In May 1985, the Secretary of Agriculture established EEP to address, in part, continuing declines in U.S. agricultural exports and to pressure foreign nations to reduce trade barriers and eliminate trade-distorting practices. Subsequently, the Food Security Act of 1985 (P.L. 99-198, Dec. 23, 1985) specifically authorized EEP as an export subsidy program. The program was reauthorized by the Food, Agriculture, Conservation, and Trade Act of 1990, which extended EEP through 1995. From May 1985 to May 1994, FAS awarded bonuses valued at $7.1 billion (in constant 1993 dollars) to EEP exporters to sell mainly bulk commodities, such as wheat or rice. To qualify for EEP funding, proposed commodities and countries must be approved under an interagency process. FAS receives oral and written recommendations for countries and commodities to target under EEP; most of the recommendations come from trade associations and from within FAS. Recommendations are also submitted by importing countries, exporters, U.S. and foreign government officials, and other members of the U.S. agricultural community. EEP regulations outline four criteria to be used, among other things, by FAS in determining if commodities and countries proposed for EEP participation meet the program’s objectives. How will the proposal contribute to furthering trade policy negotiations with foreign competitor nations that use unfair trade practices? How will the proposal contribute toward developing, expanding, or maintaining U.S. agricultural export markets? What will be the impact on countries that do not subsidize their agricultural exports? What is the cost of the proposal compared to the expected benefits? FAS recently changed the emphasis in its review of EEP proposals from furthering trade policy negotiations to market development. According to FAS, the implementing legislation for the GATT Uruguay Round agreement made furthering trade policy negotiations with competitor nations less significant. If FAS recommends approving the proposal, the proposal must then be approved by the Department of Agriculture’s Under Secretary for Farm and International Trade Services and by the interagency Trade Policy Review Group. The Group includes representatives from agencies with an interest in foreign trade issues. Once a proposal is approved, FAS issues invitations for bids specifying the targeted country or countries, the commodity, the maximum quantity of the commodity eligible for a bonus, the eligible buyers, and the other terms and conditions of the sale. Exporters can then bid for an EEP bonus award. First, exporters must negotiate a sales price with an eligible buyer in the target country. After determining what bonus amount is needed to close the gap between the going price for the commodity in the targeted country (world price) and the U.S. price, the competing exporters then submit this information to FAS as bids. Next, FAS reviews the bids to determine if the price and bonus amounts are within FAS’ acceptable ranges. FAS calculates the prevailing price for the commodity in the target market using various information sources. FAS rejects bids proposing prices that undercut the world price it calculated for the commodity as well as those proposing bonus amounts that exceed the difference between the world price and the U.S. market price. FAS then awards bonuses starting with the lowest bonus amount requested per unit of the commodity and proceeds to the next highest bonus amount until the quantity of the commodity eligible for EEP bonuses is exhausted. To assess whether providing EEP bonuses to foreign-owned exporters is consistent with program goals and objectives, we researched the legislative and regulatory history of the program to identify (1) the objectives of the program and (2) the intended role of exporters in the program. We also interviewed FAS headquarters officials to discuss those issues and whether changes to EEP contained in legislation recently passed by Congress would alter the role of exporters in the program. To assess whether restricting foreign-owned exporters from participation would adversely affect EEP, we obtained and analyzed fiscal year 1992 FAS data on EEP bids and awards for eight commodities. Fiscal year 1992 data were used because they were the most current and complete fiscal year data available at the start of our review. We also obtained and analyzed data from FAS on exporters participating in the program from May 1985 to May 1994. We did not verify the accuracy of data obtained from FAS. Because there is no standard definition of what constitutes a foreign- or domestic-owned firm, we used the location of company headquarters and parent company headquarters to categorize exporters as foreign- or domestic-owned. If the company was headquartered outside the United States or if it was the U.S. subsidiary of a company headquartered outside the United States, we classified the exporter as foreign-owned. We then used these data to determine (1) the extent to which foreign-owned exporters bid for and received EEP bonuses and (2) the quantity of EEP commodities exported by these foreign-owned companies on a commodity- and country-specific basis. We also reviewed