has been a wide variety
of reasons.
Senator Crapo. Thank you.
I have one more question, and that is according to the Ex-
Im Bank's 2004 Competitiveness Report the status goal of
official export credits is being challenged by the emergence of
an alternative ECA world, particularly the recent rapid growth
in the activity of Chinese, Brazilian, and Indian Export Credit
Agencies.
To what degree is the Ex-Im already seeing the impacts of
emergence of these ECA's and demand for its own financing of
U.S. exports?
Mr. Lambright. We are starting to see aggressive government
financing more and more, though Ex-Im Bank has not yet been
asked to match one of these aggressive financings. The Chinese,
in particular, have been using aggressive government financing
for commercial reasons, especially to lock in long-term market
share.
So this is something that we expect to see more and more
of. And our charter gives us not just the authority but the
responsibility to level that playing field for exporters. But
the Ex-Im Bank cannot act in a vacuum.
As part of the Executive Branch, I have to be cognizant of
other considerations, broader legitimate policy concerns within
the U.S. Government. And so I think this is an issue that we in
the Government will be facing during the whole course of this
new charter reauthorization.
Senator Crapo. Thank you very much. That is all the
questions I have.
Senator Sarbanes is here.
Senator Sarbanes, if you would like to make an opening
statement and ask questions, you are welcome to do so.
STATEMENT OF SENATOR PAUL S. SARBANES
Senator Sarbanes. Thank you very much, Mr. Chairman. I
would like to do that.
I am not going to be able to stay for the hearing and I
apologize to these witnesses and I assure them that we will
carefully review their testimony.
Mr. Chairman, I want to thank you as the Chair of the
Subcommittee, and Senator Bayh who is the Ranking Member, for
arranging for this hearing, and also for a second hearing which
I understand has been scheduled for later in the month
concerning the reauthorization of the Export-Import Bank.
The Bank's charter expires on September 30 of this year.
And I think it is very important for this Committee to follow a
schedule that will permit Congress to finish the
reauthorization process by that date, actually even earlier
would be better.
I strongly support reauthorization of the Ex-Im Bank, as I
have in the past. I have been very much involved in the
previous reauthorizations. U.S. exporters can compete very
effectively on the basis of price and quality, but they
encounter a competitive disadvantage when foreign governments
provide subsidies to their country's exporters that more than
balance where our companies find themselves.
The work of the Export-Import Bank also provides leverage
to U.S. negotiators attempting to extend international
agreements to limit the use of government export subsidies. If
everyone limited them, we would have a different situation, but
that is not the world in which we find ourselves. And I think
we have to deal with the real world.
There is another important reason to support the Ex-Im
Bank. Some developing economies can pose credit risks from
which commercial banks shy away, even when the transactions may
represent significant opportunities for U.S. exporters. By
evaluating the country risk involved, the Export-Import Bank
can provide a guarantee for commercial export loans, opening
the way for an export transaction that would otherwise not
occur.
The Bank has handled the risks associated with its
activities quite well. Its losses are more no more than 2
percent of its disbursements over its 72 year life. The fees it
charges for its financing services have brought hundreds of
millions of dollars into the Federal Government which have been
returned to the Treasury.
Obviously, our approach to the Ex-Im Bank should reflect
whatever progress has been made in controlling the growth of
exporter credits offered by a national government, but it
appears that overall funding for the Export Credit Agencies of
other governments have not declined and may, in fact, have been
growing although different accounting and funding methods
sometimes make comparisons difficult.
In addition, foreign governments may continue to use market
window and untied aid arrangements to avoid the OECD
limitations on tied aid.
In light of the size of our trade deficit and the
continuing challenges to our trade competitiveness, I was
disappointed by the Administration's proposal to substantially
reduce funding for Ex-Im Bank. But we are told that in the
short-term the Bank will be able to maintain its programs at
current levels because it will have available carryover funds
and funds freed up when anticipated transactions are not
completed. But obviously the Bank is being put right at the
margin, at the edge, and I am concerned about a possible
downward trend in the Bank's funding. I do not think we are a
point in international trading arrangements where a reduction
in Ex-Im Bank funding is prudent.
This is especially true if we want the Bank to extend the
reach of its operations for support of exports by smaller U.S.
business and exports to developing countries.
Mr. Chairman, I want to share one other concern that I
have, and that is that the Treasury Department may be taking an
unduly intrusive role in the Ex-Im Bank's use of the tied aid
war chest. I am going to ask about this, but it appears that
there have not been any transactions from the war chest
authorized over the past 4 years.
Now, the Treasury has the legal responsibility to negotiate
arrangements in the OECD to limit tied aid export credits, and
that is an important objective. But one of the objectives of
the Congress in the 2002 reauthorization was to limit the
Treasury's role in the Bank to the formulation, along with the
Bank, of general guidelines for tied aid transactions. Case-by-
case decisions about tied aid were to be left to the Bank,
subject to rejection by the President. This is a complex
subject, but I think we need to explore it in the course of
these hearings.
I said back then, when we did the reauthorization, and I
want to repeat it, the tied aid credit war chest is a very
important resource to meet the challenge posed by foreign
export credits and its use should not be hampered by
disagreements among Executive Branch agencies.
Mr. Lambright, let me ask you, how many transactions have
been financed with funds from the war chest since September
2002?
Mr. Lambright. None.
Senator Sarbanes. None? How do you explain that no war
chest transactions have been authorized?
Mr. Lambright. Given the U.S. Government's success over the
last 15 years to reduce the amount of tied aid use globally, we
now have a war chest that is a tool to be a deterrent but not
to be used with great frequency. And as a result, the policy
parameters surrounding when it would be appropriate----
Senator Sarbanes. But does it continue to be a deterrent if
you use it with no frequency?
Mr. Lambright. That is a good question, Senator, but the
global use of tied aid has come down. And so on any particular
case that we assess we need to make sure that it meets all of
the transactional and policy elements. And the cases that we
have seen we have pursued, but they have dropped away for a
variety of reasons, leaving us with no approved transactions,
as you noted.
Senator Sarbanes. When does the Treasury become involved in
any transactions in this case-by-case examination?
Mr. Lambright. The charter does give Treasury a
consultative role in the process and they weigh in early in the
process to assess the proper course of action. Sometimes the
decision might be to pursue remedies in the OECD. Other times
it might be to develop information on a case to decide whether
or not Ex-Im war chest funds would be appropriate to use.
Senator Sarbanes. Have there been instances in which Ex-Im
thought that using the war chest was reasonable but it was
blocked by Treasury?
Mr. Lambright. I would not say that we put forward a formal
proposal to use it and it was blocked. The way it works in
practice is, as we develop a file on a case to answer all of
the transactional and policy elements sometimes the cases just
do not come to fruition. Even if at the beginning we would have
thought that it did meet the criteria, sometimes exporters just
do not stick it out with us through the whole process.
And so while there may have been cases that would have fit
the criteria, we never had any that went all of the way to
winning an American contract.
Senator Sarbanes. I mean, you are saying we have the OECD
limitations and people are adhering to those. But it is my
understanding that countries are developing all sorts of end
runs around these limitations. Is that correct?
Mr. Lambright. We certainly have heard of cases where there
have been rule violations or new types of government financing
that we have to deal with. Where there have been clear
violations is where I think the procedures have worked best.
We did have one case where there was a violation. Ex-Im
Bank did make its war chest funds available but ultimately the
exporter did not win the contract.
Senator Sarbanes. What can you do to get a better handle in
terms of knowledge and information about these alternative ways
of financing that competitor countries are using?
Mr. Lambright. Just next week, I am hosting my G-7 Export
Credit Agency head counterparts where this will be a major
focus of discussion. In our preliminary conversations with
them, I think what we are seeing is more and more use of these,
particularly by the Chinese. So we are going to be spending a
great deal of time next week exploring the details of those
kinds of financings and how traditional Export Credit Agencies
can respond.
Senator Sarbanes. I have to say to you, and I will close
this line of questioning, it does not seem to me that the Bank
is standing shoulder-to-shoulder with our exporters the way it
should be doing in terms of the competition. If it is a level
playing field out there, than it is up to the exporter to
compete on price and quality. If that is the basis of it, I
think our people can do quite well. And if they can do quite
well then we need to examine why we are falling short.
But it is my understanding that other countries are
figuring out all kinds of ways to provide support to their
exporters and that our people take it on the chin as a
consequence.
Mr. Lambright. Senator, I agree with you 100 percent on the
competitiveness of the U.S. exporter. In terms of U.S. Ex-Im
Bank with respect other Export Credit Agencies you are right,
there has been some divergence in the flexibilities that
various Export Credit Agencies hold.
Certainly in Europe, many of the Export Credit Agencies
have been given greater flexibilities to operate effectively
off budget and that has freed them up to find a number of new
tools to compete with the emergence of new forms of government
finance.
The U.S. Ex-Im Bank is a very traditional Export Credit
Agency by our charter. We are focused on the U.S. jobs
associated with exports and so our policies reflect that focus.
But I can tell you that I personally come to work every day
thinking about how to help U.S. exporters and keep jobs here in
the United States.
And if I see any way that the U.S. Ex-Im Bank can stand up
on behalf of exporters, I will do that.
Senator Sarbanes. You keep referencing Europe but my
understanding is that China, Brazil, India are all engaged in
these activities as well. Is that correct?
Mr. Lambright. You are absolutely right and they are
outside of the OECD and not constrained by the rules that we
operate by. What I was suggesting is that some of the European
ECA's are developing flexibility to try to compete with those
emerging Export Credit Agencies.
Senator Sarbanes. I know the Chairman asked about this or
has expressed an interest in it. And that is what can the Bank
do to strengthen its small business program? Is there a small
business division within the Bank?
Mr. Lambright. Just in the last few months, we have taken a
number of steps to further our small business outreach. We now
have a new small business unit headed by a Senior Vice
President that has about a tenth of our staff focused
exclusively on outreach to small businesses and advocacy within
the Bank for small businesses. There are a number of other
steps that we have taken to improve our technology, to
designate specialists within each Bank division, who will be
experts on small business.
So there is a lot we are doing but we strive every day to
do more and more for small businesses that need our help to
export.
Senator Sarbanes. Is the position of Executive Vice
President and Chief Operating Officer, do you continue to hold
those positions and Acting President as well?
Mr. Lambright. Technically, in the paperwork, I suppose my
title was changed to Acting President but those positions are
not filled.
Senator Sarbanes. Not filled?
Mr. Lambright. Right.
Senator Sarbanes. Is it the assumption that you will return
to them because there has now been a nomination for President
of the Ex-Im Bank; is that right?
Mr. Lambright. Right, and----
Senator Sarbanes. Okay, I am sorry. I was misinformed. You
are waiting.
Mr. Lambright. I am currently the Acting President of the
Bank, as well as, just a few weeks ago, have been nominated to
the position and I await Senate confirmation.
Senator Sarbanes. I assume those positions will not be
filled until the Senate acts on your nomination; is that
correct?
Mr. Lambright. That is most likely, yes, sir.
Senator Sarbanes. Okay. Thank you very much.
Thank you, Mr. Lambright.
Mr. Lambright. Thank you, Senator.
Senator Crapo. Again, thank you, Mr. Lambright.
We appreciate your attention to these issues and coming
before us today.
That will conclude our first panel. You are excused, Mr.
Lambright. We appreciate your attendance.
Mr. Lambright. Thank you, Mr. Chairman.
Senator Crapo. I will call up the next panel and while they
are coming up let me introduce them.
The next panel, as I indicated at the outset, is made up of
Mr. Gerald Rama, who is the Senior Vice President and Deputy
Group Head of Global at PNC Bank; Mr. Al Merritt, President of
MD International, Inc.; and Mr. John Matthews, the Managing
Director of Boeing Capital Corporation.
Gentlemen, if you will please these take your seats at the
appropriate part of the table as designated, and Mr. Rama, we
will begin with you.
I would like to remind all of our witnesses that we want to
have you--by the way, I wanted to say you provided very
excellent written testimony. You are not going to be able to
say it all in 5 minutes but I encourage you to remember to
watch the clock and then we will get into some good discussion.
Mr. Rama, you may proceed.
STATEMENT OF GERALD F. RAMA
SENIOR VICE PRESIDENT AND
DEPUTY GROUP HEAD GLOBAL, PNC BANK
ON BEHALF OF
THE BANKERS' ASSOCIATION FOR FINANCE AND TRADE
Mr. Rama. I am pleased to be here today to express the
banking industry's view on the reauthorization of the U.S. Ex-
Im Bank, particularly since I have had the opportunity of work
consistently with the Ex-Im Bank over the last 32 years. The
agency and staff, in my mind, are some of the most committed
and hard-working public servants.
The credit support Ex-Im provides is a vital and integral
component in the competitiveness of American products in the
international market. Its reauthorization is designed to keep
American products competitive in the global marketplace.
My written statement includes comments on a variety of
topics. This morning I will focus on the two topics I believe
are the most important, economic impact and domestic content.
The Export-Import Bank is required to consider the extent
to which transactions are likely to have an adverse effect on
industries and employment in the United States. Though the
rationale for this requirement is understandable I am unaware
of another ECA that is subject to a similar requirement. In
most cases, the domestic harm that might result from a
transaction will occur whether or not the U.S. exporter seeking
Ex-Im support makes the sale. If the U.S. exporter does not
make the sale, one of its competitors from another country
will.
In evaluating economic impact however, Ex-Im staff does not
consider the availability of goods from foreign sources. We
strongly feel that the Bank should take into account whether a
project will go forward, particularly since we may be limiting
an exporters ability to be considered a consistent and
righteous provider in future sales and in this sale.
We appreciate the mission of the Export-Import Bank and the
U.S. jobs created through exports. We feel that the Bank has
adopted an overly restrictive policy of only providing credit
support for the value of the U.S. content and capital goods
term sales. The Bank limits its involvement in the transactions
for the lesser of 85 percent of the value of eligible goods and
services and 100 percent of the U.S. content in those goods and
services. If the U.S. export consists of 50 percent U.S.-made
components and 50 percent non-U.S. made, the Bank support is
limited to 50 percent of the contract price. This is
problematic because as the complexity increases in the
manufacturing processes and the sourcing of components it is
more difficult to track the levels of sources of non-U.S.
content.
This is particularly true for small businesses who lack the
resources to do such research. Requiring strict proportionality
results in fewer U.S. exports than could otherwise be achieved.
Other countries have concluded that strict porportionality
and less strict accounting for content is not required. For
example, Japan's ECA does not reduce its support of
transactions that have at least 30 percent Japanese content and
Canada decides its level of support on a case-by-case basis.
Italy's ECA announced in 2004 that it would shift its standard
from made in Italy to made by Italy. And Ex-Im reported that
other countries are moving to this approach as well.
Ex-Im should adopt a case-by-case approach that balances
the costs and benefits of individual transactions rather than
adhering to a strict formula that requires precise tracking of
U.S. content and we urge Congress to express its support for
that approach as well.
The Export-Import Bank, I am saying this again, plays a key
role in helping U.S. businesses of all sizes compete in markets
around the world. Ex-Im has recently been critiqued as being
too slow and overly conservative. Within the constraints of its
budget and resources we feel that Ex-Im Bank and its current
management is doing a good job, particularly as the staff has
lost experienced personnel through attrition. But improvements
can always be made.
We believe the Bank is hampered by having too few people
and too many requirements imposed on it by Congress and by the
Government requiring seasoned staff to do that work that do not
relate to its primary mission. We urge Congress to provide the
Bank with significant additional resources in its
administrative budget and to act on our recommendation to
reduce the Bank's administrative burdens.
We look forward to continuing to work with Members of
Congress and with the Bank to maximize its effectiveness in
promoting American exports.
Thank you.
Senator Crapo. Thank you very much, Mr. Rama.
Mr. Merritt.
STATEMENT OF JAMES ``AL'' MERRITT
PRESIDENT AND CEO,
MD INTERNATIONAL, INC., MIAMI, FLORIDA
Mr. Merritt. Thank you, Chairman Crapo and Senator Bayh and
Members of the Subcommittee. Thank you for asking me to appear
here today. This is a thrill for a small business owner from
Miami to come up here to Washington and be in this fancy room.
So thank you.
Senator Crapo. We welcome you here.
Mr. Merritt. I am Al Merritt, President, Owner, and Founder
of MD International, a small business based in Miami, Florida.
We export medical equipment and services, primarily to Latin
America.
MD International has used Ex-Im Bank financing on numerous
occasions during our 19-year history. In 2003, we had the honor
of being named Ex-Im Small Business Exporter of the Year, which
was very thrilling with a ceremony here in Washington, DC.
We are proud of the relationship we have had with Ex-Im and
we look forward to working with them in the future.
I also appear here as a board member of the Small Business
Exporters Association of the United States. SBEA is the
Nation's oldest and largest nonprofit association of small and
mid-sized companies.
We had a meeting in Miami in my offices 2 weeks ago and
people flew in from around the country from our association to
prepare for this and discuss the issues, so I am truly speaking
for the association as well as my own company.
SBEA represents the more than 22,000 companies of the NSBA
that export. The NSBA is the National Small Business
Association that has 22,000 members in the United States.
As in prior years, SBEA and NSBA strongly support the 2000
reauthorization of the Ex-Im Bank by Congress. We are
optimistic about Ex-Im's future under the leadership of Jim
Lambright and we appreciate the open and honest dialogue that
we have had with him thus far and the other Ex-Im Bank board
members and the Ex-Im Bank senior management.
A strong Ex-Im Bank is very much in the interest of smaller
companies and the Nation as a whole. Ex-Im is not simply the
bank of last resort but for many small exporting companies it
is the bank of only resort.
Yet while we honor Ex-Im Bank for financing billions of
dollars in export sales by smaller companies, we also want to
offer some recommendations for improving the Bank's performance
in a rapidly growing globalizing and competitive world.
This subject is treated extensively in my written
testimony, which I will simply summarize.
First, we backed the mandate enacted by Congress in 2002
that Ex-Im devote 20 percent of its financing dollars strictly
to small business. The 20 percent mandate remains a reliable
indicator of the Bank's focus on small business and the
effectiveness of its efforts.
The Bank exceeded this mark several times in the 1990's and
it reached 19 percent or better several times since. The fact
that the Bank has fallen below the mandate since 2002 is no
reason to change this measurement.
SBEA believes that the Bank can achieve the 20 percent
mandate consistently if it organizes its efforts under a small
and medium-size enterprise division comparable to the highly
successful ones at the Overseas Private Investment Corporation
and the Canadian Export Credit Agency. Ex-Im needs permanence
and stability in its SME operation.
By our count, Ex-Im has had 15 major changes in the
structure, leadership, and responsibilities of its small
business operations just in the past 10 years. Ten of those
changes have occurred since the last reauthorization. I think
that is a key point.
At various points since 2002, a Group Vice President, a
Senior Vice President, a Vice President, and an Office Director
have headed the Bank's small business organization.
At times since 2002, the operation has reported directly to
the Bank President, at times to lower middle management figures
and at times there has been no small business office at all.
During periods when the Bank has had a designated small
business operation its responsibilities have fluctuated
considerably, as has its authority to make decisions about
transactions. Normally, we prefer to let Ex-Im Bank handle
small business on its own and we certainly commend Chairman
Lambright and the Bank's management staff for the effort that
went into the recent Small Business Committee proposal. But on
this point the Bank needs some additional Congressional
guidance, in our opinion.
The commercial banking community, exporters, and the Bank
staff need to know that the small business operation is
permanent and stable. They need transparency and a sustained
focus. Congress needs clear accountability. We recommend that
Congress create a small and medium-sized enterprise division at
Ex-Im Bank. We recommend that the division handle all of Ex-Im
small business financing and credit decisions, that it have
full-time staff including underwriters dedicated exclusively to
small business transactions and that the head of the division
report directly to the Ex-Im Bank board.
A similar structure has helped OPIC go from $10 million in
small business financing in 2001 to $347 million in 2005. It
lifted Canada's Export Credit Agency from dealing with less
than 500 SME's to dealing with 7,000, one-fifth of Canada's
exporting companies. Ex-Im deals with about 1 percent of the
SME exporters in this country.
We suggested two ways that Ex-Im can use this proposed SME
division to increase U.S. exports. First, it can focus on the
60 percent of SME exporters who are only shipping to one
country and encourage them to ship to two or three. The
Commerce Department can help Ex-Im with this.
Second, Congress can direct Ex-Im to begin delegating
authority for medium-term transactions to commercial banks and
export finance institutions. Medium-term financing covers
periods of 6 months to 7 years. It is what buyers of U.S.
manufactured capital equipment want. Those capital equipment
exports offer the quickest payoffs in high-paying jobs at home,
trade deficit reduction, and benefitting for U.S.
manufacturing.
Yet, while SBA delegates authority for its small export
finance transactions and OPIC is delegating authority for its
larger transactions, and even Ex-Im itself delegates authority
for other transactions, the Bank still does all of the nuts and
bolts work for medium-term transactions at its headquarters.
One consequence is that medium-term transactions take
inordinate amounts of time, sometimes more than a year. The
slow paperwork, heavy process is costing our country important
export sales.
Giving commercial banks more authority to move these
transactions along subject to final Ex-Im approval would be
enormous benefit to exporting companies of all sizes.
That concludes my remarks and I would be happy to take any
questions.
Senator Crapo. Thank you very much, Mr. Merritt.
Mr. Matthews.
STATEMENT OF JOHN MATTHEWS
MANAGING DIRECTOR, BOEING CAPITAL CORPORATION
ON BEHALF OF
THE NATIONAL ASSOCIATION OF MANUFACTURERS,
THE NATIONAL FOREIGN TRADE COUNCIL, AND
THE COALITION FOR EMPLOYMENT THROUGH EXPORTS
Mr. Matthews. Mr. Chairman and Members of the Subcommittee,
I am John Matthews, Managing Director of Boeing Capital
Corporation, the financing arm of the Boeing Company.
We at Boeing and the other members of NAM, NFTC, and CEE
strongly support the reauthorization of Ex-Im Bank. Each year,
Ex-Im Bank supports some 3,000 overseas sales of American-made
goods and American-provided services. During fiscal year 2005,
Ex-Im issued $13.9 billion in financing, mostly guarantees and
insurance of commercial loans. That financing supported $17.8
billion in U.S. exports. Those export sales, in turn, supported
thousands of jobs for American workers.
Most of these transactions are sales by small and medium-
sized companies. But even for large corporations like Boeing,
Ex-Im Bank plays an essential role not only for our 50,000
commercial aircraft employees but also for our 26,000 U.S.
suppliers and vendors throughout all 50 States.
In 2005, the Boeing Company purchased approximately $5
billion from more than 11,500 small business suppliers in the
United States. Of that total our commercial unit, Boeing
Commercial Airplanes, paid $1.4 billion to over 2,900 American
small businesses.
Today, I would like to focus on three key points. One,
financing is the key element of global competition. Two, Export
Credit Agencies are growing around the world. And three, Ex-Im
Bank is financially sound.
First, financing. Traditionally, companies competed on
product quality, price, and service. In today's world,
financing is an increasingly important competitive element. Ex-
Im Bank has two central missions: To level the playing field
first when U.S. exporters are confronted with competitors that
have ECA financing; and second, when commercial banking is not
available. Each year, 70 percent of all Boeing's commercial
aircraft sales are to overseas customers. Historically, 30
percent of these Boeing exports have relied upon Ex-Im to
provide loan guarantees. In fiscal year 2005 alone, Ex-Im
authorized financing to support the export of 78 Boeing
commercial aircraft to 19 airlines located in 18 different
countries around the globe, including nations in Africa and
Latin America. This represented 33 percent of all of our
exports for that year.
Second, Export Credit Agencies. Virtually all trading
nations operate Export Credit Agencies. The most recent data
show that ECA financing is increasing worldwide. Last October,
the International Union of Credit and Investment Insurers, the
Berne Union, reported that its 52 member ECA's executed a total
of $788 billion in financing during 2004, the highest total
ever measured.
That total approaches 10 percent of global trade flows in
that year. Even more telling, the 2004 total marked a 60
percent increase over the 2001 level of $470 billion. While the
structure of ECA's varies from country to country, virtually
all operate in close corporation with their national government
and most operate with government financial support of some
type.
Faced with that financial backing for its foreign
competitor, no U.S. company, no matter how large, can compete
on its own. When foreign ECA support is present, we must have
the backing of Ex-Im Bank.
Third, Ex-Im Bank is financially sound. At the end of
fiscal year 2004, the most recent public data, Ex-Im Bank had a
total exposure of $61.1 billion. Against that exposure the Bank
had $9.6 billion in reserves, a very strong reserve position.
Exporters and our overseas customers pay fees for Ex-Im's
participation in overseas sales, which in the last several
years have covered the Government's costs of operating the
Bank.
Ex-Im charges interest on its direct loans and premiums for
its guarantees and insurance. Ex-Im does not subsidize interest
rates. In financial terms, Ex-Im's commercial role is in
mitigating risk, especially in markets where commercial
financing is not available.
