U.S. Export-Import Bank: Actions Needed to Promote Competitiveness and International Cooperation

The U.S. Export-Import Bank (Ex-Im), the United States’ official export credit agency (ECA), helps U.S. firms export goods and services by providing a range of financial products. Ex-Im, whose primary mission is to support jobs through exports, has a range of policy requirements, including support of small business. The Organisation for Economic Cooperation and Development (OECD) Arrangement governs aspects of U.S. and some foreign countries’ ECAs. GAO examined (1) Ex-Im’s mission and organization compared with ECAs from other Group of Seven (G-7) countries (major industrialized countries that consult on economic issues), (2) Ex-Im’s policy requirements compared with other G-7 ECAs, (3) Ex-Im’s domestic content policy compared with other G-7 ECAs, and (4) the OECD Arrangement’s role in governing ECA activities.

The United States and other G-7 countries have ECAs that support domestic exports, but Ex-Im differs from other ECAs in several important ways, including its explicit mission to promote domestic employment. The G-7 ECAs range from government agencies to private companies contracted by governments. Most of these ECAs, including Ex-Im, are expected to supplement, not compete with, the private market. Ex-Im offers direct loans, which were increasingly utilized during the recent financial crisis, while European ECAs do not.

Ex-Im has specific mandates in areas where other G-7 ECAs have broad directives. Ex-Im has specific mandates to support small business and environmentally beneficial exports, while other ECAs are broadly directed to support such exports. In addition, Ex-Im has other mandates and legal requirements, such as shipping certain exports on U.S.-flagged carriers and conducting economic impact assessments for large transactions, which other G-7 ECAs do not.

Ex-Im’s requirements for the level of domestic content in the exports it fully finances are higher and generally less flexible than those of other G-7 ECAs. Ex-Im requires 85 percent domestic content for medium- and long-term transactions to receive full financing, while other ECAs’ domestic content requirements generally range between zero and 51 percent. Ex-Im’s policy on supporting local costs can result in more foreign content support in some transactions. While Ex-Im has modified its method for calculating domestic content, its threshold for receiving full financing for medium- and long-term transactions has not changed since 1987, and the policy and its overall impact on jobs has not been studied systematically. Other ECAs have modified their policies in recent years, citing increasing global content of industrial production. In its charter, Ex-Im is directed to provide financing competitive with that of other ECAs, as well as to support U.S. jobs.

The OECD Arrangement has expanded to regulate additional aspects of officially supported export credits, but increasing activity of nonmembers threatens its ability to provide a level playing field for exporters. Several agreements have been made that decrease subsidies and increase transparency among ECAs. However, these agreements apply only to participant ECAs, and important emerging countries, including China, are not part of the Arrangement. Officials from several G-7 ECAs and other institutions identified effective engagement with these countries on export credit issues as being increasingly important and presenting challenges for the OECD Arrangement and its participants.

GAO recommends (1) that Ex-Im conduct a systematic review to assess how well its domestic content policy continues to support Ex-Im’s mission, and (2) that the Department of the Treasury, with Ex-Im and international counterparts, develop strategies for further engagement on export credit issues with emerging economy countries. Ex-Im stated it considers content policy in its annual competitiveness assessments, but did not comment directly on the recommendation. Treasury stated it supports encouraging emerging market economies’ participation concerning export credit issues and is engaged in that activity, but did not state whether it agreed with the recommendation.

As the nation’s official export credit agency (ECA), the U.S. Export-Import  Bank (Ex-Im) supports U.S. exporters by providing loans, guarantees,  and insurance, particularly during times of economic crisis when private  financing is not available. Ex-Im’s primary mission is to create U.S. jobs  through exports. In addition, Ex-Im has a variety of other policy  requirements, including congressional mandates to support small  businesses and promote environmentally beneficial exports, as well as  policies regarding the amount of U.S. content in the exports it finances. In  its charter, Ex-Im is directed to provide financing competitive with the  rates, terms, and other conditions available from other ECAs.

An international agreement, the Organisation for Economic Cooperation  and Development (OECD) Arrangement on Officially Supported Export  Credits (the Arrangement), governs various aspects of U.S. and other  member countries’ ECAs. The Arrangement aims to promote a level  playing field where exporters compete on the basis of price and quality  rather than export credit support, including any subsidies. The Group of  Seven (G-7) major industrialized countries are all participants in the  Arrangement. However, some countries with substantial export credit  activity—including China, India, and Brazil—are not participants in this  agreement.

In the context of Ex-Im’s latest reauthorization, Congress asked GAO to  examine how Ex-Im’s export credit support and policy requirements  compare with those of other export credit agencies in developed  countries. This review examines (1) Ex-Im’s mission, organization, market  orientation, and product offerings compared with those of the other G-7  ECAs; (2) Ex-Im’s policy requirements compared with those of the other  G-7 ECAs; (3) Ex-Im’s domestic content policy compared with those of  the other G-7 ECAs; and (4) the role of the OECD Arrangement in  governing ECA activities.

