[Senate Hearing 107-]
[From the U.S. Government Publishing Office]
S. Hrg. 107- 245
REAUTHORIZATION OF THE EXPORT-IMPORT
BANK OF THE UNITED STATES
=======================================================================
HEARING
before the
SUBCOMMITTEE ON
INTERNATIONAL TRADE AND FINANCE
of the
COMMITTEE ON
BANKING,HOUSING,AND URBAN AFFAIRS
UNITED STATES SENATE
ONE HUNDRED SEVENTH CONGRESS
FIRST SESSION
ON
ENSURING THAT EX-IM BANK HAS THE RESOURCES TO ENABLE IT TO FULFILL ITS
STATUTORY MANDATE FOR U.S. EXPORTERS BOTH SMALL AND LARGE TO PROVIDE
FINANCING TERMS AND CONDITIONS COMPETITIVE WITH THOSE OFFERED BY
FOREIGN EXPORT CREDIT AGENCIES
__________
MAY 17, 2001
__________
Printed for the use of the Committee on Banking, Housing, and Urban
Affairs
_______
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COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS
PHIL GRAMM, Texas, Chairman
RICHARD C. SHELBY, Alabama PAUL S. SARBANES, Maryland
ROBERT F. BENNETT, Utah CHRISTOPHER J. DODD, Connecticut
WAYNE ALLARD, Colorado TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming JACK REED, Rhode Island
CHUCK HAGEL, Nebraska CHARLES E. SCHUMER, New York
RICK SANTORUM, Pennsylvania EVAN BAYH, Indiana
JIM BUNNING, Kentucky ZELL MILLER, Georgia
MIKE CRAPO, Idaho THOMAS R. CARPER, Delaware
JOHN ENSIGN, Nevada DEBBIE STABENOW, Michigan
JON S. CORZINE, New Jersey
Wayne A. Abernathy, Staff Director
Steven B. Harris, Democratic Staff Director and Chief Counsel
Adrienne B. Vanek, Staff Assistant
Martin J. Gruenberg, Democratic Senior Counsel
George E. Whittle, Editor
______
Subcommittee on International Trade and Finance
CHUCK HAGEL, Nebraska, Chairman
EVAN BAYH, Indiana, Ranking Member
MICHAEL B. ENZI, Wyoming ZELL MILLER, Georgia
MIKE CRAPO, Idaho TIM JOHNSON, South Dakota
(ii)
C O N T E N T S
----------
THURSDAY, MAY 17, 2001
Page
Opening statement of Senator Hagel............................... 1
Opening statements, comments, or prepared statements of:
Senator Bayh................................................. 3
Senator Miller............................................... 4
Senator Johnson.............................................. 30
WITNESSES
Peter A. Bowe, President, Ellicott Machinery Corporation
International and Liquid Waste Technology, on behalf of the
U.S. Chamber of Commerce....................................... 6
Prepared statement........................................... 30
Response to written questions of:
Senator Hagel............................................ 49
Senator Miller........................................... 80
E. Robert Meaney, Senior Vice President, International, Valmont
Industries, Inc................................................ 8
Prepared statement........................................... 32
Response to written questions of:
Senator Hagel............................................ 80
Senator Miller........................................... 81
Dean R. Dort II, Vice President International, Deere & Company,
also on behalf of the National Foreign Trade Council and the
Coalition for Employment through Exports....................... 11
Prepared statement........................................... 34
D.P. (Darin) Narayana, President, Bank One International
Corporation, also on behalf of the Bankers' Association for
Finance and Trade.............................................. 13
Prepared statement........................................... 37
Response to written questions of:
Senator Hagel............................................ 81
Senator Miller........................................... 82
Terrence D. Straub, Vice President, Governmental Affairs, USX
Corporation.................................................... 16
Prepared statement........................................... 39
Tom McKenna, Executive Director, Indiana Department of Commerce.. 18
Prepared statement........................................... 40
C. Fred Bergsten, Director, Institute for International Economics 21
Prepared statement........................................... 43
Additional Material Supplied for the Record
Statement of American Iron and Steel Institute on behalf of U.S.
Member Companies............................................... 84
(iii)
REAUTHORIZATION OF THE EXPORT-IMPORT BANK OF THE UNITED STATES
----------
THURSDAY, MAY 17, 2001
U.S. Senate,
Committee on Banking, Housing, and Urban Affairs,
Subcommittee on International Trade and Finance,
Washington, DC.
The Subcommittee met at 2:30 p.m., in room SD-538 of the
Dirksen Senate Office Building, Senator Chuck Hagel (Chairman
of the Subcommittee) presiding.
OPENING STATEMENT OF SENATOR CHUCK HAGEL
Senator Hagel. Let me call the Subcommittee to order.
We have a number of distinguished, enlightened, didactic
witnesses today and we are most grateful.
The Subcommittee on International Trade and Finance meets
today for an important hearing on the reauthorization of the
Export-Import Bank, commonly referred to as the Ex-Im Bank. The
Ex-Im Bank was last authorized in 1997, for a 4-year term that
expires September 30 of this year.
The Ex-Im Bank is an important component of U.S. economic
and international policy. It helps U.S. companies get their
products and services to customers overseas. It helps new
exporters get started in the global marketplace. The Ex-Im Bank
also sustains relations between the United States and
struggling countries that rely on U.S. products and services.
Such relations encourage the sharing of democratic ideas and
the rule of law. Exports facilitated by the Ex-Im Bank support
jobs in America. Some of our witnesses today will tell what
these exports mean to their employees.
The Ex-Im Bank's role as a stabilizing influence during
periods of economic instability is also important to recognize.
Ex-Im emerged relatively unscathed from the Asian-Russian
financial crisis of 1997-1998. For the 2-year period ending
September 1999, Ex-Im paid guarantee and insurance claims
totalling $1.5 billion. Ex-Im helped keep trade going between
Asia and the United States during the crisis when no commercial
banks would take the risk.
The Export-Import Bank is an independent U.S. Government
agency that is charged with financing and promoting exports of
U.S. goods and services. It was established over 65 years ago
to match officially supported foreign competition and fill
financing gaps in order to maximize support for U.S. exports
and contribute to the promotion and to the maintenance of U.S.
jobs. By targeting financing gaps and officially supporting
competition, Ex-Im Bank supports sales that might otherwise not
have gone forward. These additional export sales expand or
maintain employment in sectors where jobs are both among the
highest paid in the economy and have extensive ``multiplier''
effects on the U.S. economy.
To accomplish its goals, Ex-Im uses its authority and
resources to assume commercial and political risks that
exporters or private financial institutions are unwilling, or
unable, to undertake alone. It also overcomes maturity and
other limitations in private-sector export financing and it
assists U.S. exporters to meet foreign, officially sponsored,
export credit competition. It provides guidance and advice to
U.S. exporters and commercial banks and foreign borrowers.
Ex-Im Bank financing helped facilitate more than 2,500 U.S.
export sales in fiscal year 2000. The Bank authorized $12.6
billion in loans, guarantees, and export credit insurance
supporting $15.5 billion of U.S. exports to markets worldwide.
Ex-Im Bank financing supports small businesses, the production
of environmentally friendly goods and services, energy
production, and high-tech innovations. In fiscal year 2000,
nearly $75 million of U.S. agricultural commodities, livestock,
and foodstuffs were assisted by Ex-Im Bank financing.
For example, some companies in Nebraska, a small State,
middle of the country, important----
[Laughter.]
Senator Bayh. Just to pick one at random.
[Laughter.]
Senator Hagel. You will have your turn here.
[Laughter.]
Indiana always vies with Nebraska, or Nebraska with
Indiana, for the popcorn capital of the world championship. And
you have the last word on that, I think.
Senator Bayh. I wish we could vie for the NCAA football
championship.
[Laughter.]
Senator Hagel. Well, thank you. I might add, volleyball as
well.
Let's see. Where were we? Back to business.
Lozier Store Fixtures of Omaha is among the companies
receiving financing that supports the sale of grocery store
equipment and furnishings, and transport equipment to Cameroon.
The Administration has sent a request to Congress to
reauthorize the Bank's charter for 4 years with no changes from
its current operating procedures. Through two hearings, this
Subcommittee will review Ex-Im Bank's issues and determine how
to respond to the Administration's request. This first hearing
includes private-sector witnesses. The second hearing will
follow at a later date with the Administration's witnesses.
This first hearing will focus on the experiences of large and
small companies doing business with Ex-Im and on how Ex-Im
impacts the companies' ability to compete with bidders from
other countries.
There is no doubt that Ex-Im has helped companies export
where commercial banks would not. However, there are legitimate
questions of what can be done to improve the Bank's
effectiveness to meet new challenges. These challenges include
competition from foreign companies that receive export credit
agency financing outside of the OECD Arrangement rules on tied
aid, term limits, and interest rate subsidies.
Another topic we need to examine includes the procedures
that an exporter faces to prove that it is meeting the local
content requirements. Of course, a significant question in all
of our minds is what impact a 25 percent budget cut will have,
if any, on Ex-Im's ability to meet its charter goals.
To discuss these and other issues, we have an impressive
group of witnesses here today. Before we hear from our
witnesses, I would ask my friend and colleague, the Ranking
Democrat on this Subcommittee, Senator Bayh, of the great State
of Indiana, for any comments he wishes to share.
Senator Bayh.
OPENING STATEMENT OF SENATOR EVAN BAYH
Senator Bayh. Thank you, Mr. Chairman.
I want to thank my friend, Chuck Hagel, for his leadership
in calling us together today on this reauthorization issue.
Senator Hagel and I have worked together on a variety of other
issues. We hail from the same part of the country, the great
Midwest, and have been able to forge some bipartisan
cooperation on issues like this when that spirit has too often
been lacking around this institution. So it is good to be with
you again today, exploring this important issue. And we will
settle questions about popcorn and athletics and things like
that in another venue.
I want to thank all of our witnesses for their time in
joining us here today. I know some of you have traveled a great
distance.
In particular, I want to thank Mr. McKenna, who we will be
hearing from. I have known Tom for many years. He is the head
of Indiana's Department of Commerce, and doing a wonderful job
in helping to create investment and promote job creation in our
State. I hope that Mr. McKenna will share with us the really
laudatory track record that he, the administration, and our
State have established in terms of promoting exports, and how
important that is in creating good quality, high-paying Hoosier
jobs.
Tom, I want to thank you for your time. Please give my
regards to Governor O'Bannon.
I also want to thank Terry Straub. We make many things in
our State, in the agricultural sector, the automotive sector,
pharmaceuticals, consumer electronics, insurance, banking, and
a variety of others. But we make more steel than in any State
in the United States of America. We are proud of that fact.
Mr. Straub will share with us some of the competitive
factors that exist internationally and, in particular, some of
the challenges faced by steelmakers in a very competitive
environment.
Terry, I want to thank you as well. Your institution is
represented in our State. You are national in scope. But we are
proud of your location and involvement in the State of Indiana.
Senator Hagel, very briefly, this is a timely hearing
because, as you mentioned, many are questioning whether we
should reauthorize the legislation that provides for the
Export-Import Bank.
Some people favor a pure model of economics which would
view the Export-Import Bank as essentially a subsidy of some
kind that would be unnecessary in the give and take of free
markets and a free economy.
My own view is that while that is with some merit in terms
of economic theory, we don't live in a theoretical world. We
live in the real world. And we have to focus very carefully
upon what it takes to enable our country to compete and to
level the playing field, particularly at a time when many of
our foreign competitors have efforts like this that assist
their industries with their exports. I think it is important
that the United States not unilaterally disarm.
Second, at a time when our trade imbalance is so large,
that over time, this is going to threaten the vibrancy of our
economy, we must do everything we can to close that gap, in
particular, by promoting exports. Of course, we need to do this
in the right kind of way. And in some of the questions I will
ask in just a few moments, I will explore this in greater
depth.
But there have been instances in which the Export-Import
Bank has lent its support to exports that have helped foreign
companies with a track record, indeed, ongoing investigations
into whether they were engaged in the illegal dumping into
domestic markets.
The Export-Import Bank has a standard that is supposed to
be enforced for assessing whether there is adverse impact to
the domestic economy from the activities that they are
supporting.
I understand, Senator Hagel, that we had assurances from
the recently departed Chairman, Mr. Harmon, that he was going
to look into how the Ex-Im Bank implements the adverse impact
test and was also going to report to the relevant Committees,
this one in particular.
And I intend to hold those who will soon be taking over the
reins of the Bank responsible for fulfilling the pledges of Mr.
Harmon because I think it is important that we not
inadvertently assist those who are engaged in illegal trade
practices. I think that is very, very important. So this is
something that I intend to follow very closely with further
questioning. But, again, I want to thank our witnesses for
being here today.
My personal belief is that the Ex-Im Bank is important. We
need to continue its function and make sure that it enforces
its own regulations and in so doing, benefit the American
economy as it was intended to do.
Thank you, Mr. Chairman.
Senator Hagel. Senator Bayh, thank you.
Senator Miller.
OPENING COMMENTS OF SENATOR ZELL MILLER
Senator Miller. I don't think I have anything to add at
this time, except to say that this Southerner from the
struggling State of Georgia is glad to be here with my
colleagues from the Midwest. I would like to welcome all of our
witnesses today and apologize if I get up and leave. I may have
to leave in a few minutes because I have some CEO's from
Georgia that I have to talk with about a little economic
development, if you don't mind.
But it is good to have all of you here and I will try to
get back.
Senator Hagel. Senator Miller, thank you very much. It is
always uplifting to have the Georgia finesse that Senator
Miller brings to the Committee.
Let me quickly introduce each of our witnesses and then ask
you to please proceed and offer your testimony.
We will first hear from Mr. Peter Bowe, President, Ellicott
Machinery Corporation International. Ellicott is a small
company that manufactures dredges for every use, including
environmental waste clean-up, beach restoration, mining and
land reclamation. In his 17 years at Ellicott, he has held the
position of Treasurer, Vice President, General Manager, and
Member of the Board of Directors.
Following Mr. Bowe, Mr. E. Robert Meaney, Senior Vice
President, International, Valmont Industries, Incorporated.
Valmont is an Omaha-based manufacturing company with global
activities and infrastructure in water management. Prior to
joining Valmont, in 1994, Mr. Meaney spent 20 years at
Continental Can Company in various positions, including General
Manager, Korea; Vice President, Asia Pacific; and President of
Continental France.
We will then hear from Mr. Dean R. Dort II, Vice President,
International, of Deere & Company. His responsibilities include
international marketing and foreign market development for all
Deere machines and services throughout the world. Mr. Dort has
been with Deere for over 20 years. Prior to being with Deere,
Mr. Dort served as a Federal criminal court judge.
Next, we will hear from Mr. Darin P. Narayana, President,
Bank One International Corporation. Mr. Narayana oversees
international banking services to small, medium, and large
corporations and financial institutions in the United States,
as well as overseas. Prior to this position, Mr. Narayana was
Executive Vice President for Norwest Bank World Holding
Company.
Then we will hear from Mr. Terrence D. Straub, Vice
President of Governmental Affairs, USX Corporation. Mr. Straub
joined USX in 1981. Prior to that he served in Congressional
affairs in the White House. He is responsible for the
international trade policy issues affecting the corporation. He
currently serves on the Board of Directors of the Center for
National Policy and is on the Advisory Committee of the Ex-Im
Bank.
Mr. Thomas McKenna, who you have already been introduced to
by Senator Bayh. Mr. McKenna is Executive Director of the
Indiana Department of Commerce. Mr. McKenna received a law
degree in 1974 from Notre Dame and soon became the Deputy
Prosecuting Attorney in LaPort County, Indiana. He has worked
at the National Steel Corporation and Browning Investments. Mr.
McKenna also served the Lieutenant Governor of Indiana as an
Executive Assistant in charge of Operations.
Mr. Fred Bergsten, Director, Institute for International
Economics, is with us this afternoon. Mr. Bergsten has been the
Director of the Institute since its creation in 1981. He has
also served in the Competitiveness Policy Council, the U.S.
Treasury, the National Security Council, Brookings
Institutions, the Carnegie Endowment for International Peace,
and the Council on Foreign Relations.
Gentlemen, we welcome you. We appreciate you taking the
time to be here and share your thoughts and views with us.
I would ask each of you, if you could, to keep your opening
remarks limited to somewhere between 5 and 7 minutes because we
would really like to get into some of the specifics of your
testimony and thoughts.
Mr. Bowe, we understand that you have to leave here
shortly. So, we will ask you to begin. Please proceed.
OPENING STATEMENT OF PETER A. BOWE
PRESIDENT, ELLICOTT MACHINERY
CORPORATION INTERNATIONAL AND
LIQUID WASTE TECHNOLOGY
ON BEHALF OF THE
U.S. CHAMBER OF COMMERCE
Mr. Bowe. Thank you for accommodating that.
Mr. Chairman, thank you for the invitation to appear before
the panel today. My name is Peter Bowe, and I am offering this
testimony for Ex-Im Bank renewal on behalf of the U.S. Chamber
of Commerce, and on behalf of two small companies I run as
President--Ellicott International of Baltimore and Liquid Waste
Technology of Wisconsin.
The subject today really should not be renewal of Ex-Im
Bank, but rather its expansion--and how its export programs can
be made more competitive. We should be considering not how
Congress can attempt to legislate export financing guidelines
for the world, but how to deal with the realities of the
aggressive practices of export credit agencies from other
countries which understand how important exporting is to their
economy. Allow me to say what Ex-Im Bank does well.
First, the concept of delegated authority, whereby Ex-Im
Bank lets private sector banks issue loan commitments on its
behalf, is a great idea and should be expanded. This is
especially appropriate for small businesses, which may find the
task of dealing with Washington-based bureaucrats daunting.
Second, Ex-Im Bank's program to support standby letters of
credit for bid bonds is innovative and should be continued. My
company Ellicott has found this program effective in overseas
transactions.
Third, Ex-Im Bank has a small business working capital
program, which means that the Bank recognizes that the needs of
small businesses can be different, and has dedicated staff
trained to understand these needs.
One further positive comment. Ex-Im's staffing of an office
in China shows that it has the ability to act strategically,
recognizing where the potential for export growth is greatest
and the impact of financing can make the most difference.
But there are a few areas where Ex-Im Bank can improve its
value to small business exporters.
First, it needs to reduce its exposure fees, which on a
per-transaction basis, sometimes compare unfavorably to foreign
competition. For example, we have a Vietnamese customer which
says that it can finance its purchases from us on its own
cheaper than Ex-Im Bank. That should not be the case.
Second, Ex-Im Bank is often too slow to respond in those
cases where Ex-Im staff response is required. Ellicott lost a
million dollar sale in India because of an untimely ability to
deliver a firm proposal to a contractor customer who needed to
mobilize for a job in hand. I have heard the same comments from
members of the Small Business Exporters Association, of which I
also am a Director. I believe more Ex-Im staff may be required
to solve this problem.
Third, Ex-Im Bank's requirements for U.S. content have
traditionally been far more restrictive than what other export
credit agencies allow. While I understand that the objective of
Ex-Im is to create export-related jobs, one must often be
willing to give up a piece of the pie to get any pie at all. By
contrast, Canada's Ex-Im Bank equivalent would say that a CAT
engine bought from a Canadian CAT dealer is 100 percent
Canadian content, even if built in Peoria. And that freight
arranged through a Canadian freight-forwarder is 100 percent
Canadian content even if the item is shipped on a non-Canadian
flag vessel. As Commerce gets more global and sourcing more
international, it becomes increasingly more difficult to
achieve Ex-Im's local content requirements.
No doubt a major problem for Ex-Im is Congressional
mandates. Besides content rules, these mandates include
unilateral trade sanctions and, perhaps most important of all,
too strict a policy objective of avoiding losses through credit
decisions about foreign buyers and exposure fees designed to
generate income.
I note the Chairman's comment about no losses in the Asian
crisis. Perhaps Ex-Im should have had more losses if it had
really been taking some risks to get some transactions going.
Small business has special constraints here compared to big
business. Typically, small businesses are limited to production
in one or two American plants. They cannot move that production
to meet customer financing requirements. By contrast,
multinationals with many factories often can move sourcing to a
factory in a host country where superior export financing may
be available.
Small businesses, as well as large businesses, complain
about the use of tied aid by foreign countries. The U.S.
continues to fail to come to grips with this problem. Our
policy has been occasionally to engage in matching tied aid
with the intent of dissuading its use by others such as France,
Germany, or Japan, rather than accepting its use by those who
consider it to be a legitimate export tool. A country as small
as Holland can boast about $500 million of exports to China
through a 10-year mutual collaboration based on the so-called
ORET financing program. The Chinese acknowledge the need to buy
from Dutch suppliers in using this program.
I should add that the Dutch ORET requires less Dutch
content for the special financing that they offer than Ex-Im
Bank requires in standard Ex-Im Bank loan offers.
Our company recently lost a $15 million project for
Bangladesh where Ex-Im was unwilling to even consider making a
proposal due to the per-capita income status of the country,
even though we had evidence in advance of the Dutch loan offer.
Within the last year we can see that our two Dutch competitors
have received orders worth about $30 million based on this
ORET-type financing for markets such as Bangladesh, China, and
Vietnam. Such financing typically uses a 35 percent grant
element.
Our current understanding is that the U.S. Treasury has
restricted any further use of the Ex-Im Bank ``war chest'' to
match tied aid loans. Even in an era of matching, Ex-Im is
still oriented toward what I call the ``dead body'' approach.