Specifically in aircraft transactions, Ex-Im generally does
not provide direct loans. Rather, Ex-Im guarantees that if the
airline customer defaults on the loan, Ex-Im will assume the
financial liability. These guarantees make it possible for
certain foreign airlines, especially in developing countries,
to secure commercial bank loans they might otherwise not
qualify for at those commercial banks. Ex-Im has not incurred
any losses on its commercial airplane guarantees over the past
15 years. This is a real testament to the continuing effective
due diligence performed by the Bank before it provides
guarantees to foreign airlines.
According to the Bank's Annual Report, Ex-Im generated a
net income of $2 billion during fiscal year 2004 through its
interest charges, premiums, and fees. Unfortunately, under the
Credit Reform Act of 1990, the Bank cannot utilize its own
revenues to cover its costs. Instead, the Bank must obtain
annual appropriations for both its operating expenses and its
loan loss reserves. As a result, the Bank is handicapped by the
Government's own budget rules.
In conclusion, Mr. Chairman, I want to thank you for the
opportunity to testify today. The Bank is indispensable to
Boeing and has been innovative and reliable in times of crisis,
such as the financial markets' retrenchment in the aftermath of
September 11. It is critical to our ability to compete against
a subsidized competitor while sustaining high-paying U.S. jobs.
We commend this Committee for its timely consideration of
Ex-Im Bank's reauthorization, and we urge that the Committee
act expeditiously to report the reauthorization bill to the
Senate so that Congress can complete the legislative process
prior to the September 30 expiration of the Bank's charter.
I would be happy to answer any questions.
Senator Crapo. Thank you very much, Mr. Matthews. And again
to each of you, I thank you for not only your testimony here
today but also the written testimony that you have provided,
which has gone into a number of issues in more detail that you
have been able to do in your comments and it will be very
helpful to us.
I want to just start out with you, Mr. Rama. I was
interested in both your discussion of the economic impact and
the domestic content issues. Starting out with domestic
content, could you review with me again just what the U.S. rule
is, what is required?
Mr. Rama. We will only support on term capital goods,
capital goods sales, medium-term not short-term up to the U.S.
content with the foreign content being no more than 85 percent.
So that if you have a $100 million sale, $60 million of which
is U.S. made, $40 million is non-U.S. made, Ex-Im will only
support the $60 million level.
The second problem with the U.S. content is you have many
small businesses that do not know what the sources of their
primary material are and are unable to complete the forms
necessary to access Ex-Im Bank. There is a major supplier in
the Pennsylvania area of rebuilt carburetors employing
thousands of people, selling both domestically and
internationally, that cannot tell you where the original
carburetor came from or where the original auto part came from
and cannot access to Ex-Im.
Senator Crapo. I was interested in, was it Japan or Italy
that was changing----
Mr. Rama. All of the above.
Senator Crapo. They are doing made by as opposed to made
in.
Mr. Rama. That is correct.
Senator Crapo. The notion there is that if the manufacture
takes place there that they are not focusing so much on where
the individual parts came from.
Mr. Rama. We stand, as a bank, PNC--and I am representing
BAFT, but I can speak specifically for PNC. We were the most
active in the number of transactions in medium-term
transactions with Ex-Im last year. We devote inordinate amounts
of time working with exporters and with Ex-Im trying to figure
out whether the goods qualify. Sometimes they simply do not and
it is a lost sale and a lost financing.
Senator Crapo. What is the source of the U.S. domestic
content rule? Is that in statute?
I see someone behind you shaking their head yes.
So basically, the Ex-Im Bank is operating under a statutory
requirement that they deal with these----
Mr. Rama. I think the reality of the global marketplace,
that particular issue, people simply do not know where their
primary products when they are manufacturing is coming from.
And they are being asked to make an attestation and oftentimes
they simply cannot. The bigger companies can because they have
the research, et cetera. The small companies simply cannot. And
sales are lost and opportunities are lost, in our mind.
Senator Crapo. I suppose that one of your recommendations
would be regardless of whether this is a statutory requirement
or not, we should probably address the question as we deal with
reauthorization?
Mr. Rama. Yes, sir.
Senator Crapo. Thank you very much.
Let us move to your discussion of economic impact, as well.
You indicated in your testimony that your concern with it was
that even in those cases--and let me get to it--where if a U.S.
exporter does not make the sale, one of its competitors from
another country will.
Mr. Rama. That is correct, sir. That is our opinion.
Senator Crapo. I underlined your, as I was reading it, the
notion that the competitor from another country will. How does
the Ex-Im Bank make that determination with confidence, that
another competitor from another country will be the one that
steps in and makes that sale?
Mr. Rama. In my mind, there is a partnership with Ex-Im
Bank and it is a tripartite partnership with the importer, the
exporter, and oftentimes the Bank. When the importer is saying
I can buy this product elsewhere and they are showing you a
quote, I think that answers the question.
Certainly, I am not doing major financing in my own bank,
but we have been involved with issues involving economic
impact. And when we lost that sale, when the U.S. company lost
the sale, the project was made anyway.
In talking at--I am a member of BAFT, which is part of the
ABA--our last Trade Finance Committee meeting it was generally
stated that no one could say one project that was not done by
Ex-Im because of economic impact that was not done anyway with
sourcing from other places.
It becomes also problematic when that supplier is further
deemed to be unreliable in the global marketplace because the
importers do not know whether Ex-Im will support them.
Senator Crapo. I understand the points you are making and I
also see the potential problem if the United States began
subsidizing or supporting transactions that truly are
competitive with the U.S. producer, if there is a U.S. producer
who could fill that order. And it seems to me that that is an
issue we want to address because, as you indicate, if in fact
the transaction will take place with a non-U.S. producer no
matter what, that is pretty relevant. But on the other hand if,
in fact, a U.S. producer has the most likely opportunity to
pick up a transaction if we do not finance it from some other
source, that should be a very relevant factor in the Ex-Im Bank
deliberations.
And so somehow we have to get to a median level here where
we are analyzing the right things and making the determinations
on the right basis. I understand your point.
Mr. Rama. And I agree, sir, the question is particularly
difficult. But again I think the research will prove, at least
from the banker's perspective, that the deals are getting done.
However the resolution occurs, I do not have an answer. I am
simply raising the point.
Senator Crapo. Thank you very much.
Mr. Merritt, I would like to turn to for a moment. You are
a very strong and eloquent advocate for the small business
mandate. There are some who say that the calculation of how we
hit the 20 percent is not been made or does not take into
consideration the small business benefits from a lot of other
transactions that are considered to be large transactions and
so forth.
To me, one of the facts that was the most significant about
the testimony of Chairman Lambright was that no small business
loan had been denied on a budget basis. In other words, if they
had been denied it was on other grounds. What does that say to
you?
Mr. Merritt. I do not really know how they calculate those
numbers. I think that if Boeing has small business suppliers to
them, I believe that they included those in that 20 percent.
They do not? Okay, so I really do not know how they make
those calculations.
I understand that about 28 percent of all U.S. exports are
made by small companies, companies with less than 500 people.
And the Bank has no office to support those transactions, with
no authority to make credit decisions.
Senator Crapo. I also found or have significant interest in
your suggestions as to this office that you would like to see
the Bank establish. You went into this a little bit in your
testimony and I would like you to expand on it.
Chairman Lambright has taken some steps in that direction
and has established this new unit that will report and has a
person with I think the same level of seniority in the company
that you were recommending. What are your thoughts about what
they have done so far and what, in addition to that
specifically, do you think that we would need to encourage them
to do?
Mr. Merritt. I think, with all respect, that started 2
months ago immediately prior to the Bank's reauthorization.
There has been 15 changes, 10 in the last 5 years. So, I really
do not think that the Bank is structured competitively for the
people like us in a small business.
I think the best way to measure things is by comparison. In
Canada, as a comparison, their Ex-Im Bank equivalent financed
$57 billion in export transactions and of those, $11 billion
were small business. Our bank did $18 billion and of those $2.7
billion were small business. Canada's economy is one-seventh
the size of our economy.
The reason that the Bank has been so successful is about 10
or 12 years ago they set up an office like what we are asking
the Bank to do, which is dedicated to small business, a
separate team of people with a career track, with authority to
make credit decisions that structure for small businesses, for
this 28 percent of our economy, 28 percent of the exporters
that are represented by small businesses. Our Bank does not
have an office like that.
Senator Crapo. So basically your point is that there is
plenty of fertile ground out there for these types of loans if
we can simply----
Mr. Merritt. You better believe it. I can tell you, many
companies like our size, we do not have the time to go through
the process and try to figure out who we should talk to this
year at the Bank.
We were talking about the tied aid before. It is a very
similar situation with tied aid. When we see tied aid cases,
the effort that it takes a small business, a company with $10
million, $20 million, or $30 million in sales to fight that
battle in Washington, we just do not have the ability to do
that.
If we had an advocacy office in the Bank that looked after
our interests, that came to know us as clients, it would be a
very different story, I believe.
We made some calculations yesterday and the small business
exporters, if we only increase 10 percent the amount that they
are exporting, it will take a $280 billion bite out of our
Nation's $700 billion deficit. We have an enormous problem in
this country, and this Bank is a key element in the solution,
along with Commerce Department and trade promotion, to solve
that problem.
Senator Crapo. Thank you very much. I appreciate that.
Mr. Matthews, in your testimony you talked a little bit
about the way in which we handicap the Ex-Im Bank by our own
budget rules. Your point, if I understand it correctly, and I
would like you to explain it to me a little bit, is that the
Ex-Im Bank generates a significant amount of income through its
interest charges, premiums, and fees. And yet it is not allowed
to use those varied resources, its own revenues, to cover its
own costs. And it has to come back to Congress on an annual
basis to get appropriations and so forth.
First of all, tell me if I have explained the issue
correctly and clarify it a little bit, if you would like to.
But also, would you recommend that we change the operations
of the Bank so that we allow them to use their own revenues for
these costs and then to engage in more transactions?
Mr. Matthews. Thank you, Senator.
Yes, as I mentioned, the Bank generated over $2 billion in
fees and interest in 2004, and that was more than enough to
cover its costs of operation. So we believe that if the Bank is
able to retain those earnings and revenue over time the surplus
would grow and they would be able to do more business without
imposing any financial impact on the Government.
As far as whether we would recommend changing that, I think
we would but we would like to get back to you in writing with
more detail on that.
Senator Crapo. Certainly, and I appreciate that.
Let me say to the entire panel, just because of time I am
going to have to wrap up here. There is a lot of questions on
each one of your testimony that I would like to pursue further
with you, although the testimony itself is very helpful. And we
can go into a number of the aspects of it simply with your
written testimony.
But I would encourage you, if there are additional points
or if you want to clarify or enhance anything or any points
that you have made, please do not hesitate to submit further
supplemental testimony to us if you will, as we move forward.
We are going to hold another hearing on the economic impact
issues specifically, but just in reviewing your testimony I
have seen a number of other issues I personally was not aware
of and will be very interested in pursuing.
So again, thank you for the time and effort that you have
put into preparing you written and your oral testimony today
and your interest in the Bank. I do know that although each of
you have raised issues about how we can improve and strengthen
the system, each of you have very strongly indicated that we
should proceed expeditiously with the reauthorization of the
Bank and try to strengthen it because it is a very key part of
our competitiveness globally. And I want to let you know that I
agree with that. I believe our whole panel, our whole
Subcommittee, and full Banking Committee agrees with that. And
we just need to figure out the things that we need to do to
improve and strengthen the operations of the Ex-Im Bank.
So with that, again I thank you all for coming and this
hearing will be adjourned.
Thank you.
[Whereupon, at 11:15 a.m., the hearing was adjourned.]
[Prepared statements and additional material supplied for
the record follow:]
PREPARED STATEMENT OF SENATOR MICHAEL B. ENZI
I would like to thank Senator Crapo for scheduling this important
hearing on the reauthorization of the Export-Import Bank. I also want
to thank Mr. James Lambright, acting Chairman and President of the
Export-Import Bank, Mr. Gerald Rama, Mr. Al Merritt, and Mr. John
Matthews for agreeing to testify today.
As the official export credit agency of the United States, the
mission of the Export-Import Bank is to assist in the financing of
goods and services from the United States for export. Since the Bank
operates under a renewable charter that is authorized through September
2006, it is important that the process for reauthorization begin and I
applaud the work of Senator Crapo for holding this hearing.
I am a strong supporter of encouraging U.S. exports abroad. By
expanding our Nation's ability to export, we are in turn creating more
jobs and stimulating the economy here at home. It is clear that some
businesses cannot obtain the funding necessary to expand their export
business without the financial support of the Export-Import Bank. In
addition, as a former small businessman, I am particularly supportive
of the small business lending mandate that was increased in the 2002
reauthorization. I hope that the Bank will work with the small business
community to encourage additional applications. I also hope that small
businesses are receiving the support they need from the Bank in order
to increase their ability to export.
One issue that I have major concerns with is the economic impact
determination. As you know, when the Board of Directors reviews an
application, the Board will look to see if the benefits of approving
the proposal outweigh the costs. It is my understanding that the Board
will only look at the benefits/burden analysis during the repayment
period. By only looking at the economic impact during the repayment
period, the Board is receiving a skewed version of just how detrimental
certain loans can be to the U.S. economy. The Bank is currently
reviewing an application to finance the export of refurbished
locomotives to a soda ash facility in Kenya. I am strongly opposed to
this application. If approved, U.S. taxpayers will be subsidizing a
soda ash facility overseas that will be in direct competition with
domestic soda ash producers. Soda ash, which is a primary raw material
in the manufacture of glass and detergents, is America's largest
inorganic chemical export. About 90 percent of soda ash production in
the United States is located in my home State of Wyoming. This industry
is a crucial supplier of jobs and economic expansion in communities
throughout Wyoming. By aiding this facility in Kenya, the Export-Import
Bank would be supporting a company that is a direct competitor of U.S.
companies in the soda ash export market.
Under the application discussed above, the Board will only review
the costs associated with increasing global production of soda ash over
6 years, or the life of the loan in question. It is clear that
refurbished locomotives can be used for far longer than the 6-year
period. By limiting the economic impact period to the life of the loan,
the Bank is giving its economic support to projects that in the long-
run will have a detrimental impact on the U.S. economy. This practice
must change.
This proposal is one example of the flaws in the current economic
impact process. Under its own Economic Impact Fact Sheet, the Export-
Import Bank stresses the fact that its charter requires that the Bank
``assess whether the extension of its financing support is likely to
yield a net adverse economic impact on U.S. production and employment
or would result in the production of substantially the same product
that is the subject of specified trade measures.'' In order to ensure
that the Bank is not approving applications which would adversely
affect the American economy, the Bank must look at the economic impact
of a proposal over a timeframe that is similar to the life of the
export.
As the Banking Committee considers the reauthorization of the
Export-Import Bank, I urge my fellow Members of this Committee to
ensure that the Bank is upholding its duty to properly balance the
benefits of an application with any negative economic impact on the
U.S. economy.
Thank you again to Senator Crapo for holding this important hearing
today.
----------
PREPARED STATEMENT OF JAMES H. LAMBRIGHT
Acting Chairman and President
Export-Import Bank of the United States
March 8, 2006
Mr. Chairman, Senator Bayh, Members of the Subcommittee, I am
pleased to be here today to testify on the 2006 reauthorization of the
Export-Import Bank of the United States (hereinafter Ex-Im Bank, or
Bank). Ex-Im Bank was originally chartered in 1934 and has played an
active role in assisting in the financing of U.S. exports ever since.
The mandate of the Bank as expressed in our charter is to create and
sustain U.S. jobs by supporting U.S. exports that otherwise would not
go forward. And while there are many issues pertaining to Ex-Im Bank
policies that I will discuss in this testimony, that mandate remains at
the core of why the Bank exists and why it should be reauthorized.
There is little argument that we are living in a very competitive
global economic environment, and there are many instances when our
exporters cannot be left to go it alone if we are to sustain the well-
paying jobs behind those exports. In this kind of environment, the
United States cannot afford to unilaterally disarm. The specific role
of the Bank is to help provide export financing in instances where
otherwise creditworthy transactions would not go forward. That can
occur when private sector banks find a market or a buyer too risky for
commercial financing, or when the export credit agencies of other
countries offer support to their exporters in order to secure a sale
for their workers and industries.
Make no mistake about it--I believe that U.S. workers make goods
and services that can more than match the price and quality of any of
our major competitors. But when other export credit agencies such as
COFACE of France, Hermes of Germany, or ECGD of Great Britain offer
financial support to their exporters, Ex-Im Bank steps in to ``level
the playing field'' for our exporters and our workers. We want to make
it possible to keep those jobs here in the United States.
We do this by offering direct loans to foreign buyers of U.S. goods
and services, guaranteeing commercial bank loans to those same buyers,
guaranteeing working capital loans to U.S. exporters to make it
possible for them to make the exports and offering insurance policies
so exporters, especially small business exporters, can offer extended
payment terms to their foreign buyers. It is through working capital
guarantees and our insurance policies that we do the great bulk of our
small business transactions, a topic I will discuss in depth below.
The Congress, through our charter, has offered us clear guidance on
how to meet our mandate. I liken it to steering a ship between two
beacons. One beacon represents the benefits we offer to U.S. workers
and exporters when we assist in the financing of exports that otherwise
would not occur, while the other represents the risks associated with
credit. Over the years, those exports have helped to sustain U.S. jobs,
jobs that on the average offer higher wages than nonexport jobs. Since
our 2002 reauthorization, we have authorized $47.9 billion in financing
support of an estimated $63 billion in U.S. exports. Some of those have
been big ticket items such as aircraft or power generation equipment.
But over 80 percent of those transactions have been made available to
directly support small business exports.
But we adhere just as strictly to the other beacon--the one that
represents assuming reasonable risk and responsible stewardship of the
resources provided by taxpayers necessary to bear those risks. The
beacon of risk is ``reasonable assurance of repayment,'' a term
Congress has explicitly put in our charter as our standard for making
credit judgments. Once we decide to finance a transaction, we set aside
a ``loss reserve'' to cover expected future losses. This reserve is
provided for by the appropriations for our ``program budget,'' which
represents the taxpayers' contribution necessary to, when added to fees
paid by our customers, serve as an estimated loan loss reserve against
expected losses on transactions underwritten in a given year. So the
taxpayers assume the risk represented by the program budget and also
provide for our administrative budget. The results have been a bargain.
Currently, every taxpayer dollar invested in the Bank's program and
administrative budgets makes financing available for over $50 in U.S.
exports. The overall loss rate for Ex-Im Bank over the course of its
history has been less than 2 percent. That compares favorably to rates
for commercial banks. Loss rates vary between markets and products, and
we keep a close eye on what is occurring with every type of
transaction. We believe Ex-Im Bank's financial success is attributable
to (i) productive international negotiations to create a level playing
field with other Organisation for Economic Co-operation and Development
(OECD) countries, (ii) responsible credit underwriting standards that
seek reasonable assurance of repayment and (iii) rigorous management of
our portfolio.
The conclusion is that we are conscientious fiduciaries of
taxpayers' dollars. When we manage to steer a course between the
beacons of supporting exporters and workers on the one hand, and
assuming reasonable risk on the other, we are of real benefit to the
U.S. economy.
Congress also guides us on some course refinements along the way.
It has instructed us to make 20 percent of our financing authority
available for small business transactions, and though the 20 percent
has never been fully realized, we have never turned down a small
business transaction due to lack of resources. We are still seeking the
best course to steer in order to maximize support for small businesses,
within the context that Congress has instructed us to be a demand-
driven institution and not to compete with the private sector. We are
happy to follow Congress' guidance on that issue. Congress has also
told us to include efforts to promote exports to sub-Saharan Africa. As
a result, Ex-Im Bank supported 115 transactions in 20 countries in the
region, totaling $461.8 million, a 36.4 percent increase over the
fiscal year 2004 volume. In addition, Congress told us to support
exports from businesses owned by women and minorities, which I will
discuss later.
I was privileged to become Acting President and Chairman in July
2005, and I am happy to continue in that role until the Senate acts on
my nomination to be President and Chairman. If I am confirmed, I will
continue to steer the Bank between those beacons, to keep an even and
predictable course. But I won't be able to do it by myself. I will need
the help of our very capable Bank staff, upon whom all Board members
depend for the vital information that makes it possible for the Bank to
function. Moreover, I want to emphasize that the Chairman and President
of the Bank cannot act in isolation from the other Board members and
expect to have an effective, smooth-running institution. I depend upon
my fellow Board members for advice and counsel right now, and I can
promise that I will continue in that practice if I am confirmed. That
includes assuring that members of the Board have access to all of the
information available on transactions and Bank policies, and have
access to Bank staff to supply that information. That is the way I work
now, and that is the way I will work in the future, if confirmed.
In the 8 months I have held the position of Acting President and
Chairman, and the 4 years I served on the staff level at the Bank, I
have participated in Bank decisionmaking and become familiar with Bank
policies. The Administration's decision not to request any substantive
changes in the policies laid out in our charter is appropriate to our
needs. Although the role and need for official export credit are
constantly evolving in the face of the changing nature of export credit
competitors (from France and Japan to China and Brazil) and the massive
flows of private capital into the emerging markets since 2000, we at
Ex-Im Bank believe the current charter language provides the
institution with sufficient powers and flexibility to adjust our
programs and policies to meet those challenges.
We are requesting an extension of the charter for 5 years, to
September 30, 2011. We are also requesting that our existing authority
to approve dual-use transactions, as well as the life of the Sub-
Saharan Africa Advisory Committee, be extended to that same date.
Ex-Im Bank currently has the authority to approve transactions
supporting the financing of dual-use exports as long as the items are
of a nonlethal nature and are used primarily for civilian activities.
While not widely used, that authority is important to some of our
exporters. And the Sub-Saharan Africa Advisory Committee has proved to
be a valuable source of knowledge to the Bank as we attempt to increase
our exports to this important part of the world that offers great
potential for our exporters.
Appropriations
For fiscal year 2007, Ex-Im Bank is requesting $26.4 million for
its program budget. When added to other available budget authority,
that will give us a total estimated program budget of $176.5 million.
We further estimate that it will allow us to authorize financing of
approximately $17.5 billion in support of $22.5 billion in U.S.
exports. From fiscal year 2002 through fiscal year 2005, the Bank has
authorized financing of $48 billion in support of U.S. exports using
$1.6 billion in program budget. That is a bargain for the U.S.
taxpayer.
The Administration is also requesting $75.2 million for our
administrative budget, compared to $72.5 million enacted for fiscal
year 2006. This pays for every aspect of our operations, from salaries
to rent. I would like to emphasize that it is the administrative budget
that is most important for our small business initiatives. It covers
our outreach efforts and technological upgrades.
Small Business
Since I was appointed Acting President and Chairman about 7 months
ago, no topic has received more attention at Ex-Im Bank than small
business. We have been working with Congress on its concerns as well as
with the U.S. Government Accountability Office (GAO) as they prepared a
report on how we interpret our small business legislation and account
for our small business transactions. We have conferred with small
business representatives on changes I am about to discuss. And while I
cannot say we have reached total agreement on all issues with all of
the parties involved, we are embarking on major changes in our
administrative structure with the purpose of continuing to increase our
support for small businesses.
I say continuing to increase because we have already laid a strong
foundation for growing our small business program. In fiscal year 2005,
Ex-Im authorized 2,617 transactions that were made available for the
direct benefit of small business, compared to 2,154 in fiscal year
2002, which represents a 21 percent increase. In terms of dollar
volume, the Bank supported $2.66 billion in small business transactions
in fiscal year 2005 compared to $1.8 billion in fiscal year 2002, a 47
percent increase. And the Bank's Working Capital Guarantee Program,
which benefits primarily small business exporters, had a record year in
fiscal year 2005. Of the Bank's total Working Capital authorizations of
$1.096 billion, 78 percent, or $850 million, directly benefited small
business exporters.
While I recognize that we have been making progress, I am also
aware that there is room for improvement. As I stated above, Congress
has placed in our charter the mandate to make available 20 percent of
our resources for direct support for small business. We have
consistently made these resources available but they have never been
utilized at the 20 percent level. We feel the way to move to the 20
percent level and beyond is to improve our outreach programs in order
to increase demand. I have appointed John Emens to the new position of
Senior Vice President for Small Business to manage his own unit, a
staff focused solely on small business outreach. He will report
directly to the President and Chairman of the Bank. The person holding
the position of Senior Vice President will serve as the primary small
business advocate on the staff level, and will of course work closely
with the Board member given responsibility for small business matters.
In addition, the Bank's regional offices in New York, Florida,
Illinois, Texas, and California are now dedicated exclusively to small
business outreach and support. Since his appointment in August as Vice
President for Small Business, Mr. Emens has had a total of 129 meetings
with, and sales calls to, small businesses.
Because the new Senior Vice President for Small Business is
responsible to the President and Chairman for outreach to small
business, and therefore has the lead responsibility for increasing the
number of our small business transactions and the overall dollar amount
of those transactions, we are separating those responsibilities from
Bank personnel who are responsible for actually processing the
transactions--that is, those in what we call the ``business units.''