To address these objectives, we reviewed relevant documentation related  to Ex-Im and the other G-7 ECAs, including legislation, annual reports,  OECD and academic reports, and Ex-Im’s annual Competitiveness  Reports. We met with officials from the following ECAs: Export  Development Canada (EDC) in Canada, Coface in France, Export Credits  Guarantee Department (ECGD) in the United Kingdom, Servizi  Assicurativi del Commercio Estero (SACE) in Italy, and Hermes in  Germany. We also met with officials from oversight organizations in G-7  countries, as well as the OECD and the Berne Union, an association of  export credit and investment insurance providers. We spoke via  telephone with officials from the Japanese ECAs, the Japanese Bank for  International Cooperation (JBIC) and Nippon Export and Investment  Insurance (NEXI). We interviewed Ex-Im officials from various divisions of  the organization. We also spoke with officials from other U.S. government  agencies, including the Departments of the Treasury and State, as well as  the Small Business Administration. We interviewed a variety of experts on  China’s export credit activities, including experts at American University  and the Brookings Institution. Appendix I provides more information on  our scope and methodology.

We conducted this performance audit from February 2011 to February  2012 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

Export credits are financing arrangements designed to mitigate risks to  buyers and sellers associated with international transactions. Export  credits generally take the form of direct loans, loan guarantees, and  export credit insurance, and may be short-term (0-1 year), medium-term  (1-7 years), and long-term (7 plus years). (See textbox below.) Buyers  and sellers in international transactions face unique risks, such as foreign  exchange risk, difficulties in settling disputes when damages to shipments  occur, or instability in the buyer’s country. For these reasons, lenders may  be reluctant to finance a buyer’s purchase of foreign goods. Export credit  products are meant to facilitate international transactions by mitigating  these risks. Official ECAs are organizations that provide export credits  with explicit government backing, where either the government, or the  government-owned ECA, assumes the risk and is financially liable for  reimbursing the exporter or the lending institution if the buyer fails to pay.

Export credit insurance: An insurance policy that protects the exporter from the risk of  nonpayment by foreign buyers for commercial and political reasons.

Loan guarantee: An ECA guarantees a lender’s financing to an international buyer of  goods or services, promising to pay the lender if the buyer defaults.

Direct loan: The ECA makes a fixed-rate loan directly to an international buyer of  goods and services.

Interest make-up: In lieu of making direct loans, an ECA pays a lender the difference  between the OECD minimum interest rate and commercial interest rates.

Ex-Im, the official export credit agency of the United States, is an  independent government agency operating under the Export-Import Bank  Act of 1945, as amended. Ex-Im currently has about 400 employees. Its  mission is to support U.S. exports and jobs by providing export financing  on terms that are competitive with those of official export credit support  offered by other governments. Since fiscal year 2008, Ex-Im has been  “self-sustaining” for appropriations purposes, financing its operations from  receipts collected from its borrowers.insurance, direct loans, and loan guarantees in support of U.S. exports. In  fiscal year 2011, Ex-Im authorized $32.7 billion: $7.0 billion in export  credit insurance, $6.3 billion in direct loans, and $19.4 billion in loan  guarantees. Ex-Im has a risk exposure limit of $100 billion, meaning that  the total outstanding value of all loans, guarantees, and insurance  contracts cannot exceed this number; at the end of fiscal year 2011, Ex- Im had a total exposure of $89.2 billion.

The other G-7 countries, which include some of the largest exporters, all  have at least one ECA. See figure 1.

G-7 ECAs differ in the magnitude and types of their activities. All offer  medium- and long-term officially supported export credits. According to  Ex-Im, this financing is subject to the most intense international  competition, where the support of an ECA can influence who wins  overseas deals. Ex-Im’s annual competitiveness reports compare ECAs  on the basis of their medium- and long-term export credit support  programs. ECAs also can provide other products and services in addition  to these medium- and long-term officially supported export credits; some  of the G-7 ECAs offer short-term export credits, market-based export  credits (called “market windows”), and other non-export credit products  such as investment insurance. This can complicate comparisons among  institutions, as some ECAs offer products that are also offered by other  types of institutions, such as development or finance institutions, in other  countries. ECAs do not typically compete with one another in the area of  short-term credits.

Figure 2 shows each ECA’s total new business in 2010, providing a  comparison between medium- and long-term officially supported export  credits and other new business in that same year. Germany was the  largest provider of medium- and long-term export credits, followed by  France and the United States. Japan’s two ECAs, combined, had the  largest amount of total new business in 2010, but only a very small  portion was for officially supported medium- and long-term export credits;  the remainder included other products such as overseas investment  loans, untied loans, and overseas untied loan insurance. This was also  true of Canada’s ECA, EDC, which had the second highest volume of  total new business. A large proportion of the new business was  attributable to short-term credit insurance.