That means that the evidence required to justify a matching
loan is burdensome, and sometimes, the only truly convincing
evidence is the lost contract--the ``dead body.''
A further problem with the tied aid issue has been the
technical interpretation of what is a ``matching'' proposal. In
one case where we did receive a tied aid match and got a
contract, Ex-Im actually forced us to ``dumb down'' our
superior product by deleting environmental features so that our
proposal was no better than our competition's. In other words,
we had to have an exact technical specification match. This
also delayed project implementation by a year.
Staff has asked me to elaborate a bit further on the tied
aid issue and some flaws that I see from its implementation
perspective.
Our approach to tied aid is totally defensive--we are
trying to stop others from doing it. The recipients of tied aid
from other countries like to get it, not surprisingly. So when
we come in there, we are not the white knight. In fact, we are
usually unwelcome, as parties who are interfering with the
normal commercial dealings between two consenting parties.
From the side of the American exporter, it is almost like
having to start a 100-yard dash, but you are not allowed to
start the race until you can prove that the other guy has
already started, and you don't have much time to catch up. So
everything has to be in place before you can come in at the
last minute. And usually at that point, the competing parties
really don't want to see you.
Despite these issues, it is frankly inconceivable to think
of an export world without an Ex-Im Bank. It is also hard to
imagine how Ex-Im can function in any practical way with a
budget cut of the magnitude of the one proposed by the
Administration. The real question should be--how much more Ex-
Im Bank can and should do, especially in a continuing strong
dollar era, and how much more resources it needs.
I close with a sober note.
Last week, the CEO of a major independent power producer
based in Baltimore told me that all of its major equipment
vendors are now foreign-based, in part, because of the superior
financing programs from their host governments.
A world without Ex-Im is likely to be one where strategic
industries such as power plant equipment makers adapt to the
changing market environment by sourcing all of their production
where financing is available on terms attractive to them. That
is how the world works. It is not only unrealistic but also
dangerous to think it can be changed unilaterally through
American legislation.
Thank you.
Senator Hagel. Mr. Bowe, thank you.
Mr. Meaney.
OPENING STATEMENT OF E. ROBERT MEANEY
SENIOR VICE PRESIDENT, INTERNATIONAL
VALMONT INDUSTRIES, INC.
Mr. Meaney. Mr. Chairman and Members of the Subcommittee,
my name is Robert Meaney, I am Senior Vice President of Valmont
Industries. We manufacture center pivots for irrigation and
poles for the electric utility industry, the highway and street
lighting industry, and for supporting telecommunication
structures.
I will give you a few more details about my company. First,
it is a $900 million company listed on the Nasdaq,
headquartered in Omaha, Nebraska. We have 5,500 employees, two-
thirds of whom live in the United States. We have 31
manufacturing locations around the world, located in eight of
our States in the United States and 11 foreign countries. We
are the largest producer of center pivots in the world and also
the largest producer of poles in the world.
Our overseas markets include France and Japan, developed
countries, and also developing countries like Brazil, China,
Mexico, and many of the countries of Sub-Saharan Africa.
One very good example of the importance of our products is,
I think, the center pivot. Our company was the first
manufacturer of center pivots approximately 50 years ago. It is
a large machine that goes in circles. It makes the circular
patterns that you see in the Midwest. It is a technology which
saves about half of the water used in irrigation.
As you might know, 66 percent of the fresh water in the
world is used by irrigation. So if you are going to conserve
water in this time of water crisis, the best place to start is
on large farms. And center pivots save half the water applied
on the large farms.
We have had an international business for many years, and,
in the last 7 years, we have really established a global
network of small facilities that manufacture the large bulky
parts of the center pivot. These facilities have been very
successful, and they have enabled us to add quite a bit of
export sales to our facilities in Valley, Nebraska and in
McCook, Nebraska, and San Antonio, Texas, and add jobs in those
facilities as well.
About 1997, we started to look at the potential for center
pivots in China because we had read, of course, like most
people, about the water crisis, especially in the north of
China, ranging all the way from the west to the east. We had
read that the Yellow River does not reach the sea for 5 months
a year. And we started a marketing program in China.
We focused on the northeast of China, where there are very
large farms and a fairly arid climate. But also, in the center
of China, Gansu Province, Inner Mongolia, Ningsha Province. And
then also, way out in the west of China, in Xinjiang Province,
which is halfway to Moscow, a huge province, seven times the
size of Nebraska.
We had some moderate success. We have a good infrastructure
in China as a company because we have a very successful pole-
manufacturing operation in Shanghai, actually. It has been
financially successful and we have a good pool of talent to
help with the other product line. That has been a very good
plant for our U.S. business, too. It has enabled us to expand
our market share in the Asia Pacific region by making us more
competitive. And we have become the leading supplier of telecom
structures for cellular antennas in China from that plant.
In any case, we worked on the center pivot development in
China. But a curious thing happened in 1999. We learned of a
large order obtained by an Austrian competitor, a very small
pivot manufacturer, who really are not even in the pivot market
some of the time. So it was very surprising to us, considering
that 60 percent of all the center pivots in the world, of which
there are 300,000, are supplied by companies from Nebraska. In
fact, 40 percent are supplied from our brand, Valley.
We investigated this and found that the Austrian producer
had obtained this $5 million order, which is a big order for
the center pivot business, especially in a developing market
and a new market, by offering tied aid financing. The terms
were 25 year loans at 2.95 percent interest with 5 year grace
periods. We went back and discussed this with the Commerce
Department people in Bejing and the Ex-Im people in Bejing and
in Washington and judged that we were qualified to apply for
the Tied Aid Willingness to Match program.
We put together an application. We worked very hard with
the Ex-Im Bank staff, who were very helpful and knowledgeable.
We put together the application and filed it, and it was
considered at the February Ex-Im Bank board meeting. Then we
were advised at the end of March that the application had been
denied.
Of course, we were very disappointed. We had worked very,
very hard. We have no comment on whether their decision was
right or wrong because we are not a frequent user of Ex-Im Bank
facilities. But we had invested a lot of our valuable time in
this that we could have been investing in other things,
obviously.
Needless to say, after the Austrian company obtained their
second order, which our application was intended to match, they
obtained a $3 million order.
Since then, we have been working hard to continue to market
our product. The Austrians have basically established their
brand as the reference, however, even though they are a very
small company. And in China, whoever establishes that first
entry has a great advantage.
Also since that time, we have actually put together a small
production joint venture for western China. We have established
a model farm. We have continued our seminars and visiting the
large farms.
The Austrian company has done nothing to support their
product, which for us is evidence that, in fact, it was the
tied aid financing that got them the deal.
These are the facts of the situation on that incident. I
will say that we offer them as a constructive example of what
can go wrong.
As a company, Valmont has long supported the mission of the
Export-Import Bank and we believe that support for the Bank
should be continued. We do believe that the Tied Aid
Willingness to Match program should be streamlined and should
be applied more consistently.
On the other hand, having gone through it, we realize that
the Ex-Im Bank and the United States should have a weapon like
this to cancel out the unreasonable subsidies that are provided
by many other countries for their exports.
This is my testimony, so thank you very much.
Senator Hagel. Mr. Meaney, thank you.
I suspect, Senator Bayh, that you have some of those
Valmont center pivots in Indiana.
Senator Bayh. We do.
Senator Hagel. It makes your corn grow strong and tall.
Very high yields.
Mr. Meaney, thank you for your testimony as well.
Mr. Dort.
OPENING STATEMENT OF DEAN R. DORT II
VICE PRESIDENT INTERNATIONAL
DEERE & COMPANY
ALSO ON BEHALF OF
THE NATIONAL FOREIGN TRADE COUNCIL AND
THE COALITION FOR EMPLOYMENT THROUGH EXPORTS
Mr. Dort. Thank you, Mr. Chairman and Senator Bayh. I am
Dean Dort, Vice President International for Deere & Company.
You may know us better as ``John Deere''--the premier producer
of agricultural equipment, or the company of choice that
harvests that popcorn that is under apparent dispute within the
Subcommittee.
Mr. Chairman, 164 years ago, a Vermont blacksmith moved
west, invented a plow that not only turned the world's best
topsoil, but it also helped turn our country into an economic
powerhouse. That invention, incidentally, began Deere's journey
to today, where we rank among the oldest industrial companies
in the United States.
Besides the world's most technologically advanced farm
equipment, we manufacture sophisticated construction, timber
harvesting, lawn care, work-site products, and also engines and
parts.
We have a commercial credit company that ranks in the list
of the top 25 lenders in the United States. We deliver and
manage health care for 3,000 companies, including our own.
Deere's Special Technologies Group provides electronics-
related products and services from information management
systems to wireless communications.
In short, Mr. Chairman, we create smart and innovative
solutions in the form of advanced machines, services, concepts
for customers on the farm site, the work site, and the home
site, and we do it globally.
Today, I have been asked to speak for the members of the
National Foreign Trade Council and the Coalition for Employment
through Exports. The membership of these two organizations
includes not only America's major exporters, but also many
smaller companies that aspire to that size and to that scope.
Mr. Chairman, I travel a lot in my work. I carry not one,
but two U.S. passports that bulge with visas. And most of those
are for the largely cashless countries of the world,
particularly the CIS.
Bob, I have also been to Xinjiang Province in China.
That travel, gentlemen, has taught me a lot about the
global marketplace and what it takes to compete successfully in
it.
One thing I have learned is Deere, as the only major U.S.-
owned and controlled company manufacturing and marketing a full
range of ag equipment, Deere is in a unique position to capture
a market for U.S.-produced machines.
Yes, I said capture a market, not capture market share.
The countries of the CIS are in desperate need of machines
to plant, to nurture, and to harvest badly needed crops. What
is left from the CIS 1990 machine park is far below the numbers
needed to meet their harvest potential. And there is no longer
a viable domestic industry in place to manufacture those
machines.
This is not a secret. Our competitors are headquartered in
Italy and Japan, in Germany, and elsewhere. They have strategic
goals similar to our own. They also have the backing of their
country's well-funded, aggressive export credit agency. We can
compete and we can win against the companies. But we cannot
compete successfully against the countries.
Another lesson learned is that today's customers are
looking for more than just machines. They are looking for
solutions to the challenges they face. The key challenge, of
course, is paying for the equipment. In fact, it can be said
that the company that brings the financing, as Peter quite
clearly pointed out to us earlier, often gets the deal.
The United States is behind in supporting U.S. exporters
and their workers, not only in these cashless markets, but
others as well. For example, the Export Credit Agencies like
the U.S. Ex-Im Bank around the world provided approximately
$500 billion of credit for exports in 1998. That is the latest
official figures.
Japan provided nearly $140 billion that year. France
provided about $50 billion. The United States ranked seventh on
that list, at $13.8 billion, behind the Netherlands and just
ahead of Spain.
Allow me to provide a specific example of what we face each
day in the market.
Deere has been working in China for decades. We recently
made a sale in Western China that positions us to do much more
for that region. The sale was facilitated by the Ex-Im Bank of
the United States. The financing, of course, was arranged by us
through a major money center bank at world market rates--an
OECD requirement--and it was over 5 years.
One of our competitors in this important break-through deal
for us was a Finnish company. Through a quasi-official Export
Credit Agency there, the financing they offered was zero
percent interest over 10 years with 3 years' grace. Naturally,
we nearly lost that deal. But our superior product and what we
could do in support of the machines after the sale led to our
success.
Bob talked about that a moment ago.
However, our supply of those U.S.-produced machines was
always in question because of financing.
Gentlemen and ladies, I have also learned that the
importance of trade is not something that is only appreciated
by management and shareholders. It is fully understood by
another key stakeholder in the success of our enterprise--those
who hold the jobs these sales support. Officials from the
United Auto Workers of America--the UAW--have joined me and
other Deere managers in visiting your colleagues, the
Administration, and others, in urging that the Ex-Im Bank
support sales to countries like Russia and the republics of
Central Asia.
My written statement, and doubtless, the statements of
others on this panel and elsewhere, refute the sound bite of
corporate welfare in great detail, complete with numbers
showing the profitability of the Bank, and the returns it
generates to the Treasury from the fees and interest that
exporters pay.
Let me just say here that the $700 million of product that
Deere has delivered to the CIS and other cashless markets in
the last 5 years would not have been produced by the UAW or
anyone else in the United States without the participation of
the Ex-Im Bank.
The beneficiaries of the work of the Ex-Im Bank's able
staff and the leadership, however, are worthy of your
consideration. Those beneficiaries include the American
taxpayer, American workers, and, yes, of course, American
exporters. They also include people all over the globe for whom
modern technology offers a more hopeful future.
In conclusion, we submit that the Bank should be
rechartered for a minimum of 5 years at full levels of funding.
Now is not the time to do less. In the words of Senator Hagel,
in a recent floor speech on the importance of trade--``Let's
not squander this opportunity.''
Thank you for this opportunity and I am happy to answer any
questions.
Senator Hagel. Thank you.
Senator Bayh has just acknowledged the strong finish with
that quote.
[Laughter.]
Thank you for your astute observation, Mr. Dort.
Senator Bayh. Ending on a high note to Mr. Dort.
[Laughter.]
Senator Hagel. Mr. Narayana.
OPENING STATEMENT OF D.P. (DARIN) NARAYANA
PRESIDENT
BANK ONE INTERNATIONAL CORPORATION
ALSO ON BEHALF OF THE
BANKERS' ASSOCIATION FOR FINANCE AND TRADE
Mr. Narayana. Thank you, Mr. Chairman and Senators. I
appreciate the opportunity to be here.
I am representing Bank One Corporation, which is the fifth
largest bank in the country in terms of assets. We are in 12
States, from the Midwest up to the West Coast and Arizona. We
have about 20,000 exporters in our region, of whom we work with
about 7,000 of them in our bank. We are working on the other
13,000 exporters.
I am also here representing the Bankers' Association for
Finance and Trade, an organization dedicated to international
business, and has been so for a long time.
Being the only banker on the panel, if you will, there are
some observations that I would like to make. You have my
written testimony, but I would like to just speak from some
informal notes I made here.
In my role, I see about 300 to 400 exporters every single
year and I travel to the potential buyers abroad. The trends in
the industry are the following.
Exports are among the fastest-growing segments of the
American economy. People should realize that. The dream of all
of us would be that the United States reach in terms of its
percentage of exports as part of GDP to the levels of other
OECD countries.
Emerging markets are a huge market for our products and
they need capital. Emerging markets need capital. The buyers in
emerging markets--I was with some in Brazil last week, for
example, they focus on total cost of importing, including
financing and cost of the foreign currency. Our strong dollar
has not been of much help to exporters.
The other thing we observe is that multinational
corporations are increasingly sourcing their product from
various countries where there are subsidiaries, depending on
where the financing is most easily available because financing
is critical to make a sale happen.
I agree with my colleagues here that have testified to that
effect.
When we in banking look at financing, we look at more than
Ex-Im. We don't start with Ex-Im per se because Ex-Im is not
the fastest, easiest, and always the best. So we look at other
options as well. But Ex-Im Bank for us is an incredibly useful
option to examine. As somebody noted, Ex-Im Bank's financing is
$14 billion. Our exports are a trillion dollars. So it is not
like the rest of it is being financed by some other agencies. A
lot of private sector financing happens.
Essentially, Ex-Im Bank is an interesting, important option
for us to have.
The tough competition that our exporters face, I think it
is the toughest I have seen in the 30 years I have been in this
business with Norwest Bank and now with Bank One. I used to
prowl the streets of Nebraska and the Dakotas and Wisconsin and
Illinois and Indiana in search of business.
The thing is that among the exporters, it is critically
important we compete with other ECA's, which are far more
aggressive than we are. You heard that ad nauseam here today.
The point is that with things like market windows and other
things that they are coming up with, it is interesting how they
are coming up with financing. We keep wanting evidence--it is
very difficult to get evidence until after the fact, as Peter
said here a few minutes ago.
So the thing that I find about Ex-Im Bank's role in helping
exports is the following:
First is that it is a great help to small- to medium-sized
exporters. It is a lifeline. What people don't realize is that
when small exporters have an export transaction, one of the
organizations that they think about very quickly is Ex-Im Bank.
It has a great brand name. We must recognize that. I will give
you a couple of examples on this.
The second matter is that Ex-Im Bank also empowers United
States exporters.
The third point is Ex-Im Bank for us in commercial banking
is a lender of last resort. I give the example here of a
company in Milford, Indiana, called CTB Corporation. They
export to Kazakhstan and there is no way that any commercial
bank would finance Kazakhstan, financing for multiyear. Without
Ex-Im Bank, that transaction would not have gone through.
Similarly, CTB also had a couple of transactions to
Venezuela that Bank One financed using Ex-Im Bank. Venezuela,
as you know, has been a risky country for many banks for a
multiyear basis because of all the uncertainty in Venezuela.
And Ex-Im Bank steps in and supports it.
The Ex-Im Bank was the only game in town when Korea was in
trouble. When they had that huge debt and their currency was
imploding, Ex-Im Bank stepped up and supported it. We financed
companies in Ohio and in Indiana and in Illinois using Ex-Im
Bank at the time as a bridge until Korea got better. Then we
went on our own.
The Ex-Im Bank is a lender of last resort. It is also a
catalyst for financing in the sense--I will give you an
example.
We financed a $40 million export transaction to China about
3 months ago, Bank One did. It was for a company in Milwaukee,
GE Medical. Ex-Im Bank's portion was $10 million. We provided
$30 million, for a total of $40. Without Ex-Im's $10 million,
that transaction would not have happened. They were a critical
part of that facility. They acted as a catalyst in that
transaction.
Now, you may say, why don't you always do that? Why don't
you get Ex-Im for 25 percent or 30 percent?
There are some countries where we cannot take any risk at
all because we don't have the critical mass, like an insurance
program where you have the loss averages and so forth, whereas,
the Ex-Im Bank has that. Another thing is that Ex-Im Bank is an
incremental resource.
There is a company in Louisiana called Almond Brothers.
This company has been in business for 50 years. In 1990, their
exports were like 5 percent of their total sales. In 1999, they
were over 90 percent. Ex-Im Bank provided Bank One with the
support on a working capital program and performance letters of
credit. The chairman of Almond Brothers said, without our Ex-Im
programs, we would not have been able to expand and create the
jobs.
In the city where this company is located, called
Coushatta, Louisiana, this company is the largest employer. You
talk in the parish in Louisiana about Ex-Im Bank, they will
brag about it. It is a wonderful story. I think it is very
important to understand that.
Even in countries like Mexico, we did a financing for a
company in Grand Island, Nebraska, called Chief Industries.
Chief Industries is a leader in some of the things it does,
including providing agricultural support systems and so forth.
There was a transaction in Mexico for multiyear that we
used Ex-Im Bank to finance. In that case, Ex-Im Bank was
critical to get the kind of pricing we needed to be competitive
in the market.
We do not consider Ex-Im Bank as a subsidizing
organization. Its fees are not exactly very low. If anything, I
think Ex-Im Bank is quite expensive.
The other thing is that everybody says it is a large
exporter-friendly organization. It is. But at the same time,
show me a large exporter and I will show you a lot of
subcontractors below that.
In the GE Medical case in Wisconsin, there were a number of
companies along the way in the State of Wisconsin that
supported the export sale.
In risk-taking, Ex-Im Bank, I think we find it to be quite
conservative at times. It almost acts like a commercial bank,
which is good from the standpoint of U.S. taxpayers because it
is a pretty responsible organization. And it is an organization
that works with the private sector extremely well in the United
States.
It is critically important that we support Ex-Im Bank's
charter for a 5-year period, hopefully. I strongly endorse it
on behalf of the Bankers Association for Finance and Trade and
Bank One.
Thank you very much.
Senator Hagel. Mr. Narayana, thank you.
Mr. Straub.
OPENING STATEMENT OF TERRENCE D. STRAUB
VICE PRESIDENT, GOVERNMENTAL AFFAIRS
USX CORPORATION
Mr. Straub. Thank you, Mr. Chairman. I am pleased to be
here with you and with Senator Bayh, a good friend of the
producers of American steel and the working men and women in
the American steel industry.
I am Terrence D. Straub. I am Vice President of USX
Corporation. My remarks this afternoon, Mr. Chairman, are
submitted on behalf of USX Corporation, which is the parent
company of U.S. Steel, and a company which has followed the
activities of the Ex-Im Bank very closely over many years.
Recently, I have also been privileged to be appointed a
member of the Ex-Im Bank's Advisory Committee. In that
capacity, I look forward to working with the Ex-Im Bank's Board
of Governors to develop policies that will continue to foster
global economic growth and to create increased export
opportunities for U.S. businesses. USX strongly supports
policies which seek to open foreign markets to American-
produced goods and services.
There are some concerns on our part, however, that I would
like to present in my testimony today. My concerns rest on a
simple core point. We believe it does not make sense for the
United States, or any other nation for that matter, to
facilitate or subsidize the expansion of capacity to produce
any major commodity which is already in massive world
oversupply. To do so will inflict great harm on all world
producers of that commodity leading to loss of revenue, falling
prices and cashflow and, in the extreme, the collapse of the
producers themselves.
Witness the American steel industry today, of which I
speak.
This is precisely the situation in which we find ourselves
today in the steel industry. I won't repeat the points made in
the written testimony submitted for this hearing by the
American Iron and Steel Institute. We support the proposition
that the Ex-Im Bank's provision of funding to produce still
more steel in a world market which has the capacity to produce
nearly 300 million tons more than it needs, which, just by way
of reference, Mr. Chairman, that is three times the annual
output of the U.S. industry alone. We think that doesn't make
economic or political sense.