That reflects what we do for all businesses, large and small, within
the Bank. It is part of our credit culture, and reflective of the
culture in the private sector, that those who must objectively evaluate
credit not be the same as those responsible for business outreach.
However, I want to assure you that small business transactions are
processed only by personnel experienced in small business and who are
sensitive to the special needs of the small business exporter. To
further enhance our services to small business, I have designated all
such employees throughout our business units as ``small business
specialists,'' so that when representatives of small business come into
the Bank to discuss their transactions, they will interact with
personnel who are familiar to them and knowledgeable about what their
needs are.
The GAO report mentioned earlier finds that Ex-Im Bank ``generally
classifies small business status correctly.'' Ex-Im Bank employs a
transparent and reliable methodology for determining our customers'
small business status and reporting our direct support for small
business. We have appreciated GAO's cooperative approach to the small
business review. It has been a positive experience for Ex-Im Bank, both
in terms of reaffirming our methodology and from the perspective of
identifying areas in which Ex-Im can improve the efficiency with which
we determine and report our direct small business support. For example,
in conjunction with the introduction of our Ex-Im Online program, we
are this fiscal year updating electronic participant records,
strengthening internal controls around small business reporting, and
arranging for an independent external audit of the Bank's direct small
business reporting starting with fiscal year 2006.
Ex-Im Bank's Small Business Committee
We also realize that outreach to small businesses and processing
small business transactions involve almost every division within the
Bank. Therefore, we have established an Ex-Im Bank Small Business
Committee (SBC) to coordinate, evaluate and make recommendations
regarding the many Bank functions necessary for a successful small
business strategy. The SBC will be co-chaired by the Senior Vice
President of Export Finance and Senior Vice President for Small
Business, who will report to the President and Chairman of the Bank.
And we have institutionalized this structure by having the Board
formally approve it. The SBC will be composed of representatives from
Domestic Business Development under the Senior Vice President for Small
Business as well as the principal processing units within our Small
Business Group--Export Finance (Business Credit, Trade Finance and
Insurance and Multi-Buyer Insurance), Credit Underwriting, the Office
of the General Counsel and Asset Management. Other divisions within the
Bank, including Congressional Affairs, will also participate at
meetings.
The goals for the SBC are to:
<bullet> Provide a Bank-wide focus on small business;
<bullet> Report and evaluate each unit's small business performance;
<bullet> Identify opportunities for cross-selling and expanding the use
of Bank programs for small business;
<bullet> Measure the progress and take steps toward meeting small
business plan objectives; and
<bullet> Serve as a forum for exploring new small business initiatives.
Claims Committee
In addition, we have established a new claims reconsideration
procedure and ``Claims Committee.'' The Claims Committee will be
responsible for evaluating and making final decisions with respect to
claims originally denied by the Office of the Chief Financial Officer.
I believe these changes will help all of our customers, but will be
particularly useful to small businesses, by improving transparency in
the claims reconsideration process. In addition, the new procedure
establishes formal consultation among the business units of the Bank
and the Asset Management Division as part of the reconsideration
process. The Claims Committee will comprise (i) the Senior Vice
President for Small Business, (ii) the Senior Vice President for Export
Finance, (iii) the General Counsel, (iv) the Chief Financial Officer,
and (iv) the Senior Vice President for Credit and Risk Management.
To strengthen customer education about the reconsideration process,
a small-business portal with information pages will be created on Ex-Im
Bank's website. The Claims Committee will hold its first meeting in
mid-March.
Technology Upgrades
I also want to discuss with you the progress we are making
regarding our technology improvements. The Bank has responded to the
Congressional mandate in our last reauthorization to ``implement
technology improvements that are designed to improve small business
outreach, including allowing customers to use the Internet to apply for
the Bank's small business programs.'' The Bank has substantially
expanded its online capabilities for its customers, especially small
businesses. The Bank has been implementing online capabilities in
stages. In the past 5 years, we have done the following:
<bullet> Forms automation. Ex-Im Bank has updated its website to
provide all customers, particularly small businesses, with improved
access to information, applications, and forms. All of Ex-Im Bank's
applications and forms are available through the website.
<bullet> Electronic claim filing. Ex-Im Bank has established an
electronic claim filing system to expedite claim filing and enable
customers to obtain a quicker claim payment.
<bullet> Electronic compliance. Ex-Im Bank has developed an online
Medium-Term Electronic Compliance Program, which greatly improves
the efficiency and turnaround time in approving disbursements.
<bullet> Letter of Interest. Ex-Im Bank has implemented an online
application for its letter of interest. The online letter of
interest system provides a paperless workflow and application
process for small businesses. This capability streamlines the
process for small businesses and saves them time in tracking the
status of their submitted applications.
<bullet> Registration and subscription services. Customers can sign up
online to receive Ex-Im Bank publications, e-mail updates, and
other information and to manage their subscriptions.
Ex-Im Online
Ex-Im Online, our major business reengineering and automation
project, is the next step. In June, small business customers will begin
using Ex-Im Online for multibuyer products, including support for
special buyer credit limits. These are the products most heavily used
by small business: More than 80 percent of the customers are small
businesses, and these products represent half of Ex-Im's annual
transaction volume. Customers will apply online, get quick decisions,
and receive online status information. Programming for the system is
complete. The system has been fully tested and customers are being
trained.
Ex-Im Online will reengineer, automate, and modernize Ex-Im Bank's
primary business processes, particularly for the products used by small
businesses (short-term export credit insurance) and the products that
provide significant indirect
support for small business exporters and suppliers (medium-term
insurance and guarantees).
Ex-Im Online will provide exporters, in particular small
businesses, the benefits of electronic application submission,
processing, and insurance policy management. Ex-Im Online will reduce
customers' paperwork, improve Ex-Im's response time, increase
productivity and improve risk management.
Ex-Im Online will allow customers to:
<bullet> Apply online. Applications and all supporting documentation
can be submitted and processed electronically.
<bullet> Get quick decisions. Online retrieval of credit and
demographic information and automated underwriting will reduce
review and decision time for short-term transactions.
<bullet> Receive online information on application status. Applicants
will receive email notification of the status of their application.
<bullet> Reduce paperwork burden. Automatic data entry and reuse of
existing data will permit ``enter once-use many times'' management
of customer information.
<bullet> Manage export accounts receivable online.
<bullet> Strengthen product development. Ex-Im will be able to consider
a broader range of product enhancements and modifications,
particularly in the short-term insurance area, as a consequence of
better risk quantification and management capabilities using online
systems.
There will also be benefits to Ex-Im Bank:
<bullet> Increased productivity and better resource use. Replacing
manual processes will allow staff to focus on meeting growing small
business needs and extending outreach to new customers. Ex-Im will
redeploy staff from processing to customer service. As small
business transactions and volume grow as expected from increased
outreach, we will be able to manage the growth without adding
staff. In addition, staff shifted from processing to customer
service will provide more person-to-person service for small
business customers, especially new exporters.
<bullet> Increased customer satisfaction. Streamlined application
submission, automated case processing, and quicker decisions will
increase satisfaction with Ex-Im services, supporting our outreach
and marketing.
<bullet> Stronger risk management. Business intelligence tools and
better sharing of information will improve management of the
portfolio.
This program is the result of approximately $10.8 million in
spending over 5 years, and while it has taken a long time to get it in
place, I am confident it will bear fruit by easing small business
customers' interaction with the Bank.
Pursuant to direction in our 2002 reauthorization, the Bank has
realigned its budget to support small business technology. Technology
expenditures in fiscal years 2001 and 2002 increased from $7.6 million
to $12.0 million, an increase of more than 50 percent, with smaller
increases in fiscal year 2003 and fiscal year 2004. In the last three
fiscal years, Ex-Im's administrative expense budget has been generally
flat, and Ex-Im has funded improvements to its portfolio of online
applications and services from its general technology budget.
In the end, I would like to be able to guarantee that these efforts
will result in 20 percent of our funds being utilized by small business
exporters, and that our small business figures will continue to grow in
absolute terms. Unfortunately, I cannot. At Congress' direction, we are
a demand-driven enterprise. I cannot predict business cycles, or
whether applications that come in tomorrow will be appropriate for the
financing we have to offer. But what I can guarantee is that we will do
everything within our power to increase demand through improved
outreach programs. And I promise you that Ex-Im Bank is going to listen
to small business input concerning our programs, that we will
communicate with Congress and take your concerns seriously, and that
our renewed efforts in small business are going to be sustained.
Economic Impact
Through the economic impact process the Bank seeks to determine
whether a transaction under consideration would adversely affect U.S.
production or employment, or result in the manufacture of a good
subject to specified trade measures. In analyzing these cases, Ex-Im
Bank must balance the benefits associated with the U.S. export against
the long range implications of increased foreign production. Given Ex-
Im Bank's objective of maintaining and increasing employment of U.S.
workers, Ex-Im Bank has long accepted the principle that it should not
extend financing support when such support would adversely affect the
U.S. economy.
While Ex-Im Bank's consideration of economic impact predates the
Bank's 2002 reauthorization, Congress made substantive changes to the
economic impact section of our charter in 2002. After extensive vetting
and coordination with our stakeholders--including the U.S. export
community, industry, labor interests, and Congress--Ex-Im Bank issued
revised economic impact procedures in March 2003.
The economic impact procedures are intended to lay out a reasonable
and logical process to analyze the impact of Ex-Im Bank support for a
particular transaction. The economic impact analysis considers issues
such as whether the goods and services Ex-Im Bank is asked to support
would establish or expand foreign production capacity of an exportable
good, the relevance of trade measures, the global supply and demand for
the good to be produced and the competitive impact on U.S. industry
from increased production. The process includes review by other U.S.
Government agencies, as well as input solicited from interested parties
through Federal Register notification.
In recent years, economic impact decisions have affected Ex-Im Bank
financing support for many exports, including steel-making equipment,
glass-making equipment, greenhouses, microchip manufacturing machinery,
soda ash processing equipment, and others.
Keeping the Competitive Edge in New Products and Special Markets
Environmentally Beneficial Exports
Ex-Im Bank established the Environmental Exports program to
increase support of environmentally beneficial goods and services.
Since the program's inception in 1994, Ex-Im Bank's environmental
transactions have grown significantly, with a total portfolio in excess
of $2 billion. That has allowed U.S. environmental companies to compete
in promising emerging markets. From fiscal year 2002 to fiscal year
2005, Ex-Im Bank has supported more than $1.3 billion in
environmentally beneficial exports. The Ex-Im environmental portfolio
includes transactions financing U.S. exports of renewable energy
equipment, wastewater treatment projects, air pollution technologies,
waste management services, and many other goods and services. Renewable
energy and water project exports are eligible for repayment terms of up
to 15 years under an OECD agreement that became effective July 1, 2005,
for a trial period of 2 years. It is our goal to use these new terms
and our outreach programs to expand our exports in this sector, where
we feel the United States has a real technological edge over its
competition.
Women and Minorities
As a nation, our institutions work best if they reflect the society
in which we live. This holds true especially for business. It is easier
to successfully market a product or services to a community if you know
that community and are part of it. With this in mind, we at Ex-Im Bank
are striving to help the American export community be more competitive
by working to increase our transactions involving women- and minority-
owned businesses. For fiscal year 2005, our authorizations in this area
were $353 million, compared to $296 million in fiscal year 2004. We
have increased our outreach to achieve this goal, and plan to increase
it even more this year. In fiscal year 2005, Ex-Im Bank staff
participated in 57 speaking engagements and attended thirteen
conferences expressly aimed at these targeted audiences. We are
committed to continuing and expanding these efforts.
Future Challenges
Any testimony about Ex-Im Bank must include a discussion of the
challenges Ex-Im Bank will be facing over the next 5 years, the length
of our request for reauthorization. That is no easy task, because it is
extremely difficult to predict even such major events as the Asian
financial crisis of the late 1990's, or the rise and fall of some or
our major markets in South America such as Venezuela and Argentina. But
there are issues that bear watching and which may have to be dealt over
the next 5 years.
Developing countries on the upper part of the industrialization
scale (for example Brazil, Russia, India, and China) are emerging as
significant exporters of capital goods such as airplanes, trains, and
construction and telecommunications equipment. Those products are
generally priced very attractively, are steadily improving in their
quality and are typically supported by official financing. This
financing is often on better terms better than agreed to by members of
the OECD. U.S. companies, and those in all G-7 countries for that
matter, are noting that these emerging exporters are displacing them in
a variety of markets around the world--and financing is sometimes a key
element in that displacement. We have to decide what should Ex-Im
Bank's response be.
Looking at this issue from the standpoint of our Congressional
mandate, there is little doubt that the guidance would be for Ex-Im to
offset the financing if requested to do so, keeping in mind that we
also must find a reasonable assurance of repayment, comply with our
environmental guidelines, live within a limited budget and meet our
economic impact requirements. There is no clearer or more fundamental
mandate than leveling the playing field for our exporters and keeping
jobs here in the United States.
Conclusion
I have every confidence that this institution that I have grown to
admire and respect will continue to serve U.S. workers and taxpayers
for years to come. A flexible charter allowing Ex-Im Bank--with the
guidance of Congress and the exporting community, to develop answers to
the pressing issues facing us now and in the future--is key. The
beacons to help a steer a true course have been set so we can do our
job for the U.S. economy. There is no more important economic issue
than preserving our job base, and with the help of Congress in this
year of our reauthorization, we will continue to fulfill that mandate.
I will be happy to answer your questions.
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PREPARED STATEMENT OF GERALD F. RAMA
Senior Vice President and Deputy Group Head Global, PNC Bank
on behalf of the
Bankers' Association for Finance and Trade
March 8, 2006
Introduction
I am pleased to be with you today to discuss the banking industry's
views on reauthorization of the Export-Import Bank of the United
States. I am testifying today as a banker who has worked with the Ex-Im
Bank for over 32 years and as a member of Trade Finance Committee of
the Bankers' Association for Finance and Trade (BAFT), an organization
founded in 1921. Today, BAFT is an affiliate of the American Bankers
Association and its membership includes most of the major American
banks that are active in trade finance and other international banking
activities and also many of the major international banks chartered
outside of this country.
My employer, PNC Bank, is part of the PNC Financial Services Group,
one of the Nation's largest financial services firms. PNC is
headquartered in Pittsburgh, Pennsylvania, and has a diversified
business mix, which includes providing a broad range of international
banking solutions such as trade finance, foreign exchange,
correspondent banking, international cash management, and online trade
services applications. For more than 30 years, PNC Bank has supported
export growth by providing export financing and trade facilitation to
companies nationwide. In 2005, our bank received the Presidential ``E''
Award for export service on the basis of the bank's record of export
promotion and continuing efforts to educate U.S. companies about trade
finance resources.
Why We Need the Export-Import Bank
Every so often, and particularly during the process of
reauthorizing the Export-Import Bank, someone will express the view
that the United States does not need and should not have such an
agency. They contend that the Bank is unnecessary and constitutes
nothing more or less than corporate welfare. If the Bank actually were
serving an important purpose, they argue, the private sector would meet
that need without requiring any taxpayer support. In their view, the
Bank simply is a mechanism to hand out taxpayer money to special
interests.
In my view, these critics are wrong. The reality is that the Bank
serves the interests of our Nation by providing credit support that is
a vital component in the competitiveness of American products in
international markets. For example:
<bullet> An American software developer with 60 high-paying U.S. jobs
in the Southeast started exporting products in 2004. The company
had a contract to provide software priced at $1.6 million to a
foreign purchaser but could neither get financing approval from its
principal bank nor find another lender. The company went to the Ex-
Im Bank and obtained single-buyer export insurance for $1.6 million
and a $900,000 Working Capital Guarantee Program transaction-
specific guarantee. It then was able to obtain financing from a
local bank. The insurance policy from the Ex-Im Bank was critically
important to the software company's success for several reasons:
(i) it is a pay-as-you-go policy which the private sector does not
provide (small businesses often cannot afford the large up-front
premiums the private sector requires regardless of usage); (ii) it
covers countries and situations that the private sector will not
(because of long lead-times to project completion and
installation); and (iii) Ex-Im was able to provide a fast and very
reasonable response to a small, but complex transaction.
<bullet> A small family held company in the Northeast, which employs
100 people, manufactures machine tools used to maintain
transportation equipment. The company also has a larger, German
affiliate that manufactures the same equipment (and which can
obtain export credit financing from Germany's export credit
agency). The company has a large customer in Eastern Europe on
which it relies for a significant portion of its annual revenue,
and this customer's needs can be met by products made by the
company in America or by its affiliate in Germany. The customer is
undertaking an extensive, long-term refurbishment of its operations
and when it makes equipment purchases it specifically seeks export
credit financing. Medium-term guarantees from the Ex-Im Bank on two
occasions (approximately $10 million and $6 million) played an
important part in the company's sales of equipment manufactured in
the United States.
<bullet> A guarantee provided by the Ex-Im Bank has enabled a company
in Arizona that manufactures electronic test products to obtain
working capital financing that otherwise would not have been
available. The company's sales in foreign markets have expanded in
the face of international competition and exports now contribute
about 45 percent of the company's total sales. The total number of
employees at the company has grown by 25 percent per year since
2003, largely on the basis of the expanded foreign sales made
possible by the Ex-Im Bank's guarantee.
<bullet> An American company that employs 70 people in the Southeast
emerged from bankruptcy in 2005. It is the last producer of its
product in the United States and Europe, and it is facing
substantial competition from producers in Japan. More than 30
percent of the company's sales are outside the United States and it
expects that to grow to 50 percent in the next few years. Without
Ex-Im Bank multibuyer insurance coverage, the company's asset-based
lender would not be willing to include the foreign receivables in
the company's borrowing base and it could not survive. The pay-as-
you-go feature and Ex-Im's quick response time on special buyer
credit limits were essential to meeting this company's financial
needs.
<bullet> An American company based in the Midwest employs 77 people in
manufacturing operations that produce processing equipment. It
competes with companies from Taiwan, Japan, and China. The company
sold equipment to a buyer in Eastern Europe. The buyer made a down
payment of 15 percent of the purchase price. An American bank was
willing to finance the remaining 85 percent only because the
company obtained an Ex-Im Bank guarantee under its medium-term
financing program. The bank also used the Ex-Im Bank's Working
Capital Guarantee Program to extend a $1.5 million transaction-
specific line of credit to the company to enable it to meet the
payment guarantee bond and work-in-process financing needs of this
transaction. Ex-Im's credit support of this company has enabled it
to be successful against its foreign competition in the global
marketplace.
Each of these situations represents incremental export sales by
American companies that support the jobs of American workers and help
to reduce our national trade deficit.
Many other examples could be cited. These are the ``special
interests'' the Ex-Im Bank serves and I would like to suggest it is in
our national interest for it to continue doing so.
It is important for Congress to remember that American businesses
are engaged in fierce competition with foreign companies in the global
market. Many of those foreign companies come into the market with
various advantages, including credit support from their home country
export credit agency (ECA). In the midst of this competition we cannot
afford to abandon one of the most important factors that helps American
business compete--the Export-Import Bank--nor can we afford to impose
any new or more onerous restrictions on its ability to support American
exports. If we did, the inevitable result would be fewer export sales,
loss of jobs, and an even wider trade deficit.
Something that I and other trade bankers have observed in recent
years is that the ECA's from other countries are getting to be more
strategic and flexible in their approaches to export finance. In
addition, new competition is coming from emerging market ECA's, such as
those in China, India, Eastern Europe, and Brazil. They all understand
the extent of international competition and they are taking new
approaches that will enable their exporters to win in the global
marketplace. For example, many ECA's are becoming more aggressive when
it comes to taking on risk and more willing to provide financing for
transactions that generally benefit their country, even if the
transaction does not directly involve the export of locally produced
goods. I believe that U.S. companies' efforts to compete in
international markets will be hampered if our Ex-Im Bank does not take
a similarly aggressive approach. (This is not to say that Ex-Im has not
been aggressive in certain respects in the past. Trade bankers have
noted the Bank's willingness to take on credits that commercial banks
have been unwilling to accept.) I hope that in reauthorizing the Bank,
Congress will clearly express its support for an aggressive effort by
the Export-Import Bank to meet the needs of American businesses--large
and small--competing in global markets.
Issues Related to Ex-Im Bank Operations
I would like to comment on a number of issues that arise out of the
Ex-Im Bank's operations and the various requirements imposed on the
Bank under current law.
Small Business
The Export-Import Bank is required by law to make available an
amount equal to at least 20 percent of its aggregate loan, guarantee,
and insurance authority in each fiscal year to finance exports made
directly by small business concerns. The Bank frequently is criticized
on Capitol Hill for its repeated failures to satisfy this requirement.
We think the criticism is unfair.
In the first place, it should be acknowledged that the 20 percent
standard is a limited and arbitrary measure of the Bank's service to
small business. Small business transactions, by number, typically make
up more than 80 percent of the transactions approved by the Ex-Im Bank
each year. But when the sole measure is total dollar amount, large
business transactions overwhelm those done by small business. By their
very nature, the large export products that generally are produced by
larger companies (airplanes, heavy equipment, and project work) mean
large dollar volumes. If Ex-Im were evaluated on the amount of effort
it puts into small business transactions, the 20 percent standard would
be easy to meet because the work put in by the Bank on a small
transaction can be as much or more than a large one. Another
shortcoming of the test is that it fails to take into account the
participation of small business in large business transactions. A
single airplane sold by Boeing has myriad components produced by small
business, yet Ex-Im gets no credit in its small business ledger for the
support it provides to Boeing that indirectly benefits those small
businesses. Finally, it also is difficult to understand why 20 percent
is an appropriate test. As a banker, I find it difficult to comprehend
why Ex-Im should be considered a failure at 19 percent and a success at
21 percent.
I also believe that critics of the Bank are misconstruing the 20
percent test. The Bank is required to ``make available'' to small
business a specified amount of its authority--the law does not require
the Bank to actually extend loans, guarantees, and insurance equal to
that amount. This is appropriate because the Bank is a demand-driven
organization. It has no control over the source of credit support
requests it receives. All that it can do is educate small businesses
about its programs, encourage them to use its programs, and assist them
in negotiating their way through the process. We believe that through
its small business outreach efforts the Bank is making available to
small business the full amount its authority, thus in reality it is
satisfying the statutory requirement.
Thinking of this provision as if it were a mandatory 20 percent
requirement also puts the Ex-Im Bank in an untenable position. Suppose
that the Bank's loans, guarantees, and insurance extended to support
small business exports in a particular fiscal year exceeded 20 percent
of its authority by a small amount near the end of the year. If an
exporter that does not qualify as a small business brings a large
export transaction to the Bank, the 20 percent standard gives the Bank
an incentive to delay or not do the transaction in order to stay above
20 percent. That does not make sense if the real purpose of the Ex-Im
Bank is to promote U.S. exports. At the same time, the 20 percent
standard also creates an incentive for poor credit decisions if the
Bank is below 20 percent and needs more transactions to satisfy the
test. Neither incentive is a healthy one for the Bank.
Congress should rethink this requirement and devise a better way to
measure the Ex-Im Bank's success in working with small business.
Economic Impact
The Export-Import Bank is required by law to consider the extent to
which transactions are likely to have an adverse effect on industries
and employment in the United States. The rationale for this requirement
is understandable (although I am not aware of any other ECA that is
subject to a similar requirement): Taxpayer money should not be used to
support a transaction if its benefits for U.S. industry and employment
are outweighed by the transaction's adverse impact on U.S. producers
and employment. In most cases, however, the harm that might result from
a transaction will occur whether or not the U.S. exporter seeking Ex-Im
support makes the sale. If the U.S. exporter does not make the sale,
one of its competitors from another country will. The adverse impact on
U.S. industry will occur in either case. Thus, it seems that unless the
U.S. exporter is the only possible source of the equipment to be sold,
the economic impact on the United States of an export sale will always
be positive. Unfortunately, when it evaluates the economic impact of a
transaction, the Ex-Im Bank staff does not consider the availability
from another source of the goods to be sold. We believe this is a valid
consideration that the Bank should take into account in its analysis
and we urge Congress to provide direction to the Bank in that regard.
I have another concern that the Ex-Im Bank and Congress should
consider as well--the reputation risk created by the economic impact
test. Whenever the Bank turns down a transaction on the basis of
economic impact, it has an adverse effect on the perception of U.S.
exporters as reliable suppliers: The financing support that was
expected did not come through. If a foreign purchaser has doubts about
whether Ex-Im support for the financing of their purchase actually will
be made available, the likelihood of the U.S. exporter getting the sale
is diminished. For this reason we believe that the economic impact test
should be used as little as possible. A step in the right direction
would be to raise the minimum transaction size for economic impact
assessment from $10 million to $25 million, to take into account the
effects of inflation over time.
Co-Financing
Co-financing is an arrangement whereby exports that are sourced
from more than one country can receive credit or credit support from
two or more ECA's in an efficient manner. Typically, the ECA for the
country that is the principal source of the products or services takes
the lead and is the sole agency with which the purchaser must interact.
The cofinancing arrangement allows for one set of documents and one
source of disbursements, in each case provided by the lead ECA which
obtains supporting financial commitments directly from the other
participating ECA's.