The G-7 ECAs have historically accounted for the majority of medium-  and long-term officially supported export credits, according to Ex-Im. The  share of national exports financed by official export credit agencies is not  large; on average, medium- and long-term ECA financing as a share of  total exports for each of the G-7 countries in 2008 was 0.6 percent. The  United Kingdom’s (UK) share was lowest at 0.1 percent, and Italy’s was  the highest at 1.2 percent; the remaining G-7 countries ranged between  those values. However, ECAs do play a large role in certain sectors,  such as aircraft. According to Ex-Im, at its peak in 2009, ECA financing  represented about 40 percent of the total worldwide market for aircraft  financing. In addition, the recent financial crisis has increased the amount  of ECA support for exports; most G-7 ECAs saw notable increases in the  volume of their medium- and long-term officially supported export credits  starting in 2008 or 2009 because private sector lenders and insurers were  either unwilling or unable to support transactions on their own. See figure  3 for estimates of the volume of medium- and long-term officially  supported export credits provided by each G-7 country over the past 5  years.

The OECD Arrangement on Officially Supported Export Credits is a set of  nonbinding rules among some OECD countries concluded in 1978 amid  increases in ECAs’ provision of officially supported export credits. The  purpose of the Arrangement is to provide a framework for the use of  officially supported export credits; to promote a level playing field, where  competition is based on the price and quality of the exported goods and  not the financial terms provided; and to provide transparency over  programs and transactions. Participants to the Arrangement are Australia,  Canada, the European Union (EU), Japan, South Korea, New Zealand,  Norway, Switzerland, and the United States. Other countries may join  following invitation and OECD membership is not required. In addition,  countries may belong to one or more of the Arrangement’s sector  agreements—for example, Brazil is a member of the Aircraft Sector  Understanding—without being a full-fledged participant.

The Arrangement applies to officially supported export credits with  repayment terms of 2 years or more. It places limitations on the terms and  conditions, such as interest rates, length of repayment terms, and risk  fees, of export credits that benefit from official support, and it also  contains a variety of reporting requirements to ensure transparency.  Another requirement is a down payment of 15 percent of an export  contract’s value. The Arrangement and its various sector agreements are  negotiated among participants and updated on an as-needed basis.

In addition to the OECD Arrangement, another export credit committee at  the OECD, the Working Party on Export Credits and Credit Guarantees  (Export Credit Group), was set up in 1963. Its general objectives are to  evaluate export credit policies, identify and resolve problems by  multilateral discussion, work out common guiding principles, and improve  cooperation between countries. To date, the Export Credit Group has  been the venue for important export credit agreements on antibribery,  environmental screening, and sustainable lending. All OECD countries  except Chile and Iceland are members.

The U.S. Department of the Treasury’s Office of Trade Finance has lead  responsibility within the U.S. government for the development,  implementation, and enforcement of international trade and aid finance  policy, and its primary goal is to create and maintain a market-based,  competitive environment in which governments’ financing of national  exports contains minimal subsidies. The Office of Trade Finance leads  the U.S. delegation to the OECD Arrangement. Other members of the  delegation include Ex-Im, the Departments of Commerce and State, the  Office of the U.S. Trade Representative, the U.S. Agency for International  Development, the U.S. Trade and Development Agency, and other  agencies whose programs or roles might be affected by the negotiations.

Ex-Im Differs from the Other G-7 ECAs in Several Important Ways, Including Its Explicit Mission to Promote Domestic Employment

Ex-Im is different from other G-7 ECAs in several significant ways,  including its mission, which is explicitly focused on creating domestic jobs  through exports. It is similar in its role as a lender/insurer of last resort to  four other ECAs, while Canada and Italy have commercial market  orientations and are not restricted from competing with the private market.  As an independent government agency, Ex-Im’s governance and  organization type differ from those of other ECAs, which range from  government departments to private companies contracted by  governments. Ex-Im and other G-7 ECAs offer a different mix of export  credit and other financing products, which provides them with different  tools to help exporters. Ex-Im has an advantage over some of the other  ECAs because it offers direct loans, which were useful during the  financial crisis.

ECAs Differ in Their Missions and Organization Types

Ex-Im’s mission strongly emphasizes supporting domestic jobs through  exports, which is unique among the G-7 ECAs (see table 1). This aim  underlies certain Ex-Im policies, such as its economic impact analysis  requirement and its domestic content policy. Other ECA missions range  from promoting and supporting domestic exports to securing natural  resources.

Along with its mission is the ECA’s “market orientation”—whether an  export credit agency supplements or competes with private markets for  export credit support. Most G-7 ECAs are directed to supplement the  private market; that is, they play a role as a “lender or insurer of last  resort,” providing financing, guarantees, or insurance for transactions that  are too risky or are undesirable for commercial support. In addition,  according to G-7 ECA officials, European ECAs must abide by EU law  prohibiting them from supporting short-term export credits to other EU  member states and most OECD countries—transactions that the private  market is willing to support. Ex-Im’s role as a lender of last resort is  emphasized in its charter. It must report the purpose for each transaction  it supports, either to provide financing where private sector financing is  unavailable or to meet foreign competition. Canada’s ECA, in contrast,  has a commercial market orientation and is not restricted from competing  with the private sector. Italy’s ECA, while having to abide by EU law, also  has a commercial market orientation, according to Italian officials.