Indeed, U.S. Government economic policy, which is based on
the fundamental principle that free markets should dictate the
flow of capital, should not subsidize increased production of a
product when there is already an oversupply of that product.
The hundreds of millions of tons of foreign steel overcapacity,
and the misguided policies by foreign governments that led to
this overcapacity, was well documented by the Department of
Commerce in its report issued last year: Global Steel Trade--
Structural Problems and Future Solutions.* And with your
permission, Mr. Chairman, I would like to submit a copy of that
for the record. It is one of the finest pieces of work our
Government has done on a nonpartisan, unbiased, and a
nonideological basis I think in many, many years of studying
the problems of world steel trade done by some professional
career folks who spent almost 2 years collecting evidence
worldwide and pulling it together for the report.
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*Held in Committee files.
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Let me cite a real-life example of the problem I am talking
about. Last year, the Ex-Im Bank decided to provide export
financing to support a steel project in China by the Benxi Iron
and Steel Company which would add a million and a half tons to
the company's capacity. This investment clearly further
aggravated the foreign excess capacity problem. It did not make
economic sense, of course, but exacerbating this problem is
that our own Department of Commerce found just last month that
this same producer, Benxi, has been dumping their exported
steel into the United States market at margins greater than 65
percent. Promoting U.S. exports just simply cannot be at the
cost of American jobs. In other words, the Ex-Im Bank should
review its existing policies to make certain that it not only
promotes U.S. exports, but that it also makes certain that
other U.S. industries are not adversely affected by imports
arising from the Ex-Im Bank investment. This clearly did not
occur in the consideration of the loan to Benxi Iron and Steel
Company.
USX understands the value of exports. I think we sell a
good amount of steel to the gentlemen's company sitting on
either side of me here, a good deal of which go into export
markets. We are strongly supportive of that, just to be clear.
We export steel ourselves, and we sell through our subsidiary,
USX Engineers and Consultants, a business that we value highly
and which we want to grow. In fact, in the 1990's, UEC, which
provides worldwide steel consulting services, participated in
an Ex-Im Bank program to assist a Romanian steel producer, to
become more environmentally efficient by providing technical
and engineering services and equipment. This initiative, which
has long since ended, was not designed to increase production
capacity, but primarily to help the producer become more
environmentally sound.
This China example, which actually increased production, as
I said, a million and a half tons of capacity, throws economic
and business logic on its head. USX Chairman Thomas Usher,
following appeals to the Ex-Im Board of Directors by then-
Commerce Secretary Mineta, by then-Treasury Secretary Summers,
and by Members of Congress to halt the financing of the China
project, described the financing as, ``an affront to the
hardworking men and women of my company and other U.S.
steelmakers struggling to remain in business despite a massive
glut of world steel production.'' This is from a CEO who
enthusiastically supports U.S. trade promotion objectives and
policies, but believes they cannot violate common sense. I have
submitted for the record copies of the letters** on this matter
from Secretary Mineta, Secretary Summers, and Congressmen
Regula, Murtha, Quinn, Visclosky, and Mr. Usher.
---------------------------------------------------------------------------
**Held in Committee files.
---------------------------------------------------------------------------
What then should the U.S. policy be? I suggest three
guiding principles. First, by all means, continue to have the
Ex-Im Bank support the export of U.S.-produced goods and
services. Again, I want to be very clear on that. That is our
position.
Second, enforce a policy--and here I speak to the steel
industry primarily--in which investments are not made that
would increase production of a commodity product for which
there is already a recognized and tremendous worldwide
overcapacity. Invest only in steel, primarily in the
modernization of existing facility, such as in enhanced
environmental safety and other initiatives related to that,
only when it does not result in increased production and avoid
any investments in any foreign producers that are under
investigation for or have been found to be dumping in the U.S.
market. And I also think that it would be useful to make it a
priority to look at areas where countries are making genuine
efforts to reduce production capacity in steel if they see if
there is assistance in those areas as well.
Third, and last, to encourage foreign governments to engage
with our own Government in negotiations that will address these
overcapacity issues and to see if there may be a role for the
lending institutions in that regard.
That concludes my remarks, Mr. Chairman. I would be happy
to take your questions.
Senator Hagel. Mr. Straub, thank you.
Mr. McKenna.
OPENING STATEMENT OF TOM McKENNA
EXECUTIVE DIRECTOR
INDIANA DEPARTMENT OF COMMERCE
Mr. McKenna. Chairman Hagel, Ranking Member Bayh, as the
grandson of an Irish immigrant, I cannot express what an honor
it is for me to be here today.
In 1986, I had the opportunity to run for the Congress of
these United States to represent the 6th District of the great
State of Indiana. That same year, a young man from
Shirkeyville, Indiana, ran for Secretary of State.
Senator Bayh, to be sitting here as you occupy the same
seat as your father is about as good as it gets for a southern
Indiana boy. And, as Senator Bayh is in all things humble, I
want to point out to Chairman Hagel that just a few months ago,
the University of Notre Dame women and the women of Purdue
University competed in an all-Indiana final in the NCAA
championship.
Senator Bayh. Thank you very much for getting that on the
record, Mr. McKenna.
[Laughter.]
Senator Hagel. Mr. McKenna, you know that Notre Dame visits
Lincoln in September.
Mr. McKenna. I am full of fear and trepidation.
[Laughter.]
But my lieutenant governor is not.
[Laughter.]
And Coach Davey will not--I repeat, will not--play for a
tie in the last minute of the game.
I am here today to support the reauthorization of the Ex-Im
Bank's charter, so that it may continue assisting Indiana
exporters.
The Indiana Department of Commerce is the lead economic
development agency in the State of Indiana. Specifically,
Commerce works to assist communities and businesses in efforts
to develop, expand, and strengthen the quality of life in
Indiana.
Commerce's aim is to ensure secure jobs, higher incomes,
and competitive communities in Indiana. We do this by providing
grants and services for development throughout the State. Our
customers include growing Indiana businesses, companies looking
to locate a facility in the Midwest, communities accessing
grants, organizations and businesses leveraging tax credits,
and individuals who use our services.
As we move into an increasingly global economy, our
International Trade Division continues to play a very important
role in economic development. Indiana has been a national
leader in export growth and in the attraction of inward
investment. Our International Trade Division stimulates this
growth in a variety of ways, targeting our services to small-
and medium-sized businesses--the ones that need that help the
most. Namely, it provides personalized services and networking
through our 13 overseas offices, and our Trade Show Assistance
Program provides grants to companies that are participating in
an overseas trade show. Plus our field and staff
representatives consult with Indiana businesses, encouraging
more Hoosier exports.
The benefit of an international presence has been
tremendous for Indiana's economy. There are a number of reasons
for Indiana's superb export growth--Evan Bayh being one of
them.
First, Indiana companies and local development offices do a
terrific job of seeking new markets throughout the world. Our
efforts at the State level play a role, too. There is yet
another resource that helps Indiana companies perform well in
the international marketplace --the Export-Import Bank of the
United States.
The Ex-Im Bank is vital to exports in the United States.
Without it, some exporters would not be able to finance their
projects. While the Export-Import Bank works with companies of
all sizes, it is of greater importance to small- and medium-
sized companies.
For instance, if a small company in Indiana wanted to send
a large shipment of exports to an emerging market overseas, the
company might have to increase production or purchase new
equipment to enter this market, and financing that growth would
be difficult. However, Ex-Im Bank can offer a pre-export
working capital guarantee, helping the exporter obtain a loan
to allow the company to produce goods or provide a service for
export. This finances the company's inventory and accounts
receivable, helping make it financially feasible to fill the
order. That is good for their business, good for the emerging
market, and the U.S. economy.
The Ex-Im Bank has a very high success rate, primarily
because if someone defaults, they are, in fact, defaulting
against the U.S. Government.
Finally, the Ex-Im Bank also helps exporters by ensuring
against political risks overseas. This is especially important
in the smaller markets, which are some of the fastest growing
destinations for U.S. exports.
Indiana is a great success story in the international
marketplace, and Ex-Im Bank has played a role in that story
time and again. Some examples.
International Cryogenics is a small manufacturer of
cryogenic materials located just outside of downtown
Indianapolis. It has been in business since 1980. The company
worked with the Indiana Department of Commerce to obtain credit
insurance with the Ex-Im Bank. International Cryogenics exports
its materials to markets worldwide, but concentrates on Korea.
Prior to obtaining credit from the Ex-Im Bank, the company was
only able to offer cash in advance terms, thereby limiting
sales. Now, with the credit insurance, the company can offer
more competitive open account terms, which has enabled it to
increase sales and to maintain its workforce.
G.R. Wood Inc. in Mooresville manufactures hardwood lumber
from logs. In the early 1980's, G.R. Wood wanted to sizably
increase its exports of lumber to Europe. It applied for Ex-Im
Bank's multibuyer insurance policy in order to mitigate some of
the risks associated with exporting. Initially, exports were a
small part of their business, but today, exports represent
about 50 percent of total sales.
Radian Research is a manufacturer of power and energy
measurement instruments in Lafayette. In 1996, Radian
approached Ex-Im Bank for a multibuyer insurance policy in
order to increase the volume of exports. The company needed Ex-
Im Bank's assistance to obtain the necessary financing. Without
Ex-Im Bank's insurance program, Radian's lender would not have
approved a line of credit. Ex-Im Bank approved the insurance
policy in 1996 and the company continues to increase its export
volume.
It should be noted that companies that export perform
better than nonexporters, and they are better prepared for the
global economy. These companies provide better jobs, with
workers earning up to 7 percent higher pay. Additionally, they
are more stable jobs because these companies are less likely to
be susceptible to the vagaries of our domestic economy.
The Ex-Im Bank of the United States is an important part of
our economic future. Moving more goods into the international
marketplace is vital to our growth--something Indiana has done
very well with the assistance of the Ex-Im Bank.
By helping companies that may not be able to increase trade
otherwise, the Ex-Im Bank plays an essential role. That means
encouraging as many companies as possible--in all States--to
pursue increased exports. The Ex-Im Bank can help achieve that
goal.
My lieutenant governor tells me every day that he wants us
to be competitive. He wants us to be in the marketplace and to
compete. He asks us to be aggressive, proactive, tactical, and
practical. And this Bank allows us to do that with small- and
medium-sized businesses.
We feel it is vital to reauthorize the Ex-Im Bank to full
operation, and we urge you to do so. From Indiana's
perspective, we know first-hand what kind of positive influence
it can have on a State's economy, but we know we are not an
isolated case, and the success that we have enjoyed in Indiana
is shared throughout this great Nation.
Again, we believe it is in the Nation's best interest to
reauthorize the Ex-Im Bank for the United States. On behalf of
the Indiana Department of Commerce, I thank you for this
opportunity to testify here today.
Senator Hagel. Mr. McKenna, thank you.
Mr. Bergsten.
OPENING STATEMENT OF C. FRED BERGSTEN
DIRECTOR
INSTITUTE FOR INTERNATIONAL ECONOMICS
Mr. Bergsten. Mr. Chairman, as your final witness, I will
try to honor your admonition to be succinct.
Let me start with the bottom line.
I believe it would be a huge mistake to sharply decrease
the program of the Export-Import Bank as proposed by the
Administration. Indeed, I would argue that you should increase
the amount of funding and program authority for the Ex-Im Bank
by about 50 percent.
In my statement and underlying studies we have done on the
issue at my institute, I lay out the reasoning behind that
suggestion for a substantial increase. I would be happy to go
into that if you like.
In addition, I believe the Committee and the Congress--as
you reauthorize the Bank later this year--should increase its
operating authorities and broaden them substantially. You
should enable it to carry out the kind of market window
activities that have been referenced earlier in the hearing.
You should expand the use of its war chest to cope with so-
called untied foreign aid practices, which also undermine U.S.
competition in world markets.
I package those proposals to increase the size of the bank
and expand its authorities because only if you do that will you
enable U.S. exporters to compete on a truly level playing field
with their foreign competitors and enable our Ex-Im Bank to
adequately match the practices of the export credit agencies of
other countries.
Why do I advocate such seemingly radical proposals? Because
exports are a key driver of the U.S. economy. Even you may not
realize that the share of exports in the U.S. economy has
tripled in just the last 25 years. Indeed, exports are now a
much bigger share of the U.S. economy than they are in the
economy of Japan. They are a considerably larger share of our
economy than the economy of the European Union, when you look
at it as a group.
So, we have both experienced a huge increase in our
dependence on foreign markets and we are more dependent than
the other major industrial countries with which we compete.
Therefore, it would be sheer folly for us not to have a fully
competitive export credit program.
But it is more than just the aggregate numbers. As was
mentioned a moment ago by Mr. McKenna, U.S. export jobs are
among the best jobs in the country. A number of studies we have
done at my institute document that worker productivity in
exporting industries is 20 percent higher than the national
average. Export jobs pay 5 to 10 percent more than production
worker jobs in other industries. Exporting firms are 10 percent
less likely to go out of business so the jobs are more stable.
We create jobs. We create better jobs. Exports are a
vibrant part of the economy as a whole. I would argue that
those factors are particularly important at this juncture in
our history and for the next few years.
We know the economy has slowed down. Domestic demand has
slowed down. That means export markets are even more important
in the foreseeable future.
In addition, one of the few big imbalances in our economy
is the trade deficit, which is approaching $500 billion. So
far, we have been able to finance that successfully. But it
means we have to borrow $2 billion every working day from the
rest of the world. If that number dropped just a little bit,
the dollar would plunge, inflation would rise, interest rates
would soar, the stock market would crash again, and our economy
would be in big trouble.
We have to bring down--not eliminate but bring down--
substantially the level of our external deficit. And there are
only two ways to do it-- cut imports or raise exports. For
obvious reasons, the healthy way to do it is to expand exports.
And to do that we need a vibrant, successful, and fully
competitive Export-Import Bank.
Finally, in terms of current reasons and policies, the
Administration, to its great credit, is trying to get the U.S.
back in the game of international trade negotiations.
As you know, we have basically been out of that game for 6
or 7 years because the previous Administration and the Congress
were unable to work out a basis for new negotiating authority
to permit the United States to negotiate international trade
deals. As a result, other countries are increasingly striking
trade deals around us. Those are hurting us. They will
accumulate. They will make our trade position even worse.
We have to get back into that game. To do so, of course, we
need strong political support from the exporting sector and we
need an export performance that gives us clout in world markets
when our negotiators go abroad. You do not do that by cutting
your Export- Import Bank. You do not do it by unilaterally
backing away just when you want to proceed on all these fronts.
So, I think there are multiple reasons to move ahead
positively--indeed, aggressively--in your reauthorization
legislation to increase the size and scope of the Export-Import
Bank. I would propose that in doing so, you have in mind a
fundamental two-track strategy in this area of export credits.
On the one hand, provide full financing and program
authority so that our firms can compete on a level playing
field. But on the other hand, always look for opportunities to
reduce the credit subsidies that are applied in world markets
by our competition.
We should always be trying to negotiate down the subsidies
and practices that are outside the international norms that our
foreign competitors pursue.
The sorry fact, however, is that you cannot negotiate a
reduction in the others' subsidies if you are sitting on your
hands because they don't take you seriously.
So, we have to, on the one hand, fight fire with fire. But,
on the other hand, use that increased clout of our own programs
to try to reduce the levels all around. And that, incidentally,
is not theory. It has been done twice before. When I was in
charge of this policy area in the late 1970's, in the U.S.
Treasury, we negotiated the first international agreement, the
OECD consensus or guideline agreement, that did sharply reduce,
indeed, to a large extent eliminate, old-style competition in
this area with long maturities and subsidized interest rates.
The only way we were able to do that, however, was by
quadrupling the size of the Ex-Im Bank program over the 4-year
period when I was at the Treasury.
The other countries then took us seriously. We were able to
negotiate a reduction in subsidy practices.
This happened again in the mid- to late-1980's, when tied
aid credits became a major source of competition in this area.
The Administration of the day--the Reagan and, subsequently,
Bush Administrations--created with Congressional support and,
indeed, leadership, the so-called war chest, which enabled the
United States to match those foreign practices and ultimately
bring the foreign perpetrators to the table, and successfully
reduce that element of export credit competition in the early
1990's.
So the fundamental strategy I would recommend to you is one
of two tracks--make sure that we can compete and also enable us
to negotiate reduction in objectionable practices abroad.
As has been mentioned in hearings on the House side and
also a little bit here today, there are those who say, it is
bad economics to do these export credit supports because it
deviates from the market and that is a bad thing.
Leaving aside the philosophy, the economics is just wrong
because what we are trying to do is not create new subsidies.
We are trying to match other people's subsidies. There is a
fundamental theorem of economics called The Theory of the
Second Best. It is not pure market economics, but the theory is
very clear.
When others pursue market distortions, it in fact makes
sense to generate offsetting distortions because the net
outcome actually is a closer approximation of free market
principles.
Senator Bayh. We call that not making the perfect the enemy
of the good.
Mr. Bergsten. You have it. So even in terms of economic
theory, as I said to a colleague from the Cato Institute on the
House hearing side, there is strong rationale for doing what we
are talking about here.
Finally, I would just leave one point of history. There
have been a couple of times in the last generation when the
Administration of the day and /or the Congress actually did cut
the programs of the Export-Import Bank. It happened in the mid-
1970's. It happened again in the early 1980's--due to a
combination of ideology, budget desires, and the like. In both
cases, after having done considerable damage to U.S. economic
interests and international goals, those policies were quickly
reversed.
In other words, they were not sustainable. When cuts as
proposed by the Administration now were actually implemented,
they turned out to be a bad thing. They generated strong and
bipartisan political opposition. And they were quickly reversed
and the program was put back on track, partly for the reason I
indicated--to enable us to have a serious voice in negotiating
reductions in foreign practices.
I will close with an appeal to history. Let's learn from it
for once. Let's not go through another see-saw because I would
confidently predict that if you reduce the program this year,
you will be back next year or the year after and substantially
increase it because gentlemen like those on the rest of this
panel, many participants and key actors in the U.S. economy,
will simply let you know what a drastic mistake it would be.
Instead, let's do it right in the first place. Increase the
program, broaden the authorities, get back in the game of
negotiating reductions in foreign practices, and give American
exporters a truly level playing field.
Thank you.
Senator Hagel. Mr. Bergsten, thank you for that statement.
Since we are dealing with only two of us here, what we will
do, Senator Bayh, if it is acceptable to you, is just start a
7-minute round, and others may show up, but we will start it
that way, if that is acceptable.
I would like to begin with Mr. Bergsten's pronouncements
and suggestions. Any on the panel who would like to respond to
anything you heard him say? Good? Bad? Does he make any sense?
Mr. Narayana. Mr. Chairman.
Senator Hagel. Yes, sir.
Mr. Narayana. It makes a lot of sense. I went through the
two times he was talking about when the budget was cut and it
was tough going because it was hard enough to persuade American
companies to export, saying, you have a competitive product for
world markets. There are pretty reticent exporters in this
country. And then there was a momentum that was hurt because we
did not get quite the support for Ex-Im Bank we needed.
So, I think it is very important to have a certain program
for a sustainable period of time where momentum is on the
upward so that we can just get more and more American companies
to export increasing amounts. We have the quality in the world
markets. People respect our product. It is a shame we don't get
the product out there.
I think that we should be very careful to not tinker with
the overall support to Ex-Im Bank. If I was a CEO of a company
and a segment of my business is growing as fast as it is, I
would invest more money in that business than to cut it back.
And I think it is interesting, we seem to feel that that
train will go forward even without support. That is not true
because the exports are going to those markets that can ill-
afford to pay. It is important to have a risk-taker, if you
will, to support that kind of growth because, essentially, that
is where the future markets are.
Senator Hagel. Mr. Narayana, thank you.
Mr. Meaney.
Mr. Meaney. Mr. Chairman, I am not an experienced
international negotiator, but it just seems common sense to me
that you cannot convince people to reduce their subsidies of
their industries by just trying to persuade them. You have to
have some weapon that makes it clear to them that those
subsidies will be rendered useless. And that is, I think, a
good justification for continuing the Tied Aid Willingness to
Match program.
Senator Hagel. Anyone else want to respond?
Mr. Dort.
Mr. Dort. Mr. Chairman, I speak reluctantly in trying to
add something to what Mr. Bergsten said for a lot of obvious
reasons. But the one thing that I might bring to Fred's example
is the signal that a cut makes in the marketplace.
We face international competition around the globe. And
frankly, the Ex-Im Bank is a target of criticism by others
talking in terms of its reliability. ``Look,'' says the
competition, ``at the signal from the United States Government.
President Bush is trying to eliminate the Bank. Will they be
there next year?''
What Fred said and others have said is quite true, but that
perhaps is another element that we should consider, the signal
that it makes.
Senator Hagel. I agree, Mr. Dort. Symbolism signals are
very powerful, especially in the international arena.
Mr. Bergsten, would you elaborate a bit on your thoughts
about increasing not just the financial commitment structural
activity focus, but also the market windows, the tied aid
programs. Where do we cross the line with OECD on this?
Mr. Bergsten. Well, that is a matter of great debate
between the United States and some of the foreign export credit
agencies. But in practice, what is happening is that some of
the other major countries are conducting practices that give
them a substantial competitive gain, which they claim are not
subject to the OECD guidelines, and therefore, do not require
any constraints.
Indeed, one important part of the OECD Agreement is prior
notification of a particular subsidy practice or one that is
covered by the arrangement. That then gives the other countries
and their own export-import banks an opportunity to match the
practice.