Bankers that finance these transactions like cofinancing
arrangements because they are an efficient and convenient way of
providing credit support for what otherwise could be extremely complex
transactions. As the Export-Import Bank noted in its June 2005 Report
to the U.S. Congress on Export Credit Competition (the 2005 Report to
Congress), the ``availability and ease of ECA cofinancing has become an
important and measurable competitive issue.''
According to the Ex-Im Bank's website, it currently has bilateral
cofinancing agreements with ECA's in four other countries: Canada,
Italy, Japan, and the United Kingdom (and a limited agreement with K-
Exim of Korea). At a hearing before the Senate Banking Committee prior
to the Bank's last reauthorization in 2001, Ex-Im Chairman John Robson
reported that the Bank had entered into a bilateral agreement with ECGD
of the United Kingdom and that discussions with EDC of Canada were
close to completion. We are disappointed that agreements have been
signed with only two other countries in the ensuing 4 years (a 1998 GAO
report said there were more than 70 ECA's operating throughout the
world; the UK's ECGD has agreements with ECA's in 24 different
countries). Although the Bank has participated in cofinancing
arrangements on a one-off basis with ECA's in countries with which it
does not have a cofinancing agreement, having signed agreements is
preferable. The agreements make it clear to potential purchasers that
cofinancing is available and they establish a framework that
facilitates cofinancing implementation for an actual transaction. When
the Bank signed its cofinancing agreement with Canada in May 2001, its
press release said, ``This is another step in the right direction by
Ex-Im Bank to deliver the same type of flexibility offered by a number
of ECA's.'' We urge the Bank to take more of these steps and to make
cofinancing agreements with other ECA's a priority.
MARAD
Transactions supported by Export-Import Bank guarantees in excess
of $20 million or that have a repayment period of more than 7 years are
subject to a requirement (administered by the U.S. Maritime
Administration--MARAD) that the goods being financed must be shipped on
a U.S.-flag carrier if they are transported by sea. The exporter is
required to use a U.S.-flag carrier even though other carriers might
(i) be available at lower cost; (ii) have vessels that are more
suitable for the particular cargo being shipped; and (iii) provide
logistical advantages with respect to their availability and routing.
This can result in situations that are nothing short of ridiculous. For
example, a West Coast-based exporter that was selling goods to a
purchaser in Jamaica was required to use a U.S.-flag carrier and as a
result watched its goods in one shipment go from San Diego to Japan, to
the Dominican Republic, then finally to Jamaica. Another shipment went
from San Diego to Florida, to Spain, and then to Jamaica. If it were
not required to use a U.S.-flagged vessel, the exporter could have
arranged direct shipment from San Diego to Jamaica. The MARAD
requirement added significant costs and weeks of shipping delays. The
exporter summed it up as ``extortion.'' It certainly is nonsense.
Although waivers are available in certain limited circumstances,
the waiver process itself acts as a disincentive for potential
purchasers of U.S. goods.
At a time when the United States is recording record merchandise
trade deficits, it seems foolish to burden U.S. exporters with
requirements of this kind. According to the 2005 Report to Congress,
``None of the other G-7 ECA's have similar cargo preference
restrictions.'' Congress should seriously consider rethinking the MARAD
requirement and, at the very least, restrict its application by raising
the minimum amount from $20 million to $30 million or more.
Domestic Content
The Export-Import Bank's mission is to support U.S. jobs through
exports. In pursuing that mission, the Bank has adopted a restrictive
policy of only providing credit support for the value of the U.S.
content in an export. The Bank limits its involvement in a transaction
to the lesser of: (i) 85 percent of the value of eligible goods and
services, and (ii) 100 percent of the U.S. content in those goods and
services. Thus, if a U.S. export consists of 50 percent U.S.-made
components and 50 percent non-U.S. made, the Bank's support would be
limited to 50 percent of the contract's value. This is problematic in
several related respects. First, as complexity increases in
manufacturing processes and the sourcing of components, it is becoming
increasingly difficult to track the levels and sources of non-U.S.
content. This is particularly true for small businesses that do not
have the resources to devote to it. Second, requiring such strict
proportionality likely results in fewer U.S. exports than could
otherwise be achieved. The question is: How much support should Ex-Im
be willing to provide in order for an export transaction to occur? It
is not at all clear that the correct answer is tied to the proportion
of U.S. content. What is clear is that other countries have concluded
that strict proportionality--and thus strict accounting for content--is
not required. For example, the 2005 Report to Congress indicates that
Japan's ECA does not reduce its support of transactions that have at
least 30 percent Japanese content and Canada decides its level of
support on a case-by-case basis. Italy's ECA announced in 2004 that it
would shift its standard from ``Made in Italy'' to ``Made by Italy''
and Ex-Im reported that other countries were moving to this approach as
well. We believe that Ex-Im should adopt a case-by-case approach that
balances the costs and benefits of individual transactions, rather than
adhering to a strict formula that requires precise tracking of U.S.
content, and we urge Congress to express its support for that approach
as well.
Tied Aid
The Export-Import Bank's tied aid war chest was established to
enable the Bank to combat export subsidies provided by foreign
governments in the form of financing for public-sector projects that is
tied to the purchase of goods and services from exporters in the donor
country. Although the Bank's 2005 Report to Congress expressed the view
that OECD tied aid rules have been a ``great success in reducing the
level and distortive influence of tied aid,'' there is a general
perception among American bankers and exporters that the use by other
countries of tied aid and implicitly tied aid (referred to as ``untied
aid'') is growing. The particular countries that are mentioned include
China, Japan, Germany, and Denmark. We are concerned that the Bank has
not utilized any tied aid funds since 2002, possibly because the Bank
is unwilling to act unless it has overt proof and possibly because of
the unwieldy procedures that govern the relationship between the
Treasury Department and the Bank regarding use of the war chest (and
the Treasury Department's unwillingness to use the war chest funds). We
believe that the Bank should reexamine what is happening in the market
and then determine whether greater use of the war chest is needed.
Congress should review the procedures followed by the Treasury
Department and Ex-Im Bank for utilizing the war chest and consider
whether they could be simplified and whether clarifying the Bank's
authority to utilize the war chest would facilitate the use of those
funds to combat the use of tied aid by other countries.
Dual-Use Products
The Export-Import Bank generally is prohibited from providing
credit or credit support in connection with the sale of defense
articles or services to any country, with the exception that the Bank
may provide such support if it determines that the articles or services
are nonlethal and that their primary end use will be for civilian
purposes. This exception, which we believe is useful and appropriate,
sunsets and requires periodic renewal. It currently is set to expire on
October 1, 2006. In 1997, the U.S. General Accounting Office reported,
``the Ex-Im Bank appears to have established procedures that provide a
sound basis for determining whether these exports are nonlethal and
primarily used for civilian purposes, as required by law.'' We believe
the time has come to make this a permanent provision that does not
require periodic renewal.
Conclusion
We believe that, within the constraints of its budget and other
resources, the Export-Import Bank generally is doing a good job in
promoting the export of American goods and services to international
markets, but improvements always can be made. The Export-Import Bank
plays a key role in helping U.S. businesses of all sizes compete in
markets around the world, but we believe the Bank is hampered by having
too few people and too many requirements imposed on it that do not
relate to its primary mission. Consequently, we urge the Congress to
provide the Bank with significant additional resources in its
administrative budget, and to act on our recommendations to reduce the
Bank's administrative burdens that inhibit its functions. We look
forward to continuing to work with Members of Congress and with the
Bank to maximize its effectiveness in promoting American exports.
----------
PREPARED STATEMENT OF JAMES ``AL'' MERRITT
President and CEO, MD International, Inc. Miami, FL
March 8, 2006
Senator Crapo, Senator Bayh, Members of the Subcommittee, thank you
for inviting me to appear here today. I am Al Merritt, President of MD
International, Inc., of Miami. MD exports medical equipment and related
services to Latin America, the Caribbean, and other markets. Areas of
medical care that we address include general medicine, ENT obstetrics/
gynecology, ophthalmology, physical therapy, cardiology, surgery,
critical care, anesthesiology, and imaging. We also provide turn-key
and ongoing hospital renovation and remodeling projects throughout the
world.
Throughout its 19-year history, MD International has offered
financing to foreign buyers, often with the support of the Export-
Import Bank of the United States. Without Ex-Im's assistance, our
company would have lost important sales, and individuals throughout
Latin America would have gone without access to modern medical
technology.
I also appear here today as a representative of the Small Business
Exporters Association of the United States, on whose Board of Directors
I serve. SBEA is the Nation's oldest and largest nonprofit organization
of smaller exporting companies. As the international trade council of
the National Small Business Association, SBEA also represents NSBA's
22,000 exporting companies.
Let me begin by stating unequivocally--on behalf of MD
International and SBEA--that we strongly urge Congress to reauthorize
Ex-Im Bank.
We support Ex-Im and we want to make it even more effective.
The Need for Ex-Im Bank
Sales of products and services to developing nations involve a
significant degree of foreign risk, especially when the foreign buyers
finance their purchases over several years. Commercial banks
historically have been reluctant to assume a major share of this risk.
For one thing, the collateral securing the loans is often in another
country, where recovery can be difficult.
Every exporting Nation grapples with this risk. Nearly all of them
address it by providing guarantees to commercial lenders and brokers
that agree to finance exports using certain criteria, or by providing
credit directly to exporters.
This is particularly vital for transactions by smaller companies.
Not many banks are involved in export finance. And not many of those
will handle smaller international transactions, especially when the
exporter is a small business. Fewer still will accept ``walk-in'' small
business exporters who are not long-time commercial customers. Without
Ex-Im's (and SBA's) available backing for export finance, small
business access to export finance would be close to zero. Congress
envisioned Ex-Im as a ``bank of last resort'' for exporters; for small
and medium-sized companies, it is frequently the ``bank of only
resort.''
Our company is a good example. We have been exporting successfully
for nearly 20 years. We ship to forty countries. We employ 111 people.
Yet even with our history, reach, and employees, many deals would be
impossible for us without Ex-Im guarantees and insurance.
Maybe I can illustrate this with an analogy. If you buy a tire for
your car, you probably will pay cash for it. If you buy a new
transmission for your car, you may well charge the cost to your credit
card and pay it off over 3 or 4 months.
But if you buy a new car, you probably are not going to pay cash
for it or even pay it off in a few months. You will most likely want to
finance it over a couple of years.
Lots of small exporters in effect sell tires. Tire sales can be a
good business. Plenty of foreign buyers want the equivalent of tires,
and that can form a pretty good trading relationship. You can do a lot
of ``tire exporting'' as a cash business without having to find
financing for your buyers.
With ``transmissions'' and products that cost more per unit,
however, many buyers will want to take a few months to pay. Unless you
as an exporter want to act like a bank--and most exporters cannot and
do not--you will need short-term export financing.
``Transmissions'' and their equivalents are desirable exports that
can support good jobs at home and form the foundation for solid and
growing international trade channels. So it helps everybody when Ex-Im
provides short-term guarantees and insurance for the financing of these
exports.
``Cars'' (in other words, higher value exports like capital
equipment) are a much bigger deal. The buyers want to take years to
pay, but the benefits to the exporters and the United States as the
exporting country are huge. Companies that build ``parts'' for the
``cars'' get sales. Many jobs, both direct and indirect, get created
and supported. ``Car''-type exporting is a very good business. Sales
are larger. Margins are usually healthy. And the buyers eventually come
back for ``tires'' and ``transmissions,'' not to mention servicing and
training. ``Car'' transactions use medium-term financing. Without Ex-Im
backing, these transactions are extremely hard to put together.
(Ex-Im also provides long-term financing for very big ticket items.
Let's call them ``airplanes.'' They are vital to the U.S. balance of
trade, and necessary, but not a major focus for ``SME's.'' * Few small
business exporters want to extend payments out beyond 7 years.)
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* Here, as elsewhere in this testimony, ``small and mid-sized
enterprises'' (or exporters or ``SME's) refers to U.S. businesses with
fewer than 500 employees, with certain limited exceptions as defined by
the U.S. Small Business Administration (SBA).
In sum, American companies of all sizes would lose countless
billions of dollars in export sales--and the high-paying export-related
jobs that go with them--without Ex-Im, the official export credit
agency of the United States.
But there is another side of it, too. I like to think that
companies like mine help the United States put its best foot forward
overseas. Companies that construct roads, purify water, build homes and
schools, and improve health care. We show our neighbors that we care
about the quality of their lives. We demonstrate that our government
and our private sector want to help them achieve health and prosperity.
Without Ex-Im, that capability, too, would be greatly diminished in the
developing world.
Here are two examples of MD International transactions that Ex-Im
financed.
<bullet> (A ``transmission'') We sold a fluoroscopic diagnostic device,
manufactured in Utah, to a Mexican hospital for $150,000. Ex-Im
provided the hospital with financing.
<bullet> (A ``car'') We completely outfitted a women's hospital in the
Dominican Republic with $7 million worth of U.S. manufactured
medical equipment. Thanks to 7 year financing from Ex-Im, we made
the sale despite stiff competition from German and Spanish
companies, selling EU-manufactured equipment, and backed by the
export credit agencies of Germany and Spain.
So MD International and many other SBEA members keep a close watch
on Ex-Im.
How To Improve Ex-Im
MD International and other SME exporters appreciate the assistance
that Ex-Im has provided. But it is no secret that Congress gave Ex-Im a
mandate in 2002 to allocate 20 percent of its financing dollars to SME
transactions, and that the Bank has so far failed to meet that mandate.
SBEA would like to suggest some reasons why, based on the
experiences of companies like mine, and to recommend steps that
Congress and the Bank could take to meet this entirely achievable
threshold.
Ex-Im starts with an great resource--many dedicated, hard-working
people. There are also several Ex-Im products that are well-suited to
smaller companies. These include the agency's export working capital
(preshipment) financing and its short-term insurance against buyer
default.
While these products--and the SME awareness of them--could always
be improved, overall they tend to work well. The criteria for obtaining
the financing are relatively transparent and the authority to get the
transactions underway is delegated to a network of banks and brokers.
Ex-Im's principal challenge with these products is finding and
educating its potential customers. A secondary challenge is making sure
that those customers, once inside, are retained and return again.
So our first recommendation is to the Bank: Broaden outreach to
SME's on these products and use their feedback to make improvements in
them.
While we would encourage Congress to stress this point in the
Report accompanying the reauthorization legislation, we do not feel it
is necessary to be included in the statute itself.
To its credit, Ex-Im has developed an ambitious plan for outreach,
as part of its recent ``Small Business Committee'' initiative.
In terms of identifying further new SME customers, I would simply
repeat what my SBEA Board colleague Jim Wilfong said at last week's Ex-
Im Advisory Committee meeting. Over 60 percent of the SME's that are
currently exporting ship to only one country. Getting them into a
second or third country would increase the demand for Ex-Im products--
without the sometimes steep learning curve involved in a company's
first export transaction. The Commerce Department's U.S. Export
Assistance Centers, located in over 100 cities across the country,
could be helpful partner to Ex-Im in this process.
Our second point is that the Bank's emphasis on SME transactions
has tended to ebb and flow over the years, based on the priority that
the Bank leadership has attached to them. Unfortunately, this has
resulted in considerable SME management instability.
When we consulted with current and former Bank staffers about Ex-
Im's approach to SME management over the past decade, a rather confused
picture emerged.
By our count, Ex-Im has had 15 different management structures for
addressing SME's since 1997, or more than two a year, on average. The
point person for SME's has been at various times a Group Vice
President, a Senior Vice President, a Vice President, and an Office
Director. For at least two substantial periods of time since 1997, no
one was in charge of SME responsibilities. ``Business Development'' has
been included in and excluded from the small business operation (when
the Bank has had one), at one point being separated into international
business development, which was excluded, and domestic business
development, which was included. The Ex-Im field offices have been told
to concentrate on small business, to concentrate on large business, and
again to concentrate on small business. The SME operation has been near
the top of the organization chart, answering to the President, in the
middle, answering to various Senior Vice Presidents, near the bottom,
and for a while in 2004-5, essentially off the chart, directing no one
and essentially directed by no one. The staffing levels have ranged
from one to more than twenty. Sometimes the person in charge of SME's
could intervene in specific transactions, but sometimes not. Sometimes
the SME operation has handled insurance products, sometimes guarantee
products, sometimes both, and sometimes neither. Sometimes the SME
operation has had the authority to approve credit and authorize
transactions, but sometimes not. Sometimes the head of the Bank's SME
operation has long been involved in the Ex-Im's small business
transactions; sometimes the person has had no significant recent SME
experience.
Ex-Im's SME management reached one of its ``high points''--with a
Group Vice President answering directly to the Bank President--prior to
the Bank's 2002 reauthorization. Shortly afterward, the entire
operation was abolished. What followed was one of the periods in which
the Bank had no SME operation as such.
Our normal preference would be to let Ex-Im handle SME's on its
own, and we certainly commend Chairman Lambright and the Bank's
management and staff for the effort that went into the recent ``Small
Business Committee'' proposal.
But we do believe that the lack of a permanent, stable structure
with responsibility and accountability for the Bank's SME performance
has reduced the effectiveness of the Bank's SME work. It also has
confused commercial banks and exporters, as well as the Bank's own
staff. So we request that Congress provide Ex-Im with additional
guidance in this area.
We recommend that Congress:
<bullet> create a permanent Small and Medium Size Enterprise Division
at the Bank,
<bullet> direct this Division to have its own staff of underwriters and
business development specialists, devoted exclusively to SME
transactions,
<bullet> authorize the Division to create its own credit standards and
to process its own transactions (subject to approval by the Ex-Im
Board),
<bullet> require this Division to have a system of compensation,
benefits, incentives, and promotions comparable to other career
tracks at the Bank,
<bullet> put a Senior Vice President or higher in charge of the
Division,
<bullet> stipulate that the person holding that position have
significant recent SME experience, and
<bullet> have this person report directly to President and Board of the
Bank.
We believe that this approach would offer significant advantages.
First, it offers a framework of transparency, responsibility and
accountability for SME transactions at the Bank. It puts the Bank's
senior SME management in charge of the Bank's SME products and
transactions.
Second, it creates an environment of stability in a domain of Ex-Im
management that has been subject to frequent upheavals. It permits
planning and benchmarking.
Third, it provides a secure setting for Bank employees who want to
focus on SME's but fear more sudden shifts in the winds.
Fourth, it shortens the ``feedback loops'' between the Bank's SME
customers and its SME policies, as well as between the Bank's SME
officials and its Board. Process streamlining, turnaround time
reduction and new product offerings will be simplified. Outreach
becomes strategic and sustainable.
Fifth, it facilitates oversight by the Bank and Congress as Ex-Im
carries out such Congressional mandates as the requirement to devote 20
percent of the Bank's financing dollars directly to SME's.
We suggest that the SME Division's funding allocation be left up to
the Bank. Adjustments can be made, if necessary by Congress, according
to the Division's success in hitting its benchmarks.
We believe that this approach to the management of Ex-Im SME
transactions will be successful in part because we have seen something
very similar to it succeed spectacularly at the Overseas Private
Investment Corporation.
OPIC's mission is in many ways more difficult than Ex-Im's. Rather
than finding American companies that want to sell goods overseas, OPIC
must find ones that want to invest overseas.
These investments must promote American companies and not cost a
single American job. They must aid in the progress of developing
countries (OPIC was once part of USAID), and they must make economic
sense on their own.
If the universe of SME's that export is small--5-10 percent of all
U.S. SME's--the universe of SME's that want to invest overseas, and
with these stipulations, is a fraction even of that.
Five years ago, a debate raged within OPIC about whether to stop
handling SME transactions altogether.
OPIC's President at the time, Dr. Peter Watson, made the decision
to go in the other direction. He set up a Small and Medium Enterprise
Finance Department, installed an focused and energetic leader to head
it, allocated significant agency resources to it (including full-time
dedicated underwriters), and gave it his strong public and private
backing.
In fiscal year 2001, OPIC handled SME transactions valued at $10
million. Last week, the agency released its numbers from fiscal year
2005: $347 million in SME transactions.
At the same time, the agency announced a new Enterprise Development
Network that will use delegated authority financing to raise these
figures even higher.
A similar approach also had a dramatic impact at Canada's export
credit agency, Export Development Canada (EDC). In 1994, the Canadian
Government decided to create an SME unit within EDC, with its own
underwriters and business development staff, with full responsibility
for EDC's SME products, and with its reporting directly to EDC's
President.
Since then, EDC has grown from servicing fewer than 500 SME's to
more than 7,000,--or one-fifth of Canada's 35,000 total exporters.
Providing export financing through commercial banks (80 percent) and
directly (20 percent), EDC last year provided CAN$11 billion in SME
export financing.
From a base of 220,000 SME exporters in the United States, Ex-Im
provided export financing to around 2,300, in the amount of US$2.7
billion. This is only about a fourth of the export financing that
Canada provided to its SME's, despite the fact that the overall U.S.
economy is seven times larger than the Canadian economy.
Ex-Im has the raw material--in the U.S. economy and in its own
staff--to greatly expand its SME financing. It needs an appropriate
management structure, the right allocation of resources, and strong
backing from Congress.
On that note, our next recommendation relates to the Bank's
allocation of staffing.
To step back a bit, Ex-Im as an institution reflects the
environment in which it developed. Founded in the 1930's, the Bank
evolved mainly in the 1950's through the 1970's--a time when larger
companies represented nearly all of the demand for buyer financing
instruments, especially those involving terms of longer than a few
months.
As more American ``SME's'' have gone global in recent decades, that
demand pattern has shifted. SME's here are finding overseas customers
quite willing to place larger orders, and orders for more expensive
items (cars), but in need of more flexible and longer-term financing.
In 1986, the year before MD International began exporting, there
were about 65,000 small business exporters in the United States. Today,
there are nearly 220,000. The value of American small business exports
now tops $200 billion annually. (And that's just counting merchandise
exports, not most service exports. Many small businesses like MD
International sell services separately or packaged with goods exports.)
Today, over 97 percent of all U.S. exporters are small businesses.
Their activity is broadly dispersed across the country. Take my home
State of Florida. Over half the value of Florida's exports comes from
SME's. The same is true, remarkably enough, in the economic powerhouse
of New York State. In California, the figure is almost half--and the
number of SME exporters tops 50,000. Across the Nation, more than one-
fourth of all U.S. zip codes show merchandise exports of over $500
million a year.
Ex-Im as a whole has not really reflected these changes in the
business environment.
The Bank's staff is highly concentrated in Washington, DC. No more
than 25 Bank employees--highly dedicated and overworked ones, we might
emphasize--are in the field. And virtually none of them have the
authority to underwrite and approve transactions.
In terms of ``being where the customers are,'' the Bank is almost
the polar opposite of the Small Business Administration, about 20
percent of whose staff is in Washington, with 80 percent in the field.
Even SBA's modest Office of International Trade has only 6 people in
Washington, with 17 in the field.
As noted, the Commerce Department maintains a network of over 100
U.S. Export Assistance Centers across the Nation. These would be
logical settings for Ex-Im personnel.
So our third recommendation to Congress is to have Ex-Im provide
you with a report on how it could shift more underwriting and business
development staff, especially those handling SME transactions, into the
field.
But field staff alone cannot reach every SME exporter with
financing needs. The Bank operates through a network of brokers and
delegated authority lenders. Except when it does not.
And here I return to my point from earlier, about tires,
transmissions, and cars.
Companies like mine--capital equipment exporters with bundled
services--are selling ``cars.'' More and more SME exporters are
migrating into cars--higher value equipment and service exports. But
buyers want to take several years to pay for cars.
This upside potential is extremely significant for several reasons.
First, capital equipment exports support U.S. manufacturing. MD
International, for example, buys from smaller U.S. manufacturers like
Welch-Allyn in New York, Wallach Surgical in Connecticut, Miltex
Surgical Instruments in Pennsylvania, Health-O-Meter Scales in Chicago,
Gendex Del X-Ray Company in Chicago, Midmark in Ohio, Simmons in
Atlanta, Mettler Electronics in California, Protocol Monitoring in
Oregon, and Medical Research Labs in Illinois. Altogether, we buy from
over 100 U.S. manufacturers based all across the country--almost all of
them SME's.
Second, these exports are closely linked to higher-paying jobs in
the United States--jobs that pay 15-20 percent higher, on average, than
comparable work in nonexporting companies, according the Commerce
Department statistics.
Third, these exports establish longer-term buying relationships
with foreign customers, as those customers order parts, upgrades,
servicing, training, and ancillary equipment over time.
Fourth, they also help establish American technical standards and
specifications in overseas markets, a boon to a wide array of
exporters.
Fifth, capital equipment exports are simply worth more money, on
average, than most other types of exports.
So if the SME Division of Ex-Im that we are proposing needs an
early focus, expanding SME capital equipment exports should be it, in
our opinion. Nothing will get the Bank's SME numbers up above 20
percent faster, nothing will yield a quicker payoff in job creation,
and nothing offers greater potential to make an early dent in the U.S.
trade deficit.
But there is a rub.