G-7 export credit agencies range from government agencies to private  companies contracted by governments, with different organization types,  governing structures, and processes for approving transactions (see table  1). The ECAs that are managed by private companies, such as those in  France and Germany, experience more direct political oversight, as their  governments take a more direct role in approving transactions and can  take policy considerations into account on an individual transaction basis.

G-7 ECAs each offer a different mix of export credit and other financial  products. In general, a greater mix of products allows an ECA more  flexibility in responding to its customers’ needs, particularly during an  economic crisis. Most ECAs offer standard export credit products such as  export credit insurance and loan guarantees. However, ECAs may offer  additional export credit products, such as direct loans (United States,  Japan, and Canada) and interest make-up programs, where the ECA  pays the difference between commercial lending rates and fixed OECD  minimum rates (Italy, France). ECAs also may offer products that are not  technically “export-related,” but that, according to Ex-Im, could possibly  be used in lieu of or in addition to standard export credits, such as  investment insurance and untied lending. Figure 4 shows a comparison of  selected export credit and other financial products offered by G-7 ECAs.

Ex-Im’s provision of direct loans proved to be useful during the financial  crisis, when commercial financing was expensive or unavailable. While its  direct lending program was little used in the early 2000s, Ex-Im  experienced a surge in demand for direct loans over recent years, from  $350 million in fiscal year 2008 (3 percent of its total authorizations) to  $6.3 billion in fiscal year 2011 (19 percent of its total authorizations). See  figure 5.

The Japanese and Canadian direct loan programs also experienced  increases. The G-7 European ECAs, which do not have direct loan  programs, sought alternative solutions to mitigate the lack of such  financing. Several U.S. officials and a G-7 official stated that Ex-Im’s  direct loan program gave it an advantage in responding to the needs of  exporters and their customers during the crisis.

Ex-Im Has Specific Mandates and Operates under More Policy Requirements than Other ECAs

Ex-Im receives specific mandates from Congress and generally operates  under more policy requirements than other G-7 ECAs. Ex-Im’s mandates  include specific targets from Congress for small business and  environmentally beneficial exports. Other G-7 ECAs may have broad  directives from their governments or ministries to focus on these areas.  Ex-Im also faces additional mandates and legal requirements that other  ECAs generally do not. For example, Ex-Im is statutorily required to  perform an economic impact analysis to assess whether a project will  negatively affect U.S. industries.

Ex-Im Has Specific Mandates on Small Business and Environmentally Beneficial Exports where Other G-7 ECAs Have Broad Directives

Ex-Im receives mandates from Congress that include specific targets in  the areas of small business and environmentally beneficial exports,  whereas some other G-7 ECAs have been given broad directives to focus  on these areas by their governments or ministries. Specifically, four G-7  ECAs have received external directives to encourage small business  exporters, and two ECAs have received external directives to support  environmentally beneficial exports (fig. 6). According to OECD officials,  Ex-Im is unique in that Congress gives it explicit policy goals to pursue in  addition to its general mandate to support domestic exports. By contrast,  other ECAs generally receive limited specific policy guidance from their  respective legislatures and oversight ministries.

Since the 1980s, Congress has required that Ex-Im make available a  certain percentage of its export financing for small business. In 2002,  Congress established several new requirements for Ex-Im relating to  small business, including increasing the small business financing  requirement from 10 to 20 percent. Related congressional directives have  included requirements to create a small business division and to define  standards to measure the bank’s success in financing small businesses.

From fiscal years 2006 to 2010, Ex-Im met the 20 percent small business  financing target, but did not in 2011. Ex-Im’s small business financing  percent ranged from about 27 percent in fiscal year 2007 to 18.4 percent  in fiscal year 2011. financing in 2009 and 2010, meeting the 20 percent target has meant  large annual increases in small business financing. For example, Ex-Im  small business financing increased by about 58 percent between 2008  and 2010. According to Ex-Im officials, the bank allocates significant  resources to meeting its small business mandate. About 27 staff work  exclusively on small business marketing, primarily in regional offices,  according to Ex-Im officials.

In fiscal years 2002-2005, Ex-Im did not reach the goal, with its small business financing  share ranging from 16.9 percent to 19.7 percent. companies to offer insurance to small business exporters that have had  difficulty obtaining short-term export credit since the financial crisis.