In the case of some of these new programs that I mentioned,
the other countries claim they are not covered. Therefore, they
don't even notify. We are not even aware that we are facing an
unlevel playing field in particular cases. So, it is a doubly
difficult situation. You face a new subsidy and you don't even
know that it is hitting you until after the deal has already
been made.
The market window issue, Mr. Narayana mentioned it briefly.
Some of the other gentlemen may have competed with it directly
and can give examples. Market windows are these newly
developing, hybrid programs that are carried out particularly
by the German and Canadian export credit agencies, though it is
clear they are being considered by others as well. The practice
will spread whether we do it or not.
What is being done is that in those countries, the relevant
government agency is conducting business pretty much like a
private bank, meaning it goes faster. But it gets government
funds and pays no taxes. It has an implicit government
guarantee behind what it does. It shifts some of the
administrative costs to the government payroll.
In short, it has lots of benefits which enable it to cut
its costs and thereby reduce the interest rates it charges and
have a substantial competitive advantage in both quantitative
and qualitative terms.
And the argument from the agencies involved is that they
are not subject to the international guidelines.
We ran a big conference on this last May and, much to their
credit, the leaders of those foreign agencies gave us papers
and explained what they did, and defended their practices, and
basically said, ``come on in, the water is fine.''
They were not discouraging the United States from doing it.
They said, ``we think it is a good idea.''
Both the presidents of the German and Canadian agencies
testified at great length and their papers are in the book that
we published on it. It gives you the blueprint, tells you how
to do it and, quite candidly argues that it is a good thing for
their competitive position and their exporters. They go on to
argue that there is nothing wrong with it under the
international rules and they say, ``if you don't like it,
emulate it.''
That is what I am suggesting--we ought to emulate it.
The so-called untied aid is a fascinating area where, in
principle, a foreign aid-giving agency provides a credit or
grant-like credit to a developing country with no strings
attached. But in practice, when you trace the procurement under
those loans, particularly in the case of the Japanese program,
you find, mystery of mysteries, almost 100 percent of it winds
up in Japanese exports. And you don't even have to charge
perfidy on the part of the Japanese. You can note that their
borrowers, knowing where their bread is buttered and knowing
where they might want to go for the next untied credit, give
the business to the country.
Again, there is a paper in our book that documents in great
depth how Japan has given a number of loans of this type to
China, particularly in the power-generating sector, and all the
exports wind up with Japanese firms.
So that is another practice that we, in fact, would be in a
pretty good position to compete with if we used the war chest
in its currently updated manifestation to cope with those
practices, and again, then try to bring them under the
international guidelines.
I think those are the two big ones now where we need
additional authorities, a guide and a lead from the Congress--
and hopefully the Administration in response--that would enable
us then to truly try to level the playing field.
Senator Hagel. Thank you.
Senator Bayh.
Senator Bayh. Thank you, Mr. Chairman.
Mr. Straub, I would like to begin with you. I understood
your testimony to be that you think the Export-Import Bank
should not encourage or extend credit support when there is
excess capacity in the world. As you know, there is a two-part
test, that being one of the parts. The other is substantial
injury.
I understand your objection being that, in many ways, the
current standards are not being enforced by the Export-Import
Bank.
Mr. Straub. Something clearly went wrong in the case of the
Benxi Steel loan. You look at the regs or the rules and on the
face of them, they would seem adequate. I know the Ex-Im has
been diligent in the years past, checking with some affected
parties in the industry about loans and the industry has
responded about those and they have not gone forward.
It is not clear what happened. We had a good meeting with
Chairman Harmon. We pressed him on the issue.
There is a standard, apparently, that suggests that one of
the tests, maybe the only test, I am not sure, that was not
clear to me, but one test was to determine whether there was an
outstanding order, an antidumping order against a particular
company. There was then a further sort of parsing of that
investigation to suggest that it had to be a final order, not a
preliminary order, which made us scratch our heads.
These steel cases cost tremendous amounts of money. They
cost millions of dollars to prepare. They are not brought
lightly. They are brought in full anticipation that they will
be won and, in fact, most of them are won--probably 85 to 95
percent, on average, because the facts usually are so
compelling.
We as an industry never want to be in a position of
bringing a case under the antidumping laws and routinely
losing. I think that challenges your credibility on an issue
that is very important. So they are very carefully and
methodically constructed. They are very expensive to construct.
Just the filing of a case alone, really, I think is some
kind of a condemnation of a practice. But quickly, the
Departments of Commerce and the International Trade Commission
get to preliminary judgments that give you fairly good guidance
and independent observers that might suggest there is some
wrong-doing there before they can get to a final. That is using
one standard. But as a final rational way to look at this--but
not looking at a preliminary--that was questionable.
But, look. At the end of the day, Senator, that in itself
is a very narrow interpretation of what I am trying to get to
here, which is to say that we should not have a situation where
there has to be a final order, or even a preliminary order
against a company that is clearly dumping in our market before
the Ex-Im Bank decides that they should go forward with the
loan or not.
That is a minimal threshold, in my opinion. And maybe that
regulation needs clarification, and I would hope that the
Committee would look at that in its report and in its final
product.
But there is a much larger question here about the widely
recognized--you had to have been on Mars for the last 3 or 4
years not to know of the problems--not just in the American
steel industry, but worldwide, about the over-capacity issue.
So when you have our own Government official weighing in,
like Secretary Mineta did, like Secretary Summers did, when you
have a stated Government position, irrespective of whether
there is an order against a particular company, if the problem
exists worldwide, if there is a country that has been found to
be in excess capacity, as most foreign producers really are--
the United States is one of the rare exceptions. We are
primarily a domestic-consuming industry. It seems to me that
should highlight the issue itself.
Now how do you write a regulation for that? I am not sure.
It is a little more vague. But common sense really has to creep
in here somewhere. I guess we would ask for a real review of
the regulations in this area and to try to determine this would
not happen again.
There was a lot of consternation among the officials of the
Bank. I think they were perplexed over this. There was a
tremendous reaction, negative and very emotional reaction, from
the Congress and from others. It is not a healthy condition for
the Bank or for the industry and we should try to avoid it in
the future.
So a good review of those rules and regulations would
certainly be in order.
Senator Bayh. Well, perhaps it was a one-time oversight or
perhaps not. But in any event, it does not hurt to look at the
standard used and the internal procedures of the Bank.
If I hear you correctly, you are suggesting that where
there is a well-established glut of capacity in the world
market, that that should at least raise a cautionary flag. And
in a particular case with regard to a company where there is a
preliminary investigation or preliminary order of some kind,
that should be sufficient to raise a yellow flag. It should not
have to go all the way to a final judgment and order of some
kind.
Mr. Straub. Absolutely not. We don't want to be in a
position where U.S. taxpayer money is being used to fund the
expansion of capacity of an actor in a foreign country that is
going to turn around and violate our laws with that product
that we now helped finance and build and produce.
Senator Bayh. Mr. McKenna, maybe in layman's terms, you
could share with us--you were so eloquent in describing the
importance of exports to Indiana's economy and the States, and
your and the lieutenant governor's successful efforts to expand
exports.
As you have heard here, the Administration has recommended
a 25 percent reduction in funding for the Export-Import Bank.
I have only been in the Senate 2 years. But in my brief
tenure, it is rare that you discover a lose-lose-lose situation
where we would risk business, we would risk jobs, and in this
case, as one of the witnesses testified, we would actually risk
money.
It makes it terribly ironic. They proposed reducing the
funding in a way to free up funds to make the tax cut and some
other activities possible. But in fact, the Export-Import Bank
generates a net surplus to the Treasury of about $1.7 billion.
We would be actually making the budget situation worse, not
better.
If we did reduce the activities of the Ex-Im Bank by a
quarter, what impact would that have on Indiana's economy and
on your efforts to expand exports?
Mr. McKenna. Well, what has been mentioned earlier is,
sometimes it is difficult to get local businesses to export.
They don't think of it in terms of going outside the Midwest.
By reducing this tool, we are not allowed to do the
missionary work throughout the State that we are compelled to
do, that we want to do, in order to convince the people within
our State that the world wants their products. We now have the
quality products. We have the distribution system. And to help
somebody who has 25 employees or 100 employees to think about
the world market, this is the kind of nudge that will encourage
that kind of activity.
It sounds like the same person that was lending the money
to the Chinese to build excess steel capacity, is now trying to
figure out what to do about the Ex-Im Bank.
Both ideas were bad. Common sense tells you that both ideas
are bad. And Indiana has experienced yet its 13th record year
in exports--$16.5 billion. We have consistently led the Nation.
And things like the Export-Import Bank, increasing the
number of our foreign trade offices--when you left office,
Governor, there were eight. We now have 13. Only Pennsylvania
has more foreign trade offices.
This is important to us. It is an essential building block.
It helps us spread our resources. And it helps Hoosier
employees, Hoosier owners, and Hoosier taxpayers. It is a very,
very solid program that helps those help themselves.
Senator Bayh. Thank you.
Mr. Chairman, I see my time is expired and I regret that. I
have an amendment over on the floor on the education bill that
I am going to need to get to.
Mr. Bergsten, before I leave, I would just like to say, I
find your comments to be very enlightening and persuasive,
particularly in light of past efforts to reduce the support of
the Bank.
And also your argument that, if we are going to have any
credibility in our attempts to reduce foreign governments'
subsidies, that we need to have a credible deterrent of our own
first.
So, really, the theory and the practice come together, it
seems to me, if you look at it that way. I appreciate all of
your testimony here today, gentlemen.
Thank you.
Senator Hagel. Senator Bayh, I have just been informed that
they have called a vote. They are holding the vote for two of
the most important Senators in the United States Senate.
[Laughter.]
I don't know who they could be talking about. But,
nonetheless, we have a couple of options here. If you want to
come back and ask more questions after the vote, we will. Or if
you have more questions, we could submit those in writing. Or
we could finish the hearing right now.
Senator Bayh. Senator, I am going to need to submit mine in
writing. I am going to have an amendment, I need to stay on the
floor following this vote.
Senator Hagel. All right. I have a similar time commitment.
So, with that, let me on behalf of the Committee thank you all
again very, very much. You have been very helpful.
What we will be doing, as I said in my opening statement,
is holding another hearing soon, as Senator Bayh and I have
talked about. That time we will have the Administration
officials here.
Your comments will be incorporated in our line of
questioning. I think you all have made immense sense. You are
practitioners of the business, and that is why your testimony
has been so valuable.
Again, thank you.
Anything else, Senator Bayh?
Senator Bayh. That is all. Thank you, gentlemen.
Senator Hagel. Thank you.
Mr. McKenna. See you in Lincoln, Senator.
Senator Hagel. Thank you.
We stand adjourned.
[Whereupon, at 4:05 p.m., the hearing was adjourned.]
[Prepared statements, response to written questions, and
additional material supplied for the record follow:]
PREPARED STATEMENT OF SENATOR TIM JOHNSON
Thank you, Mr. Chairman. I am pleased to be here today to speak
briefly about the reauthorization of the Export-Import Bank. I
appreciate the work that you and Senator Bayh are doing and will work
with you to advance the important issues under this Subcommittee's
jurisdiction.
Mr. Chairman, the Export-Import Bank has always played an important
role in our Nation's export financing. In our current global economy,
with a growing number of suppliers and increasingly aggressive export
credit entities, the Export-Import Bank will plan an even larger role.
The $10 million in exports that my State of South Dakota produces adds
strength and a host of jobs to our economy. The guarantees and
insurance provided by the Bank help to make it possible for companies
in my State to expand their businesses overseas, and play an important
role in leveling the playing field for American companies to compete in
the global marketplace.
South Dakota is a perfect rebuttal to the myth that the Bank helps
only large corporations. In addition to the companies that export
directly, the 49 South Dakota companies that supply exporters
contribute significantly to job creation for our citizens. When you
consider the total picture of how exports fuel our economy, the Bank's
investment is even more important.
Again, Mr. Chairman, I look forward to working with the
Subcommittee on the reauthorization of the Export-Import Bank.
----------
PREPARED STATEMENT OF PETER A. BOWE
President, Ellicott Machinery Corporation International
and Liquid Waste Technology
on behalf of the
U.S. Chamber of Commerce
May 17, 2001
Mr. Chairman, thank you for the invitation to appear before the
panel today. My name is Peter Bowe, and I am offering this testimony
for the Export-Import Bank renewal on behalf of the U.S. Chamber of
Commerce, and on behalf of two small companies I run as President:
Ellicott International, a dredge exporter, and Liquid Waste Technology,
a waste water treatment plant equipment manufacturer.
The subject today really should not be renewal of Ex-Im Bank, but
rather its expansion--and how its export programs can be made more
competitive. We should be considering not how Congress can legislate
export financing guidelines for the world, but how to deal with the
realities of the aggressive practices of export credit agencies (ECA's)
from other countries which understand how important exporting is to
their economy. Ex-Im Bank needs a mandate to be more flexible, more
aggressive, less restrictive about U.S. content, and less expensive
with respect to fees.
First, let me review what Ex-Im Bank is doing well in pursuing its
role of export promotion:
The concept of delegated authority, whereby Ex-Im Bank lets
private sector banks issue commitments on its behalf is a great
idea and should be expanded further. This is especially appropriate
for small business which may find the task of dealing with
Washington-based bureaucrats daunting.
Ex-Im Bank's program to support standby letters of credit for
bid bonds and performance bonds is innovative and should be
continued. This program covers an important need for exporters--and
bridges a difference between foreign banks which issue bank
guarantees, as opposed to letters of credit, for this purpose and
do not charge the exporter's credit line. My company Ellicott has
found this program effective.
Ex-Im Bank has a small business working capital program which
means that the Bank recognizes that the needs of small business can
be different, and has dedicated staff trained to appreciate these
needs.
A further positive comment: Ex-Im Bank's staffing an office in
China shows that it has the ability to act strategically,
recognizing where potential for export growth is greatest and the
impact of financing the most significant.
There are a few areas where Ex-Im Bank can improve its value to
small business exporters:
First, it needs to reduce its exposure fees which on a per
transaction basis often appear unfavorable compared to foreign
competition. By way of an example, our Vietnamese customers have
said it is cheaper for them to arrange financing on their own than
use Ex-Im Bank. Even though Ex-Im Bank should not be a bank of
first resort, it should not be comparably so expensive.
Second, Ex-Im is often too slow to respond in those cases
where staff response is required. We lost a $1 million transaction
in India because of an inability to deliver a firm proposal in a
time period satisfactory to our contractor customer who had to
mobilize for a job. I have heard similar anecdotes from other small
business exporters. I believe more staff may be required to solve
this problem.
Third, Ex-Im Bank's requirements for U.S. content have
traditionally been far more restrictive than what other exporter
credit agencies allow. While understanding that the objective of
Ex-Im Bank is to create export related jobs, one must often be
willing to give up a piece of the pie to get some pie. By contrast,
Canada's Ex-Im Bank equivalent would say that a CAT engine bought
through a Canadian CAT dealer is all Canadian content, and that
freight arranged through a Canadian freight forwarder is Canadian
content even if the conveyance is not Canadian flagged. As commerce
gets more global and sourcing more international, it becomes
increasingly more difficult to achieve Ex-Im Bank's local content
requirements despite their recent relaxation.
No doubt a major problem for Ex-Im Bank is Congressional mandates.
These affect subjects such as allowable local content or foreign
content. There are other mandates which interfere with Ex-Im Bank's
business such as unilateral trade sanctions and perhaps most of all,
too strict a policy objective of avoiding taxpayer loss through credit
decisions about foreign buyers, and exposure fees designed to generate
income from export financing.
Small business has special constraints compared to big business
with respect to exports. Typically small businesses are limited to
production in one or two plants and can't move that production to meet
customer financing requirements. Multinationals with many factories can
move sourcing to a host country where superior export financing is
available. Thus, for a small business exporter the choice is to move
manufacturing to a foreign country altogether, or to lose a particular
deal if Ex-Im Bank financing is not on a par with that offered by
competitive sources.
Small businesses, as well as large businesses, complain about the
use of tied aid by foreign countries. The United States continues to
fail to come to grips with this problem. Our policy intent has
typically been to occasionally engage in matching tied aid with the
intent of dissuading its use by others such as France, Germany, or
Japan, rather than accepting its use by such countries as what they
consider to be a legitimate export tool. A country as small as Holland
can boast of $500 million of exports to China through a 10-year mutual
collaboration based on Dutch special financing (ORET Program) and
Chinese acknowledgement of the need to source from Dutch suppliers.
Our company recently lost a $15 million project for Bangladesh
where Ex-Im Bank was unwilling to even consider making a proposal due
to the per--capita income status of the country, even though we had
evidence in advance of the Dutch loan offer. Within the last year we
can point to our two Dutch competitors having received orders worth
approximately $30 million to $40 million based on special financing for
Bangladesh, China, and Vietnam. Such financing is under the auspices of
the ORET Program which typically initiates a 35 percent grant element.
Within the last 5 years our German competitor has used similar
financing from KfW for Vietnam, Thailand, and elsewhere.
Our current understanding is that the U.S. Treasury has restricted
any further use of the Ex-Im Bank ``war chest'' to match tied aid
loans. Even in the era of matching, Ex-Im still was oriented toward
what I call the ``dead body'' approach meaning that the evidence
required to justify a matching loan was burdensome, and that the only
truly convincing evidence was a lost contract--the ``dead body.'' I
should acknowledge that in the mid-1990's Ex-Im Bank did adopt more
realistic procedures to assess the existence of foreign tied aid
offers.
A further problem with the tied aid issue has been the technical
interpretation of a ``matching'' proposal or project. In the one case
where we successfully received a tied aid match, Ex-Im actually forced
us to ``dumb down'' our superior product by deleting environmental
features so that we would be no better than our competition, i.e., our
exact technical specification match. This also delayed project
implementation by most of a year.
One policy comment: Exporters know that U.S. Government interagency
coordination is an urgent requirement for better results. Yet we have
no real consensus about what needs to be done.
In 1992, the Congress passed (and the U.S. Chamber supported)
legislation (introduced by our Maryland Senator Paul S. Sarbanes) to
create the Trade Promotion Coordinating Committee (TPCC), chaired by
the Secretary of Commerce. It also required the President to submit an
annual export development plan that would serve as a comprehensive
blueprint for Federal trade development activities, including strategy
to coordinate Federal programs involved, budget issues, etc.
The TPCC and the annual submission served for a while to improve
interagency coordination especially when the late Commerce Secretary
Ron Brown devoted his personal energy to the concept. However, the
hoped for setting of priorities across agency lines has failed to
materialize consistently. I urge that this Subcommittee examine this
issue further not only in the context of the reauthorization of the
U.S. Export-Import Bank, but also in terms of its interaction with the
Office of the U.S. Trade Representative, the Overseas Private
Investment Corporation, the Trade Development Agency, and the Small
Business Administration.
It is frankly inconceivable to think of an export world without an
Ex-Im Bank. It is also hard to imagine how Ex-Im Bank can function in
any practical way with a budget cut of the magnitude of the one
proposed by the Administration. The real question should be, how much
more Ex-Im Bank can and should do, especially in a continuing strong
dollar era, and how much more money it needs.
I close with one sober note. Last week the CEO of a major
independent power producer based in Baltimore noted to me that all of
its major equipment vendors are now foreign-based in part because of
the superior financing programs from their host governments. A world
without Ex-Im Bank is likely to be one where strategic industries such
as power plant equipment makers adapt to the changing market
environment by sourcing all their production where financing is
available on terms attractive to their customers. That is how the world
works. It is not only unrealistic but also very dangerous to think it
can be changed unilaterally through American legislation.
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PREPARED STATEMENT OF E. ROBERT MEANEY
Senior Vice President, International
Valmont Industries, Inc.
May 17, 2001
Mr. Chairman and Members of the Subcommittee. My name is E. Robert
Meaney, and I am Senior Vice President of Valmont Industries, Inc. I am
here today at the request of Senators Hagel and Bayh to present the
story of Valmont's experience with an unsuccessful attempt to obtain
matching tied aid financing from the Export-Import Bank of the United
States for a project in China.
I would like to start with some information about my company.
Valmont is headquartered in Omaha, Nebraska. We are a publicly traded
company listed on the Nasdaq with sales of about $900 million and 5,500
employees, two-thirds of whom reside in the United States. We have
manufacturing facilities in eight States and 11 foreign countries.
Founded in 1946, Valmont is the world's largest manufacturer of
mechanized irrigation products, as well as the world's largest
manufacturer of pole structures for applications such as telecom
antenna towers, street and highway lighting poles, and large structures
for utility transmission and distribution lines.
Our overseas markets range from developed countries like France and
Japan to countries who are developing their modern infrastructure like
Brazil, China, and the countries of Sub-Saharan Africa. We are very
proud of our products. We are motivated by how they enhance the
standard of living worldwide, and we believe they aid in the
development of freedom and prosperity.
A good example of the importance of our products is the use of
center pivots for irrigation. For those not from the Great Plains,
center pivots are responsible for the great green circle patterns in
fields of 160 up to 340 acres that you often see from airplanes. There
are 300,000 of these circles in the world, more than half in the United
States. We believe that 60 percent of the world's 300,000 circles use
pivots from Nebraska producers, and that fully 40 percent of the
world's circles are made by Valmont's Valley brand.
The original drivers for the industry were enhanced yields and the
reduction of labor needed to move irrigation pipe by hand, but water
conservation and environmental issues soon became as important,
especially in international markets.