economic literature regarding the relationship between the number of bidders and the extent of competition. To identify FAS’ internal controls for detecting unauthorized diversions of EEP shipments, we reviewed EEP regulations and FAS written guidelines and procedures on controls over EEP shipments. We also interviewed officials from FAS headquarters in Washington, D.C., and the Agricultural Stabilization and Conservation Service in Kansas City, Missouri, about features of the control system. To assess the adequacy of the controls, we initially tested the controls by reviewing 25 judgmentally selected EEP shipments. The shipments reviewed were selected to cover the various commodities exported under EEP and to provide a mix of foreign- and domestic-owned exporters. On the basis of our preliminary results, we expanded our testing by randomly selecting 100 shipments from the 3,356 shipments that occurred under EEP during fiscal year 1992. During our testing, we compared data provided by exporters on EEP shipments with data maintained by Lloyd’s Maritime Information Services, Inc., on the movement of marine vessels. We did our review from July 1993 to September 1994 in accordance with generally accepted government auditing standards. We received written comments on a draft of this report from the FAS Administrator. They are summarized on page 13 and presented in full in appendix II. FAS’ award of EEP bonuses to foreign-owned corporations is consistent with program objectives set forth in the Food, Agriculture, Conservation, and Trade Act of 1990. These objectives are to “discourage unfair trade practices by making U.S. agricultural commodities competitive.” The nationality of an exporter’s ownership is not germane to the pursuit of these objectives, since both foreign- and domestic-owned EEP exporters act as intermediaries in the program’s sales of U.S. agricultural commodities in overseas markets. Exporters help ensure that U.S. agricultural commodities compete on the world market by negotiating sales and prices with potential foreign buyers and by arranging for commodity deliveries to foreign buyers. The 1990 statute does not preclude foreign-owned exporters from receiving cash payments or commodities under the program as long as such payments serve the stated purpose of discouraging unfair foreign trade practices by making the prices of U.S. agricultural commodities competitive. In addition, the statute does not make a distinction regarding the treatment of domestic- and foreign-owned exporters under the program. Pending changes to EEP resulting from the implementation of the GATT Uruguay Round agreement are unlikely to alter the role of exporters in the program, according to FAS officials. In April 1994, U.S. officials joined delegates from more than 100 other countries in signing the GATT Uruguay Round agreement. The agreement, among other things, requires participating developed countries to reduce their subsidies for agricultural exports by 36 percent in budgetary outlays and reduce the quantities of subsidized exports by 21 percent. The agreement also prohibits member nations from introducing or reintroducing subsidies for agricultural products that were not subsidized during the 1986 to 1990 base year period. In December 1994, Congress enacted implementing legislation for the Uruguay Round agreement (P.L. 103-465, Dec. 8, 1994). The legislation extended EEP through 2001 and refocused EEP so that it would not be limited to countries where the United States faces unfair foreign trade practices. While the Uruguay Round agreement established annual ceilings on the use of subsidies, it did not prohibit the use of agricultural export subsidies. Therefore, the Clinton administration recommended, and Congress agreed, that it was necessary to maintain EEP and other U.S. agricultural subsidy programs as a means of inducing other nations to negotiate further reductions on the use of agricultural export subsidies. According to FAS officials, the implementing legislation allows EEP to be used to export U.S. agricultural commodities to a greater number of countries. FAS officials we spoke with did not yet know how the change in EEP’s objectives would affect the program’s operation. However, they did not anticipate changes being made to the role of exporters in the program. Eliminating foreign-owned exporters from EEP participation could impair competition for EEP bonuses, which could ultimately lead to higher subsidies being paid for each unit of commodity exported under the program. In addition, our analysis of EEP award data suggested that restricting foreign-owned exporters from EEP participation could significantly lower the amount of barley malt, barley, and wheat exported under EEP unless the extent of foreign-owned exporter participation could be replaced by domestic-owned exporters. However, we could not determine whether domestic-owned exporters could easily replace foreign-owned exporters in the program. Currently, foreign-owned exporters receive a substantial portion of EEP bonuses—over 39 percent—as shown in table 1. It is important to note that of the 38 exporters we classified as foreign owned, 36 are the U.S. subsidiaries of parent