Congress also mandates Ex-Im to support environmentally beneficial  exports and provides specific targets for such exports. However, specific  targets in this area have greatly exceeded Ex-Im financing. In fiscal year  2008, Congress directed Ex-Im to allocate 10 percent of its annual  financing to renewable energy and environmentally beneficial products  and services. For fiscal years 2009 and 2010, Congress directed Ex-Im to  allocate 10 percent to a subset of those exports—renewable energy and  energy efficient end-use technologies. We previously reported that Ex-Im  had not come close to meeting this 10 percent target when it is applied to  all of its environmentally beneficial financing. Ex-Im has reported  significant increases in its renewable energy financing, from $101 million  in 2009 to $332 million in 2010. In 2011, Ex-Im authorized about $889  million in environmentally beneficial exports, of which about $721 million  was for renewable energy.

In contrast to Ex-Im’s mandates, some ECAs are broadly directed by their  governments or ministries to support small business exports and  environmentally beneficial exports with, generally, no specific targets to  meet, according to G-7 officials. Specifically:

The British government asks the Export Credits Guarantee  Department to promote small and medium-sized exporters, but the  guidance ECGD receives is suggestive, rather than a specific  directive, according to officials at the ECA.

The French Ministry of Finance provided a target for its export credit  agency, Coface, to support 10,000 small and medium-sized exporters  by 2012, according to Coface officials. However, officials stated that  this target only applies to one product—market survey insurance— and there are many other products that Coface uses to promote  exports of small businesses that are not associated with specific  external targets.

Japan’s Parliament also asks JBIC to support small and medium- sized businesses, but provided a general directive to support such  exporters and did not include specific targets, according to JBIC  officials.

Italy’s ECA, SACE, is directed by an interministerial decree to  designate renewable energy exports as a strategic sector, but no  specific targets are provided, according to SACE officials.

Some ECAs that do not have external directives from their governments  to support small businesses and environmentally beneficial exports have  developed internal initiatives to support such exports. For example, in  January 2011, Germany’s ECA introduced a new product that provides a  fast-tracked application process allowing exporters to receive export  credit coverage for transactions of up to 5 million euros in 4 days.  Additionally, Canada’s ECA has developed internal initiatives to support  environmentally beneficial exports. For example, a team within Export  Development Canada has been tasked by EDC executives to come up  with a clean technology strategy, and the team is in the early stages of  putting a strategy in place, according to EDC officials.

Ex-Im Has Additional Mandates and Legal Requirements that Other ECAs Generally Do Not Have

Ex-Im has additional mandates and legal requirements that other ECAs  generally do not. These include (1) promotion of exports to sub-Saharan  Africa, (2) requirements to ship certain exports on U.S. flag carriers, (3)  carbon policy, (4) economic impact analysis, and (5) congressional  notification. All of these requirements, except for the carbon policy, are  the result of congressional mandates. Although most ECAs do not have  similar requirements (see fig. 7), as noted above, ECAs have different  organizational and governance structures. These differences can affect  how a government exercises policy considerations through its ECA. For  example, Germany has an interministerial board that approves individual  transactions and takes into account policy considerations on a case-by- case basis; in contrast, Ex-Im is an independent agency and Congress  exercises policy considerations through programmatic mandates,  according to a Treasury official.

Specifically, Ex-Im must consider the following mandates and legal  requirements when financing transactions:

Promoting exports to sub-Saharan Africa. Congress mandates that  Ex-Im promote the expansion of its financial commitments in sub- Saharan Africa under Ex-Im’s loan, guarantee, and insurance  programs. No other G-7 ECAs have specific external requirements to  support exports to sub-Saharan Africa. In 2010, Ex-Im financed 132  transactions totaling $812 million in 20 sub-Saharan African countries.  Ex-Im dedicates two full-time employees to promoting exports to sub- Saharan Africa; others work part-time on the issue.

Requirement to ship certain exports on U.S.-flagged carriers.

In 2002, Ex-Im’s energy financing, specifically its financing for fossil fuel projects, was  the subject of a lawsuit brought against the bank and the Overseas Private Investment  Corporation by environmental nongovernmental organizations and four U.S. cities. Friends  of the Earth, Inc., et al. v. Spinelli, et al. (Civ. No. 02-4106, N.D. Cal.) The lawsuit asserted  that Ex-Im and the Overseas Private Investment Corporation (OPIC) provided assistance  for fossil fuel projects that caused greenhouse gas emissions without complying with  provisions of the National Environmental Policy Act requiring assessments of their  projects’ impacts on the U.S. environment resulting from their emissions. The lawsuit was  settled in 2009 with Ex-Im agreeing to develop and implement a carbon policy for Ex-Im’s  financing; provide the Board of Directors with additional information about carbon dioxide  emissions associated with potential fossil fuel transactions; and take a leadership role in  consideration of climate change issues, promoting emissions mitigation measures within  the Organisation for Economic Cooperation and Development and among export credit  agencies. transaction valued at $887 million that was subject to the enhanced  due diligence review.