Water conservation has become a compelling priority for governments
in developing countries. The statistics are well known: Only 3 percent
of the world's water is fresh water. Only one-third of that is
available for human use. Of that 1 percent, two-thirds is used to
irrigate farms. Solving the world's water crisis means making farms
better at stretching water resources. Nothing comes close to doing this
on large fields, as well as center pivots. (Drip irrigation, the other
principal water-conserving technology, is about as efficient as center
pivots, but it is economical only on small- and medium-sized fields.)
With these strong environmental and agricultural drivers, our
export center pivot business has expanded rapidly, especially during
the past 7 years. To improve our speed of delivery and product support,
we have built satellite manufacturing facilities in Brazil, Spain,
Saudi Arabia, United Arab Emirates, and South Africa. We have also
established distribution centers in Mexico, Australia, and now in
Western China. This regional manufacturing and distribution strategy
has been a great success for us. We have improved our market share
against competitors both in the United States and in the regions
involved. This has enabled Valmont to expand employment in Valley,
Nebraska, our main irrigation technology center, and in a smaller
operation in San Antonio, Texas.
It was in this context that in 1997 we made a decision to pursue
the China mechanized irrigation market. After about a year of market
development work, we began to sell a moderate number of machines to
private customers, usually by confirmed letter of credit. At an early
stage we began to understand that China is setting a high priority on
water conservation .
Having concluded that China inevitably would start to adopt our
technology in order to move toward water conservation and protection of
its soil resources, we invested considerable effort in marketing in key
areas with large farms. These regions included Inner Mongolia,
Northeast China, Ningsha, Gansu, and Xinjiang. Our development effort
was aided by the fact that Valmont had already established a pole
manufacturing plant in Shanghai some years earlier. The pole plant has
been a financial success, and its seasoned staff has supported the
effort of the Irrigation team. In early 2000, we concluded a joint
venture agreement with a strong Xinjiang company in order to follow our
normal strategy of establishing a strong local organization to address
local competition.
In early 1999, an unusual event occurred in Xinjiang. A small
Austrian competitor closed a very large center pivot order for about $5
million. This was unusual because our competitors are usually either
local companies or those few other Nebraska center pivot manufacturers.
The competition in the international segment of our industry is
intense, and small regional firms from Europe are normally not
competitive. We were suspicious and soon discovered that the sole
reason for the Austrians' competitiveness in the 1999 and in later
deals was tied aid financing offering 25-year loans at 2.95 percent
interest with 5-year grace periods. We consulted the Ex-Im Bank and
learned that we could use Tied Aid Willingness to Match procedures to
cancel out the very favorable terms being offered by the small Austrian
company.
Racing against an uncertain deadline, we worked intensively with
Ex-Im Bank personnel and gathered all the documentation necessary to
file a formal request for a matching proposal to be considered at the
February 2001 Ex-Im Board meeting. We have nothing but praise for the
professionalism and enthusiasm of the Ex-Im staff assigned to assist
us. We also received encouragement and support from our Nebraska
legislative delegation here in Washington, especially from Senator
Hagel and Representative Bereuter. We worked very hard to keep our
Chinese customers' minds open in spite of pressure from the Austrians
to close the deal with them.
At about the time we expected to receive Ex-Im's Board approval, we
received word from Representative Bereuter's office that, although our
request for a match to the Austrian tied aid offer had been approved by
Ex-Im's Board, the Department of the Treasury opposed it. One month
later, we received a letter from Ex-Im telling us officially that the
Ex-Im Board was ``unable to take favorable action on your request.'' As
a result, the Chinese gave the order to our Austrian competitor.
These are the basic facts of the Valmont effort to obtain matching
financing from the Ex-Im Bank. We are most disappointed that, after
months of work, the attempt to use the Ex-Im Tied Aid program was a
failure. It is not possible for Valmont to judge the overall fairness
of the result, because we are not experts in policy matters. However,
we are businessmen who try not to engage in activities which lead us
nowhere. In this case, we wasted months of very valuable time.
Needless to say, the small Austrian company has now booked another
order, this time for approximately $3 million. Because of the dramatic
financing packages they offer to the customers in Xinjiang, their
product line has a dominant share of the promising and growing market
there. China is the only meaningful irrigation market in the world in
which American, which is to say Nebraskan, companies do not dominate.
Although these projects may seem like small ones to some, they are
large ones for us. They are also more important than most because, as
the initial installations in the region, the brands involved become the
reference.
In the months since the disappointment of the rejection of our
application, we have continued our marketing efforts to establish our
brand by conducting seminars and field training sessions. Our
competitor has not supported his product in the field. To us, this is
undeniable proof that the only advantage he had was Tied Aid Financing.
In conclusion, we would like to say, for the record, that we
believe strongly in the overall mission of the Ex-Im Bank and we wish
to see its programs continued. It is our belief that the Tied Aid
Willingness to Match program can serve an important purpose in
protecting American businesses from unfair practices of foreign
governments, but only if it is implemented in a streamlined and
consistent fashion.
I would like to thank you, Mr. Chairman, and the other Members of
the Subcommittee for your interest in this matter.
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PREPARED STATEMENT OF DEAN R. DORT II
Vice President International, Deere & Company
also on behalf of
The National Foreign Trade Council and
The Coalition for Employment through Exports
May 17, 2001
Mr. Chairman and Members of the Subcommittee, I am Dean Dort, Vice
President International for Deere & Company. You may know us better as
``John Deere''--the world's premiere producer of agricultural
equipment; a leading manufacturer of construction, forestry,
commercial, and consumer equipment; and a business leader in parts,
engines, financial services, health care, and special technologies. We
compete globally and create smart and innovative solutions in the form
of advanced machines, services, and concepts for customers on the
farmsites, worksites, and homesites of the world, where our distinctive
brand and special competencies bring added dimensions of value.
Our company, founded by John Deere in 1837, has been a leader in
product innovation and in service to agriculture since its inception.
Throughout most of our company's history we have focused solely on the
challenges and opportunities of providing products and services to
American farmers and ranchers. We are proud of our relationship with
our American customers and will continue to provide them the highest
level of attention, but this segment of our business represents a very
mature market. Therefore, it has become increasingly important that we
look globally for expanded business opportunities in our agricultural,
construction, and other product and service lines. Much of that global
market is in developing countries, where the Export-Import Bank is a
crucial business partner.
Ex-Im Should Be Reauthorized for 5 Years
I am here today representing the National Foreign Trade Council and
the Coalition for Employment through Exports. The membership of those
organizations includes our country's major exporters. CEE and NFTC urge
Congress to reauthorize the Export-Import Bank of the United States
(Ex-Im Bank) for 5 years. It is essential to American exporters and
workers that the Bank's charter be renewed until September 30, 2006.
This would avoid the difficulty which occurred in 1997, and again this
year, when reauthorization occurs in the first year after a
Presidential election and in the same year when the Ex-Im Chairman's
and Vice Chairman's terms expire.
Adequate appropriations are as important as reauthorization in
ensuring that the Ex-Im Bank is able to promote U.S. exports around the
world. Ex-Im's budget must be adequately funded and its policies and
procedures must be aligned with the realities of today's global
marketplace.
The Global Marketplace: The Race Is On
Although Deere was selling products overseas under the direction of
Mr. Deere's son, Charles, at the turn of the century, there has been a
substantial increase in business outside the United States over the
recent past. The net result is that in a relatively short period of
time we have gone from an essentially midwestern company to a global
enterprise.
Customers around the world today expect and are demanding a higher
level of performance from John Deere. And Deere delivers, not just in
products, but in the total John Deere experience --from ordering, to
delivery, to billing, and especially to aftermarket service. Global
customers judge us by the totality of dealing with us.
Why have customers become more demanding? Because they have at
their fingertips more and better information, more choices from global
competitors, and more experiences in a variety of products and of
services to which they can compare. Financing is a huge part of their
expectations--the sale often goes to those who can provide the
financing to complete the sale.
Deere had sales in over 160 countries last year, most all of which
were on a cash or private credit system basis. However, in some
emerging markets, sales will occur only with Ex-Im Bank involvement.
Since 1996, Deere has sold over $700 million of equipment--primarily
combines, tractors, and cotton pickers--to republics of the former
Soviet Union. All of these products were manufactured by U.S.
employees. None of these sales would have happened without Ex-Im Bank's
guarantee to the commercial banks which provided the money.
Ex-Im Is Being Outgunned by Other Export Credit Agencies
The United States is significantly behind its major trade
competitors, and some of the minor world players as well, in supporting
its exporters in emerging markets. This is true in terms of both
quantity and quality. While we debate the latest round of proposed
budget cuts for Ex-Im, other countries are increasing their budgets for
similar programs, leading to increased exports and jobs. Based on 1998
Berne Union data, for example, Ex-Im financed $13.8 billion in United
States exports that year, while Japan financed more than $130 billion
and France financed more than $50 billion. Korea, Germany, Canada, and
the Netherlands all financed significantly more exports than the United
States.
In fact, the United States ranked seventh among eight advanced
industrialized countries in terms of the amount of exports it supported
with official export financing programs--behind the Netherlands and
just in front of Spain.
Not only do America's trade competitors have more export credit
backing from their respective governments, they also have more
innovative programs that are increasingly being used to finance their
exports. Additionally, these ECA's do not face the range of policy
conditions, restrictions, and periodic unilateral sanctions that have
been imposed on Ex-Im by the United States Government.
For example, Germany and Canada have created and are aggressively
using the so-called ``market windows.'' At least one other government--
the United Kingdom--is considering a similar arrangement. These are
quasi-official financing arms that operate outside of the OECD rules
that establish world market lending rates as restrictive standards of
borrowing. These ``market window'' activities borrow and lend money
with the full faith and credit of their governments on much more
attractive terms than Ex-Im or private banks. These market windows,
such as Germany's KfW and Canada's EDC, claim that they operate on a
commercial basis. However, there is no transparency or reporting on
these activities to verify such claims.
One thing is clear: U.S. private financial institutions cannot
match these terms. Moreover, Ex-Im Bank believes it does not have a
clear enough legislative mandate to combat these ECA practices by
creating its own market window or by matching market window
transactions when needed on behalf of U.S. exporters and the jobs they
create. We hope that the reauthorization legislation can rectify this
serious challenge faced by U.S. exporters.
In examining the practices of other foreign governments--in Europe,
Japan, and Canada--the one common theme among them is that they are
aggressively competing against U.S. exporters and tailoring their
export finance programs with the single objective of promoting their
respective countries' exports. We emphasize: The foreign countries are
competing against the U.S. companies. Ex-Im Bank must have a similar
focus if American exporters and their workers are to succeed in the
global marketplace. Without this, U.S. exports and jobs will be lost.
While Ex-Im Bank has made recent progress in updating some of its
procedures to improve its competitiveness--with the support and
encouragement of U.S. exporters--much more remains to be done. Needed
additional steps include combating ``tied aid'' and ``untied aid''
practices through aggressive use of the tied aid war chest. We also can
no longer afford to ignore the phenomenon of market windows. Ex-Im
should have the legislative mandate to combat these practices,
alongside a focused government-wide effort to negotiate rules to bring
these practices within the OECD Arrangement.
U.S. Exporters and Workers Need a Stronger Ex-Im Bank
American exporters and our workers need a stronger Ex-Im Bank, with
more robust financing products and a more aggressive approach. Today,
all of Deere's operations are bringing out innovative products at an
impressive rate--reaping the benefits of years of heavy investment in
research and development and capital programs. Over $2.5 billion in R&D
expenditures since 1995 has resulted in product lines that are second
to none--whether ag tractors, lawn mowers, massive excavators, and dump
trucks, mobile vehicle electronic controls or navigational devices. We
aim to compete and win, serving deeply satisfied customers with
breakthrough innovations. And we will work with conviction, knowing we
serve society in important ways, notably our vital role in feeding the
world.
We can compete with anyone in the world on product, service, and
price, but no U.S. company can compete on its own against foreign
countries' well-funded and aggressive export credit agencies.
Increasingly, finance determines who wins export sales. Our
customers expect us to bring financing. If our competitors are able to
bring their governments' export credit agencies with them to the
negotiating table and we do not have Ex-Im backing, we will lose out
and the jobs flowing from those sales will go to foreign workers.
Ex-Im is of great importance to our employees. As an illustration
of this, we have worked side by side with officials of the United Auto
Workers--our largest union--to tell the story about the importance of
Ex-Im projects to our factories and employees. We have met jointly on
multiple occasions with Members of Congress and the Administration to
convey this message.
Like most major exporters, significant numbers of Deere jobs depend
on overseas sales. More than that, because we purchase $7 billion of
supplies each year, the positions of many thousands of employees in the
plants and offices of our suppliers depend directly on our exports. We
have suppliers in most States of the Nation, including all the States
represented by the Senators on this panel. Deere recently participated
in a CEE and NFTC study along with twelve other exporters. The study
identified 35,000 small- to medium-sized businesses, so called
``invisible exporters,'' that benefit from Ex-Im participation in
export business.
Ex-Im Bank is Financially Sound and is Not a Corporate Subsidy
There is a widespread misconception that taxpayer funds are used to
subsidize the terms of a Bank-backed export transaction. In fact, Ex-Im
guarantees are costly to the exporter. 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 (a program of
critical importance to many small- and medium-sized business customers
but not used by Deere & Company), and premiums for its guarantees and
insurance. Therefore, we always prefer private financing without Ex-Im
participation, but this option is usually not available in many of the
markets where our greatest growth opportunities exist: The emerging
markets.
According to the Bank's fiscal year 2000 annual report, the Bank
generated $1.7 billion in revenues through its interest charges,
premiums, and fees. Its total expenses, including borrowing costs,
totaled $1.4 billion. Thus, the Bank generated a net $345 million
surplus for the U.S. Government. 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. On the Government's
books, the Bank will appear to have spent $927 million this fiscal
year, even though the Bank's own financial statement will show a
surplus. Thus, the Ex-Im Bank is handicapped by the Government's own
budget rules.
Moreover, the Bank has a very low loss rate, historically about 2
percent. In fiscal year 2000, the Bank paid out $249 million in claims,
even though the Federal Government's process for estimating losses
required reserves of $938 million for the $12.6 billion in credit which
was issued that year. The actual loss rate is far lower than the
estimated loss rate that is used to calculate the loan-loss reserves
that are required in annual appropriations. As a result, the Bank has
accumulated $10 billion in reserves, against its approximately $61
billion in current exposure. That reserve rate is far higher than
comparable commercial bank reserves.
The Administration's Proposed Budget Cuts Will Cost
U.S. Exports and Jobs
We would also alert you to our concerns about the Administration's
proposed budget cut for Ex-Im next year.
The Bush Administration has proposed a 25 percent cut in the Bank's
fiscal year 2002 budget. All of this reduction would be taken from the
Bank's loan-loss reserve funds. With fewer funds for the conservative,
mandated, loan-loss reserves we have described, the Bank would have to
reduce the amount of financing available for U.S. exporters.
The Office of Management and Budget (OMB) indicates that it would
implement the budget cut through a combination of steps: (1) unilateral
fee increases in some markets; (2) reductions in the amount of a
transaction which the Bank finances; (3) restrictions on the
availability of financing to some U.S. companies; and (4) a
recalibration of the amount of loan-loss reserve required for a given
amount of credit.
Of those four specific proposals, the first three would have the
effect of reducing the competitiveness of the Bank and U.S. exporters.
Unilateral fee increases, cuts in the Bank's share of a transaction and
added hurdles for qualifying for Ex-Im Bank financing all would make
U.S. exporters' financing proposals more costly and less attractive to
our overseas customers.
Of particular concern to us is the fact that the Administration's
proposed cut comes while other governments are increasing their own
export credit agencies. Canada, for example, has increased the volume
of its export credit agency to $30 billion in 2000, up from $19 billion
in 1998. By contrast, Ex-Im's financing volume in fiscal year 2000 was
$12.6 billion.
In sum, the Administration is taking the Ex-Im Bank in the wrong
direction. U.S. exporters and workers will suffer. We urge you to
encourage the Appropriations Committee to oppose the Administration's
ill-advised proposal.
While our corporation has a variety of legislative measures before
Congress, none is of greater importance to Deere & Company, its
business goals and its workforce than assuring a fair competitive
environment for our equipment businesses in developing countries. The
Ex-Im Bank must continue to play a key role in helping American
companies, and in turn their employees, compete in the global
marketplace.
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PREPARED STATEMENT OF D.P. (DARIN) NARAYANA
President, Bank One International Corporation
also on behalf of the
Bankers' Association for Finance and Trade
May 17, 2001
Mr. Chairman and Members of the Subcommittee, my name is D.P.
(Darin) Narayana, and I am President of Bank One International
Corporation, a subsidiary of Bank One Corporation. Bank One Corporation
is headquartered in Chicago, Illinois, and is among the five largest
banking organizations in the United States. As part of my
responsibilities, I manage Bank One's international banking services
provided to the U.S. corporations and Bank One's trade finance group. I
appreciate the opportunity to appear before your Subcommittee to share
Bank One's views on the importance of the Export-Import Bank's
programs.
In addition, I am also representing the views of the Bankers'
Association for Finance and Trade (BAFT). I served in the past as
President of BAFT, and Bank One is an active member of this
organization which is committed to fostering international trade.
Bank One conducts banking operations in 12 States in the United
States, and in addition, has international banking operations in
California and New York. Bank One also has subsidiaries/branches and
offices in 9 countries outside of the United States. We are a leading
provider of financial services to all market segments with emphasis on
medium to small businesses. In fact, the international trade finance
activities of Bank One are focused mainly on the medium to small
business customer segments.
If I could add a personal note here, I have been in the
international banking business for over 30 years with two major U.S.
regional banks, Norwest Bank of Minnesota (presently Wells Fargo Bank)
and Bank One. My career has been primarily focused on supporting the
international banking activities of medium to small businesses. During
these years, I have been privileged to regard Ex-Im Bank as a key ally
in supporting the export activities of the U.S. customers. I am,
therefore, well aware of the high regard in which Ex-Im Bank is held by
the exporting community of the United States.
The international trade finance activity of Bank One is conducted
in close cooperation with our bankers located in States such as
Indiana, Illinois, Colorado, Texas, Louisiana, etc. When examining our
clients' needs for export financing, we are guided by the need to be
competitive in order to facilitate our clients' success in obtaining an
export order. We look for the best financing option, and we are
sensitive to the competition faced by our clients. We certainly look to
the Ex-Im Bank as an option; but we also examine other options
including providing the financing ourselves and taking the credit and
political risk of the foreign country. In fact, my experience indicates
that Ex-Im Bank provides an important and at times crucial option to
help our customers win the business.
Bank One's activities with Ex-Im Bank include obtaining guarantees
for medium-term loans, utilizing the insurance programs and relying
upon its working capital guaranty loans to support pre-export
financing, as well as needs for performance guarantees by our exporting
clients. In fact, during the year 2000, our activities with Ex-Im Bank
exceeded $225 million. In addition to this amount, Bank One provided
trade lines of credit to foreign financial institutions to support
their financing of U.S. exports. In all cases, Ex-Im Bank's activities
were complimentary to our trade finance activities.
I would like to illustrate Ex-Im Bank's crucial role in financing
exports for our customers by providing examples:
CTB, Inc., headquartered in Milford, Indiana, is a global
supplier of products which help efficiently convert feed to protein
which preserve the quality of grain for food and feed stuffs. CTB
serves the poultry, swine, egg production, and grain industries.
CTB's product lines include automated feed and watering systems,
heating, cooling and ventilation systems, commercial egg
production, and poultry nesting systems, etc.
Bank One was able to provide a 5-year financing to Venezuelan
buyers of CTB equipment with the help of the Ex-Im Bank's medium-
term insurance policy. This financing would not have been provided
without Ex-Im Bank's support given our analysis of the risks
involved in financing the transaction.
Bank One also provided a 5-year financing to Kazakhstan buyer to
purchase CTB equipment under the Ex-Im Bank insurance policy. As
you know, private sector funding for Kazakhstan is scarce, and Ex-
Im Bank's role was crucial in helping our customer succeed in that
market. Ex-Im Bank, in this case, was a lender of last resort.
Chief Industries, Inc., headquartered in Grand Island,
Nebraska, is engaged in the fabrication and sale of steel products,
the manufacture and distribution of factory-built homes and the
production and sales of Ethanol. They are also engaged in the
manufacture and distribution of grain, drying and storage bins,
aeration systems for use in agricultural buildings. This company is
a leader in its field and its products have a demand in emerging
markets.
Recently, we used Ex-Im Bank's programs to support a financing
facility for its exports to Mexico.
Almond Brothers Lumber Company is located in Coushatta,
Louisiana, and has successfully operated in that community for over
50 years. They have specialized in high-grade lumber that is
primarily sold to international markets. In fact, their export
sales as a percent of total revenues have reached over 90 percent
in 1999 from a base of 5 percent in 1991.
Obtaining financing based on foreign receivables is a very
difficult option for U.S. exporters. Bank One was able to put
together a $4.5 million line of credit to provide working capital
for Almond Brothers based on Ex-Im Bank's working capital guaranty
program. According to Mr. William Almond, ``Without the Ex-Im
programs, Almond Brothers would not have been able to expand and
create the jobs in our parish that it has since 1997.'' Almond's
employment has gone from 65 in 1997 to 89 in 1999 due to increased
export sales. Additionally, the company impacts approximately 150
other jobs for loggers, truckers, and other providers of goods and
services. Almond Brothers is the major employer in the parish where
Coushatta is located, and the export support by Ex-Im Bank made a
huge impact on the community.