Because foreign buyers of capital equipment (car buyers) want and
need to spread their payments over many months or even several years,
exporters like me and quite a few other SBEA members need to access Ex-
Im's ``medium-term'' financing, covering repayment periods of 6 months
to 7 years.
Ex-Im does not delegate authority for its medium-term products to
private sector lenders. As a result, the agency's transparency and
decision cycle times for these products leave much to be desired.
The Bank says that medium-term transactions take about 40 days. I
will have to tell you that just about every capital equipment exporter
I know tells me they endure much longer waits--months and even years. I
know I often do.
Given the many good transactions with Ex-Im that I have had, I hate
to say this, but the Bank has developed a bad reputation among foreign
buyers for its medium-term financing. Knowledgeable buyers that my
company encounters often flinch when we say we want to finance through
Ex-Im. They tell us stories of shuffling paper back and forth with Ex-
Im for a year or 18 months--and then being turned down. They tell us
they turn to the Europeans and Japanese and get their transactions
settled in a matter of weeks.
SME's cannot handle delays of this duration. Customers walk away.
Cash flow problems develop. Business reputations get damaged.
While the Bank does not break out its figures for the small
business share of medium term financing, we have heard Bank officials
estimate it at about $100 million out of $1.7 billion in overall
medium-term financing. If this is correct, the SME share is less than 6
percent.
This medium-term bottleneck will persist, in our opinion, as long
as Ex-Im itself continues trying to handle the nuts and bolts of every
transaction at its headquarters. There simply are not enough people at
811 Vermont Avenue, and there never will be.
The only way to truly solve the problem is to make the commercial
banks genuine partners by delegating more authority to them for medium-
term transactions.
If delegating authority works for SBA, with smaller transactions,
and for OPIC, with larger transactions--as well as for Ex-Im itself
with other products--it can be made to work with the Bank's medium-term
financing.
Accordingly, we urge Congress to direct the Bank to delegate more
medium-term export financing authority to commercial banks and export
finance institutions.
I might note that this proposal is also strongly backed by the
Bank's larger company customers.
What we are ultimately talking about here is faster turnaround
times, higher customer satisfaction levels, and lower transaction
costs.
Those are three pretty good measures for service improvements at
the Bank.
Another way to accomplish both is by putting more of the Bank's
transactions online.
Happily, the Bank's new ``Small Business Committee'' plan
anticipates this.
We would encourage Congress to hold Ex-Im to this commitment by
stipulating, at least in Report language if not in the law, that the
Bank's online system for exporters be up and running by July 2006, as
promised, and that it soon include a password-protected area of the Ex-
Im website displaying:
<bullet> where each exporter's application(s) for financing stand,
<bullet> what decisions have been made on the application(s) and what
decisions remain,
<bullet> whether any further information will be needed from the
applicant,
<bullet> the person or persons at the Bank responsible at each step of
the process,
<bullet> the anticipated timeline for final action on the application,
and
<bullet> the anticipated date for the disbursal of funds.
Such a system would not only improve turnaround times and lower
transaction costs, but would also enhance transparency at the Bank and
provide a valuable benchmarking tool for senior management.
Finally, there is one Ex-Im metric that we believe Congress should
not change.
It is the requirement for the Bank to devote 20 percent of its
financing dollars directly to small business.
The Bank surpassed this percentage at least three times during the
1990's, and it is perfectly able to do so again, particularly if it
manages for a goal of 21 percent or 22 percent.
For fiscal year 2005, the Bank says the SME share is at 19.7
percent.
The SME share metric supplies a necessary spur to Ex-Im to keep a
strong focus on SME financing. It works hand-in-glove with the SME
Division that we are proposing. Each reinforces the other.
Other metrics have significant disadvantages, in our view. For
example, the Bank's SME dollar volumes, while generally useful, reflect
a mixture of factors. General trends in world trade and exchange rate
variations can play as much of a role in shifting the Bank's dollar
volumes as the efforts of the Bank itself.
Focusing too closely on the number of transactions will perversely
incentivize the Bank to emphasize simple, very low risk transactions
with rapid approval times. More complex transactions, particularly
medium-term transactions with higher dollar values--where the Bank's
approval processes are already far too long--could well be pushed to
the back burner. Yet, as noted, these types of transactions generally
have far greater paybacks in high-paying U.S. export jobs.
A concern is sometimes expressed that the 20 percent requirement
for SME's might cause larger exporters to be refused financing if their
transactions occurred toward the end of a fiscal year and would thus
drop the Bank's final SME percentage below 20 percent. While SBEA
believes that the Bank could avoid such unforeseen difficulties by
managing for a goal of 21 percent or 22 percent rather than 20 percent
(which allows little room for error), we share the view that the Bank
itself--and not exporters--should be held responsible for any failure
to meet the 20 percent mandate.
Accordingly, we propose the following process for assuring Bank
compliance with the 20 percent mandate:
<bullet> In any Fiscal year that the Bank fails to allot 20 percent of
its transaction dollars to SME's, the Bank shall submit a report to
Congress within 60 days acknowledging the shortfall and describing
a specific plan of action for rectifying it. This plan must, at a
minimum, specify additional funds that will be allocated from the
Bank's administrative budget to the SME Division.
<bullet> Within 30 days after the above plan is submitted to Congress,
the Bank shall report to Congress on its implementation.
<bullet> During the fiscal year following the one in which the Bank
fails to meet the 20 percent mandate, it shall report quarterly to
Congress on the percentage of its dollars that have financed SME
transactions.
We believe that this approach will communicate the seriousness with
which Congress views the Bank's SME responsibilities without adversely
affecting any other exporters. The requirement for Ex-Im to allocate
more administrative funds to the SME Division if the mandate is not met
will help keep the agency's management focused on the SME goals. The
quarterly reporting requirement assures that Congress does not have to
wait till the end of the next fiscal year to see whether the Bank has
corrected any deficiencies.
In sum, Ex-Im has inherent strengths and the Bank does some things
very well. As a Nation, we would be seriously set back without it.
SBEA strongly supports Ex-Im's reauthorization, and we intend to
strongly support it in the appropriations process.
But Ex-Im can be improved, and we hope Congress will do so.
This concludes my testimony. I would be happy to take any questions
at this time.
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PREPARED STATEMENT OF JOHN MATTHEWS
Managing Director, Boeing Capital Corporation,
on Behalf of
The National Association of Manufacturers,
The National Foreign Trade Council, and
The Coalition for Employment Through Exports
March 8, 2006
Mr. Chairman and Members of the Subcommittee, I am John Matthews,
Managing Director of Boeing Capital Corporation, the financing arm of
The Boeing Company.
We at Boeing, and the other members of NAM, NFTC, and CEE, strongly
support the reauthorization of Ex-Im Bank. Each year, Ex-Im Bank
supports some 3,000 overseas sales of American-made goods and American-
provided services. During fiscal year 2005, Ex-Im issued $13.9 billion
in financing--mostly guarantees and insurance of commercial loans. That
financing supported $17.8 billion in U.S. exports. Those export sales
in turn supported thousands of jobs for American workers.
Most of these transactions are sales by small- and medium-sized
companies. But even for large corporations like Boeing, Ex-Im Bank
plays an essential role, not only for our 50,000 commercial aircraft
employees, but also for our 26,000 U.S. suppliers and vendors
throughout all 50 States. In 2005, the Boeing Company purchased
approximately $5B from more than 11,500 small business suppliers in the
United States. Of that total, our commercial unit, Boeing Commercial
Airplanes (BCA), paid $1.4B to over 2,900 American small businesses.
Today, I would like to focus on three key points: (1) Financing is
a key element of global competition; (2) Export credit agencies are
growing around the world; and (3) Ex-Im Bank is financially sound.
Financing is a Key Element of Global Competition
Traditionally, companies competed on product quality, price, and
service. In today's world, financing is an increasingly important
competitive element. Ex-Im Bank has two central missions: To level the
playing field when U.S. exporters are confronted with competitors that
have ECA financing; and when commercial financing is not available.
Each year, 70 percent of all Boeing's commercial aircraft sales are
to overseas customers. Historically, 30 percent of these Boeing exports
have relied upon Ex-Im to provide loan guarantees.
In fiscal year 2005 alone, Ex-Im authorized financing to support
the export of 78 Boeing commercial aircraft to 19 airlines located in
18 different countries around the globe, including nations in Africa
and in Latin America. This represented 33 percent of all our exports
for that year.
Export Credit Agencies are Growing Around the World
Virtually all major trading nations operate export credit agencies.
The most recent data show that ECA financing is increasing worldwide.
Last October, the International Union of Credit and Investment
Insurers--the Berne Union--reported that its 52 member ECA's issued a
total of $788 billion in financing during 2004, the highest total ever
measured. That total approaches 10 percent of global trade flows in
that year. Even more telling, the 2004 total marked a 60 percent
increase over the 2001 level of $470 billion.
While the structure of ECA's varies from country to country,
virtually all operate in close cooperation with their national
government, and most operate with government financial support of some
type. Faced with that financial backing for its foreign competitor, no
U.S. company, no matter how large, can compete on its own. When foreign
ECA support is present, we must have the backing of Ex-Im Bank.
Ex-Im Bank is Financially Sound
Ex-Im Bank is financially sound. At the end of fiscal year 2004,
the most recent public data, Ex-Im Bank had a total exposure of $61.1
billion. Against that exposure, the Bank had $9.6 billion in reserves--
a very strong reserve position.
Exporters and our overseas customers pay fees for Ex-Im's
participation in export sales, which in the last several years have
covered the government's costs of operating the Bank. Ex-Im charges
interest on its direct loans and premiums for its guarantees and
insurance. Ex-Im does not subsidize interest rates. In financial terms,
Ex-Im's crucial role is in mitigating risk, especially in markets where
commercial financing is not available.
Specifically, in aircraft transactions, Ex-Im generally does not
provide direct loans. Rather, Ex-Im guarantees that if the airline
customer defaults on the loan, Ex-Im will assume the financial
liability. These guarantees make it possible for certain foreign
airlines, especially in developing countries, to secure commercial bank
loans they might otherwise not qualify for at those commercial banks.
Ex-Im has not incurred any losses on commercial airplane guarantees
over the past 15 years. This is a real testament to the continuing
effective due diligence performed by the Bank before it provides
guarantees to foreign airlines.
According to the Bank's fiscal year 2004 annual report, Ex-Im
generated a net income of $2 billion, through its interest charges,
premiums, and fees. Unfortunately, under the Credit Reform Act of 1990,
the Bank cannot utilize its own revenues to cover its costs. Instead,
the Bank must obtain annual appropriations for both its operating
expenses and its loan-loss reserves. As a result, the Bank is
handicapped by the Government's own budget rules.
Conclusion
Mr. Chairman, thank you for the opportunity to testify today. The
Bank is indispensable to Boeing. It has been innovative and reliable in
times of crisis such as the financial market's retrenchment in the
aftermath of September 11. It is critical to our ability to compete
against a subsidized competitor while sustaining high-paying U.S. jobs.
We commend this Subcommittee for its timely consideration of Ex-Im
Bank's reauthorization and we urge that the Committee act expeditiously
to report a reauthorization bill to the Senate, so that Congress can
complete the legislative process prior to the September 30 expiration
of the Bank's charter.
I would be happy to answer any questions about the broader
exporting community or provide more specific examples of the Bank's
criticality to Boeing's ability to compete.
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ECONOMIC IMPACT ISSUES IN EXPORT-IMPORT BANK REAUTHORIZATION
----------
WEDNESDAY, MARCH 29, 2006
U.S. Senate,
Subcommittee on International Trade and Finance,
Committee on Banking, Housing, and Urban Affairs,
Washington, DC.
The Subcommittee met at 10:02 a.m., in room SD-538, Dirksen
Senate Office Building, Senator Mike Crapo (Chairman of the
Subcommittee) presiding.
OPENING STATEMENT OF SENATOR MIKE CRAPO
Senator Crapo. This hearing will come to order.
Today, the Subcommittee on International Trade and Finance
meets to discuss the reauthorization of the Export-Import Bank.
This is our second hearing and today we are going to focus on
ways to improve the Bank's economic impact procedures.
The last reauthorization changed the economic impact
procedures to include the effect of outstanding trade orders,
preliminary injury determinations, and Section 201
investigations before determining the Bank's financing of
exports. This was an attempt to ensure that the Bank support
for transactions not only helps U.S. exporters but also does
not negatively impact domestic companies.
The current system still has problems and tensions continue
between companies on both sides of the issues. This has been
demonstrated on loan guarantees involving steel,
semiconductors, ethanol, and soda ash to name a couple.
Although the vast majority of loan guarantees before the Bank
should not be slowed down, some of the larger and more
controversial loan guarantees do need to be better vetted.
Otherwise, groups that believe they will be harmed by the loan
guarantee are then forced to come to Congress and ask us for
intervention. A better approach would be to establish a process
which is fair and perceived to be fair by everybody so that the
facts are all well-presented to the board and they can act
accordingly.
For our first panel today, we welcome Jim Lambright, the
Acting Chairman and President of the Export-Import Bank.
Welcome, Mr. Lambright. At our last hearing, Jim Lambright
suggested that Ex-Im could improve the economic impact process
by making it more predictable, transparent, and by involving
interested stakeholders in the process earlier. I completely
agree with this and I appreciate Mr. Lambright's willingness to
work with our Subcommittee on these issues.
Our second panel includes Steve Appleton, the CEO of Micron
Technology, Inc. and Thomas Sneeringer, Governmental Affairs
Director of United Steel Corporation. Both of these witnesses
have considerable experience with the Export-Import Bank's
economic impact procedures and have specific suggestions on how
procedures could be improved to provide greater fairness and
transparency.
I thank each of you for coming before the Committee this
morning and I look forward to your testimony.
Let me turn off my Blackberry so it does not keep beeping
into the microphone.
We will now proceed. I know that the witnesses have all
received the instructions about testimony today. What we like
to do, we have a little system of lights here to help you try
to keep focused on the time limits. We ask you to keep your
oral presentations to 5 minutes and that will give us time to
go through questions and answers. I always remind witnesses
that if you are like me and like 99 percent of all other
witnesses, the 5 minutes run out before you run out of things
to say. Please be assured that we will have an opportunity
during the question and answer period with me and with other
senators who will be here to get in the points that you want to
make. So we just ask you to pay attention to the clock.
With that Mr. Lambright, please proceed.
STATEMENT OF JAMES H. LAMBRIGHT
ACTING CHAIRMAN AND PRESIDENT
EXPORT-IMPORT BANK OF THE UNITED STATES
Mr. Lambright. Thank you very much, Mr. Chairman. I am
happy to be here today to testify on Ex-Im Bank's procedures
involving economic impact.
As I stated in my testimony of March 8, the mandate of the
Bank is to preserve and create U.S. jobs by supporting U.S.
exports that would not otherwise go forward. Consistent with
this mandate Ex-Im Bank fully agrees with the principle that it
should not approve a transaction that would, on balance, harm
the U.S. economy. This is the foundation of our economic impact
procedures.
Decisions that raise economic impact considerations,
however, are the most difficult the Bank must make because it
weighs the interests of American workers against those of
another.
The Bank's economic impact procedures are intended to lay
out a reasonable and logical process for analyzing the impact
of Ex-Im Bank support for a particular export transaction. Ex-
Im Bank endeavors to implement the Congressional mandate in a
thoughtful, considered, and transparent manner with full
participation of interested stakeholders.
In 2001, Ex-Im Bank recognized the shortcomings in the
then-existing economic impact procedures and initiated a
process to improve them. The process of vetting changes was
extensive and included representation of all stakeholders.
In March 2003, Ex-Im Bank released new procedures
reflecting changes developed through public consultation as
well as changes mandated by Congress in the Bank's 2002
reauthorization. Many of the shortcomings of the prior economic
impact analysis were addressed, including clearer criteria and
definitions, broad consideration of trade measures, enhanced
interagency consultation, and provision of notice to interested
parties. As you noted in your opening, Mr. Chairman, since the
new procedures took effect economic impact issues have arisen
in a number of transactions, including those related to the
production of textiles, chemicals, steel, semiconductors, soda
ash, and solar panels.
Ex-Im Bank must balance the need for inclusiveness with
commercial practices that require efficiency and timeliness on
transactions. While the Ex-Im Bank makes every effort to
complete the economic impact analysis expeditiously, it
requires a substantial dedication of staff resources, usually
takes 8 to 10 weeks, and has even taken up to 1 year, depending
on the extent to which the feedback and information obtained
through the notice and comment period comport with the Bank's
analytical findings.
For example, a lack of consensus among industry observers
about the outlook on supply and demand balances can lead to an
inconclusive finding on oversupply and may complicate the
Bank's analysis.
Exporters have indicated that the delay and uncertainty
associated with the Bank's economic impact policy have, in some
instances, frustrated their commercial relationships and caused
them to lose export sales to foreign competitors. At the same
time, the Bank must ensure that potential transactions are
thoroughly vetted and all interested parties have an
opportunity to be heard.
The revisions of the economic impact procedures implemented
in 2003 have been successful from a number of perspectives.
They clarified the criteria for Ex-Im Bank's analysis and
expanded participation by other U.S. Government agencies and
stakeholders in the process.
Yet, as you noted, the economic impact analysis continues
to present challenging issues for Ex-Im Bank. Despite these
challenges, Ex-Im Bank strives to implement the economic impact
procedures so that they are transparent, predictable,
effective, and fair to exporters, affected industries, and
other interested parties.
I look forward to working with you and the Committee to
achieve these objectives and I would be happy to take any
questions. Thank you.
Senator Crapo. Thank you very much, Mr. Lambright.
I do have a number of questions. I have been studying the
flow chart of the economic impact policy to try to understand
just exactly how economic impact decisions and trigger points
are reached. And it actually is not one of the more complicated
Government flow charts that I have seen. It is relatively
comprehensible and I think that you guys should be commended
for that. We need to just be sure that the substance in it is
what we want to have.
At our last hearing, you suggested that the Ex-Im Bank
could improve the economic impact process by making it more
predictable, transparent, and involving more stakeholders in
the process at an earlier date. Could you elaborate on those
points and give me a little more detail about what exactly it
is you think that can be done to improve in those areas?
Mr. Lambright. Certainly, Mr. Chairman. While you note that
we have worked hard to develop a clear flow chart of the
decisions that need to be made, unfortunately at nearly every
stage in that flow chart a debate can arise, depending on the
facts of a particular case.
Take the very first step. Some cases are subject to debate
as to whether they implicate the procedures at all. For
example, if the export is part of a plant but is only ancillary
to production, does it expand production capacity? As an
illustration, think of a dedicated power supply to a widget
factory where our export would not be involved in making more
widgets but it is certainly part of the overall operation.
Right now, Ex-Im Bank errs on the side of inclusion but I
think that exporters would benefit from more clarity in this
case as to what even falls under the procedures. And we would
be happy to work with the Committee on developing guidance on
that front.
Senator Crapo. Thank you.
We are going to get into some more details on each of these
issues but, as you know, one of the questions or issues is
whether a product in question will be in surplus or in
oversupply at the time when it is marketed or when it is sold.
It seems to me that is a really difficult calculation to make,
and frankly reasonable people are going to have different
points of view on that.
How does the Ex-Im Bank or how should the Ex-Im Bank
resolve that question?
Mr. Lambright. During the last reauthorization, the Bank
went into the process of reauthorization with no definition and
no indicators of how to think about that term surplus or
oversupply. What was added in the last reauthorization was a
list of possible indicators that the Bank should look to as
guidance in assessing this oversupply question. But there is
still no explicit definition.
So we look to this list of indicators that includes Section
201 investigations or preliminary trade measure determinations,
price dynamics--are they rising or falling? We look at
bankruptcy or unemployment trends. We can even look at whether
there are trade adjustment and assistance program petitions.
In many cases, these indicators form a consensus view and
it is an easy decision. As you noted, many of them are very
difficult. But I think one thing that we may do to make it
easier could be to explore finding a clearer definition that
would add some more predictability or clarity.
But I am not sure that there is an elegant solution that
would eliminate contentiousness entirely, Mr. Chairman, because
this is a test about predicting the future, forecasting global
supply and demand dynamics of an industry several years out.
And as you might imagine, especially when jobs are at stake,
opinions can diverge dramatically as to what that future will
look like.
From my days in banking, I saw people make and lose
fortunes speculating on the future dynamics of a commodity. So
finding a consensus might be difficult.
And so what we do with these indicators that guide us is we
must judiciously assess all of the positions that are put
forward in the process and work to develop the most reasonable
set of assumptions for the board to consider.
Senator Crapo. Do you think we need to change or alter the
process which the statute now sets forth and the indicators
that the statute now requires?
Mr. Lambright. Because there is an inherent likelihood for
diverging opinions, given that this is looking forward to the
future, there is some prognostication involved, and as you
noted reasonable people can disagree. I do not know that we can
eliminate that contentiousness entirely. But I do think that we
could work with various industries, exporters, to try to
explore a definition that perhaps we could all agree on, even
though some people will still likely disagree in its
application.
Senator Crapo. I think that would be very helpful because,
as you indicated, people have made and lost fortunes trying to
figure out what the market is going to do in a particular
product. And yet that is exactly what you are asked to do, to
determine whether to proceed with a loan or a loan guarantee.
I do not know that I have the answer but I think it would
be very helpful if some type of review process were undertaken
in which participants were involved in a decisionmaking process
or at least a review process to help identify not only the
factors but also the decision points that need to be reached in
terms of making that decision.
Obviously nobody has a final answer to this or they would
be probably the most sought-after investment adviser in the
world. But I think that we can get to the point where we
generate a process by which we have a much higher level of
confidence. And so I would be encouraged by your suggestion
that perhaps getting people together to analyze that would be a
good idea.
Mr. Lambright. I would be happy to work on that in any way
that the Committee would advise.
Senator Crapo. Thank you very much.
Let us go on. Another issue that comes up is in determining
whether the product in question competes with U.S. production
of a same or similar product. That is an easy thing to answer
if it is the same product that we are talking about. But often
what we find out, I am learning, is that there are similar
products or products in the chain that manufacturing equipment
can be utilized to make or that can be facilitated by the loan,
even though they are not directly related to the proposed
product that is at issue in the loan.
The question that I have is how do you make the
determination as to whether the product in question competes
with another U.S. product that is the same or similar? And how
do we improve that determination, if there is a way to do so?
Mr. Lambright. It seems like there were two parts of your
question. The first is making the determination. If I
understood the second part of your question correctly, it was
also making sure that a borrower is going to use a machine as
they say they would so that it is not producing other products
that might also compete with U.S. firms.
But both of those are things that we do investigate in the
course of underwriting a transaction. First of all, we
determine the magnitude of the competitive threat to U.S. firms
by looking at where the foreign producer will sell this new
output and then comparing that with the markets where U.S.
firms are active so that we can try to measure the displacement
of U.S. production that is at risk.
In terms of determining whether a product is the same or
similar, we have engineers that assess the technical elements
of the export and advise us on the various uses to which that
export could be put. We also work with other U.S. Government
agencies that may have expertise in certain industries in
coming to a conclusion of whether this is a competitive
product. But we try to be inclusive in that definition so that
we are not ignoring a potential threat to U.S. industry.
Senator Crapo. It would seem to me that this is one area
where getting the proposals publicly vetted at an early stage
would significantly benefit the Ex-Im Bank analysts because, as
wonderful and as smart as they are, I do not think that they
are necessarily experts in every product in every market. If we
were to have the public availability of what is being
considered accomplished at an earlier stage, then those who
might feel that there is a competing product or a circumstance
involved could then provide that information and help the
analysis at an earlier stage.
Would you agree with that?
Mr. Lambright. There seems to be a lot of merit in that and
we can explore ways to introduce that part of the process
earlier.
Senator Crapo. Thank you.
Another aspect of this, which I do not even have any idea
how we would solve is that often, although we might be trying
to analyze whether a certain set of manufacturing equipment can
be used for this process or that process or product, in a
significant sense financing is fungible. And if money is
utilized for a totally unrelated aspect of a business but is
provided for that, then that can free up money inside that
company or that business for what may not be a related product
but would be money that is related because the company is
manufacturing it and they have freed up assets in another area.
Is that kind of issue discussed?
Mr. Lambright. It is certainly discussed but, as you noted,
it can be a difficult question to resolve because money is
fungible and it may be difficult to identify all the potential
uses to which a firm might put its funds. But we certainly do
look at whether an overseas firm or even a country generally is
subject to any kind of a U.S. Government trade measure so that
if a foreign entity has been determined by the U.S. Government
to be an unfair competitor, then that would certainly limit our
interest in working with that borrower.
Senator Crapo. I can see that in terms of any trade
circumstances where a competitor has already been identified as
being in violation of some kind of a trade rule but it seems to
me the question goes even more broadly to those who are not
engaging in unfair conduct in any way, it is just that they are
competitors and money is fungible. And it seems to me to be a
very difficult--I do not have an answer for you. It just seems
to me to be a very difficult issue.
I wonder is that issue even a factor in the economic
analysis at this point?