Economic impact analysis. Congress requires Ex-Im to perform an  economic impact analysis to assess whether a project will negatively  affect U.S. industries either by reducing demand for goods produced  in the United States or by increasing imports to the United States.  Other G-7 ECAs do not have similar requirements, according to G-7  ECA officials. As we have previously reported, Ex-Im uses a  screening process to identify projects with the most potential to have  an adverse economic impact, and then subjects the identified projects  to a detailed analysis.  Of medium- and long-term transactions Ex-Im  authorized in 2010, 82 transactions, valued at $2.8 billion, were  subject to Ex-Im’s economic impact analysis, with a small percentage  of those subject to detailed analysis.

Congressional notification. Congress requires Ex-Im to submit a  detailed statement describing and explaining a transaction to  Congress prior to the Board of Directors’ final approval if the  transaction is (1) in an amount equal to or greater than $100,000,000  or (2) related to nuclear power or heavy water production facilities.  According to Hermes officials, Germany also sends a notification to  the German parliament’s Committee on Budgets for transactions  exceeding 1 billion euros. According to Ex-Im, 38 transactions valued  at about $16 billion in 2010 were sent to Congress before the Board of  Directors’ final approval of the transactions.

Ex-Im’s Domestic Content Requirements Are Generally Higher and Less Flexible than Those of Other ECAs

Ex-Im’s domestic content requirements are generally higher and less  flexible than those of other ECAs. To fully finance a medium- or long-term  transaction, Ex-Im requires that 85 percent of the value of the transaction  be supplied domestically. Other G-7 ECAs generally require between  zero to 51 percent domestic content. Additionally, key elements of Ex- Im’s domestic content policy have remained relatively unchanged over  two decades; at the same time, manufacturing patterns have evolved  toward greater integration in production and data show that the domestic  content of exports has decreased. Several ECAs have modified their  policies in recent years, often citing the increasingly global content of  industrial production as a primary reason for the change.

Ex-Im’s Current Policy Limits the Amount of Foreign Content in the Exports It Finances

Ex-Im’s domestic content policy places limits on the amount of foreign  goods and services making up the exports it finances. Domestic content  refers to the portion of an exported good or service that is sourced  domestically. Ex-Im’s policy is not the result of a statutory requirement;  according to Ex-Im, the policy reflects an attempt to balance the interests  of multiple stakeholders and Ex-Im’s mission to support U.S. jobs through  export financing. Ex-Im’s domestic content policy for medium- and long- term transactions limits its level of support to the lesser of (1) 85 percent  of the total value of all eligible goods and services in the U.S. export  transaction, or (2) 100 percent of the U.S. content in all eligible goods  and services in the U.S. export transaction.percent domestic content to receive full financing for medium- and long- term transactions but does not require a minimum amount of domestic  content to receive a portion of financing. See the sidebar for two  examples of how the domestic content policy affects the level of support  Ex-Im can provide.

In effect, Ex-Im requires 85  Ex-Im has separate domestic content requirements for short-term  transactions—the percentage required to receive maximum coverage is  lower than for medium- and long-term transactions and the calculation  method differs. The short-term policy is generally more lenient for small  businesses than for other exporters. For example, small businesses can  satisfy the short-term domestic content requirement based on  aggregating all of the products in an export contract, while non-small  businesses must meet the minimum domestic content threshold on a  product-by-product basis. In addition, small businesses include indirect  costs in the calculation of domestic content. According to Ex-Im, the  difference reflects Ex-Im’s directive to consider the unique business  requirements of small businesses.

Other ECAs Generally Have Lower and More Flexible Domestic Content Requirements than Ex-Im

Other G-7 ECAs have lower domestic content requirements than Ex-Im,  generally requiring between zero and 51 percent domestic content (see  table 2). Some ECAs with domestic content polices have more flexibility  in implementing their policies by allowing for exceptions to their minimum  domestic content requirements on a transaction-by-transaction basis. For  example, according to Japanese officials, Japan’s ECAs require a  minimum of 30 percent domestic content, but the institutions can make  exceptions for projects deemed to be of strategic importance. Ex-Im  makes no exceptions to its content policy for specific transactions, except  for those involving tied aid or raw materials. According to Canadian and  Italian officials, Canada and Italy do not require a certain level of domestic  content; rather, both consider domestic content in the context of a broad  range of factors to determine whether supporting a transaction benefits  national interest.

EDC’s Canadian Benefits policy considers the research and development  spending by the company and the potential for increased access to global  markets, among other factors, when deciding to finance a transaction  (see textbox). According to Canadian officials, the Canadian Benefits  model is designed to capture all benefits that accrue from Canadian  companies’ involvement in international trade.

In the early 2000s, Export Development Canada implemented a national benefits policy rather than a domestic content requirement,  referred to as the Canadian Benefits model. With this model, EDC measures its contribution to Canada’s economy through the  economic benefits generated by the exports and investments it supports. EDC takes the following steps under the Canadian  Benefits model:  1.  Calculate economic benefits. The economic benefits are based on the amount of gross domestic product (GDP) in the exports it  finances by determining the amount of Canadian content in the export. The Canadian content is provided by Statistics  Canada’s Input/Output Model, which tracks the production chain of Canadian industries, and identifies and measures inputs  and outputs.  2.  Calculate base grade. EDC then calculates a base grade by dividing the level of GDP generated by the transaction by the  amount of EDC support that was requested. EDC assigns letter grades A-F according to these support percentages.