On behalf of Bank One and Bankers' Association for Finance and
Trade, I would like to urge the Subcommittee to support the
reauthorization of the Export-Import Bank's charter for a period of 4
additional years without any amendments. In making this request and
recommendation, I would also like to make the following points:
U.S. exporters face the toughest competition they have ever
faced in my 30 years in this business. Emerging market buyers need
access to capital to purchase products from abroad. Financing is a
crucial element of a sale, and foreign ECA's are being very
aggressive in providing credit. Ex-Im Bank must step up to support
the U.S. exporters with more flexible programs, more competitive
financing at rates that are at parity with our competition and with
speedier response.
Ex-Im Bank's financing and its guarantees and insurance
programs are a catalyst and, many times, represent an incremental
source for commercial bankers in their efforts to provide export
financing. For example, recently, Bank One arranged financing for
Chinese buyers of medical systems manufactured by a company located
in Milwaukee, Wisconsin. Of the approximately $40 million of
financing we provided, Ex-Im Bank's participation amounted to 25
percent. This participation by Ex-Im Bank was crucial for the
overall successful facilitation of the transaction.
Multinational corporations that have subsidiaries in more than
one country tend to source their exports based on the type of ECA
support they can obtain. In other words, a U.S. multinational can
export from the United States or Canada or Germany; and sometimes,
competitive financing offered by the ECA of the respective country
can swing the decision on where they will source their export.
Ex-Im Bank is not regarded as providing subsidies to U.S.
exporters of financial institutions. In fact, we find that the
foreign ECA's role in supporting the exporters from their countries
is far more aggressive than Ex-Im Bank's role is in terms of U.S.
exporters.
In our experience with Ex-Im Bank, we find this institution to
be sound, well managed, and is very relevant to the needs of the
U.S. exporting community. We find Ex-Im Bank's risk assessment to
be sound and is protective of the U.S. taxpayers' funds.
Overall, export activity by small- to medium-sized companies
in the United States is growing; and within a few years, our
overall exports as a percent of GDP should approach the levels
enjoyed by our OECD counterparts. Not supporting Ex-Im Bank at this
time would amount to unilateral disarmament and will hurt the cause
of American exporters.
I appreciated this opportunity to provide this testimony on behalf
of the reauthorization of the Export-Import Bank of the United States,
and I would be pleased to answer any questions the Committee might
have.
----------
PREPARED STATEMENT OF TERRENCE D. STRAUB
Vice President, Governmental Affairs
USX Corporation
May 17, 2001
Thank you, Mr. Chairman.
My remarks this afternoon are submitted on behalf of USX
Corporation, which has followed the activities of the U.S. Export-
Import Bank very closely over many years. Recently, I have been
privileged to be appointed a Member of Ex-Im Bank's Advisory Committee.
I look forward to working with the Ex-Im Bank's Board of Governors to
develop policies that will foster global economic growth and create
increased export opportunities for U.S. businesses. USX strongly
supports the policies of the Bush Administration which seeks to open
foreign markets to American-produced goods and services.
There are some concerns on our part, however, that I would like to
present in my testimony today. My concerns rest on a simple core point:
It does not make sense for the United States, or any other nation, to
facilitate or subsidize the expansion of capacity to produce any major
commodity which is already in massive world oversupply. To do so will
inflict great harm on all world producers of that commodity leading to
loss of revenue, falling prices, and cash flow and, in the extreme, the
collapse of the producers themselves.
But this is precisely the situation in which the American steel
industry finds itself today. I won't repeat the points made in the
written testimony submitted for this hearing by the American Iron and
Steel Institute. I certainly support the proposition that the Ex-Im
Bank's provision of funding to produce still more steel in a world
market which has the capacity to produce nearly 300 million tons more
than its needs, doesn't make any economic or political sense. Indeed,
U.S. Government economic policy, which is based on the fundamental
principle that free markets should dictate the flow of capital, should
not subsidize increased production of a product when there already is
an oversupply of that product. The hundreds of millions of tons of
foreign steel overcapacity, and the misguided policies by foreign
governments that led to this overcapacity, was well documented by the
Department of Commerce in its report issued last year: ``Global Steel
Trade--Structural Problems and Future Solutions.''* I am submitting a
copy of that report for the record.
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*Held in Committee files.
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Let me cite a real-life example of this problem: Last year, the Ex-
Im Bank decided to provide export financing to support a steel project
in China by the Benxi Iron and Steel Company which would add a million
and a half tons to the company's capacity. This investment clearly
further aggravated the foreign excess capacity problem. It didn't make
economic sense, of course, but exacerbating this problem is that the
Department of Commerce found just last month that this same producer
has been dumping their exported steel into the U.S. market at margins
of greater than 65 percent. Promoting U.S. exports must not be at the
cost of American jobs. In other words, the Ex-Im Bank must review its
existing policies to make certain that it not only promotes U.S.
exports but that it also makes certain that other U.S. industries are
not adversely effected by imports arising from the Ex-Im Bank
investment. This clearly did not occur in the consideration of the loan
to Benxi Iron and Steel Company.
USX absolutely understands the value of exports. We export steel
ourselves, and we sell through our subsidiary, USX Engineers and
Consultants, a business we value highly and which we want to grow. In
fact, in the 1990's UEC, which provides worldwide steel consulting
services, participated in an Ex-Im Bank program to assist a former
Soviet producer in Romania to become more environmentally efficient by
providing technical and engineering services and equipment. This
initiative, which has since ended, was not designed to increase
production capacity but rather to help the producer become more
environmentally sound.
But this China example, which actually increased production
capacity, throws economic and business logic on its head. USX Chairman
Thomas Usher, following appeals to the Ex-Im Board of Directors by
then-Commerce Secretary Mineta, by then-Treasury Secretary Summers and
by Members of Congress, to halt the financing of the China project,
described the financing as ``an affront to the hardworking men and
women of my company and other U.S. steelmakers, struggling to remain in
business despite a massive glut of world steel production.'' This, from
a CEO who enthusiastically supports U.S. trade promotion objectives and
policies, but believes they must not violate common sense. I have
submitted for the record copies of the letters on this matter from
Secretary Mineta, Secretary Summers, Congressmen Regula, Murtha, Quinn
and Visclosky and from Mr. Usher.
What, then should U.S. policy be? I suggest three guiding
principles:
First: By all means continue to have the Ex-Im Bank support the
export of United States-produced goods and services.
Second: Enforce a policy under which:
Investments are not made that would increase production of a
commodity product for which there already is overcapacity.
Invest only in modernization of existing facilities, such as
in enhanced environmental safety initiatives, only when it does not
result in increased production and avoid any investments in any
foreign producers that are under investigation for or have been
found to be dumping in the U.S. market.
Make it a priority to invest in projects to reduce production
capacity in areas where there is already global overcapacity.
Third: Encourage foreign governments to engage with the U.S.
Government in negotiations to ensure internationally agreed policies
that will prevent a recurrence of the tragic, and tragically wasteful,
crisis we have today in steel. In fact, USX is prepared to assist in
any appropriate manner in such governmental negotiations.
Thank you, Mr. Chairman.
----------
PREPARED STATEMENT OF TOM McKENNA
Executive Director, Indiana Department of Commerce
May 17, 2001
Introduction
On behalf of the Indiana Department of Commerce, I want to thank
the Chairman and Ranking Democrat, Senator Hagel and Senator Bayh, for
inviting me to address the Subcommittee on International Trade and
Finance of the United States Senate Committee on Banking, Housing, and
Urban Affairs. I am Tom McKenna and I serve as the Executive Director
of the Indiana Department of Commerce. As a representative of the
Indiana Department of Commerce, I am here today to support the
reauthorization of the U.S. Export-Import (Ex-Im) Bank's charter, so
that it may continue in full operation.
The Indiana Department of Commerce
The Indiana Department of Commerce is the lead economic development
agency in the State of Indiana. Specifically, Commerce works to assist
communities and businesses in efforts to develop, expand, and
strengthen the quality of life in Indiana. This assistance also
includes the promotion of international trade, energy efficiency, and
tourism development. Commerce's aim is to ensure secure jobs, higher
incomes, and competitive communities for Indiana citizens.
Commerce does this by providing grants and services for development
throughout the State. Our customers include growing Indiana businesses,
companies looking to locate a facility in the Midwest, communities
accessing grants, organizations and businesses leveraging tax credits,
and individuals who use our services.
Commerce's International Trade Division
As we move into an increasingly global economy, our International
Trade Division continues to play a larger role in economic development.
Indiana has been a national leader in export growth and in the
attraction of inward investment--foreign-owned companies starting
ventures in Indiana. Our International Trade Division stimulates this
growth in a variety of ways, targeting our services to small- and
medium-sized businesses--the ones that need our help the most. Namely,
it provides personalized services and networking through our 13
overseas offices, and our Trade Show Assistance Program provides grants
to companies that are seeking representation at an overseas trade show.
The benefit of an international presence has been tremendous for
Indiana's economy--both through sending our goods overseas and in
attracting foreign businesses to Indiana.
Indiana exports for 2000 ended at $16.52 billion. This represents
an all-time high for Hoosier exports and an 18.3 percent increase over
1999's performance. Indiana outpaced the Nation in terms of growth,
with U.S. exports growing by 12.6 percent.
The most notable increase in Indiana's exports came in gains to
Mexico. Exports to Mexico exploded from $812 million in 1999 to $2.2
billion in 2000--an increase of $1.4 billion or 173 percent. Increased
exports of machinery and transportation equipment account for most of
the jump in exports to Mexico.
Indiana also more than doubled its exports to the Netherlands.
Strong gains also occurred in Singapore, Brazil, Australia, France,
Japan, and Germany. Indiana realized gains to Canada, its leading
destination, but not as striking as some other destinations.
Nine out of 10 of Indiana's top export industries had increased
sales to the world in 2000. The fastest growing industry was Primary
Metals, with a 56 percent increase. Transportation Equipment rose by 20
percent in 2000, after a slow 1 percent growth in 1999. Some other
industries with double-digit growth were: Industrial Machinery &
Computer Equipment, Food Products, Chemicals and Rubber & Plastic
Products.
There are a number of reasons for this superb growth. First,
Indiana companies and local development offices do a terrific job of
seeking new markets throughout the world for Hoosier goods. Indeed, our
efforts at the State level play a small role, too. There is another
resource, though, that helps Indiana companies--especially small
companies--perform well in the international marketplace: The Export-
Import Bank of the United States.
The Export-Import (Ex-Im) Bank of the United States
The Export-Import Bank assists in the export financing of U.S.
goods and services. Ex-Im Bank facilitates exports by creating a level
playing field and by providing financing tools to U.S. companies such
as loans, guarantees, insurance, and export working capital guarantees.
Moreover, because of the nature and size of some os these services,
they are difficult for smaller companies to access through private
lenders.
The purpose of the insurance program is to provide the company with
protection against default due to political or commercial risk.
Political risk encompasses events caused by Government action, which
are beyond the control of the exporter or buyer. Commercial risk
includes the buyer's inability to pay due to financial difficulty, such
as an exchange rate devaluation. Insurance covering commercial risk
does not cover contract disputes. This support is crucial to
maintaining and to creating U.S. jobs through exports.
The Ex-Im Bank is vital to exports in the United States, especially
for small companies. Without it, quite simply, some exporters would not
be able to finance the projects associated with exports. While the Ex-
Im Bank works with companies of all sizes, it is of even greater
importance for small companies, which help propel increased exports.
For instance, if a small company in Indiana wanted to send a large
shipment of exports to an emerging market overseas, the company might
have to increase production or purchase new equipment to enter this
market, and financing that growth would be difficult. However, Ex-Im
Bank can offer a pre-export working capital guarantee, helping the
exporter obtain a loan to allow the company to produce goods or provide
a service for export. This finances the company's inventory and
accounts receivable, helping make it financially feasible to fill the
order. That is good for the business, the emerging market, and the U.S.
economy.
The Ex-Im Bank has a very high success rate, primarily because if
someone defaulted against it, they would be defaulting against the U.S.
Government.
Finally, the Ex-Im Bank also helps exporters by insuring against
political risks overseas. This is especially important in smaller
markets, which happen to be some of the fastest growing destinations
for U.S. exports.
Indiana Success Stories
Indiana is a great success story in the international marketplace,
and the Ex-Im Bank has played a role in that story time and again.
Please consider some of the following examples:
International Cryogenics
This small manufacturer of cryogenic materials is located just
outside of downtown Indianapolis. It has been in business since 1980.
The company worked with the Indiana Department of Commerce to obtain
credit insurance with the Ex-Im Bank. International Cryogenics exports
its materials to markets worldwide, but concentrates on Korea. Prior to
obtaining credit from Ex-Im Bank, the company was only able to offer
cash in advance terms, thereby limiting sales. Now, with the credit
insurance, the company can offer more competitive open account terms,
which has enabled it to increase sales and maintain its workforce.
G.R. Wood, Inc.
G.R. Wood, Inc. in Mooresville manufactures hardwood lumber from
logs. In the early 1980's, G.R. Wood wanted to sizably increase its
export of lumber to Europe. It applied for Ex-Im Bank's multibuyer
insurance policy in order to mitigate some of the risks associated with
exporting. Initially, exports were a small part of the business, but
today exports represent about 50 percent of total sales.
Radian Research
Radian Research is a manufacturer of power and energy measurement
instruments in Lafayette. In 1996, the company approached Ex-Im Bank
for a multibuyer insurance policy in order to increase the volume of
exports. The company needed Ex-Im Bank's assistance to obtain the
necessary financing. Without Ex-Im Bank's insurance program, Radian's
lender would not approve a credit line, which is necessary to increase
exports. Ex-Im Bank approved the insurance policy in 1996 and the
company has already increased its export volume.
Stories like this add up. In the last 4 years, the Ex-Im Bank has
helped more than 50 Indiana businesses--and 36 of those are small
businesses--through its insurance, working capital approvals or loan
and guarantee disbursements. The total export value of those projects
is more than $116 million. This is clearly a vital service to Indiana,
especially considering the emphasis it places on small businesses.
It should be noted, too, that companies that export perform better
than nonexporters, and they are better prepared for the future and an
increasingly global economy. These companies also provide better jobs,
with workers earning 6.5 percent higher pay. Additionally, they are
more stable jobs because these companies are less likely to go out of
business than comparable nonexporting companies.
Conclusion
The Ex-Im Bank of the United States is an important part of our
economic future. Moving more goods into the international marketplace
is vital to our growth--something Indiana has done well with the
assistance of the Ex-Im Bank.
Exporting leads to a more stable economy and better jobs--both for
the companies involved and for the Nation as a whole.
By helping companies that may not be able to increase trade
otherwise, the Ex-Im Bank plays an essential role. Part of a globalized
economy is increased competition from other countries, and it is vital
that the United States operate at full strength. That means encouraging
as many companies as possible--in all States--pursue increased exports.
The Ex-Im Bank can help achieve that goal. Without the Bank, many of
our companies will not be able to help us--the equivalent of going into
competition but leaving some of your most important players behind.
We feel it is vital to reauthorize the Ex-Im Bank to full
operation, and we urge you to do so. From Indiana's perspective, we
know first-hand what kind of positive influence it can have on a
State's economy. But we know we are not an isolated case, and the
success Indiana has enjoyed will be shared by the Nation through the
efforts of the Ex-Im Bank.
Again, we believe it is in the Nation's best interest to
reauthorize the Ex-Im Bank of the United States. On behalf of the
Indiana Department of Commerce, thank you for this opportunity to
testify before the United States Senate Subcommittee on International
Trade and Finance.
PREPARED STATEMENT OF C. FRED BERGSTEN
Director, Institute for International Economics
May 17, 2001
Summary and Conclusions \1\
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\1\ This statement draws extensively on Gary Clyde Hufbauer's ``The
U.S. Export-Import Bank: Time for an Overhaul,'' Economics Policy Brief
PB01-3, Washington, DC: Institute for International Economics, March
2001, and also on The Ex-Im Bank in the 21th Century: A New Approach?
eds. Gary Clyde Hufbauer and Rita M. Rodriguez. Washington, DC:
Institute for International Economics, January 2001. The latter volume
includes the papers contributed to a major conference hosted by the
Institute in May 2000 to honor the 65th anniversary of the Export-
Import Bank. The volume also includes presentations by Secretary of the
Treasury Lawrence Summers, Secretary of Commerce William Daley and
Chairman of the House Financial Services Committee James Leach and
former Secretary of the Treasury Robert Rubin.
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It would be a huge mistake for the Congress to cut funding for the
Export-Import Bank, as proposed by the Administration, when it
reauthorizes the Bank later this year. In light of the central
importance of exports to the American economy during this period of
slower growth and rising unemployment, and to reducing our huge current
account deficit of about $500 billion in a constructive manner, the
Bank's authorization (and appropriation) should instead be increased by
about 50 percent.
In addition, the Ex-Im Bank needs new legislative authorities to
enable it to provide American exporters with a level playing field vis-
a-vis their foreign competition. Export credit agencies in other
countries--especially Canada, Germany and Japan--have recently been
devising new programs, notably ``market windows'' and the use of
``untied aid,'' to promote their exports outside the agreed
international guidelines. Our Ex-Im Bank needs authority to emulate
these practices to permit U.S. exporters to compete equally and to
fortify efforts by the U.S. Government to negotiate an elimination, or
at least a substantial curtailment, of the offensive practices.
The rationale for these recommendations is enumerated in the
remainder of my statement.
Exports and the American Economy
Exports of goods and services have been a major source of U.S.
growth for 40 years. Since 1960, the share of U.S. gross domestic
product accounted for by exports has tripled--a stunning increase in
globalization for a mature industrial economy. In the 1990's, even as
U.S. growth--powered by the forces of the new economy--turned in one of
its best performances ever, the export share rose further from 9.2
percent to 10.3 percent. Globalization is likely to continue to
accelerate and the share of exports in the U.S. economy is thus likely
to grow substantially further in the future.
When other characteristics of companies are held constant,
exporting firms perform much better than nonexporters. Worker
productivity is 20 percent higher. Export jobs are better jobs:
Production workers in exporting firms earn 6.5 percent more. They are
also more stable jobs: Exporting firms are 9 percent less likely to go
out of business than comparable nonexporting firms.\2\
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\2\ J. David Richardson. 2001. ``Exports Matter . . . And So Does
Trade Finance,'' in The Ex-Im Bank in the 21st Century: A New
Approach?, eds. Gary Clyde Hufbauer and Rita M. Rodriguez. Washington
DC: Institute for International Economics. Also see J. David Richardson
and Karin Rindal. 1996. Why Exports Matter More! Washington, DC:
Institute for International Economics and The Manufacturing Institute.
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Despite the dramatic export expansion, the United States will run a
trade deficit that could reach $500 billion in 2001--almost 5 percent
of our GDP. The deficit is no cause for panic but it is clearly
unsustainable as it requires us to borrow almost $2 billion, net, from
the rest of the world on every working day.\3\ There are only two ways
the deficit can be reduced: Fewer imports or more exports. For the
health of the United States and the world economy, more exports are far
better than fewer imports. Ex-Im can contribute importantly to that
goal.
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\3\ Catherine L. Mann. 1999. Is the U.S. Trade Deficit Sustainable?
Washington, DC: Institute for International Economics as updated by
Catherine L. Mann. 2001. ``Is the U.S. Trade Deficit Still
Sustainable?'' Washington, DC: Institute for International Economics.
March 1.
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There is another key policy reason to support a stronger Ex-Im
Bank. To its great credit, the Administration is seeking Congressional
support for Trade Promotion Authority (aka ``fast track'') that would
enable it to participate in new negotiations to reduce trade barriers
multilaterally (especially in the World Trade Organization), regionally
(especially to create a Free Trade Area of the Americas) and
bilaterally. Such negotiations are vital to enhance the access of U.S.
firms to world markets and to avoid new discrimination against the
United States as other countries, in our absence from major
negotiations, create regional deals of their own. It will be a
difficult challenge for the Administration to garner a Congressional
majority to support the needed authority, however, and the full support
of the export community is an essential ingredient of assembling a
successful coalition. It would make no sense to reduce official support
for export activities just when the strongest possible assistance from
that quarter is so necessary.
Ex-Im is only one way--and a comparatively modest way at that--of
promoting U.S. export growth. However, it has two unique functions: It
helps secure a level playing field for U.S. exporters, in the face of
foreign export credit competition, and it corrects market failures in
trade finance. These missions have challenged Ex-Im for at least three
decades but the Bank, and the United States as a whole, now face a
wholly new environment of world export competition.
The New Environment of World Export Competition
Ex-Im Bank and similar official export credit agencies (ECA's) in
other countries traditionally finance exports of capital goods, mainly
but not entirely to developing countries. Competition in these markets
has changed dramatically since the 1970's, when the industrial nations
first agreed to a ``ceasefire'' in export credit competition under the
auspices of OECD Arrangement on Officially Supported Export Credits.
Thirty years ago, the dominant users of ECA's were vertically
integrated ``national champions'' like Siemens, Hitachi, and General
Electric. In that era, large firms were not nimble at changing the
source of components for major capital goods. Instead, each firm would
strive to produce components at designated factories within its
corporate structure. The goal of the ECA's was to ensure that their
national champion won the order; and the goal of the OECD Arrangement
was to limit highly subsidized competition between the ECA's. Today,
things are different:
No longer are major capital goods, such as power plants and
civil aircraft, made in vertically organized firms based entirely
in a single country. Instead, economic efficiency requires enormous
amounts of outsourcing. The value-added chain is sliced up and the
slices are located wherever production costs are lowest.