Mr. Lambright. It is not a formal factor mentioned in our
procedures, but certainly if interested parties raise that
issue with us it is something we can take into account.
Senator Crapo. Then you can and do take it into account.
Mr. Lambright. We can take it into account although, as you
noted, it can be difficult to decide what to do with that
information. But it is certainly something that we can explore.
Senator Crapo. Right.
To move on, when loan applicants claim that the Ex-Im Bank
financing is warranted because private sector financing is not
available or because there is some market failure of some kind,
what kind of documentation do you currently require from
applicants to demonstrate that this is the case?
Mr. Lambright. This is certainly a concern of ours and it
is part of our due diligence up front in a transaction. We pay
close attention to the markets. We follow a number of banks and
we look for an absence of commercial financing in these
transactions.
Programmatically as well, we are comfortable that our
transactions have the element of additionality which is the
term we use for the characteristics you are describing.
We do very little direct lending. There is always a
commercial bank involved in our transactions. And so the
commercial banks can let us know when this is a transaction
ripe for commercial lending.
But to your question about documentation, this is something
that we do as part of our due diligence. I am not aware that we
require anything formally in writing.
Senator Crapo. So maybe you have just answered this
question, but do you require the applicant, for example, to
provide to you, for example, the last 3 years of their capital
raising efforts and the success or failure of them? Or do you
require them to provide to you applications for commercial
financing that have been rejected so that they can establish
that they have not been able to get financing?
Mr. Lambright. No, Mr. Chairman, we do not go so far as
that in our analysis of additionality. What we have found is
that these are hard fought transactions and if it is too
difficult or too unattractive for a borrower to document their
failure to obtain funds, it might increase the attractiveness
of foreign-made products. So we try to strike a balance in our
due diligence of investigating the question. We understand that
it is central to our mission and so we do not want to be doing
transactions that violate this additionality standard. But we
also need to realize that we are a participant in private
sector transactions and try to keep pace with those
transactions.
Senator Crapo. Do you have any concerns that the banks, for
example, that you might be working with would have a financial
interest in having you conclude that the loan would be
something you should proceed with?
Mr. Lambright. Yes Senator, although generally they would
make more money doing it themselves if they found it to be a
creditworthy transaction. So, I think the profit they make on
an Ex-Im Bank transaction is very thin. So we really step in as
a lender of last resort.
Programmatically our policies are structured so that we are
not anybody's first choice for financing and really we come in
where we are needed to fill a market gap or to meet
competition.
Senator Crapo. Another related issue is the question of
whether a foreign export credit agency will provide the support
if we do not. I know that is often a question that is raised or
an issue that is raised.
What proof is provided in those cases that a foreign export
credit agency will provide financing if the Ex-Im Bank does not
go forward and that the U.S. exporter would lose that business?
Mr. Lambright. I think both the question and my answer will
follow our last exchange because again this is an area that we
investigate, and take very seriously. Again, it is a central
tenet to our mission that we are here to level the playing
field against foreign government supported financing.
And yet, to your question, we are not receiving formal
reports from borrowers as to the offer that a foreign export
credit agency might have on the table.
And again it gets to the issue that these are hard fought
transactions. We work with our counterpart export credit
agencies in the OECD to try to set up rules that level the
playing field. And so we do have procedures that we can pursue
through the OECD to make sure that these rules are being
followed. But in a transaction specific instance, the pace of
the transaction may not permit waiting for a fully authorized
foreign offer. It may put the U.S. export at risk.
Senator Crapo. You indicated some OECD procedures and so
forth and that there was communication back and forth between
you and other similar operations. Is that level of
communication sufficient, in your opinion, that you can have
confidence in the judgment that the Ex-Im Bank will make as to
whether there is, in fact, an alternative source of financing?
Mr. Lambright. I do not put that forward as an answer to a
specific transaction. What I was suggesting is that it sets a
general framework for export credit agency behavior. I know
that the U.S. Ex-Im Bank follows those rules, as do most other
export credit agencies in the world.
So it sets a framework for behavior. It allows us to have
relationships with these other export credit agencies so that
we can investigate suggestions that there would be offers. But
on any particular transaction we do need to go further than
that. We try to work with the export credit agency to confirm
the terms of the offer. Sometimes we are able to do that,
sometimes we are not. We try not just to rely on a simple
allegation made by one party. We do try to corroborate it.
But at the end of the day we do not have a formal
requirement for written proof of an offer.
Senator Crapo. Would having such a formal requirement of
written proof of the offer pose a problem? In other words,
would it slow down the process or make it so that the system
could not work well?
Mr. Lambright. I would want to think about that and talk to
some of our exporters, lenders, and borrowers about that. My
sense is that we ask about it, we do investigate it but that we
are not demanding formal written proof either because the pace
of the transaction does not allow it. But my fear really, Mr.
Chairman, would be that if we would have such a formal
requirement that by waiting for verification from a foreign
export credit agency to confirm a formal authorization the deal
may be done and U.S. exporter competitiveness would be damaged.
Senator Crapo. The deal being the alternate credit agency
would actually do the deal? Is that what you are saying?
Mr. Lambright. Right. Exactly.
Senator Crapo. So it seems to me that if an applicant were
to say look, if you do not do the deal with us, we are going to
do at it with XYZ foreign credit agency, that it should be
something that is relatively simple to say to the applicant
have you made an application? And if so, can you produce it to
us? Am I just oversimplifying the issue?
Mr. Lambright. I understand your concerns, Mr. Chairman,
and I think that it is a topic that we would certainly be
willing to explore with you of where the appropriate line to
draw would be.
Senator Crapo. Thank you. And again, I do not profess to be
an expert in these areas like you and your analysts are, and
frankly a lot of the participants in the industry are. But it
seems to me that from what I have observed there is a lot of
representations and allegations that are made from all sides
that seem to be able to be verifiable, if we had the time and
the connections to be able to do so, or if we had the
requirements that the applicant be prepared to document facts.
I think the same would probably be true about those who
were objecting, maybe not just the applicant but the objectors
may be required to document some of the financial information
or conclusions that they are suggesting that the analysts
reached in the process.
Another issue is input to our Ex-Im analysts from other
sources. For example, would it be useful to the Bank and the
Bank's economic impact assessment to be able to get greater
input from agencies like the Department of Commerce and others
that may have greater expertise in some of the industries that
are subject to the economic analysis being done?
Mr. Lambright. Mr. Chairman, we certainly put a great value
on the input that we get from other agencies and it might be
useful to explore the role of these other agencies' inputs.
Today, our procedures reach out to other agencies at the end of
the process. We could explore the practicality of changing the
timing of that as well as the extent of the interagency
involvement in the process and how their input is to fit into
our decisionmaking.
We certainly get a lot of value from the expertise that
these agencies bring and any guidance on how to use that
information in the process would be helpful.
Senator Crapo. It does seem to me that is probably an
avenue of significant help.
Another issue, has the Bank ever looked into policies or
practices of other Government agencies such as, for example,
the International Trade Commission, to try to see how they
approach these same types of issues in terms of due process and
transparency or economic impact provisions?
Mr. Lambright. Yes. At the time of the last
reauthorization, the Ex-Im Bank staff conducted a broad survey
of best practices that we could bring to bear on our process,
and one of the valuable additions that we made at that time was
introducing the public notice and comment period, so that
interested parties, not just the participants of the
transaction, but any interested party, would have an
opportunity to voice concerns in the process.
Senator Crapo. Thank you. This question, I suspect you
might have guessed you were going to get. There are some who
are concerned about previous economic impact analyses that the
Bank has done, and on a subject related to economic impact
procedures, some of my colleagues are concerned by that
application by the Ex-Im Bank of the test as to whether the
issuance of credit or financial guarantees by the Bank will
cause substantial injury to producers. Namely, they are
concerned that the credit insurance was issued to help finance
the construction of an ethanol dehydration plant in Trinidad
and Tobago, although this extension of credit resulted in
substantial injury as defined by the Ex-Im Bank's authorizing
statute to U.S. producers, and that is the concern that I know
you are very aware that some of my colleagues have raised.
I assume you are familiar with these issues. Are you
confident that the Ex-Im Bank staff are aware of the current
statutory limits on credit insurance?
Mr. Lambright. I am familiar with the concerns of your
colleagues, Mr. Chairman. I have drawn upon my staff to look
into this matter thoroughly, and they have kept me well-
informed of Congressional concerns.
As for Bank staff, I consider it my responsibility to
ensure that staff are fully aware of the statutory constraints
surrounding our ability to extend credit. I have done that. I
consider it an important part of my job, and, yes, I am
confident that staff is aware of those limits.
Senator Crapo. As you may be aware, there is at least one
Senator and probably others who would like to see some kind of
an analysis of this particular transaction by the Inspector
General's Office, but you do not have an Inspector General's
Office operating right now; is that correct?
Mr. Lambright. That is correct. We have appropriated funds,
but we do not have a nominated or confirmed Inspector General.
Senator Crapo. When did the funds get appropriated?
Mr. Lambright. In this fiscal year cycle.
Senator Crapo. This current fiscal year cycle?
Mr. Lambright. Right, for the first time.
Senator Crapo. So you now have the funds, but you do not
have the nominee.
Mr. Lambright. Right.
Senator Crapo. Do you have any other employees in this
office of the IG?
Mr. Lambright. No. This would be the first time that we
would have the Inspector General function inside the Bank.
Senator Crapo. So for those who would like to see an IG
investigation into this particular transaction, is there any
way that we could proceed without having to wait for the
nomination and then confirmation of the IG, him or herself?
Mr. Lambright. Mr. Chairman, I am as interested as anyone
in reaching a resolution on this matter, and I would like to
move as quickly as possible in addressing the Senators'
concerns on this transaction. And I stand ready to refer the
matter to an Inspector General as soon as we have one, and I
would be willing to explore any alternatives to that in terms
of referring the matter to an outside party. I am not in a
position to know whether we are able to do that or not.
Senator Crapo. I appreciate your willingness to consider
these other alternatives, because I, too, would like to get
this issue resolved as promptly as possible, and see if we
cannot move forward and really get past it. We seem to be stuck
just with the procedural fact that the President and Congress
have not appropriated the money and nominated and confirmed the
nominee for Inspector General fast enough to be able to address
it, at least at the pace that I would like to see it addressed.
I am going to be exploring other alternatives with those
who are concerned, and I appreciate your willingness to work
with us on those alternatives. Hopefully, we can find an
agreeable approach to this that does not require us to have to
wait for the IG's office to become fully functional.
I believe those are all the questions that I have right
now. I want to come back to the very first question that I
asked, and just ask you, again, looking at this from the
perspective of this Committee and its effort at
reauthorization--I guess what I am saying is looking at the
potential for statutory reform, statutory provisions that will
address the economic impact analysis process, are there any
specific statutory provisions that you believe we need to
include, either changing some existing provisions to improve
them, or adding some new provisions that would help to improve
the process?
Mr. Lambright. Mr. Chairman, the Bank has come into the
reauthorization process requesting a fairly clean bill. In the
area of economic impact, while we recognize that the process
certainly can benefit from refinement, I think most of the
ideas that I have heard or that we have contemplated may not
rise to the level of a statutory change. Rather, they are a
process or implementation change. I would be open to hearing
any ideas that you are hearing, or that you think may not rise
to the level of a statutory change, but that the Bank should be
considering nonetheless. And if in exploring any of the ideas
that we have heard from interested parties, if any of them
strike me as rising to the level of a statutory change, I will
certainly continue to remain in contact with you and your
office on this.
Senator Crapo. I appreciate that, Mr. Lambright. I would
like to first of all thank you. The willingness to work with
the Committee that you have just expressed is something that
you have proven by your conduct in the past to be something
that you are sincere about, and I appreciate the fact that you
are so willing to work with us, because it gets a lot easier
when we are able to talk these things over, find solutions, and
then agree on moving forward. In that way we have to do much
less legislating, which I think in the end is better.
With that, I do not have any further questions, and so we
appreciate you coming today, Mr. Lambright, and you are
excused.
Mr. Lambright. Thank you very much, Mr. Chairman.
Senator Crapo. We will now invite our second panel to come
up to the table.
Mr. Lambright, you did not get away from the table fast
enough. One of my colleagues had asked me if I would ask you a
question for him. Senator Enzi is not able to be here, so if it
is okay, I would like to bring you back to the table and ask
you to answer one more question.
Mr. Appleton, you can stay right there because this should
not take very long.
I apologize. You should jump up fast when you are released
from your testimony.
[Laughter.]
Senator Enzi has asked that I ask you the following
question. He indicates that it is his understanding that the
Export-Import Bank is considering an application to finance the
purchase of refurbished locomotives by a soda ash facility in
Kenya. It is his understanding also that the Export-Import Bank
only considers the negative economic impact that these
locomotives will have during the life of the loan. Locomotives
will certainly last longer than the life of the loan, and it
would seem to him, and I would agree with him, that the
economic impact analysis should consider the full impact of
such a transaction over the life of the entity, not over just
the life of the loan.
At any point during the process, does the Export-Import
Bank evaluate the full impact of such a transaction, and if
not, why?
Mr. Lambright. The useful life of the export is a
substantial factor in setting the term of our support, and
while certain exports may have a life that extends beyond the
term of our support, it does provide an objective method for
calculation, and if we keyed our analysis to useful life, it
may open us up to yet another point for debate as to exactly
how long this piece of equipment might last, and under what
circumstances it might have enhanced or diminished longevity.
But let me assure you, Mr. Chairman, and your colleague,
that our staff is quite cognizant of the potential threats from
this transaction. They are working seriously on assessing those
potential threats to U.S. industry. We have already had our
public notice period where we have received comments from
interested parties. It has not yet gone to other agencies for
comment. And as it proceeds, we will continue to keep your
office and his fully apprised of any developments.
Senator Crapo. I appreciate that, and like I said, I have
confidence when you make the representation that you will
approach it in that way, that you will do so. This may be an
issue that we would want to mandate that you evaluate. I know
you just said that it is tough, but this may be one that the
question of looking at the full life of the product or the
process might be something that we will want to be sure that
the Agency does figure out a way to evaluate.
Mr. Lambright. And I would appreciate the opportunity to
participate in that analysis of finding a way to address this
concern.
Senator Crapo. All right, Thank you very much.
Mr. Lambright. Thank you.
Senator Crapo. And now you are excused if you move fast.
[Laughter.]
Mr. Lambright. Thank you, again, Mr. Chairman.
Senator Crapo. We would like to welcome our second panel
here today. As I indicated earlier, our Panel No. 2 consists of
Mr. Steve Appleton, who is the Chief Executive Officer of
Micron Technology, Inc., and we welcome you here with us, Mr.
Appleton; and Mr. Thomas Sneeringer, Governmental Affairs
Director of the United States Steel Corporation. Mr.
Sneeringer, we welcome you as well.
We will begin with you, Mr. Appleton, and you may proceed.
STATEMENT OF STEVEN R. APPLETON
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER
AND PRESIDENT, MICRON TECHNOLOGY, INC.
Mr. Appleton. Thank you, Mr. Chairman. Thank you for
inviting me here today to testify before this Subcommittee
regarding the reauthorization of the Export-Import Bank of
United States. I will keep my comments brief, but I have
submitted a more detailed version of my statement for your
review.
Senator Crapo. And I should have said all witnesses' full
statements will be made a part of the record.
Mr. Appleton. Thank you. Let me start by saying I
appreciate the work of the Ex-Im Bank in encouraging exports
from the United States, and the work of this Committee in
authorizing and overseeing funding for the Bank. These
activities have clearly had an advancing effect on the
interests of the United States.
However, I would like to also share a perspective that
highlights how these efforts might be improved. First, a little
background on Micron. I could spend all my time telling you
Micron's history, but in recognition of your time and the
others here, let me sum it up this way. In the last 25 years,
there have been over 40 companies that have manufactured a
computer memory chip known as a DRAM. Today, there are only
five still developing this technology, one in the United
States--that is us--one in Japan, one in Europe, and two in
Korea.
Most of this consolidation was the result of nonmarket
artificial manipulations, in other words, directed Government
subsidies, but that is another story for another day. So
regardless of the reasons that there are not many of us left,
Micron has survived as one of the most competitive and
innovative memory producers in the world, with operations in
Japan, Europe, the Far East, obviously in the United States in
many location, Idaho, Utah, Virginia, California, Texas,
Minnesota, et cetera. So we have a large presence and we are a
very competitive company.
So with that background in mind, you can appreciate my
surprise when I discovered in August 2004, that the Ex-Im Bank
was considering $500 million in loan guarantees to a DRAM
competitor in China, a company called Semiconductor
Manufacturing International Corporation, also known as SMIC.
Now, SMIC is a foundry that manufactures product for both
themselves and others, including memory like the DRAM and NAND
flash chips that Micron makes and sells today.
SMIC, at that time, had three semiconductor facilities in
China. They were financed with a mix of private equity, loans
from Chinese banks, and vendor financing. Most of the equipment
it purchased for these three factories was from U.S.-based
equipment suppliers, so it was even more perplexing to me that
SMIC could claim to need Ex-Im Bank financing in order to
purchase manufacturing equipment.
So what happens when a constituent hears about something
happening in Washington they have a lot of concerns about? They
come to Washington, and indeed, I did. In fact, I met with most
of the Ex-Im Bank Board Members and various agencies, and guess
what I found out? The $500 million request had, without notice,
turned into $1.2 billion for an already over-supplied market to
produce product for our competitors, under the umbrella that
the dollars would be used for making products that did not
compete with us, with a claim that Japan was going to provide
the financing if the United States did not, and force them to
buy all Japanese equipment, along the lines of the issues you
were asking Mr. Lambright before. Of course, this turned out to
not be the case.
As you might imagine, we objected based on the available
data, and hired an economic consulting firm to further study
the issue. They performed an independent economic impact
analysis, which we submitted to the Ex-Im Bank. Fortunately,
then-Chairman and President Phillip Merrill, reviewed all of
the available data, and as you know, Mr. Chairman, including
the submitted analysis by the economist that we had provided,
and made the determination that the SMIC request did not meet
some of the required criteria, and would need further review,
at which point SMIC chose not to pursue the loan.
As a result of this experience, I have detailed a number of
recommendations that I mentioned in my written comments to
improve the Ex-Im Bank process, but let me just focus on a
couple of them.
First, more detailed information should be provided in the
Federal Register notice, and if there any significant changes--
as I mentioned there were in the loan amount--from the original
notice, the Ex-Im Bank should be required to issue another
request for public comment.
Second, the public comment period should be extended from
14 days to a minimum of 30 days, and the period of time the
interagency group has to review the proposed deal should also
be extended.
So, in summary, I believe these changes, along with the
others submitted, will be useful in future instances that may
affect companies like Micron.
Thank you, and I would be happy to answer any questions.
Senator Crapo. Thank you very much, Mr. Appleton.
Mr. Sneeringer, please proceed.
STATEMENT OF THOMAS M. SNEERINGER
DIRECTOR, FEDERAL GOVERNMENTAL AFFAIRS
UNITED STATES STEEL CORPORATION
ON BEHALF OF THE AMERICAN IRON AND STEEL INSTITUTE
Mr. Sneeringer. Thank you, Mr. Chairman, and for this
opportunity to appear. I am appearing for the American Iron and
Steel Institute, of which U.S. Steel is a member, and we have
been as active as we can be at the Ex-Im on steel issue. We
also find a great value to the Bank, I will not take the time
now to talk about that, but, as many people as are in this room
cannot all be wrong. The Bank is obviously addressing a very
important need in the economy.
I would like to draw your attention and the Subcommittee's
attention to some thoughts that occur to us after working on
steel issues at the Ex-Im as long as we have, and I could
summarize it in three points.
Number one. The Ex-Im Bank should not be in the business of
undermining a primary negotiating objective of the United
States to eliminate steel subsidies around the world.
Number two. The Ex-Im Bank should not be in the business of
enabling circumvention of trade law remedy orders after they
have been won.
And third, those of us who wish to have a greater role in
helping the Bank make the right decision, as Mr. Appleton has
suggested, can think of a number of ways in which it would be
easier for us to do that, and we think beneficial to the Bank.
Let me cover each of these very quickly.
On the subsidization issue, the steel industry operates in
a distorted market. In a real market, a persistent or a
permanent oversupply of product could not exist. When supply
exceeds demand, the price falls, the least competitive
companies fall off the bottom of the list, and some kind of
equilibrium is attained. Never, ever, ever does that happen in
the steel industry, and that is because the market is deeply
distorted through governmental intervention. This can take the
form of high tariffs, opaque nontariff barriers, currency
manipulation, et cetera, but the primary cause of the market
distortion in the steel world is subsidies.
Our Government knows that. The Clinton Administration found
it in a deeply detailed study done in 2000, and in 2001, newly
elected-President Bush instructed the USTR and the Commerce
Secretary to initiate worldwide talks to eliminate steel
subsidies. The U.S. position, going into those talks, and
maintained ever since, is that all governments should get out
of all steel making. Those talks have been very unsatisfying, I
am afraid to say, because what quickly happened is that the
rest of the world divided into two camps. The developing
countries wanted off the hook, and the developed countries
wanted their existing subsidies grandfathered and their new
subsidies green-lighted. If nothing else, it confirmed what we
already know, and that is that governments all over that world
are addicted to subsidizing their steel industries.
Now comes the Ex-Im Bank. When the Ex-Im Bank subsidizes
construction of excess capacity elsewhere in the world through
finance support or any other means at its disposal, it does two
things. It helps to create additional overcapacity in a flooded
market, and it undermines the negotiating posture of the United
States in trying to get other governments to give up their
subsidies. Every time the Ex-Im Bank subsidizes steel capacity
in other countries, the way I see it is it cuts another inch
off the bottom of the negotiating chair at the steel subsidy
talks on circumvention. All this excess steel that is floating
around looking for a home finds its home in North America, and
largely in the United States. That is because we have no
tariffs, no real nontariff barriers, and we have customers who
are always happy to pay less than the real price of steel in
their cost-cutting efforts.
So we bring trade law cases to defend ourselves. We win
orders and, immediately, the respondents go into a deep
circumvention exercise: Trans-shipping, yes; fraud, yes; but
more often just shifting products and switching countries. Some
of the ideas that have been put forward in anticipation of this
hearing address that kind of circumvention. The Ex-Im Bank
should not be in the business of helping people build capitol
equipment that is going to help them take their steel products
one more step downstream in order to avoid orders, and it
should not help them build steel capacity in other countries to
get around the order.
Last, on administrative procedures, we have not found the
procedures at the Ex-Im Bank to be particularly transparent. We
do not feel that we have been reached out to the way the Bank
promised we would be. It is very easy to contact the steel
industry. Contacting one person at the American Iron and Steel
Institute will do it. We are highly organized. I would add,
finally, that all the suggestions that have been made in terms
of notification to the Congress, et cetera, we support.
Thank you very much.
Senator Crapo. Thank you very much, Mr. Sneeringer. I have
some questions--some will be specific, but several I think
would be the type that both of you could respond to.
Mr. Appleton, first of all, thank you again for coming
before the Committee today and for helping us to analyze this
issue. I know that because of the time limits you were not able
to go into all of the recommendations that are contained in
your written testimony. Could you give us an overview, maybe,
and a little more detail of some of the changes that you think
should be made to the Ex-Im Bank procedures to increase the
fairness and the process for companies like yours?
And, Mr. Sneeringer, I am going to ask you the same
question.
Mr. Appleton.
Mr. Appleton. First of all, let me just start out by
saying, and I think echoing some of the comments made by my
peer, that the process of transparency in general needs to be
improved. When we talk about the Register notice and what is in
the Register notice, there is not a lot in there. In order to
adequately respond, we need to be able to understand a lot more
about what is being requested of the Ex-Im in order for us to
go through the three things that are important on the
transparency side. When you think about what the economic
impact analysis is supposed to do, it is supposed to look at
oversupply, it is supposed to look at competing product, and
whether there is harm or injury, and those are relatively all
detailed, involved items to look at, and we need time to do
that, which was the other thing that I had mentioned about we
need more time than what is allowed for the comment period.
Now, specifically, if you look at some of the things
surrounding--you know as you look around this impact economic
analysis, what is it that we are trying to avoid, or what is it
that we are trying to accomplish? An application is made today,
and there are a lot of assertions, as you had mentioned,
regrading things around the application, like is there really
another Government agency that is willing to loan the money? In
the example that I provided, that company said that another
country was waiting in the wings in order to provide this
money, and require them to all buy non-U.S. equipment or
Japanese equipment, and they asserted that many times, both in
the discussions I think over a number of months.
And in fact, when the Ex-Im Bank loan guarantee did not
occur, as a result of them not pursuing it, none of that ever
happened. It just evaporated, although it was a guarantee, it
was a done deal, if we were willing to step up. So your comment
earlier, I think, of Mr. Lambright about what kind of proof do
you require, we need written proof around those kinds of
things, that in fact, there has been a market failure, that you
cannot go to the market and access the money, that in fact,
there is a Government agency that is in waiting and so forth.
Those things and the specifics of them are very important, and
I think you are on the right line of inquiry as to what we can
do about that.