companies located outside of the United States. Many of these U.S. subsidiaries have a substantial presence in the United States. For example, the Pillsbury Company, which is the subsidiary of a British firm, is headquartered in Minnesota and employs 8,000 workers throughout the United States. (See app. I for a complete listing of EEP exporters participating in the program from May 1985 to May 1994 and their ownership classification.) Eliminating foreign-owned exporters from the program would reduce the number of bidders for EEP bonuses. The economic studies we reviewed suggested that eliminating potential bidders from participating in EEP would reduce competition for EEP bonuses. Reduced competition among a smaller pool of bidders for EEP bonuses could lead to payment of larger EEP bonuses per unit of commodity subsidized under the program. FAS officials hold a similar view. They explained that strong competition for bonuses should result in smaller bonus awards as exporters vie for a fixed amount of EEP bonuses. These smaller awards per unit of export should allow FAS to subsidize a greater quantity of EEP commodities since lower bonus payments per unit of export enable FAS to subsidize more exports with available EEP funds. Our analysis of bidding activity by exporters during fiscal year 1992 for eight commodities showed that foreign-owned exporters submitted over one-third of the bids for bonus awards. Foreign-owned exporters were particularly active bidders for wheat and barley malt bonuses, submitting 44 and 72 percent, respectively, of the bids for those commodities during fiscal year 1992. Foreign-owned exporters received a significant share of the winning bids, with foreign-owned exporters being more important for some commodities than others. As shown in figure 1, foreign-owned exporters accounted for about 79 percent of the quantity of barley malt sold under EEP during fiscal year 1992. As with barley malt and barley, a major portion (50 percent) of the quantity of wheat sold under EEP during fiscal year 1992 was exported by foreign-owned exporters. This is significant because wheat exports have overshadowed all other commodities in the EEP program. During fiscal year 1992, bonuses for wheat shipments accounted for about 84 percent of all EEP funds. Given the number of variables that affect whether an exporter participates in and receives bonuses under EEP, we could not determine if domestic-owned exporters could easily replace foreign-owned exporters in the program. For example, FAS does not know whether the domestic-owned exporters currently participating in the program would bid for the volume of EEP commodities currently exported by foreign-owned exporters. Domestic-owned exporters would still need to meet FAS’ price and bonus thresholds for EEP bonuses. FAS also does not know to what extent domestic-owned exporters not currently participating in EEP would enter into the program and compete successfully for EEP bonuses. Currently, exporters must provide FAS with documentation showing their experience in selling at least a minimal amount of the targeted commodity during the previous 3 calendar years to qualify for EEP participation. FAS issued a proposed rule on January 18, 1995, that would eliminate this requirement. According to FAS officials, some exporters have complained that the experience requirement prevented them from otherwise qualifying for program participation. FAS officials told us that eliminating the experience requirement should increase the number of exporters eligible to participate in the program. However, they stated that the number of additional exporters that would actually receive bonuses under the program and the extent of their participation are not known. FAS has only a limited ability to detect unauthorized diversions of EEP shipments. Unauthorized diversions occur when commodities do not arrive at the destination country and, instead, are sent to another country. Unauthorized diversions of EEP shipments are both illegal and counter to the current targeting aspects of the program. Internal FAS controls to detect unauthorized diversions primarily consisted of examining exporter-provided documentation to determine if EEP commodities arrived at the destination country. However, information the exporters provided was not reliable or accurate in some cases. While FAS is attempting to improve its monitoring of EEP shipments, key limitations hinder its ability to verify that shipments were not diverted. The possibility of unauthorized diversions of EEP shipments has long concerned Congress. The Food, Agriculture, Conservation, and Trade Act of 1990, which prohibits such diversions, requires exporters to maintain proof that EEP commodities arrived at the intended destination. The act also requires FAS to ensure that the agricultural commodities arrived at the intended destination country as provided for in the EEP agreement. FAS relied primarily on information supplied by exporters to monitor for possible unauthorized diversions. FAS required EEP exporters to provide bills of lading to document the export of EEP commodities. FAS also required exporters to provide documentation showing the receipt of EEP