Identify upgrades. Where a transaction generates a base grade of less than B, additional benefits are considered in order to  upgrade the transaction. Each applicable secondary benefit boosts the base grade by one letter grade. (An F rating cannot  receive upgrades.) Reasons for upgrades include the following:

Above average research and development spending by the Canadian company.

The transaction allows increased access to global markets.

The transaction has an above average employment impact.

The Canadian exporter is a small or medium-sized business.

The transaction supports an environmentally beneficial product.

Although transactions rarely receive low final grades, low grades do not prevent EDC from financing the transaction, according to   EDC officials.

In addition to the domestic content policies presented in table 2, ECAs’  policies for supporting local costs can also affect the level of support they  can provide related to goods and services that are not sourced  domestically. Local costs are for goods and services manufactured or  originated in the buyer’s country, such as on-site construction costs. Ex- Im’s policy allows it to support up to 30 percent of the value of the export  contract in local costs, in addition to 15 percent foreign content. In  contrast, according to Ex-Im, the other G-7 ECAs generally include local  costs in their calculation of foreign content, and this can reduce the gap  between the level of foreign content that Ex-Im can support and that of its  foreign counterparts. Ex-Im reported that, in 2010, 21 percent of its non- aircraft medium- and long-term transactions contained some local cost  support.

The degree to which countries rely on domestic components in producing  its exports differs. U.S. exports generally have higher domestic content  than those of other G-7 countries. OECD data show that domestic content  accounts for less than 75 percent of manufacturing exports for five of the  seven G-7 countries, but accounts for over 80 percent of manufacturing  exports for the United States, as well as in Japan.

While Ex-Im has modified its method for calculating the amount of  domestic content in a transaction, its minimum threshold for receiving full  financing for medium- and long-term transactions has not changed since  1987. Before 1987, Ex-Im financed only the domestic portion of medium-  and long-term transactions. If less than 100 percent of an export’s content  was domestic, the foreign part would be carved out and Ex-Im would  finance 85 percent of the domestic portion. In 1987, Ex-Im adopted its  current policy to allow transactions with up to 15 percent foreign content  to receive 85 percent of the total contract value. Ex-Im’s rationale for  allowing up to 15 percent foreign content was that the 15 percent down  payment required by the OECD Arrangement would cover the portion of  foreign content, according to Ex-Im officials.

In 2001, Ex-Im modified its method of calculating the domestic content of  exports in medium- and long-term transactions. Previously, Ex-Im  required exporters to report the domestic content of individual items in a  contract, line by line. In 2001, Ex-Im moved to a whole contract value  calculation where exporters report the domestic content of the contract’s  entire value, rather than item by item. This allowed Ex-Im to finance  contracts that may have individual items that contain less than 85 percent  domestic content as long as the total amount in the contract has 85  percent or more domestic content. There have not been subsequent  changes to the policy for medium- and long-term transactions.

Domestic Content of U.S. Exports Has Generally Declined and Varies across Sectors

Production patterns have changed in the past few decades as global  manufacturing has become more integrated. Companies increasingly rely  on parts sourced from other countries, and as a result, the domestic  content in exported goods has declined. OECD data show that from 1995  to 2005 the percentage of domestic content of manufactured U.S. exports  declined from 87.4 percent to 82.4 percent, a 5 percentage point decline  in 10 years (see fig. 9).

Ex-Im does not differentiate among sectors in its domestic content policy,  although domestic content in U.S. exports varies by sector. Among  manufactured exports, medical, precision and optical instruments showed  a greater decline in domestic content, almost 6 percentage points, than  food products, beverages, and tobacco, which experienced a 3.6  percentage point decrease. As figure 9 shows, as of 2005, the domestic  content of U.S. exports of motor vehicles, trailers, and semitrailers was  around 72 percent, and other transportation equipment, which includes  aircraft, was 83.5 percent.

Given varying levels of domestic content by product and industry, Ex-Im  may be unable to provide full financing for exports in certain industries if  trends continue. Domestic content in Ex-Im transactions fluctuated from  1997 to 2010, showing an overall downward trend. The average domestic  content for medium- and long-term transactions containing foreign  content was 91 percent in 1997 and 86 percent in 2010 (see figure 10).

This value is near the 85 percent minimum domestic content required for  a transaction to receive full Ex-Im financing.