Responding to this new reality, important trading nations are
using export credits (among other industrial incentives) in a
strategic fashion to attract procurement and direct investment from
multinational corporations that can choose from a range of
locations around the world. Most other countries depend even more
heavily on exports than does the United States; the competition in
global markets is thus becoming tougher all the time.
Both small- and medium-sized companies are becoming a bigger
factor in the export picture. One reason is the slicing and dicing
of the value-added chain. Another reason is falling communication
and transportation costs: Air freight, fiber optics, and the
Internet are all helping smaller firms reach new customers
overseas. But small companies are still handicapped by the
cumbersome character of trade finance.
Meanwhile, foreign ECA's have invented clever ways around the
OECD Arrangement to the disadvantage of U.S. exporters. Unlike the
Ex-Im Bank, where the operating procedures are rooted in the
bureaucratic practices of the 1980's, many foreign ECA's have
acquired the streamlined characteristics of market competitors
while retaining the advantages of Government support.
Securing a Level Playing Field: A Two-Track Strategy
In the field of export credit competition, as in many dimensions of
international affairs, the olive branch is diplomacy. Through continued
negotiations under OECD auspices, the industrial countries have
whittled down the subsidies offered by the official government export
financing programs. Despite U.S. efforts, however, the OECD Arrangement
has not been extended to cover new practices and institutions that
indirectly distort credit terms and export competition.
This is where the arrows come into play--specifically Ex-Im Bank.
Unless the United States, through Ex-Im, is prepared to counter the
financing terms offered outside the letter of the OECD Arrangement,
foreign governments have little incentive to extend the rules, through
OECD negotiations, to cover the new practices and institutions.
In the 1970's and 1980's, the United States successfully used both
carrots and sticks to curb wasteful competition among OECD countries in
the export credit realm. Substantial increases in Ex-Im program levels
in the late 1970's enabled us to negotiate the original OECD Agreement
that brought subsidized interest rates, unrealistic loan terms, tied
aid, and bargain insurance terms back to commercial norms.\4\ The
creation of the ``war chest'' in the 1980's had a similarly salutary
effect in checking competition in the use of tied aid to support
exports. But in recent years Ex-Im Bank has been hampered both by a
shortage of money and its own legislative constraints from effectively
supporting U.S. diplomacy. The result is the growing importance of
financial practices that skirt the edges of the OECD Arrangement on
Official Supported Export Credits.
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\4\ Peter C. Evans and Kenneth A. Oye. 2001. ``International
Competition: Conflict and Cooperation in Government Export Financing.''
In Hufbauer and Rodriguez, op. cit.
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In an era of high U.S. trade deficits, it is not acceptable for the
U.S. Government simply to sit back and accept the market-distorting
practices that have crept into the export credit picture. Over the last
few years, three financial practices have badly eroded the value of the
OECD Arrangement, disadvantaging U.S. exporters: Market windows, untied
aid, and interest make up.
Market windows. These are official institutions that operate both
as official lenders and private banks. Canada's Export Development
Corporation and Germany's Kreditenanstalt fur Wiederaufbau are the
leading exemplars. The Canadian and German market windows are hybrid
institutions with advantages over both private banks and official
ECA's.\5\ Together, they did $12 billion of financing in 1999.
---------------------------------------------------------------------------
\5\ Allan I. Mendelowitz. 2001. ``The New World of Government-
Supported International Financing.'' In Hufbauer and Rodriguez, op.
cit.
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Unlike private banks, market windows get start-up money from the
government. They pay no corporate income taxes. They raise funds with
an implicit government guarantee. They can shift some of their
administrative costs to the government payroll. Unlike official ECA's,
market windows can respond rapidly and flexibly to commercial
opportunities, and they can pay competitive salaries to attract
talented personnel. Market windows have so far insisted, against U.S.
objections, that they are not subject to the OECD Arrangement and its
reporting requirements. Ex-Im may not even know that it faces
competition from a foreign market window until a deal is lost.
Untied aid. In principle, untied aid is bilateral aid extended to a
developing country with no requirement that the recipient procure goods
and services from the donor country. The annual volume of untied aid is
running about $11 billion. Supposedly the recipient country can use the
aid funds to procure goods and services from the cheapest source
worldwide.
In practice, ``untied aid'' is often an oxymoron. The recipient
country knows very well who is providing the funds and places orders
accordingly. Japan is the most important donor of untied aid. Peter C.
Evans and Kenneth A. Oye provide a detailed case study of Chinese power
plant purchases demonstrating that, for practical purposes, Japanese
untied aid finances procurement from Japan.\6\
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\6\ Peter C. Evans and Kenneth A. Oye. 2001. ``International
Competition: Conflict and Cooperation in Government Export Financing,''
in Hufbauer and Rodriguez, op. cit.
---------------------------------------------------------------------------
Unlike tied aid, nominally untied aid need not have a minimum 35
percent grant element. And unlike normal export credits, untied aid
need not observe minimum commercial terms of the OECD Arrangement
(interest rate, down payment, and maturity terms). Putting these two
loopholes together, untied aid amounts to a backdoor route for
subsidizing export credits.
Interest make up. Several European ECA's (e.g., France, Italy,
Spain, and the United Kingdom) use this method to provide official
export credits at the fixed rates permitted under the OECD Arrangement.
In this method, commercial banks are guaranteed a return equal to the
cost of borrowed funds (say the London Interbank Offer Rate, Libor),
plus a spread of 40 to 150 basis points a year, when they provide
official financing to overseas borrowers. Thus the ECA's ``make up''
the difference between the permitted OECD Arrangement rate and the
commercial cost of funds.
There is nothing wrong with this in principle. However, the size of
the ``make up'' may be excessively generous, relative to the services
provided and the risks taken by the commercial bank. In turn, the
generous spreads may induce European commercial banks to provide export
financing for projects and countries that U.S. commercial banks would
not extend to U.S. exporters. In extreme cases, the European commercial
banks may even ``kick back'' some of the extra spread to the borrower,
providing an additional inducement to buy European exports.
Market Failures in Private Trade Finance
Over the past decade, innovation in the private financial markets
has moved at a breathtaking pace --but not in the realm of export
finance, where the trend has been more retreat than attack. Commercial
banks have merged with investment companies and insurance firms, and a
whole new menu of financial products has been invented. These
innovations have not, however, transformed the world of trade finance,
and export credits are nowhere nearly as efficient a market as home
mortgages. Market failures today are different than they were 20 years
ago but they are no less important:
On average, in 1995-98, the United States exported $128
billion of capital goods annually to developing countries (table
1). Many of these developing countries enjoyed reputations for
economic stability--before the 1994 -95 Mexican crisis and the
1997-98 Asian crisis. In the wake of the financial crises of the
1990's, however, commercial banks reevaluated the risks of trade
finance. Today they are less willing to accept medium- and long-
term export credit risk (terms over 1 year), even for shipments by
major U.S. corporations to steady markets such as Brazil and
Korea.\7\
---------------------------------------------------------------------------
\7\ William R. Cline. 2001. ``Ex-Im, Exports, and Private Capital:
Will Financial Markets Squeeze the Bank?'' In Hufbauer and Rodriguez,
op. cit.
Meanwhile, small- and medium-sized exporters (whose ranks grew
by 65 percent in the 1990's) report difficulty getting export
credits, even for shipments to Europe or Japan. Small exporters are
not big enough to establish strong client relationships with giant
banks, and their trade finance business is not worth the hassle for
medium-sized banks. Dot.com trade finance is still on the drawing
boards. Banks have not yet securitized trade credits the way they
have routinely bundled home mortgages.
Meeting the Challenge
Our competitors abroad have found new ways to play the export
financing game at the official level while our private financial
markets at home have not yet perfected export financing packages. This
has left many U.S. exporters between the proverbial rock and hard
place. Ex-Im is the arm of the U.S. Government that should buttress
U.S. diplomacy in curbing export credit subsidies (however disguised).
Ex-Im should also step in when private export finance is not available
for particular foreign markets and aspiring U.S. exporters.
But Ex-Im is seriously disadvantaged in fulfilling its two core
missions--providing arrows to reinforce the U.S. stance in official
negotiations and stepping in when private markets fail. Ex-Im is
limited by the modest size of its financial muscle, relative both to
competitor ECA's and the needs of the export market (see table 1). Ex-
Im is also limited by a series of crippling legislative constraints.
Hence Congress should give the Bank new financial muscle and relax the
legislative constraints that hamper Ex-Im.
Financial muscle. Table 1 compares Ex-Im Bank's financial muscle
with its major competitors. The focus is on medium- and long-term
credits (credits over 1 year), the arena where competition is hottest.
In recent years, Ex-Im's medium- and long-term credits amounted to
about 4 percent of U.S. capital goods exports to the world and 8
percent of U.S. capital goods exports to less developed countries
(LDC's). The figures for competing G-7 industrial exporters were 6
percent and 15 percent respectively.
These comparisons, coupled with business experience recorded in our
volume The Ex-Im Bank in the 21st Century, point to a clear
recommendation. Ex-Im should increase its medium- and long-term credit
activity by at least 50 percent so that it can effectively carry out
its dual mission. With this increase, Ex-Im's total annual budget for
new export credits, guarantees, and insurance would rise to about $20
billion, up from the current figure of about $13 billion annually.\8\
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\8\ An argument sometimes made against increasing Ex-Im's budget is
that Ex-Im will turn into another giant government credit agency, like
Freddie Mac or Fannie Mae. The comparison is totally misleading.
Together, the two home finance agencies have floated about $1.4
trillion of securitized loans. By comparison with these elephants, Ex-
Im is a mouse.
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Under its current authorizing legislation, Ex-Im is permitted a
total of $75 billion of loans, guarantees, and insurance outstanding at
any one time.\9\ Of this amount, $61.6 billion had been used at the end
of fiscal year 2000. Annual repayments of outstanding loans, and
expiration of guarantees and insurance, amount to about $10 billion
annually. To support $20 billion of new activity each year in fiscal
year 2002 and fiscal year 2003, and to provide a cushion for
extraordinary circumstances, the Ex-Im ceiling should be raised to at
least $110 billion.\10\
---------------------------------------------------------------------------
\9\ Export-Import Bank of the United States. 2000 Annual Report, p.
42.
\10\ The rough calculation is as follows. Two years of new credit
activity at $20 billion per year equals $40 billion. Two years of
repaid loans and expired guarantees and insurance at $10 billion per
year equals $20 billion repaid. Additional authorization for
extraordinary activity (matching untied aid and short-term crisis
loans) equals $10 billion. Cushion at the end of fiscal year 2003
equals $5 billion. Total authorization ceiling equals present
authorization of $75 billion plus $40 billion minus $20 billion plus
$10 billion plus $5 billion equals $110 billion.
---------------------------------------------------------------------------
The immediate constraint facing Ex-Im, however, is not the ceiling
on loans, guarantees, and insurance. Instead, it is the combination of
annual appropriations to cover possible losses together with the
schedule of required reserve ratios. Annual Congressional
appropriations have been running about $800 million to $900 million.
For fiscal year 2001, the figure is $927 million. The OMB (in
consultation with Ex-Im) sets required reserve ratios on loans,
guarantees, and insurance for different countries and sectors to cover
potential losses. The ratios are very conservative and Ex-Im reserves
have now reached $10 billion to cover possible losses on assets of $60
billion.\11\
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\11\ Under the Federal Credit Reform Act of 1980, Ex-Im is required
to set aside very generous reserves for potential credit, insurance,
and guarantee losses. Annual appropriations cover these reserves.
According to Allan L. Mendelowitz, op. cit., Ex-Im's excess reserves
over probable losses may total $10 billion.
---------------------------------------------------------------------------
In order to support a 50 percent increase in annual activity, a
combination of two measures should be taken. OMB should modestly reduce
the required reserve ratios for seasoned loans. In addition, Congress
should raise the current level of appropriations from $927 million in
fiscal year 2001 to about $1.3 billion in fiscal year 2002.
By contrast with this recommendation, President Bush's budget calls
for a 25 percent cut in Ex-Im's appropriation to $699 million in fiscal
year 2002.\12\ Ex-Im's total activity would be slashed from $12.6
billion in fiscal year 2000 to $8.5 billion in fiscal year 2002.
Cutting Ex-Im's budget at this time would be a major mistake. It would
undermine U.S. commercial diplomacy and U.S. exporters just at a time
when faster export growth is needed to strengthen our economy and
reduce the trade deficit in a constructive manner.
---------------------------------------------------------------------------
\12\ As reported in Inside U.S. Trade, vol. 19, no. 9, March 2,
2001.
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I should note that Ex-Im's budget has been cut before. There were
sharp reductions in the middle 1970's and again in the early 1980's. In
both cases, such steps clearly turned out to represent mistakes and the
policies were quickly reversed. We should not repeat the historical
errors of the past and, once again, lose market share for U.S. exports
that has to be made up by redoubled efforts at a later time after much
ground has been lost.
Besides increasing Ex-Im Bank's financial muscle, Congress should
give Ex-Im legal authority to compete in the 21st Century of export
finance --both to support U.S. exports and to bolster the OECD
Arrangement. The legal authority would have several components, any of
which could be implemented with Treasury approval:
Power to match market-distorting ``market window'' activity
both in third world markets and within the United States.\13\
---------------------------------------------------------------------------
\13\ To match market window finance within the United States, the
powers under Section 1912 of the Ex-Im statute should be widened.
Power to use the so-called ``war chest'' fund to match
officially untied aid.\14\
---------------------------------------------------------------------------
\14\ The ``war chest'' was created in the mid-1980's so that the
Ex-Im could match tied aid. It succeeded in invigorating negotiations
that significantly curtailed tied aid. See Peter C. Evans and Kenneth
A. Oye, op. cit.
Power to launch an ``interest make up'' program similar to the
---------------------------------------------------------------------------
European programs.
Legislative contraints. Ex-Im faces several Congressional mandates
that also make it a sluggish competitor. Three should be singled out
for correction in the 2001 charter renewal:
Under existing law, Ex-Im Bank must ensure that there is less
than 15 percent foreign content in the exports it supports.\15\
While the Ex-Im changed its procedures in 2000 to apply the foreign
content rule more flexibly, the requirement can still be at odds
with the new ways of slicing and dicing the value-added chain with
components from a range of countries. Ex-Im should be permitted to
act as the umbrella finance agency when a major project is
predominantly built with U.S. capital equipment even if U.S.
exports do not amount to 85 percent of the total. However, Ex-Im
should also keep a running set of records with other ECA's to
ensure that they either refinance part of the project or that, in
their role as the umbrella finance agency for other projects, they
finance an equivalent amount of U.S. exports.
---------------------------------------------------------------------------
\15\ Allan I. Mendelowitz, op. cit.
Over the last 20 years, Congress has given Ex-Im multiple
tasks with wide-ranging national interest objectives. Ex-Im is
mandated to meet official competition worldwide, make sound credit
calls on risky transactions, create new financial instruments to
access U.S. capital markets, manage more than $60 billion of global
assets in a wide range of legal and financial systems, and
aggressively help small, rural, and environmental exporters. Yet,
over the same period, Ex-Im has been administratively starved. It
has roughly the same staff numbers as 20 years ago, it has minimal
flexibility in its pay and average grade structure,\16\ and its
information technology system is outdated. Congress should scale up
Ex-Im's administrative capability to the size and scope of its
mission.
---------------------------------------------------------------------------
\16\ Ex-Im can hire only 35 employees outside the normal civil
service pay structure.
---------------------------------------------------------------------------
There are times when economic sanctions are necessary,
whatever the cost in terms of exports.\17\ For Ex-Im, however,
economic sanctions are more an issue of reputation than reality. In
1999, for example, Ex-Im, was closed for foreign policy reasons in
only five markets: Cuba, Iran, Iraq, Libya, and Pakistan. To reduce
the ``reputation cost'' of sanctions, however, Congress should
eliminate the Chafee Amendment requirement that Ex-Im Bank
transactions be withheld for foreign policy reasons under certain
circumstances. If the Amendment is retained, it should be
implemented only upon direct approval of the President, after
consultation with the appropriate Congressional committees;
currently, the power to curtail Ex-Im transactions for foreign
policy reasons, is delegated to the Secretary of State.
---------------------------------------------------------------------------
\17\ But unilateral U.S. sanctions seldom succeed and sanctions of
all types have decreased sharply in effectiveness over the past several
decades. See the comprehensive analysis in Elliot, Kimberly Ann,
Jeffrey J. Schott, and Gary Clyde Hufbauer. Economic Sanctions
Reconsidered (3rd edition). Washington, DC: Institute for International
Economics. Forthcoming (2001).
---------------------------------------------------------------------------
Conclusion
With more financial muscle and a new legislative mandate, Ex-Im can
fulfill its twin missions. On the one hand, it can reinforce U.S.
diplomatic efforts to update the OECD Arrangement to curtail untied
aid, and to bring market windows and interest make up plans fully
within the purview of official discipline. On the other, it can fill
the holes in private trade finance. Both missions will provide
essential support for U.S. exports. Without new authority from
Congress, Ex-Im will sink into irrelevance. U.S. exporters will be put
at a severe disadvantage in world markets. The U.S. economy will suffer
substantially. I urge the Congress to make the recommended changes when
it passes legislation to renew the Bank's authority later this year.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR HAGEL FROM PETER A.
BOWE
Q.1. Could you please go into a little more detail about your
experiences with transactions in which your competitor is
financed by the Tied Aid Program of the Netherlands Investment
Bank for Developing Countries (NIO Bank)? Could you describe
how the Netherlands' Investment Bank's financing terms are
better than what Ex-Im Bank can provide?
A.1. Our Dutch competitor primarily uses the ORET program to
support special financing in developing countries. ORET
provides for grants of not less than 35 percent and not more
than 50 percent of a project scope. (Information on ORET is
attached.) The balance of the contract price is usually with
market rate financing. The ORET program can be initiated in a
collaborative process under which the Dutch supplier approaches
the foreign user and states that ORET financing is likely
available for the pending project. The in-country Dutch Embassy
typically writes the buyer to confirm the general terms for
ORET and a procedure for confirming its availability.
Not only is the financing attractive on its face, but it
establishes a supplier/ buyer dialogue under which the buyer,
early on in the process, commits to product /project
specifications based on Dutch supply.
Also attached is an excerpt from a Chinese government
handbook about how Chinese buyers can access the Dutch ORET
financing in a collaborative manner.
It is my understanding that Ex-Im Bank could choose to
match ORET financing out of its ``War Chest'' Program if it
wanted to. As mentioned in my testimony, ``matching'' is
usually frowned on by the buyer country because the process
creates a winner and a loser which, although that is the
explicit intent of Ex-Im Bank, is not what the buyer country
wants.
Q.2. In your testimony, you noted the possibility that a small
business would need to move to a host country to obtain
financing from the host country on better terms than what Ex-Im
can offer. What criteria do the foreign banks require that
would make it necessary for the small business to move
offshore?
A.2. The issues here are essentially: (a) content requirements;
(b) availability of attractive financing. Special financing by
export credit agencies are always based on some minimum of
lending country content. As mentioned in my testimony, Ex-Im
Bank is more strict about United States content than other
ECA's tend to be about content from their country. I provided
some specific examples about Canada.
Another criterion would be availability of financing at
all. For example, before Ex-Im Bank opened to Vietnam, Ellicott
was exploring manufacturing a dredge in Canada, because the
Canada ECA was open to Vietnam, and aggressive about its terms
for Vietnam, where Ex-Im Bank of the United States was closed
altogether.
Q.3. What is the negative impact on the United States economy
of Ellicott going to a foreign Export Credit Agency for
financing if the Export Credit Agency can offer better terms
than Ex-Im Bank?
A.3. Building on the previous example, if Ellicott builds a
dredge in Canada for Vietnam to access Canadian financing
terms, then the Canadian content of that dredge will displace
United States content to a substantial degree.
Q.4. What different approach do you suggest that the Ex-Im Bank
take to help you compete?
A.4. (1) Ex-Im Bank should recognize that it needs to play the
tied aid game more aggressively. It should do so more flexibly,
i.e., avoid the ``dead body'' approach. (2) Ex-Im Bank needs
lower transaction fees. Our Vietnam example where the Ex-Im
Bank exposure fee is higher than that charged by other ECA's on
a similar term loan. (3) Ex-Im Bank should be more flexible
about minimum United States content. (4) Without ignoring
credit underwriting standards, Ex-Im Bank should be more
aggressive about where and when it takes foreign risks.
Q.5. You mentioned that Ex-Im has high exposure fees. If
exposure fees are increased, would you deterred from using the
Bank?
A.5. Exposure fees are a cost of doing business which the end
user compares between competing proposals, American and non-
American. All other things being equal, an increase in exposure
fees directly reduces the competitiveness of U.S. exports, and
vice versa. So higher fees don't necessarily deter us as the
exporter from using Ex-Im Bank, but they deter our customers
from choosing Ex-Im Bank financing and therefore deter them
from choosing us as an American supplier when European
alternatives exist.
RESPONSE TO WRITTEN QUESTION OF SENATOR MILLER FROM PETER A.
BOWE
Q.1. Has the Chamber of Commerce taken any position on the
proposed 25 percent cut in funding for the Export-Import Bank?
A.1. The Chamber of Commerce is opposed to any cut in funding
for the Export-Import Bank.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR HAGEL FROM E. ROBERT
MEANEY
Q.1. Could you provide an estimate of the loss to your company
that this rejected application caused?