Senator Crapo. Thank you very much.
Mr. Sneeringer, same question?
Mr. Sneeringer. Mr. Chairman, what we are looking for is an
opportunity to share what we consider relevant information, and
information that the Bank says it takes into consideration. I
imagine they have their independent sources, but there is just
no better source on what is going on in the steel market than
the steel industry itself, because we study it every day.
For example, on subsidies, we have comprehensive
information on what the subsidy picture is going to look like
and the capacity picture is going to look like in the future,
because we vigilantly cover every announcement by every
government about what it is going to build, how much the new
``investment'' is going to lead to in terms of additional
tonnage, who is going to own it, et cetera. Attached to my
prepared testimony is the most recent paper that we submitted
in to the OECD on exactly that subject. When an application is
pending before the Ex-Im Bank relating to global steel
production, we would like to explain what we know about
subsidization and capacity growth in the markets involved.
Similarly, on circumvention, I know that there has been
some resistance at the Bank to employ this one or two steps
upstream or downstream formulation that was in the legislative
history of the last amendments, and that is suggested might be
incorporated into the statute. In our case, it is easy to
implement if you are in the normal process of steel making. If
you have an order against hot-rolled steel, we know that people
can take it one step downstream to cold-rolled, or they can
coat it, or they can paint it, and any of these processed will
allow them to get out from under the order. So, in the steel
industry, this proposed rule can be relatively easy to apply.
But it is not always easy to apply, and one could make a big
mistake applying it mechanically. For example, if you went
upstream in steel, say you had a hot-rolled order, you would
have trouble getting the whole way upstream to iron ore or
scrap, or a scrap substitute. So it does not always work.
The objective, however, is to help the Bank understand when
something might be being done for the purpose of circumvention.
We have a very strong case to present to them on that.
Basically, we do not know what cases will be considered. We get
14 days when a proposed financing finally surfaces. Very
minimal information is available. We do not know exactly what
steel products are involved. We sometimes have trouble even
telling what the country is until the very last minute.
So, I embrace everything that Mr. Appleton said about
extending the comment period from 14 to 30 days. I also wish
there was more of a mandatory outreach to the trade
associations that are involved. In addition, there are
government agencies--going back to the subsidies negotiating
objective principle--that are there at the table at these steel
subsidy talks. I am sure they put their oar in the water
ultimately at the Ex-Im Bank, but, they should be consulted
right off the bat.
Senator Crapo. Thank you very much. It seems to me that a
theme that both of you have been talking about is apparent
here, and that is that as the Ex-Im Bank approaches making,
obviously, very difficult analysis, that it can be benefited in
that by getting an early, aggressive, and complete expression
of the issue out to the public so that those who know whether
the potential for circumvention is there, and if so, why, can
contact and let the Bank analysts know what is going on.
Mr. Sneeringer. It does not necessarily mean that they are
triggering an outcry of opposition. It might or it might not
end up there, but we want to have a reasoned opportunity to
present facts that we have and they do not have.
Senator Crapo. Right. First of all, let me say, both of
your sets of written testimony were very well-prepared and have
a significant amount of very helpful information in it, and I
appreciate that. I am assuming, because both of you have tended
to focus on this aspect of the public involvement and the
notice and comment opportunities, that is probably the most
important--not that we would ignore the rest--but that is
probably the most important area for us to focus on; am I
correct in that, Mr. Appleton?
Mr. Appleton. Yes. Clearly, as I mentioned, when I first
had learned, inadvertently almost, what was happening in our
particular case on a loan going to the competitor in China, you
know, I came to Washington and spent some time here, and I am
glad that I did. I learned a lot more that was without notice
by spending time with those that were involved, things that
probably never would have surfaced. There was no transparency
to it. And, of course, it heightened the issue.
Senator Crapo. One of the other suggestions that has been
made is that when a final economic analysis is reached by the
agency, that be made public and available for comment. Do you
have any suggestions or thoughts on that?
Mr. Appleton. Yes. If you do not mind, let me start.
Mr. Sneeringer. Sure.
Mr. Appleton. I completely agree. And because what happens
is--by the way, we never did see it. We never do see what that
is, so it is hard for an industry to voice input and provide
concerns when it never sees the analysis. That kind of goes
without saying.
Mr. Sneeringer. I agree it should be made available to the
public. But I also like the provision that has been suggested
that it be reported to the Congressional Committees of
jurisdiction. I think you have a right to know.
Senator Crapo. And that the Committee receive the economic
analysis.
Mr. Sneeringer. Can I just make two other points?
Yes, we are interested in procedural changes but there are
two statutory changes that I would like to highlight. One is to
be very clear that the $10 million threshold cannot be ducked
under through disaggregation of projects. We have had that
occur in the steel industry where there was an application for
financing--I forget the exact number--it might have been $30
million. But we were not hearing about it because it was being
sliced into a series of projects that were under $10 million
each. So we think that is a very important point.
Also, going back to circumvention, again I do not know if
one or two steps upstream or downstream can even be legislated.
I know it would very difficult to word it. And it would be
dangerous to try to employ it mechanically.
On the other hand, I really think there should be some
changes in the law that require the Bank to take into account
the possibility that the project that they are subsidizing is
for the purpose of circumventing a trade order. So that would
cover both additional machinery in the country where the firm
was caught dumping or creation of new capacity in a second
country that would be owned by the firm under order so they
could export product in the United States and avoid the order.
Senator Crapo. Those are very helpful, thank you.
Moving to another issue, what are you respective thoughts
about the notion that I raised with Mr. Lambright about making
sure that we have increased and adequate participation by other
Government agencies that have expertise in the area of the
particular proposal?
Mr. Sneeringer. The agencies that we know the most about
are the ones that are involved in trade cases and that would be
Commerce and the ITC. Certainly when you talk about negotiating
postures around the world, although Commerce is the lead
agency, USTR would be involved. And I do believe that they
ultimately, can and do put their oar in the water at the Bank.
But I think early consultation with those agencies is very
important and I am really not aware of the extent to which the
Bank goes to the ITC. The ITC is also a fabulous wealth of
information, in our case, on how the steel market operates, and
what competes with what.
When the ITC investigated our safeguard action, known as
the Section 201 case, it divided the entire steel market into
only four pieces because there is so much competition within
each piece. Each industry segment covered as many as 20 or more
products but the division took into account what competes with
what. So, I think that type of information is important to the
analysis conducted by the Bank.
Mr. Appleton. I completely agree with his comments on the
Agency and let me just add one other which we also found
helpful in the time that we spent looking at some of these
issues, and that was the Treasury Department, given their
expertise in the financial markets.
I know Mr. Lambright mentioned the evaluation that goes
into the probabilities and the financial expertise of these
other agencies and the capability and market principles and I
think they could be helpful there as well.
Senator Crapo. Thank you.
In the same context, we have say the Commerce Department,
the Treasury Department, the ITC, and others who I assume are
in the business of making similar types of economic analysis in
other contexts but similar types of analysis. Are there any
examples there of those types of Government agencies who have
already addressed these questions of transparency and due
process that we could look to see how perhaps we could improve
things at the Export-Import Bank?
Mr. Appleton. Absolutely. If you look at the processes that
are in place at both Commerce and ITC, and of course USTR, and
how they work together, they have pretty good precedents and
pretty good process for transparency and how to work through
these.
Mr. Sneeringer. I agree. And I know the Bank is concerned
about proprietary information and that is one of the reasons we
get so little information when we ask for it. The fact is they
could look at the ITC's procedures for redacting and publishing
parallel documents that leave Business Proprietary Information
out. I think we should be able to learn more than we do at the
Bank and without jeopardizing the economic well-being of the
applicant.
Senator Crapo. Thank you. I think these are some hopefully
very productive areas we can look into to try to move this in
the right direction.
Another question, you have both discussed the economic
analysis that you had to deal with in your particular
circumstances. What factors did the Ex-Im Bank examine when
looking at economic impact in your cases?
Mr. Appleton. Let me just highlight one that I think is
important that you noted earlier in a question that you had of
Mr. Lambright.
Right now there is an oversupply calculation, forecast that
is required. I am sure it is this way for the steel industry
and it is certainly that way for the semiconductor industry.
These markets are difficult, if not impossible, to forecast
beyond about six minutes, much less 6 months or a couple of
years. And it seems to me that the focus has been on what is
going to happen 2 years from now. And if there is a forecast
that somehow says the market is going to be fine 2 years from
now that then over weights what is going on currently in the
industry.
It just strikes me as odd that the current industry has
little to no bearing, as opposed to a forecast of something
that might happen on whether there is going to be an oversupply
in the market.
One other comment that I want to make really along the
regards of fungibility. A lot of these assets are about can you
be injured or not? And what are the assets going to be used to
produce? And they are fungible. It is almost like pouring a cup
of water into a bucket of water. It just disappears because in
this particular case, in semiconductor equipment, when you are
buying advance semiconductor equipment, you can use it to build
a number of semiconductors. It does not just have to be the one
that is particularly a competing product.
That goes along the lines of how do you determine what is a
competing or a similar or like product. And we think that in
that analysis it needs to look at not only the potential but
also the probability of the capacity being used for a competing
product.
Senator Crapo. Thank you.
Mr. Sneeringer.
Mr. Sneeringer. The question is what factors went into the
economic analysis in cases we were interested in. At risk of
sounding glib, for reasons stated earlier, we do not have the
foggiest idea.
Senator Crapo. So therefore the earlier comments about the
public notice getting engaged earlier and perhaps being able to
see the economic analysis or have access to the information,
even if it has to be redacted, would be very helpful?
Mr. Sneeringer. Yes, sir.
Senator Crapo. Thank you very much.
I want to go just a little further into the question that
Mr. Appleton just raised or the issue that Mr. Appleton just
raised and that is this notion of trying to predict into the
future whether there is going to be an oversupply.
I too think that it raises a question. If there is
currently an oversupply, why would that not be the biggest
factor rather than a projection about what may be the case a
couple of years down the road?
Mr. Appleton, you can elaborate on that if you want, and
Mr. Sneeringer, I would like to have your thoughts on that as
well.
Mr. Sneeringer. I will go first. If we just took the
existing capacity of the steel industry right now and looked at
history where, as I said before, no matter how low the price
gets the least competitive companies do not fall off the bottom
of the list, I would say it is going to be static. But I do not
have to rely on that kind of deduction.
Attached to my statement is a detailed report on
announcements made by foreign governments about capacity they
are going to build well into the future, at least to 2012. It
is pretty frightening. It is very detailed. Our experience is
that a lot of this new capacity does get built and very little
of the existing capacity gets taken down in the process.
In the case of steel what is now an oversupply will only
get worse. We can quote the foreign governments for that
proposition.
Senator Crapo. Mr. Appleton, do you want to go into that
any further?
Mr. Appleton. I just want to expand it slightly and that
is, I think similar in our industry there are a lot of
forecasts that are made about capacity and overcapacity and
subsidized. And as my colleague is well aware of, just like we
are, there are government activities, government actions if you
will, and rules and regulations and WTO compliance to try to
deal with a lot of that.
But what happens--and if there is something currently in
place, that is clear. But what happens at the Ex-Im Bank is
they make forecasts that are very difficult to do or rely upon
forecasts, if you will, that are very difficult to rely upon
with any accuracy.
And so we really do need to look at, I think as you
mentioned, the current state of the industry should clearly be
the greatest weighting.
But we also need to look at the potential, recognizing that
it may not be in overcapacity today but that it very well could
be.
Senator Crapo. Thank you. I am just about at the end of my
questions, although I want to try to summarize in my own mind
what we have gone over. I am going to ask you each a final
question and that is going to be is there something else that
we have not gotten into that you want to be sure we get on the
table? Or do your own summary for me about what you would like
to be sure we take from this hearing.
But it seems to me, as we have looked at this, we have
covered a bunch of issues but most prominent seems to be the
importance of making sure that we get detailed information
regarding proposed financing to the public at an early stage
and in an adequate way so that input can be bough to bear by
those who have expertise on the specific proposal and the
industries involved.
Giving more time to that process so that we allow again
those who are interested and who have the expertise to be able
to muster their forces and their analysis and engage in a
timely fashion would be another.
Another is extending the levels and nature of performance
by the interagency group.
Another would be making a final version of the economic
impact analysis available to the public after the decisions
have been made so that can be then commented on and evaluated.
Another would be adopting really stronger criteria for the
economic impact analysis itself. That is a little vague but a
lot of different aspects of that have been discussed here
today.
Another could be requiring substantiation of competing
offers or assertions about availability of competing offers
and, with regard to the additionality criteria, requiring
substantiation for the potential of the proposal to meet the
additionality criteria.
I have notes that I have been writing to myself all over
the desk here and I am sure that I have missed some of the
issues there but it seems to me that a number of these types of
issues have been raised today and I think they are all helpful.
What I would like to do is to just give each of you an
opportunity to wrap up if you would like to, anything that you
would like to add to this basket or to focus on and make sure
that we have before us.
Mr. Sneeringer, I will start with you.
Mr. Sneeringer. Thank you, Mr. Chairman.
Certainly the administrative procedure improvements that
you have listed go beyond what I brought to the table so I
would certainly endorse all of those.
But to go back to the top two points that I mentioned, one
is the fact that the U.S. Government's position on steel
subsidies is that all governments ought to pull out of all
steelmaking. I do not know if you can legislate that but it
certainly needs to be taken into account by the Bank. I think
that could be done through better and earlier consultation with
other agencies and taking other agencies' word for these
things, really taking the lead from agencies that are out there
trying to negotiate the end of steel subsidies worldwide.
Second on circumvention, again I hope there is something
that can be legislated that would require the Bank to ask
itself, ask others, take into account, and make findings, that
what it is doing does not constitute enabling circumvention of
trade remedies. Because how untoward would that be? Private
companies spend millions of dollars and years, right through
the appeals, finally getting these orders that are designed to
stop dumping or stop subsidization, only to find that another
arm of the Federal Government is helping the very same people
get around those orders? I think it is wrong and I think it
should be outlawed in some way.
Senator Crapo. Thank you. Mr. Appleton.
Mr. Appleton. Mr. Chairman, I will be brief and again let
me thank you for inviting us here today to share some of our
thoughts.
First of all, we need transparency.
Second, we need to be able to respond to that transparency.
And third, and finally, we need to substantiate within that
transparency the assertions and the data that are involved in
the analysis. If we can get that accomplished we will have gone
a long ways from where we are today.
Senator Crapo. Thank you. That was a very good succinct
analysis of the objectives that we need to accomplish.
Before I wrap up, I was just noting, Mr. Sneeringer, when
you were speaking about your first point about making sure that
we do not support the violation of a trade measure in the
United States.
On the Ex-Im's chart for their economic impact analysis,
one of the boxes is the economic good subject to specified
trade measures? And so the issue is certainly raised already.
But what I am hearing you say is that, at least in the case of
steel, you do not think that the box is working.
Mr. Sneeringer. Let me give two quick examples. Let us say
the trade order is against dumped hot-rolled steel and now we
find out that somebody, namely the very same firm that got hit
with the order, has decided to build a cold mill by which they
can take hot-rolled steel and make it cold-rolled steel or a
hot dip line where they make it galvanized or corrosion
resistant steel, something downstream that is not subject to
the order.
Why would we want the Bank to help subsidize that?
Another example would be what if that firm owned or wanted
to own a plant in another country and they decided that the
hot-rolled steel they used to make in country A they will now
make in country B because that is not covered by in the order.
Why would we help build that plant?
Senator Crapo. So we have to be more expansive in our
evaluation of the trade implications rather than very narrow in
terms of where there is a specific trade order?
Mr. Sneeringer. Right.
Senator Crapo. I think that is very helpful. I assume, Mr.
Appleton, the same thing would be true in the semiconductor
business?
Mr. Appleton. That is right. At the risk of going on too
long, I want to make one final comment.
In all of this analysis that we go through, I think one of
the key factors is to make sure that we are not unintentionally
harming U.S. interests. And of course there is an interest in
terms of exportation and there is an interest in terms of
competition in making sure the United States stays healthy in a
particular industry.
That seems to be sometimes in the background and not as
prominent as it should be.
Senator Crapo. Thank you very much. And I do want to again
say to both of you that your testimony was very well-prepared,
the written testimony and your oral presentations have been
very helpful here.
As you both started out with, we all understand that the
Export-Import Bank has a very important function and is very
useful and helpful. And our purpose here is to make sure that
it does actually achieve very effectively those objectives that
we all can agree on that are the proper objectives.
I think that the issues that we have raised here today
clearly can be helpful in getting us much further down that
road and your testimony has been very helpful in helping us to
bring some specificity and some focus on the specific things
that we can do.
So again I thank you very much both for the presentation
and the material and the support that you have given us but
also for the time you have given to come here and the present
your information to this Committee.
With that, the hearing is adjourned. Thank you very much.
[Whereupon, at 11:19 a.m., the hearing was adjourned.]
[Prepared statements and additional material supplied for
the record follow:]
PREARED STATEMENT OF SENATOR MICHAEL B. ENZI
I would like to thank Senator Crapo for holding this important
hearing today to discuss economic impact issues in the context of the
reauthorization of the Export-Import Bank. I also want to thank Mr.
James Lambright, acting Chairman and President of the Export-Import
Bank, Mr. Steve Appleton, and Mr. Thomas Sneeringer for agreeing to
testify today.
Earlier this month, Senator Crapo held a hearing in this
Subcommittee on the reauthorization of the Export-Import Bank. At that
hearing, I shared major concerns I have with the economic impact
determination the Export-Import Bank uses to see if the benefits of
approving a proposal outweigh the negative economic impact. I want to
reiterate those concerns and discuss an application that is currently
pending to show why the Bank's economic impact procedures do not make
sense.
Each time the Board of Directors of the Export-Import Bank meet to
review an application, they do a cost-benefit analysis of that project
to determine the projects impact on our economy. If the economic
benefits outweigh the economic harm, the application should be
approved. Vice versa, if the net benefit is negative, the application
should be denied. It sounds simple, and as a strong supporter of
sending U.S. exports abroad, I support financing projects that are
beneficial to our Nation.
Unfortunately, it is not as straightforward as it sounds because
the process that is used to determine the net benefit of a project is
suspect. The Board only examines a portion of the transaction and
therefore, only does a portion of the analysis necessary to determine
the economic impact. It is my understanding that the Board only
examines the economic impact of the transaction during the repayment
period. They do so even though the entity may be used for years and as
such, may pose challenges to the U.S. economy for years beyond the
repayment period.
The problematic nature of this process can easily be seen through
an application pending before the Board. The Board is currently
reviewing an application to finance the purchase of refurbished
locomotives for the Magadi Soda Company, a soda ash facility in Kenya.
The application is for $14.4 million in financing, but it is my
understanding that the economic impact analysis will only look at the
burden on the U.S. economy over 6 years, the life of the loan.
The refurbished locomotives will allow the Kenyan facility to
supply an additional 325,000 metric tons of soda ash to the market, and
those locomotives will obviously be functional for more than 6 years.
Our domestic soda ash industry, which is primarily in my home State,
will therefore face export markets with an additional 325,000 metric
tons of soda ash each year. That additional product will have an impact
on prices and will negatively impact our economy. Thus, I would argue
that an economic impact analysis which takes into account the effect on
our domestic market for only 6 years is inadequate.
In order to give my colleagues additional information on this
issue, I would also like to submit a letter the Wyoming delegation
recently sent to the Export-Import Bank in opposition to the
locomotives application. This letter discusses in more detail the
negative economic impact that this pending application will have on
Wyoming's soda ash communities. I hope the Board takes the information
seriously and I hope my colleagues examine it to look at the problems
with the Export-Import Bank's current process.
The process right now just does not make sense. Without looking at
the full impact of any transaction, we cannot know if the transaction
is truly beneficial to our economy. As we work through the
reauthorization of the Export-Import Bank, this is an issue that needs
to be addressed. I look forward to working with my colleagues to
improve the process for approving applications at the Export-Import
Bank.
Thank you again to Senator Crapo for holding this important hearing
today.
----------
PREPARED STATEMENT OF JAMES H. LAMBRIGHT
Acting Chairman and President
Export-Import Bank of the United States
March 29, 2006
Mr. Chairman, Senator Bayh, and Members of the Subcommittee, I am
happy to be here today to testify on Ex-Im Bank's procedures involving
economic impact.
As I stated in my testimony of March 8, the mandate of the Export-
Import Bank of the United States (Ex-Im Bank or the Bank) is to
preserve and create U.S. jobs by supporting U.S. exports that would not
otherwise go forward. Consistent with this mandate, Ex-Im Bank fully
agrees with the principle that it should not approve a transaction that
would harm the U.S. economy. This is the foundation of our economic
impact procedures. But as the Bank acknowledges the importance of this
principle and these procedures, these decisions are among the most
difficult to make.
Through the economic impact process, the Bank seeks to determine
whether a transaction under consideration would adversely affect U.S.
production or employment, or result in the manufacture of a good
subject to specified trade measures. The statutory language requiring
consideration of economic impact, which has existed in various forms
for over 35 years, reflects Congressional intent to balance two
competing priorities--supporting U.S. export transactions and denying
support for otherwise creditworthy transactions due to the possibility
of long-term adverse economic consequences to the United States.
The Bank's economic impact procedures are intended to layout a
reasonable and logical process for analyzing the impact of Ex-Im Bank
support for a particular export transaction. The economic impact
analysis considers issues such as whether the goods and services Ex-Im
Bank is asked to support would establish or expand foreign production
capacity of an exportable good, whether the product is the subject of
trade measures, the global supply and demand for the good to be
produced, and the competitive impact on U.S. industry from increased
foreign production. The process includes review by other U.S.
Government agencies, as well as input solicited from interested parties
through notification in the Federal Register.
The Bank does not take this obligation lightly, and thoroughly
analyzes these transactions in an attempt to reach the right result.
Ex-Im Bank strives to implement the Congressional mandate in a
thoughtful, considered, and transparent manner, with full participation
of interested stakeholders. At the same time, the Bank stands ready to
work with the Congress, affected industries, exporters, organized
labor, and others to refine the process for considering these
transactions, based on experience over the past several years.
I would like to take this opportunity to explain how Ex-Im Bank's
current economic impact procedures were developed, how they are applied
to export transactions, and the Bank's experience with these procedures
over the last 4 years.
Procedures Prior to 2001
In 2001, Ex-Im Bank recognized the shortcomings in the then-
existing economic impact procedures, and initiated a process to improve
the procedures. At that time, the principal criticisms of the economic
impact procedures were that they: (i) lacked clear definitions and
criteria for important terms, such as ``surplus'' and competitive
impacts; (ii) only considered final trade measures, as opposed to
preliminary determinations and injury findings; (iii) did not provide
for sufficient interagency consultation; and (iv) provided for
inconsistent and inadequate notice to potentially interested parties.
The process of vetting changes to the economic impact procedures
was extensive and included representation of all stakeholders. Ex-Im
Bank held a public hearing to discuss the procedures and consulted with
Members of Congress, other U.S. Government agencies, as well as
representatives of industry, exporters, and organized labor. In March
2003, Ex-Im Bank released the new economic impact procedures reflecting
changes developed through public consultation, as well as changes
mandated by Congress in the Bank's 2002 reauthorization. These
procedures addressed many of the shortcomings of the prior economic
impact analysis, including:
Clearer Criteria and Definitions. The procedures clarified
important concepts such as oversupply by establishing
indicators relevant to the determination. Such indicators
include commodity prices, capacity utilization rates,
employment levels, and bankruptcies. In addition, Ex-Im Bank
broadened its evaluation of the impact of new production on an
industry by consulting with a variety of knowledgeable industry
sources, including independent industry observers, trade
associations and U.S. Government agency experts.
Broad Consideration of Trade Policies. In addition to final
trade measures, the economic impact procedures consider
preliminary antidumping and countervailing duty determinations,
suspensions agreements arising from trade investigations, and
Section 201 injury findings.
Enhanced Interagency Consultation. Ex-Im Bank changed the
procedures to include regular consultation with other U.S.
Government agencies (including the Department of Commerce and
the Office of the U.S. Trade Representative.) Ex-Im Bank alerts
these agencies early in the process to all transactions that
may be subject to detailed economic impact analysis. The Bank
solicits agency views on the applicability of trade measures,
industry information, and the appropriateness of its findings.
Notice to Interested Parties. Ex-Im Bank promptly notifies
interested parties of transactions that are subject to detailed
economic impact analysis. These notices are published in the
Federal Register and on the Bank's website. U.S. Government
agencies are separately notified of such transactions.
Current Analvtical Process
Ex-Im Bank staff subjects each transaction to a series of questions
to assess the potential adverse impact. First, staff ascertains whether
an export to be supported by Ex-Im Bank will enable the foreign buyer
to establish or expand production capacity of an exportable good.
Transactions that enable a foreign buyer to establish or expand
production capacity of an exportable good are subject to further
analysis.
Second, staff determines whether the resultant production will be
``substantially the same product'' as a good that is the subject to an
applicable trade measure, including antidumping orders, countervailing
duty orders, and Section 201 safeguards. If a trade measure is
applicable, then Ex-Im Bank is prohibited from supporting the
transaction.
