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.