commodities in the intended destination countries. FAS officials told us that their staff then compared the certificates of entry to the bills of lading to monitor for possible diversions of EEP shipments and to ensure that EEP bonuses were paid only for commodities that actually had arrived at the intended destination. Our review of individual EEP shipments showed that exporters did not always provide reliable and accurate information regarding the arrival of EEP commodities in destination countries. To assess the reliability of documents submitted by exporters, we first reviewed the documentation provided by exporters in support of 25 EEP shipments made in fiscal year 1992. During our review of the 25 shipments, we found discrepancies that led us to question the accuracy and validity of the documentation provided by the exporters. For example, we compared the information on the bills of lading to the certificates of entry and found that one exporter had provided certificates of entry showing the arrival of the ship in the destination country before the cargo loading date shown on the bills of lading. We then expanded our analysis to include a review of 100 randomly selected fiscal year 1992 shipments. Although we did not find any discrepancies between the bills of lading and the certificates of entry upon our review of the 100 shipments, we did find 6 shipments for which the exporters had submitted questionable or inaccurate information. We used an on-line data service, known as SeaData, subscribed to by FAS, to verify the accuracy of the certificates of entry. FAS had been testing and using the SeaData system, which is maintained by Lloyd’s Maritime Information Services, Inc., since January 1992 to obtain information on the movement of commercial trading vessels worldwide. We found six cases in which SeaData had reported that the vessels shown on the certificates of entry had been in different areas of the world and had not visited the ports or countries shown on the certificates of entry. At our request, FAS contacted the exporters for the six shipments and verified that five of the shipments had been taken off the vessel shown on the bill of lading and loaded onto another vessel for delivery to the target country. It also verified that the certificates of entry did not list the vessel from which the EEP commodity had actually been unloaded in the destination country. Instead, the certificates of entry showed the name of the vessel that the EEP commodity had been transferred from. The remaining case was not resolved because the exporter was unable to supply additional documentation to support the arrival of the EEP commodity in the destination country. FAS subsequently notified exporters of the need to provide further documentation whenever EEP commodities are transferred from one vessel onto another for delivery to the target country. Given that five of the six discrepancies identified in our random sample were resolved, we would not expect many of the 3,356 shipments to have unresolvable discrepancies. Any unauthorized diversion of EEP shipments undermines the targeting aspect of the program. According to FAS, EEP’s targeting aspect was intended to (1) demonstrate a direct response to subsidized competition; (2) minimize the impact on foreign competitor nations that do not subsidize their agricultural exports; and (3) provide a more focused and, therefore, effective use of EEP funds. By targeting markets where foreign nations are providing subsidized exports, EEP is intended to pressure subsidizing foreign nations to eliminate the use of subsidies and other trade-distorting practices. Although the United States has made progress in obtaining foreign competitor nations’ commitment to reduce the use of agricultural export subsidies, FAS officials told us that EEP is still necessary to induce foreign competitor nations to negotiate further reductions. As a result, any unauthorized diversions of EEP shipments reduce the program’s effectiveness as a trade policy tool. FAS plans to use SeaData to strengthen its ability to ensure that unauthorized diversions of EEP shipments do not occur. FAS officials told us that they will randomly select EEP shipments and use SeaData to verify the accuracy of the data provided by the exporters. However, SeaData has some significant limitations. The SeaData system provides information on ship movement but not on whether commodities were unloaded from the ship in the ports it visited. In addition, the SeaData system does not provide data on ship movement in certain parts of the world. For example, the SeaData system cannot be used to verify whether ships bound for some ports in the former Soviet Union arrived as shown on the exporter’s certificate of entry. FAS officials told us they were exploring other methods of verifying the arrival of EEP commodities in the destination countries. They said that random on-site inspections of EEP shipment arrivals were not feasible because of resource constraints and because some foreign countries would not allow U.S. government officials physical access to their ports. However, they said they were considering more cost-effective alternatives to on-site inspections. For example, FAS