A.1. In the short term, Valmont Industries, Inc. has lost
immediate sales of approximately $9,000,000 USD. This figure
represents the total estimated value of the Xinjiang Production
and Construction Corporation's irrigation project. Our Austrian
competitor, Bauer, will obtain the center pivot sales for the
entire project.
In the long term, the loss of this project could cost
Valmont and other Nebraskan mechanized irrigation companies as
much as $100,000,000 USD per year. With the Austrians
establishing their name and product in the Chinese market,
Valmont and other United States companies will have a difficult
time in overcoming their dominance. This will be particularly
true if Bauer continues to offer tied aid financing and U.S.
companies do not have a way to compete with it.
Q.2. Was Ex-Im Bank able to explain to you why your application
was denied?
A.2. No. Ex-Im Bank provided a general letter stating that our
Tied Aid PC application was denied. There was no detailed
explanation provided.
Q.3. Are you aware of any criterion that is published that
advises you of when Tied Aid can be offered?
A.3. Yes. The U.S. Ex-Im Bank provides information in regard to
its Tied Aid program in U.S. Ex-Im literature and on their
Internet home page.
Q.4. You stated that Austria obtained succeeding sales. Has
Valmont tried to bid for those follow-on sales? If not, why
not?
A.4. Valmont has inquired about follow-on sales in Xinjiang.
However, Bauer's offer of tied aid leaves us uncompetitive. The
Chinese continue to buy Bauer center pivots because they can
purchase them on terms of 20-25 years with approximately an
interest rate of 2.95 percent.
Valmont has continued a strong market development program
in Xinjiang. This has included establishment of a manufacturing
joint venture, a model farm, and numerous seminars.
Q.5. What is the standard type of Ex-Im financing that could be
offered and how did it differ from Austria's financing terms?
A.5. The U.S. Ex-Im Bank offers several programs that could be
considered ``standard.'' Ex-Im's Export Credit Insurance
Program and Guarantee Program could have been considered in
this case. However, those Ex-Im programs would not have been
competitive with the Austrian Tied Aid Terms.
In the above-mentioned programs, Ex-Im requires a 15
percent down payment on the part of the buyer. The repayment
terms would be approximately 5-7 years. The bulk of the project
loan (85 percent) would have an interest rate of probably close
to 10 percent. Financing for the initial 15 percent down
payment would have to be provided by a commercial bank. The
terms for the 15 percent down payment would be one year
financing at an interest rate between 12-15 percent.
The Austrian Tied Aid Program offers the Chinese no down
payment (100 percent financing). The repayment terms are
between 20-25 years. There is an initial 5-year grace period on
repayment. The interest rate offered is between 2.55 percent
and 2.95 percent.
Ex-Im's current ``standard'' programs cannot compete with
the Austrian Tied Aid Program. Valmont needed Ex-Im's Tied Aid
Matching Program to compete with the Austrians on the Xinjiang
irrigation project.
Q.6. Was commercial bank financing not available to you for
this transaction?
A.6. Commercial bank financing would probably have been
available. However, the loan terms would not have been
competitive with the Austrian Tied Aid financing.
Q.7. Do you envision future ventures for which Valmont could
use Ex-Im financing?
A.7. Yes, wherever there are global opportunities to conserve
water for production agriculture and provide lighting, utility,
and communication infrastructure, we see the possibility of
using Ex-Im's programs. The U.S. Ex-Im's Export Credit
Insurance Program and Guarantee Program are two options
available to assist us in obtaining sales in international
markets.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR MILLER FROM E. ROBERT
MEANEY
Q.1. What was the Treasury's reason for opposing the tied aid
to China?
A.1. The U.S. Treasury Department did not provide a reason to
Valmont Industries, Inc. The U.S. Ex-Im's application denial
letter to Valmont did not mention Treasury's involvement in our
application review or provide Treasury's reason for its
opposition. We learned about Treasury's involvement in a letter
we received from Congressman Bereuter.
Q.2. What, if anything, did you do after you found out Treasury
said no? Was there any recourse available to you?
A.2. After learning that Treasury said no, we consulted the
U.S. Ex-Im Bank in regard to our options. The Ex-Im Bank
informed us that there was nothing further that we could do.
There was not any recourse made available to Valmont.
RESPONSE TO WRITTEN QUESTIONS OF SENATOR HAGEL FROM D.P.
NARAYANA
Q.1. If exposure fees were increased, would you or your clients
be deterred from using Ex-Im Bank?
A.1. Any increase in exposure fees would be a major deterrent
for exporters and Bank One to utilize Ex-Im Bank programs.
Increased exposure fees would raise the price of U.S. exports,
impact negatively the competitive position of U.S. companies,
and jeopardize jobs in the U.S. exporting community. We already
find that Ex-Im Bank's exposure fees are not competitive in
certain markets. Ex-Im Bank and other Export Credit Agencies
(ECA's) operate under an OECD negotiated agreement with
guidelines for minimum exposure fees. Any exposure fee
increases would serve only to further debilitate Ex-Im Bank's
ability to support U.S. exports.
Q.2. Could you go into more detail about the aggressive terms
offered by Export Credit Agencies of Canada and Germany and how
often sourcing is changed from the United States to Germany or
Canada because of the terms offered by the foreign Export
Credit Agencies?
A.2. Both Canada and Germany purport to operate as private
sector entities while taking advantage of their quasi-public
sector status to lower their cost of capital for funding export
transactions (market windows). We know firsthand of companies
that have sourced product out of Canada versus the United
States because of the Canadian export credit agency's
willingness to accommodate approvals quickly and provide low-
cost funding. Quantitative data from either Germany or Canada
is difficult to obtain because transactions funded through
market windows are not subject to public record requirements.
Clearly, we can foresee an increasing trend of Canadian and
German exporters benefiting from financing cost advantages and
of United States companies choosing to source product from
their foreign-based subsidiaries where they can benefit from
lower financing costs. The result is a reduction of export-
related jobs within U.S. companies. Going forward, we see more
foreign ECA's moving toward similar market window operations to
compete with Canada and Germany.
Q.3. Are there procedures used by the Ex-Im Bank that can be
modified to make your partnership more effective for the U.S.
exporter?
A.3. Ex-Im Bank has been successful through the years because
of its ability to function as an independent agency. The Ex-Im
Bank's independence allows the Bank to remain in dialogue with
the private sector and attuned to the needs of the U.S.
exporting community. Ex-Im Bank needs to continually refine the
organization's ability to response quickly and flexibly to
requests for transaction approvals. The most frequent complaint
about Ex-Im Bank is that the Bank moves too slowly in an
increasingly ``real time'' global environment. Retention of
highly qualified personnel should be a high priority.
RESPONSE TO WRITTEN QUESTION OF SENATOR MILLER FROM D.P.
NARAYANA
Q.1. Mr. Bergsten says in his testimony that Ex-Im Bank's
budget had sharp reductions in the middle 1970's and again in
the early 1980's. You indicated you have been ``supporting the
international banking activities of medium to small
businesses'' over a number of years. From your perspective did
you see any impact of the Ex-Im Bank's budget reductions in the
middle 1970's and early 1980's on the activities of medium to
small businesses?
A.1. Without question, the reductions in Ex-Im Bank's budget in
previous years had a dampening impact on U.S. exporting
activity. Medium and small businesses particularly are
sensitive to any decrease in support available from Ex-Im Bank
because of their dependence on the Bank's programs as a primary
tool to enable them to cultivate and retain foreign market
sales. Ex-Im Bank operates as a crucial partner to financial
institutions that work with medium and small businesses by
providing competitive solutions to their export needs.
STATEMENT OF AMERICAN IRON AND STEEL INSTITUTE (AISI)
On behalf of U.S. Member Companies
May 17, 2001
The American Iron and Steel Institute (AISI) is pleased to provide
the following statement on behalf of its U.S. member companies who
together account for approximately 70 percent of the raw steel produced
annually in the United States.
AISI has always supported a strong and competitive United States
Export-Import Bank (Ex-Im), which remains essential to promote U.S.
exports of manufactures, i.e., steel-containing products. At the same
time, the U.S. steel industry has a unique and important perspective on
Ex-Im activities because the Bank, over many years, has asked AISI in
particular to comment on scores of requests for official financing
assistance to U.S. exports of steel plant and equipment, either to
increase or modernize foreign steel capacity or to improve its
environmental performance. It is from this perspective that we submit
our statement.
Problem of World Steel Overcapacity; Simple Position, No Simple Issue
There is massive global excess steel capacity--approximately 275
million metric tons (see attachment). As a result of this massive
overcapacity, the steel sector globally is dysfunctional; there is a
crisis in world steel markets; and this crisis has engulfed the United
States and North American steel industry.
This global steel crisis is a direct result of four decades of
pervasive foreign government intervention in the steel sector,
intervention that has helped to build, perpetuate, and exacerbate the
world steel overcapacity problem.
Our position is simple enough: If private banks believe it is
economic to loan money for foreign steel industry modernization or
further steel capacity buildups, that is their business, but we
strongly object to Government involvement in such efforts.
Unfortunately, this issue is anything but simple.
Confronting Confirmed Foreign Competition
AISI Position on Ex-Im Bank Prior to 1998
The problem historically has been that other governments continue
to provide official financing aid for steel projects abroad, and so
such projects invariably go ahead anyway with or without U.S. Ex-Im
aid. Thus, for many years, AISI has confronted the likelihood that the
only effect of our opposition to U.S. Ex-Im financing support in these
cases is to deny U.S. suppliers the business, i.e., to ``cut off our
nose to spite our face.''
The key problem, in other words, has always been beyond the control
of U.S. Ex-Im to solve. Prior to 1998, we always took the view that
this is less a problem with Ex-Im, and more a problem for USTR,
Treasury, and U.S. trade policy. The real problem, we used to say, is
how to get other governments to stop this irrational and unending
intervention in the steel sector, which is the key cause of the global
and U.S. steel crisis.
Historically, then, and for only one reason-- confirmed foreign
competition--AISI has objected to, but usually not opposed, Ex-Im
financing support for foreign steelmaking projects. This is not the
case, however, since an unprecedented steel crisis hit United States
and NAFTA shores in 1998. When it struck, it became very clear to us
that--regardless of confirmed foreign competition--we could no longer
just hold our nose, object, but not oppose requests for Ex-Im financing
support that exacerbate world steel overcapacity.
1998 -Present, Unprecedented Crisis; Change in AISI Position
The past 3 years should have been the best of times for an American
steel industry restored to world class status, which in recent years
has added over 20 million tons of new, state-of-the-art steel capacity.
Instead, we have a national steel emergency. Its main cause is the
record 3-year surge of dumped, subsidized, and disruptive finished
steel imports. The last 3 years have been the three highest steel
import years in U.S. history. A tidal wave of unfairly traded and
disruptive finished steel imports from non-NAFTA countries has led to
serious import injury. Its effects include:
A record 18 steel company bankruptcies since December 1997.
Record low steel prices.
Scores of facility shutdowns.
The loss of over 23,000 good jobs.
Reduced shipments.
Large financial losses.
A lack of access to capital.
Unprecedented market instability.
Today, more than 21 percent of the total U.S. steel capacity is
operating, under Chapter 11 bankruptcy, with additional bankruptcies
threatened.
It is important that the Subcommittee understand that this has been
a transplanted crisis caused by global excess steel capacity, market-
distorting practices, and major structural economic failures elsewhere.
The result has been an unprecedented surge of imports, which has turned
the United States and NAFTA region into the World's Steel Dumping
Ground.
This has led to a change in our position on requests to Ex-Im.
Given the serious injury to U.S. steel companies, employees, and
communities from the record 3-year surge of unfairly traded and
disruptive steel imports--and because this injury is the direct result
of government assistance to foreign steel projects--AISI has been
forced to harden its position on requests to use U.S. taxpayer dollars
for steel projects abroad.
In view of massive world steel overcapacity and its key role in
helping cause the global steel crisis and our national steel emergency,
AISI will oppose future requests for U.S. Export-Import Bank financing
assistance that increase foreign steel capacity. With respect to future
requests for U.S. Ex-Im financing aid to help modernize or improve the
environmental performance of existing foreign steel capacity, we will
consider the following factors, among others: (1) Whether the project
in question could lead, either directly or indirectly, to dumping and
injury in the U.S. market; (2) whether it involves a de facto increase
in effective foreign steel capacity; or (3) whether it is part of
efforts to downsize current foreign steel capacity.
China Example; Wrong Signal At Wrong Time
In light of all that has been said above, the U.S. Export-Import
Bank decision in January to extend official financing support for a
project that will add another 1.5 million metric tons of hot-rolled
steel capacity in the People's Republic of China (PRC) was ill-timed
and wrong-headed. It sent the wrong signal at the wrong time.
As far back as April 2000, AISI wrote to the Bank making it clear
that our U.S. members were ``opposed to financing support by Ex-Im or
any other government's official lending institution for this project.''
What we said then was this:
China already has the world's largest and fastest growing
steel industry.
The PRC government is currently trying to limit domestic steel
production due to serious oversupply conditions in a number of
product lines.
It is increasing government subsidies to steel in preparation
for China's entry into the WTO.
The PRC government, which seems committed to the long-term
goal of import substitution, continues to discriminate against
imports of steel and of steel-containing products.
U.S. exports of steel to China have declined substantially
over the past 10 years.
China's exports of steel to the United States in this period
have increased significantly.
Once again we stressed that, ``if private banks wish to finance
further steel capacity expansions in China, that is their business. But
AISI believes that no government should be involved in helping China
build up further its steelmaking capacity.'' In opposing official
financing support for this project, we stressed that:
There continues to be substantial global excess steelmaking
capacity.
This project would lead to yet another significant addition to
China's steelmaking capacity.
There is a distinct possibility that this project could lead
to competition with and injury to U.S. steel producers.
China has a history of trading unfairly and causing market
disruption in the U.S. steel market.
In voicing strong objections, AISI was not alone. In December of
last year, then-Commerce Secretary Norman Mineta wrote a letter to
then-Export-Import Bank Chairman and President James Harmon, urging
that Ex-Im deny the proposed financing. Secretary Mineta said the
following:
The Department of Commerce has recently initiated an
antidumping duty investigation on hot-rolled steel from China,
the same product this financing is designed to support. . . .
Under Ex-Im Bank policy, financing that supports dumped or
subsidized exports is only allowed under exceptional
circumstances. . . . The Department of Commerce has requested
that Ex-Im Bank revise its economic impact procedures to give
greater consideration to the combined impact of chronic
overcapacity in the global steel industry and the historic
level of unfair trade in the world steel market on the U.S.
steel industry. . . . Lending institutions supported by
American taxpayers should not be adding to global excess
capacity in the steel industry. Consistent with this request to
Ex-Im Bank, the United States also is seeking a moratorium on
multilateral development bank financing that leads to
substantial increases in steelmaking capacity. . . .
Shortly before Secretary Mineta wrote his letter, then-Treasury
Secretary Larry Summers wrote to World Bank President James Wolfensohn.
Dr. Summers said:
The U.S. Government is seriously concerned about the
substantial overcapacity in the world steel market. In many
steel-producing countries, this is a result of interferences by
governments using market-distorting measures and trade barriers
to foster the growth of the domestic industries. These findings
are consistent with those of a recent report by the OECD, which
concludes that world steel making capacity remained well above
demand between 1985 and 1999. Given these conditions, we
believe that it would be hard to justify MDB financing in
support of increases in steel-making capacity. . . . This is a
high-priority matter for my government. . . .
In addition, many Members of Congress wrote to Ex-Im urging against
official financing assistance for the PRC hot-rolled steel project. As
but one example, the Executive Committee of the Congressional Steel
Caucus said:
. . . we are writing to express our strong opposition to any
proposal to provide financing backed by U.S. taxpayers that
would ultimately increase the global capacity for steel
production. We are particularly concerned about a proposal
under consideration by the Ex-Im Bank regarding financing for
the Benxi Iron and Steel Company of China. . . . the
Administration has recently announced its intention to secure a
ban on financing by multilateral lending institutions of
projects that would increase steel production overcapacity. It
would be a severe blow to this effort if an American
institution were to violate principles we encourage on an
international level.
That, however, is exactly what Ex-Im did. The reaction to this
wrong signal sent at the wrong time was outrage, especially from the
parties most directly and adversely affected, the U.S. steel industry
and its employees. A coalition of major U.S. steel companies and the
United Steelworkers of America called the Bank's decision
``disgraceful,'' saying it was ``unconscionable and utterly
inconsistent with explicit, broader U.S. policy interests.'' Thomas J.
Usher, Chairman and CEO of USX Corporation wrote to Mr. Harmon, calling
the Bank's decision ``an affront to the hardworking men and women of my
company and the other U.S. steelmakers struggling to remain in business
despite a massive glut of world steel production.'' AISI echoed these
comments. In a January 4 press release, we said:
At a time of substantial world steel overcapacity, steel
trade crisis in the U.S. market, growing U.S. steel company
bankruptcies and a pending U.S. antidumping case on hot rolled
steel from China, we strongly condemn this Ex-Im action, which
was also taken over the strong objection of the current
Administration. In response, we request that the 107th Congress
review the current ``economic impact'' procedures that Ex-Im
uses in determining whether to provide financing support, and
we urge the incoming Bush Administration to seek greater
multilateral discipline on official financing support for
projects that increase steelmaking capacity.
Solution and Policy Imperative; Get Governments Out of Steel Business
China is not an isolated example. In 2000, AISI also wrote strong
letters to the U.S. Export-Import Bank in opposition to requests for
Ex-Im financing support to help build additional steel capacity in
India and Turkey.
AISI's full North American membership believes it is time to get
governments out of the business of building additional steel capacity.
In recent months, AISI's Canadian, Mexican, and United States member
companies have spoken as one about this critical problem and the urgent
need for a solution. In recent joint media releases and policy
statements, NAFTA steel producers have said the following:
Global excess steel capacity has played a large role in the
steel crisis, and NAFTA steel producers have suffered serious
injury from unfair and disruptive steel imports linked to
uneconomic excess capacity offshore.
The recent decision by the U.S. Export-Import Bank to help
China build yet more hot-rolled steel capacity at a time when U.S.
mills are going bankrupt is an outrage. We urge the new Bush
Administration to work with the other NAFTA governments to achieve
greater multilateral discipline over official export financing aid
for projects that increase steel capacity.
Uneconomic excess steel capacity outside of the NAFTA region
is a continuing cause of harm to NAFTA steel producers. If private
banks wish to fund projects to build up further steel capacity in
countries that already have excess capacity, that is one thing.
But, given the events of the past 3 years, it is time to make it
more difficult for governments to support such projects.
If OECD governments wish to continue to provide official
export financing support for steel projects, such assistance should
in the future be limited to projects that involve environmental
clean up or the downsizing of steelmaking capacity.
The perpetual imbalance between steel supply and demand exists
only through deliberate governmental actions. To restore the basic
principles of economics to this distorted market, governments must
be held to a stricter standard of responsibility and restraint.
It is time to let the markets work in determining whether
additional steel capacity gets built or not. It is essential that
OECD governments--and especially NAFTA governments-- question why
it is that, once again, governments have to be involved in the
building of substantial additional export-oriented steel capacity
offshore.
At a time of significant world steel overcapacity and growing
steel trade tensions, we urge NAFTA governments to take the lead in
getting governments and governmental organizations out of the
business of funding additional steel capacity.
Steel is in crisis, and not just in North America. Because the
crisis is global, long term and structural; because it has, at its
root, world steel overcapacity (as much as 35 percent of world
steel production); because this overcapacity exists outside the
NAFTA region; and because this overcapacity is continuing to grow,
we recommend that NAFTA governments work closely together to:
--encourage all governments to avoid government or quasi government
assistance to increase steel capacity, especially if the
capacity increase is for export markets;
--encourage all governments to avoid, to the extent possible, support
of uneconomic steel capacity;
--promote a serious discussion of the world steel overcapacity
problem at the OECD Steel Committee and in other international
forums;
--obtain a commitment by all major steel producing and trading
nations, both governments and industries, that we need, once
and for all, to resolve this problem.
Conclusions
AISI supports a competitive, well-financed U.S. Export-Import Bank,
but there is massive global excess steel capacity, a crisis in world
steel markets and an emergency steel situation in the United States.
Therefore, Ex-Im needs to be very careful that it not contribute
further to the problems affecting both the United States and world
steel industry.
The recent United States Ex-Im Bank decision on China was a serious
policy mistake. It must never be repeated. While further multilateral
discipline on steel export financing support is the ultimate solution,
the U.S. Export-Import Bank's policy on whether to support or not
additional steel capacity abroad must be consistent with the overall
U.S. government policy in this area.
To that end, AISI looks forward to working closely with Senators
Specter and Rockefeller--the current Chairman and Co-Chairman of the
Senate Steel Caucus--as well as with the Senate Banking Committee and
other relevant Committees of Congress to tighten further the Bank's
economic impact procedures. Some initial ideas are to:
Give maximum weight to the presence of world overcapacity in
the product and the possibility of trade diversion from additions
to foreign capacity.
Take fully into account both past and pending unfair trade
case actions against the country or product in question.
Ensure as much early warning as possible to interested parties
that could be adversely affected by requests for official export
financing support.
AISI greatly appreciates this opportunity to submit comments to the
Senate Banking Committee's Subcommittee on International Trade and
Finance on the issue of the U.S. Export-Import Bank. For us, this issue
of Ex-Im is now part of the most important issue in world steel trade:
Global excess steel capacity and what to do about it.