Created in 1934, the Eximbank is an independent U.S. government agency that operates under a renewable congressional charter that expires on September 30, 1997. In conducting its operations, the Eximbank must comply with several statutory requirements. The Eximbank is required to supplement and encourage, but not compete, with private sources of seek to reach international agreements to reduce government-subsidized provide financing at rates and on terms that are “fully competitive” with those of other foreign government-supported export credit agencies (ECA) (12 U.S.C. sec. 635 (b)(1)(A)(B)). loans to foreign buyers of U.S. exports, loan guarantees to commercial lenders, export credit insurance to U.S. exporters and lenders, and working capital guarantees for pre-export production. Reflecting the growing move toward privatization in the developing world, the Eximbank has recently expanded its activities to include project finance. Project finance involves financing where repayment is provided through the project’s anticipated future revenues rather than through sovereign (government) or other forms of guarantee. In fiscal year 1997, the Eximbank estimates project-financing deals will account for about 30 percent of its total financing commitments (these deals accounted for about 14 percent of its assistance in 1996). I would first like to discuss the various rationales that have been advanced for and against government involvement in export finance and GAO’s position on this matter. The arguments for and against the programs focus on three issues: (1) trade policy leverage, (2) industry effects, and (3) employment and trade effects. Supporters of the Eximbank export finance programs say that this assistance provides leverage in trade policy negotiations, helps to “level the international playing field” for U.S. business, corrects “market failures,” and helps to increase exports and employment. According to Eximbank officials, the direct and indirect benefits include follow-on sales and support contracts, high-paying jobs, and federal tax revenues. Opponents say that the Eximbank’s programs result in no net increase in national employment and output, misallocate resources, and are a form of corporate welfare. Supporters believe that the Eximbank’s programs (1) help assist U.S. companies to compete against foreign companies that receive similar types of government support and (2) provide leverage in trade policy negotiations. Supporters hold that the Eximbank helps to neutralize the foreign exporter’s advantage in such situations by providing similar financing for U.S. exports. However, critics have questioned the usefulness of these programs in getting countries to reduce subsidies. As discussed below, the foreign competitor countries we studied offer a variety of government-supported export finance programs. As already noted, the Eximbank is required to seek international agreements to reduce government-subsidized export financing. OECD nations, including the United States, have made progress since the late 1970s in negotiating reductions in officially supported export subsidies. U.S. Treasury officials who participate in these negotiations told us that the Eximbank’s programs have provided them with leverage in negotiating subsidy reductions. Another rationale that proponents make is that markets do not always lead to an optimal allocation of resources and that so-called “market failures” provide an additional justification for government export finance programs. Eximbank claims that the following are examples of market failures: Private financial institutions may be unwilling to support exports to emerging markets even when the risk is correctly priced. Foreign buyers in certain markets may be unable to secure long-term financing for capital equipment. Finally, and probably the most often-cited example is that small business exporters may have difficulty in obtaining export financing. Supporters of government export finance programs believe that correcting such “market failures” can improve economic efficiencies and overall economic well-being. Opponents hold that there is no credible evidence that private capital markets do not function efficiently and that government intervention can potentially distort markets. According to the Eximbank, the exports it financed in fiscal year 1996 “supported or maintained” nearly 300,000 jobs. We do not dispute that some jobs are directly supported through the Eximbank’s programs. However, economists and policy makers recognize that employment levels are substantially influenced by macroeconomic policies, including actions of the Federal Reserve. At the national level, under conditions of full employment, government export finance assistance programs may largely shift production among sectors within the economy rather than raise the overall level of employment in the economy. Hence, the jobs figure that the Eximbank reports may not represent net job gains. Others