staff may be able to perform on-site reviews of documents maintained by some large EEP buyers in foreign countries. The Foreign Agricultural Service provided written comments on a draft of this report. It said that FAS had recently shifted the emphasis of its review of EEP proposals from the impact on furthering trade policy negotiations to market development. FAS said that the shift in emphasis was in accordance with the implementing legislation for the GATT Uruguay Round agreement. FAS pointed out that the draft report did not acknowledge that it had been testing and using the SeaData system for over a year before making it available to GAO. FAS provided some additional information on its efforts to obtain reliable third-party sources of information that could be used to verify the quantity of commodity discharged at the destination port. Lastly, FAS said that one of the EEP exporters shown in the draft report as being foreign-owned was currently owned by a U.S. company. Where appropriate, FAS’ comments have been incorporated into the text of the report. The complete text of FAS’ comments, along with our specific responses, is included in appendix II. We are sending copies of this report to the Secretary of Agriculture and other interested parties. Copies will be made available to others on request. The major contributors to this report are listed in appendix III. Please contact me at (202) 512-4812 if you have any questions concerning this report. N.P. N.P. AG Processing, Inc. AG Processing, Inc. N.P. N.P. ConAgra, Inc. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. Ferruzzi Finanziaria, S.p.A. N.P. N.P. N.P. N.P. Boro Hall International, Ltd. N.P. N.P. Brown Swiss Cattle Breeders Association of the U.S.A. CAM S.A. ConAgra, Inc. N.P. N.P. N.P. N.P. Cargill, Inc. N.P. N.P. N.P. N.P. N.P. N.P. Erly Industries, Inc. N.P. N.P. ConAgra, Inc. (continued) ConAgra, Inc. ConAgra, Inc. ConAgra, Inc. Connell Company, Inc. N.P. N.P. Dreamstreet Holsteins, Inc. N.P. N.P. N.P. N.P. Dolphin Reefer Lines Co., Ltd. Foster’s Brewing Group Limited N.P. N.P. Euro-Maghrib, Inc. N.P. N.P. N.P. N.P. N.P. N.P. Norfoods, Inc. N.P. N.P. N.P. N.P. N.P. N.P. Great West Holdings, Inc. Canada Malting Company, Ltd. N.P. N.P. (continued) N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. C. Itoh & Company Limited N.P. N.P. N.P. N.P. Italgraini S.p.A. Goldman Sachs Group Limited Partnership Cargill, Inc. L & M Food Group Limited N.P. N.P. Louis Dreyfus et Cie, S.A. N.P. N.P. North Star Universal, Inc. Marshall Durbin Food Corp. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. (continued) Oleo Trading, S.A. N.P. N.P. ConAgra, Inc. Salomon, Inc. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. Rosscape, Inc. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. Toshoku, Ltd. Farmlands Industries, Inc. N.P. N.P. N.P. N.P. N.P. N.P. N.P. N.P. Mars, Inc. Mitsui and Company, Ltd. N.P. N.P. N.P. N.P. (continued) N.P. N.P. Place Vendome Nominees, Ltd. Place Vendome Nominees, Ltd. N.P. N.P. N.P. = No parent company indicated in the source data. The following are GAO’s comments on FAS’ letter dated March 20, 1995. 1.The report was amended to show that FAS now emphasizes market development in its review of EEP proposals. 2.We changed the report to recognize FAS’ earlier use of the SeaData system. 3.We acknowledged in our draft report that FAS routinely examined the bills of lading and other documents it receives to monitor for possible diversions. However, we believe that additional information is needed to show what was actually received at the export destination. We encourage FAS to continue its efforts to identify additional sources of information that will allow it to monitor for possible diversions of EEP shipments. 4.Appendix I and the corresponding statistics used in this report were modified to reflect the change in the ultimate parent company for Tradigrain. Kane A. Wong, Assistant Director Harry Medina, Evaluator-in-Charge Gerhard C. Brostrom, Reports Analyst The first copy of each GAO report and testimony is free. 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Summary: Pursuant to a congressional request, GAO reviewed the participation of foreign-owned companies in the Foreign Agricultural Service's (FAS) Export Enhancement Program (EEP). GAO found that: (1) foreign exporters' participation in EEP is consistent with the program's basic objectives of discouraging other countries' unfair trade practices and increasing the competitiveness of U.S. agricultural commodities; (2) exporters help achieve these objectives by facilitating U.S. agricultural product sales in targeted countries; (3) restricting foreign exporters' EEP participation could reduce the effectiveness of the program; (4) eliminating foreign-owned exporters would reduce the number of bidders for EEP bonuses, which would reduce competition and result in higher program costs; (5) it is unclear whether domestic-owned exporters could easily replace foreign-owned exporters; and (6) FAS ability to detect unauthorized diversions of EEP shipments, consisting mainly of checking exporters' documents which may be unreliable or inaccurate, will be affected by limitations in the database.