If the resultant production is not the subject of a trade measure,
and the Ex-Im Bank transaction is more than $10 million, then Ex-Im
Bank staff considers whether the resultant production will meet the
``substantial injury'' threshold of 1 percent or more of U.S.
production. Transactions under $10 million are included in a post-
authorization annual review to determine whether the Bank authorized
multiple transactions to a single buyer that, in the aggregate,
exceeded $10 million.
If a transaction meets the 1 percent threshold, then Ex-Im Bank
staff conducts a detailed economic impact analysis that weighs the
benefits of an export against the potential costs and harm to the U.S.
economy from supporting the transaction. At this stage, Ex-Im Bank
publishes the details of the transaction in the Federal Register and on
its website and notifies relevant U.S. Government agencies. These
public notices are intended to reach out to trade associations and
other interested parties for comments on the proposed transaction.
The staffs analysis seeks to determine: (1) the likelihood that the
product in question will be in ``surplus'' (or oversupply) on global
markets at the time it is first sold; and (2) whether the product in
question competes with U.S. production of the same, similar or
competing product.
If either of these two circumstances exists, then Ex-Im Bank is
prohibited from supporting the transaction unless the Board of
Directors determines that the short- and long-term benefits to industry
and employment in the United States are likely to outweigh the short-
and long-term injury to U.S. producers and employment of the same,
similar, or competing commodity. Comments received pursuant to public
notice are included in the analysis that is presented to the Board of
Directors for decision.
Recent Experience with Economic Impact Analvsis
Since the new economic impact procedures took effect, Ex-Im Bank
has received requests to support capital equipment sales to a variety
of foreign buyers. Economic impact issues have arisen in a number of
these transactions, including those relating to the production of
textiles, chemicals, steel, semiconductors, soda ash, and solar panels.
Ex-Im Bank must balance the need for inclusiveness with commercial
practices that require efficiency and timeliness on transactions. While
Ex-Im Bank makes every effort to complete the economic impact analysis
expeditiously, it requires a substantial dedication of staff resources,
and usually takes 8 to 10 weeks. Completion of an economic impact
analysis may take up to 1 year, depending on the extent to which the
feedback and information obtained through the notice and comment period
are consistent with the Bank's analytical findings. The oversupply
assessment requires an analysis of future supply and demand balances of
the new production associated with Ex-Im Bank financing. However, a
lack of consensus among industry observers about the outlook on supply
and demand balances can lead to an inconclusive finding on oversupply
and may impede the Bank's analysis.
Trade measures, oversupply and trade flow impacts have figured
prominently in Ex-Im Bank's analysis of these transactions. Since 2002,
Ex-Im Bank has conducted a detailed economic impact analysis of 22
transactions, a quarter of which involved sales primarily by small
business exporters. Ex-Im Bank's Board of Directors has approved 11
transactions, and two were denied on economic impact grounds. Seven
transactions were withdrawn prior to Board consideration. While
applicants may withdraw their transactions for any reason, exporters
have indicated that the delay and uncertainty associated with the
Bank's economic impact policy have in some instances frustrated their
commercial relationships and caused them to lose export sales to
foreign competitors. The Bank must ensure that potential transactions
are properly vetted and all interested parties have an opportunity to
be heard. At the same time, it is critical that Ex-Im Bank's processes
permit U.S. exporters to remain competitive in the global marketplace.
Conclusion
The revisions to the economic impact procedures implemented in 2003
have been successful from a number of perspectives. They clarified the
criteria for Ex-Im Bank's review and expanded participation by other
U.S. Government agencies and stakeholders in the process. Despite this
progress, economic impact analysis continues to present challenging
issues for Ex-Im Bank. The analysis inherently pits one set of
interests and U.S. jobs--those of the prospective exporter and its
suppliers--against those of another U.S. company or industry that may
be harmed by the export sale. Moreover, Ex-Im Bank continues to grapple
with some of the core concepts raised by economic impact analysis,
including the determination of oversupply and the evaluation of trade
flow impacts. Despite these challenges, Ex-Im Bank strives to implement
the economic impact procedures so that they are transparent,
predictable, effective, and fair to exporters, affected industry, and
other stakeholders.
I look forward to working with you to achieve these objectives.
----------
PREPARED STATEMENT OF STEVEN R. APPLETON
Chairman of the Board, Chief Executive Officer, and President
Micron Technology, Inc.
March 29, 2006
Mr. Chairman, Senator Bayh, and Members of the Subcommittee, my
name is Steve Appleton, and I am the Chairman of the Board, Chief
Executive Officer and President of Micron Technology, Inc. (Micron.)
Thank you for inviting me here today to testify before this
Subcommittee regarding the 2006 reauthorization of the Export-Import
Bank of the United States (Ex-Im Bank). I appreciate the important work
of the Ex-Im Bank in encouraging exports from the United States, and
the work of this Committee in authorizing and overseeing funding for
the Bank. I welcome the opportunity to describe to the Subcommittee
Micron's experience with the Bank and to share some thoughts on how the
Ex-Im Bank's Economic Impact Analysis process and other related
procedures could be enhanced to guarantee greater fairness and
transparency.
Let me start by giving you some background on Micron and the
semiconductor industry. Micron is one of the world's largest and most
innovative providers of advanced semiconductor solutions. Micron
produces advanced DRAM, NAND Flash memory, and imaging semiconductors
that are used in today's cutting-edge, mobile, computing, server,
automotive, networking security, industrial, consumer, and medical
applications. The company is based in Boise, Idaho and began operations
in 1978. In the United States, Micron has major manufacturing
facilities in Boise, and Manassas, Virginia, and Micron also is a
partner with Intel Corporation in a Joint Venture manufacturing
facility in Lehi, Utah. Additionally, Micron has design centers in
Texas, Minnesota, California, and Idaho, and operations around the
world, including fabrication facilities in Italy and Japan, a joint
venture manufacturing facility in Singapore and a wholly owned assembly
and test facility in Singapore. Micron employs nearly 21,000 people
worldwide, over half of those employees in the United States. Micron's
revenues last fiscal year were $4.88 billion and we invest a total of
about $1-1.5 billion annually in our worldwide operations and on
research & development.
The semiconductor industry is extremely competitive. Only those
companies able to aggressively control costs, increase productivity,
and continuously innovate are able to survive. In 1985, there were
about 11 major U.S.-based companies in the DRAM business--today, Micron
is the only one still manufacturing DRAM. To compete, Micron has to
produce faster and smaller devices that provide greater capability at
the lowest possible price. At the same time, we have to be able to
anticipate the development of a wide array of end use consumer products
and electronic systems that might require our products and adapt
accordingly.
The semiconductor industry is also capital intensive. Manufacturing
equipment is highly specialized and has a life span of only about 3
years. Companies must continually reinvest to keep ahead of the
innovation curve. This means making major investments in research and
development as well. It costs around $2.5 to $3 billion to construct
and equip a manufacturing facility from green field to full operations.
And, the semiconductor industry spends an average of 40 percent of its
revenues on new capital equipment and R&D each year.
Due to the capital intensive nature of the business, the
semiconductor industry is also sensitive to the availability and cost
of capital. When our semiconductor competitors have special access to
favorable financing through government-subsidized programs, it creates
enormous and artificial advantages for that competitor. For decades,
Micron has spoken out against illegal subsidies from foreign
governments to develop and protect a domestic semiconductor industry.
In many instances, this practice has led to massive overcapacity. In
the DRAM industry, Micron has seen time and again--first in Japan, then
in Korea, and then in Taiwan--government-subsidized capital poured into
expanding capacity in an effort to gain market share or given to keep
companies from otherwise going bankrupt. For example, in 2001-2003, the
Government of Korea provided domestic manufacturer Hynix Semiconductor
with over $16 billion in illegal subsidies. As a result of this, Micron
filed and won antisubsidy cases against Hynix in the United States,
Europe, and Japan.
Given this background on Micron and the semiconductor industry, you
can appreciate my surprise when I discovered in August 2004 that the
Ex-Im Bank of the United States was contemplating providing $500
million in loan guarantees to a DRAM competitor in China, a company
called Semiconductor Manufacturing International Corporation; also know
as ``SMIC.'' SMIC is a relatively new, but rapidly growing, entrant
into the pureplay semiconductor foundry business. A pureplay foundry is
a manufacturing facility designed to produce a variety of semiconductor
products, including memory like the DRAM and NAND Flash chips that
Micron makes and sells, as well as logic products and other types of
integrated circuits. At the time of the proposed financing, SMIC was
one of the fastest growing semiconductor manufacturers in the world.
Most of its revenue came from DRAM, either manufacturing and selling
product under its own label or manufacturing product for other
companies to sell. Both from a design and a production perspective,
SMIC had made DRAM a central part of its business plans. Within 3
years, it had become the world's third largest semiconductor foundry.
Even more perplexing to me was that SMIC could claim to need Ex-Im
Bank financing in order to purchase manufacturing equipment. SMIC had
recently completed the construction and ramp of three different
semiconductor facilities in Shanghai and had done so with a mix of
private equity, credit from Chinese banks, and vendor financing. Most
of the equipment it purchased for these three factories was from U.S.-
based equipment suppliers. Moreover, in March 2004, only 3 months
before applying for the Ex-Im Bank loan guarantee, SMIC had raised $500
million on international capital markets through an initial public
offering. Clearly, SMIC was a sophisticated company with access to
international capital markets and a track record of raising money when
needed. So, why did SMIC need to go to the Ex-Im Bank? The most likely
answer was SMIC wanted to benefit from lower than market interest
rates.
As you know, the role of the Ex-Im Bank is to provide financing to
help promote the export of U.S. goods and services with the stated
purpose of maintaining and creating American jobs. Importantly, Ex-Im
Bank however, does not provide export financing for just any
transaction, but may do so under two scenarios. The first is to match
export financing from the Export Credit Agencies of other countries.
The second is to fill in gaps in private sector financing or to address
some other market failure--that is, only when an export would not go
forward without the assistance of the Bank. Accordingly, the Ex-Im Bank
should not operate as a private sector financial institution and should
not supplant or compete with financing from the private sector.
Moreover, Ex-Im should not provide financing for transactions that
would result in a net negative impact on the U.S. economy. Through its
Economic Impact Analysis procedures, the Ex-Im Bank determines whether
a transaction under consideration would adversely affect U.S.
production or employment. For example, adverse effects would occur when
the financing supports the creation or expansion of capacity of a
product that could then be exported to the United States and cause
injury. In carrying out its Economic Impact Analysis, the Ex-Im Bank
looks at the following factors:
<bullet> Whether the commodity produced with the equipment financed by
the Ex-Im Bank will be in oversupply on world markets at the time
the resulting commodity is first sold;
<bullet> Whether the resulting production capacity is expected to
compete with U.S. production of the same, a similar, or a competing
commodity; and
<bullet> Whether the Ex-Im Bank determines that the extension of such
credit or guarantee will cause substantial injury to United States
producers of the same, a similar or a competing commodity.
A Federal Register notice requesting public comment must be filed
under the Ex-Im Bank's Economic Impact Analysis procedures. With
respect to the proposed SMIC financing, a Federal Register notice was
published in August 2004. Unfortunately, the notice itself provides
very little information regarding the proposed financing, so it is
difficult to provide meaningfully comments on a proposal. The SMIC
related notice only indicated that the proposed financing was for $500
million to a Chinese company to make 60,000 wafers a month of advanced
semiconductors. Nonetheless, after doing some investigating of our own
to flesh out more details, we filed comments objecting to the
financing. We were able to assess the impact that the proposed
financing guarantee would have on Micron's operations because DRAM was
a central focus of SMIC's well-publicized business plan and a large
proportion of its production. We provided the Ex-Im Bank detailed
information on SMIC's competing DRAM production, the state of
oversupply in the DRAM market, and SMIC's apparent access to private
financial markets.
In December 2004, I came to Washington to meet directly with
members of the Ex-Im Bank Board to make this case. During these
meetings, I was informed that the terms of the proposed financing had
fundamentally changed--that the proposal was instead to provide SMIC
with a $1.2 billion loan guarantee, more than double the original
proposal. Moreover, SMIC was reportedly guaranteeing that it would
produce only small quantities of DRAM and that instead its real
intention was to make logic devices which it claimed were not in
oversupply in the global market. From my perspective, SMIC's guarantees
were not reassuring. First, the same equipment used to produce logic
semiconductors can be used to produce DRAM. Second, even if the
equipment were dedicated to logic production, it still freed up SMIC's
capital to invest its own money in DRAM production.
When I asked the Ex-Im Bank Board if Micron would have an
opportunity to comment on the revised proposed financing, there was
resistance. It was only after we persisted that the Board agreed to
publish a new Federal Register notice. We asked to see the draft
Economic Impact Analysis report, but that request was denied.
Consequently, Micron hired a private firm, CapAnalysis, to conduct a
comprehensive economic impact assessment. Based on a report by
CapAnalysis, the economists concluded that: (1) the world market was in
oversupply for both DRAM and logic chips: (2) SMIC was capable of
accessing financing on its own without an Ex-Im Bank guarantee; and (3)
the proposed financing would have a net negative impact on the U.S.
economy and U.S. jobs.
Ultimately, the proposed financing never went to a vote of the Ex-
Im Bank Board. As then-Chairman and President Phillip Merrill noted,
this was a large and complex transaction that implicated a number of
requirements under the Ex-Im Charter including the economic impact
test, the additionality standard, and reasonable assurance of
repayment.
As a result of our experience with the Ex-Im Bank process, I
believe there are a number of steps that could be implemented to
improve the economic impact assessment procedure and help ensure that
other Ex-Im Bank requirements are being met.
With respect to the economic impact procedures, I would make the
following suggestions to improve the transparency of the process:
<bullet> More detailed information should be provided in the Federal
Register notice so as to enable potentially affected U.S. producers
to comment meaningfully on the proposed transaction.
<bullet> The comment period should be extended from 14 days to a
minimum of 30 days (and, for large financings, such as the one
involving SMIC, 45 days or more) to allow for a more thorough
analysis by potentially affected U.S. producers and other
interested members.
<bullet> The period of time the Interagency Group has to review the
proposed deal and the completed Economic Impact Analysis should
also be lengthened. Based on our experience, members of the
Interagency Group were frustrated that their questions and concerns
were not being adequately addressed, and that they were consulted
only at the last minute. Moreover, certain agencies on the
Interagency Group, especially the Department of Commerce, should be
consulted early in the application procedure because they often
have industry expertise--for example, concerning the semiconductor
industry--that does not exist in-house at the Ex-Im Bank. This
especially makes sense given that the Secretary of Commerce is an
ex officio member of the Ex-Im Board.
<bullet> The Ex-Im Bank should be required to issue another request for
public comment if there are significant changes to the terms or the
amount of the financing.
<bullet> And finally, a public version of the final Economic Impact
Analysis should be made available for inspection and comment before
a Board vote on a particular financing proposal. Right now,
affected U.S. companies are never given the chance to see the final
analysis, the comments of other parties or the input from the
private experts retained by the Ex-Im Bank. This lack of
transparency puts the potentially affected producer at a
significant disadvantage in terms of transparency and due process.
These due process procedures are only what are minimally required
in other agency contexts such as the International Trade Commission
or the Department of Commerce, as well as with the Regulatory
Impact Analysis review procedures followed by OMB in the context of
E.O. 12866.
I also believe that the Ex-Im Bank should implement targeted
provisions to ensure that its mandate is being met. First, as I noted
previously, pursuant to its rules, Ex-Im Bank can provide financing to
match the competition from foreign Export Credit Agencies that provide
financing or guarantees to their own exporters. During the SMIC
application, we were told that SMIC had informed the Ex-Im Bank that if
it did not get a loan guarantee from the United States, it would get
financing from JABIC, the Japanese Export-Import Bank and that the
United States exporters would lose business. When we asked what proof
was provided, we were told that the borrower was not required to
provide documentation showing the availability of alternative
financing--instead, an applicant merely had to provide assurance that
this was the case. In our experience, SMIC never received financing
from JABIC despite its assurances to Ex-Im Bank. Applicants should be
required to provide some proof of alternative financing from a foreign
Export Credit Agency.
Likewise, if the Ex-Im Bank provides financing based on the
``additionality'' standard, then the Bank should be required to
document the alleged market failure at issue. Specifically, the Ex-Im
Bank should establish guidelines for determining whether its financing
is truly necessary. Among other things, they should request
documentation from the foreign applicant detailing their record of
raising capital from the private sector during the 3-year period prior
to the date of any Ex-Im Bank financing application. This should
include all loans, equity issuances, and vendor financing.
Documentation should also be provided to demonstrate recent, failed
attempts to access financing from the public sector.
I believe that these changes would have been helpful in assessing
the SMIC case and will be useful in future instances that may affect
Micron. However, I am not in a position to say that the recommendations
I have outlined should be applied in all cases. I would leave that to
the discretion of the Committee and the Ex-Im Bank.
I applaud the Ex-Im Bank for its efforts supporting and promoting
U.S. exports--a laudable goal. Without question, the Ex-Im Bank should
strive to help small exporters that really need assistance. As I
described, the problems that we encountered in our dealings with the
Ex-Im Bank could be improved significantly if additional procedures
were implemented to ensure a more balanced and transparent process.
Micron would be happy to work with you, Mr. Chairman, other Members of
the Committee and appropriate officials at the Ex-Im Bank.
Again, thank you for the opportunity to testify and I would be
happy to answer any questions.
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PREPARED STATEMENT OF THOMAS M. SNEERINGER
Director, Federal Governmental Affairs
United States Steel Corporation
on Behalf of
The American Iron and Steel Institute
March 29, 2006
I appreciate the opportunity to testify here today on behalf of the
American Iron and Steel Institute (AISI) and its U.S. member companies
who together account for approximately three-fourths of the raw steel
produced annually in the United States.
American steel producers strongly support U.S. Government policies
to open foreign markets and more specifically the goals of the Export-
Import Bank (Ex-Im Bank) to foster export of U.S.-produced goods and
services. The financial well-being of our industry and of our domestic
suppliers and customers is vital to our economy. At the same time, the
domestic steel industry remains concerned about U.S. Government-
subsidized financings of manufacturing facilities which lead to the
expansion of production capacity of a major commodity already in
oversupply--a problem that has been especially prevalent in the global
steel industry.
Our concerns regarding overcapacity are deepened by the fact that
world steel supply is likely to expand dramatically in the near future.
Past experience clearly demonstrates that overcapacity is the root
cause of the economic conditions that have regularly subjected American
steel producers and workers to substantial injury caused by often
unfairly traded imports. As the Department of Commerce confirmed in its
2000 study entitled ``Global Steel Trade: Structural Problems and
Future Solutions,'' government-enabled distortions and government-
tolerated anticompetitive practices are pervasive in the world steel
market. The outcome is that market forces are not able to bring world
capacity and supply in line with demand. Much of the resulting
oversupply in steel ends up, directly or through displacement, in the
open U.S. market. As a result, the American steel industry is
repeatedly injured by import surges.
This is why the President has made reducing global steel oversupply
a priority and in June 2001 launched a multilateral initiative designed
to restore market forces to world steel markets and eliminate the
unfair trade practices that harm the industry and its workers. In
announcing his multilateral initiative on steel, President Bush
confirmed the extent of foreign government interventions and the
severity of the subsidy-induced global steel excess capacity problem
and their direct impact on domestic steel producers and workers:
The U.S. steel industry has been affected by a 50-year legacy
of foreign government intervention in the market and direct
financial support of their steel industries. The result has
been significant excess capacity, inefficient production, and a
glut of steel on world markets. . . . Absent strict disciplines
barring government support, direct or indirect, for inefficient
steel-making capacity, the problems confronting the U.S. steel
industry--and the steel industry worldwide--will only recur.
The initiative included: (1) negotiations with America's trading
partners seeking the near-term elimination of inefficient excess
capacity in the steel industry worldwide; and (2) negotiations to
eliminate the underlying market-distorting subsidies. Thus, when the
Ex-Im Bank subsidizes loans which result in increased steel production
capacity abroad, it directly contradicts the policies and goals
established by the President.
Steel companies around the world have recently announced plans to
expand steel capacity by close to 600 million metric tons from 2005-
2012. While capacity expansion must of course be viewed in the context
of demand growth, this capacity growth far exceeds any reasonable
expectation for global consumption growth. The capacity expansion
continues to occur in Asia and South America, with spurts of growth
also occurring in Russia and other areas. These capacity expansion
facts are sourced from a memorandum which AISI and five other major
steel associations in the NAFTA region submitted recently to the OECD.
This submission is attached hereto for inclusion in the record.
Much of the unprecedented building binge occurring in multiple
regions of the world is taking place in countries which are producing
more steel than they consume domestically, and as a result of decisions
by governments to support the expansion of domestic steelmaking
capability. For instance, India's Government has announced that it aims
to increase steel production to 110 million tons by the 2019/20
financial year--tripling its current output.
The large, open, and therefore vulnerable U.S. market is the
natural choice for export by countries who produce more flat-rolled
steel products than they consume and are heavily reliant on exports, as
many other major steel markets are either effectively closed to
imports, or net steel exporters, or both. A renewed import wave of
surplus product flooding the U.S. market would be both harmful and
unfair. It would threaten to undermine the significant progress that
domestic steel producers have made in recent years in historic and
ongoing restructuring efforts, which in turn would be put into serious
jeopardy.
The U.S. steel industry does not oppose financings by the Bank so
long as they are not undermining U.S. Government policies to reduce
global steel overcapacity. The industry wants to work constructively
with the Bank in its consideration of requests for financing of global
projects involving the steel industry to make certain that future Ex-Im
Bank investments are not made that would increase production of a
commodity product for which there already is overcapacity.
In 2002 Congress, responding to the Ex-Im Bank providing financing
for foreign steel production over the objections of the Congressional
Steel Caucus and Cabinet level officials, and other similar concerns,
enacted legislation to prevent the Ex-Im Bank from financing production
of foreign goods that have been found to injure U.S. producers. AISI
and its U.S. members supported Congress' inclusion of provisions
strengthening the Bank's economic impact analysis provisions in the
2002 Ex-Im Bank Reauthorization Act. While the statutory and procedural
modifications to these rules were a great step forward, improvements
can be made to make the rules more effective and more transparent. AISI
therefore urges Congress to consider proposals--both substantive and
procedural, relating to increased transparency--for inclusion in the
Bank's reauthorization legislation:
<bullet> Define the term ``substantially the same product'' to include
products that are one or two steps upstream or downstream from the
product subject to an order or determination. This clarification
would apply to the rules relating to both final trade measures and
preliminary affirmative determinations under Title VII of the
Tariff Act of 1930. This clarification would make the statute
consistent with the legislative intent as expressed by Senator Bayh
and Congressmen Oxley and Toomey in 2002. Similarly, and
thematically consistent with the intent of the economic analysis
requirement, the analysis of whether the product is or will be in
oversupply or is in competition with U.S. production of a same,
similar, or competing product should include also products that are
one or two steps upstream or downstream from the product subject to
the analysis.
<bullet> Specify that the Bank shall not provide financing to a firm
for the production of substantially the same product that is the
subject of a trade law order, regardless of the country of origin
of the order against that firm. In other words, if there is a trade
law order against a company producing hot-rolled steel in Country
X, the Bank should not support a loan to that same company for
improving existing plants or building new facilities for producing
hot-rolled steel in Country Y.
<bullet> Specify that the Bank's $10 million and $5 million financing
thresholds are to be aggregated for all financings and financing
applications involving the same firm and substantially the same
product within a 24-month period. Applicants for Ex-Im Bank
financing should not be allowed to circumvent the rules by disag-
gregating financing applications into several smaller applications
to avoid the economic impact analysis and Board consideration. This
aggregation proposal would apply to the Bank's general $10 million
threshold for an economic impact analysis; the $5 million and $10
million thresholds under the preliminary determination rules; and,
the $10 million threshold under the Section 201 investigation
rules.
<bullet> Require the Bank to expand the public comment periods from 14
days to 30 days. The statute requires that the Bank seek comments
from interested parties to ensure that it refrain from financing
activities which adversely affect American
interests and that it has established procedures to notify
interested parties and provide a comment period with regard to
loans or guarantees it is reviewing. The current comment periods,
however, are too short to allow full and meaningful private sector
comment. In addition to the formal mechanism for comment and
consultation, AISI encourages the Bank to consult closely with
domestic industries to discuss proposed financings and their impact
on excess foreign production capacity.
<bullet> Require that the Bank notify the Senate Committee on Banking,
Housing, and Urban Affairs and the House Committee on Financial
Services of proposed transactions subject to an economic impact
analysis. Currently, the Bank's procedures provide that it will
notify the relevant U.S. Government agencies but there is no
required notification of the Congressional oversight committees.
In conclusion, the 2002 Ex-Im Reauthorization Act made significant
changes to the economic impact procedures, but the additional
amendments outlined above would help to ensure that the Bank undertakes
a balanced, full, and fair procedure with regard to its economic impact
analysis.
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