have supported export promotion programs as a way to substantially reduce the U.S. trade deficit. These programs, however, cannot produce a substantial change in the overall U.S. trade balance. The trade balance is largely determined by macroeconomic conditions, such as savings and investment and the government budget deficit. According to the President’s Council of Economic Advisers, significantly reducing the trade deficit will require macroeconomic policy measures, such as eliminating the federal budget deficit. During fiscal years 1994 to 1996, the Eximbank provided an annual average of $12.8 billion in export financing commitments (loans, guarantees, and insurance) at an annual average program cost of $877 million. The Eximbank projects that it will provide about $16.5 billion of export finance support in fiscal year 1997, an all-time high. Program costs are projected to fall from $934 million in fiscal year 1996 to $773 million in fiscal year 1997 and to $681 million in fiscal year 1998 because of a projected increase in lower-risk financing (such as project finance and aircraft transactions, which consume relatively lower amounts of its program budget). (See table I.1.) Another reason for the decrease is that no additional money for tied aid was included in the Eximbank’s fiscal year 1998 budget request. In fiscal year 1996, China was the Eximbank’s top export market ($1.2 billion), followed by Indonesia ($825 million), Mexico ($753 million), Trinidad and Tobago ($632 million), and Brazil ($488 million). (See fig. I.1 for a list of the Eximbank’s top 10 markets and their associated program costs for fiscal year 1996.) Relative to total U.S. goods exported to these markets, the Eximbank supported about 11 percent of U.S. exports to China, about 22 percent of U.S. exports to Indonesia, about 1 percent of U.S. exports to Mexico, about 93 percent of U.S. exports to Trinidad and Tobago, and about 4 percent of U.S. exports to Brazil. During fiscal years 1994 through 1996, the 15 largest users (lead U.S. exporters or contractors) of Eximbank financing accounted for about $14.4 billion, or about 38 percent, of the Eximbank’s total export-financing commitments made during that period. (see fig. I.2). The export finance transactions involving these companies absorbed about 27 percent of the Eximbank’s total program budget, or about $682 million over the same period. However, these data do not capture the full range of U.S. companies associated with Eximbank-financed deals such as subcontractors and other suppliers. About 20 percent ($7.5 billion) of the Eximbank’s financing commitments—about 79 percent of its total transactions—went to small business, primarily through its insurance programs. (See table I.2.) The Eximbank also supports the export of several dual-use (military and civilian) items. (See app. V). The Eximbank has participated in international (OECD) negotiations to limit the use of tied aid and has used its tied aid capital projects fund to counter foreign countries’ use of tied aid. The OECD efforts have resulted in a decrease in reported international levels of tied aid—the annual average level of tied aid decreased from about $10 billion in 1992 to approximately $4 billion in 1995. During 1994-96, the Eximbank board of directors approved the use of war chest funds in 40 instances. (See app. II for a list of firms and countries that actually received war chest assistance in 1994-96.) The balance in the tied aid war chest was $337.7 million as of September 30, 1996. Since fiscal year 1993, the Eximbank has issued guarantees related to 23 project finance deals totaling $5.6 billion (the estimated value of these projects was $21.5 billion). (See table III.1.) Because these projects tend to be large, the Eximbank often shares project risk with other export credit agencies, the Overseas Private Investment Corporation (OPIC), or with multilateral institutions such as the International Finance Corporation. With regard to project finance, the Eximbank’s activity in this rapidly expanding area has increased from one deal in fiscal year 1993 to seven in fiscal year 1996. According to the Eximbank, this growth is a reflection of the rising demand for capital projects in emerging market economies. The six G-7 countries we studied—Canada, France, Germany, Italy, Japan, and the United Kingdom (U.K.)—all have ECAs, each with different roles and structures. (According to Euromoney, a total of 73 ECAs now exist worldwide). The support the G-7 ECAs provide for their exporters can be measured in various ways. In terms of the percentage of national exports these ECAs have financed, the Eximbank is tied for last. In 1995, the Eximbank supported 2 percent of total U.S. exports (the latest year for which comparative data are available). This figure is at the bottom of the range of support provided by the other G-7 nations. In contrast, Japan’s ECAs supported 32 percent of its country’s exports in that year.