Exporters and lenders have expressed concerns about Ex-Im’s policy,  although obtaining clear evidence about the policy’s impact is difficult. In  cases where domestic content falls below 85 percent, Ex-Im’s policy  could potentially have a negative impact on U.S. competitiveness by  deterring exporters from using Ex-Im’s products. According to  respondents of Ex-Im’s most recent survey concerning its  competitiveness, Ex-Im’s content policy is the bank’s most significant  impediment to competitiveness.its criteria for support beyond domestic content and to consider support  based on national interests. Exporters and lenders have also suggested   Exporters have urged Ex-Im to expand  that Ex-Im should explore extending exceptions to its content policy to  support priority sectors, such as environmentally beneficial projects.  According to Ex-Im officials, information on exporters that have not  applied for Ex-Im financing because of its domestic content policy or  deals that have been lost as a result of incomplete financing is not  tracked.

Co-financing is a tool that some exporters can use to address financing  challenges posed by domestic content requirements, but it is not available  for all transactions. Co-financing arrangements allow an exporter to offer  a single ECA support package to a buyer interested in procuring products  from two or more countries. The G-7 ECAs have multiple framework  agreements that govern co-financing among themselves. Ex-Im officials  stated that co-financing is increasingly used in situations where foreign  content exceeds 15 percent and there is a gap in Ex-Im’s financing  coverage. In 2010, Ex-Im co-financed more than $6.5 billion in  transactions, with the vast majority of transactions involving aircraft.  However, co-financing is not an option for all U.S. transactions, because it  requires meeting the financing requirement of another country’s ECA,  particularly the production of a product or service that would qualify as an  export from that country.

Other ECAs Have Modified Their Domestic Content Policies to Reflect Changing Global Production Patterns

Some ECAs have revised their domestic content policies to reflect  changes in global production patterns. For example, following an  evaluation 10 years ago, EDC and the Canadian government determined  that EDC’s 50 percent domestic content rule had become onerous, and  that the global marketplace had changed, with more production involving  foreign content, according to Canadian officials. EDC adopted an  “integrative trade model” to reflect multiple benefits brought to Canada  from international transactions. As a result, EDC moved to the National  Benefits policy discussed above, where exporters using little or no  domestic content are eligible for support, as long as their export is  determined to benefit Canada. According to UK officials, ECGD also  substantially changed its policy in 2007, determining that its domestic  content requirement of 60 percent was an artificial barrier and  unnecessary restriction, in light of declines in the size of the UK  manufacturing base, increased globalization, and multisourcing of goods  under UK export contracts. It lowered the requirement to 20 percent. In  2008, Germany moved from a 90 percent domestic content requirement  to its current three-tier policy that attaches various limits to differing levels  of domestic content. Germany’s federal government made these changes  in response to the repeated appeals of German exporters, who  increasingly viewed the previous system as overly restrictive in light of  international competition, according to Hermes documents and officials.

There are differing views on the ultimate impact of different domestic  content requirements, and limited analytical evidence on which to base  decisions is available. While lowering a domestic content requirement can  increase the number and type of transactions that an ECA can support, it  could lessen the incentive for some companies seeking ECA support to  source goods and services domestically. The potential impact on U.S.  employment of any changes in the policy would depend on the balance of  job gains that might accrue from supporting additional transactions  against any job losses from reduced domestic content.

As other ECAs have loosened their domestic content policies, Ex-Im’s  policy remains relatively unchanged. Congress directs Ex-Im to provide  financing that is fully competitive with the financing of its competitors.

According to Ex-Im officials, Ex-Im reviews its domestic content policy on  a regular basis to identify ways to increase flexibilities for exporters.  However, Ex-Im has not conducted a systematic review of its policy in  recent years to assess to what extent the overall impact of the policy is  consistent with Ex-Im’s mission of supporting U.S. jobs.

The OECD Arrangement Has Decreased Export Credit Subsidies, but the Increasing Importance of Nonmembers Threatens Its Future Effectiveness

While the scope of the OECD Arrangement has expanded to cover  additional aspects of officially supported export credit terms among  member ECAs, the increasing activities of nonmembers, particularly  China, threaten the future ability of the agreement to provide a level  playing field for exporters. Several agreements establish guidelines for  pricing and reporting on export credit support. However, these  agreements apply only to officially supported activities of participant  ECAs. Several countries, including Brazil, China, and India, have growing  ECA financing activity but are not part of the Arrangement. Officials from  several G-7 ECAs and other institutions identify engagement with these  countries to increase transparency and promote broader discussion of  export credit issues as a major challenge that must be addressed if the  Arrangement is to remain effective.

The OECD Arrangement Has Expanded over Time to Regulate Additional Aspects of Official ECA Support

The scope of the OECD Arrangement has expanded over time to regulate  additional aspects of participating countries’ use of officially supported  export credits, decreasing export subsidies in the process. Since the  Arrangement was formed, in 1978, there have been several important  agreements among member countries that have regulated pricing or other  aspects of export credit support. These agreements include the following:

Minimum interest rates. Arrangement members adopted a system of  minimum interest rates, which has reduced the interest rate subsidy  component in ECA support. These rates, called Commercial Interest  Reference Rates (CIRR), are adjusted on a monthly basis to reflect  commercial lending rates for borrowers in the domestic market of the  relevant currency.

Minimum premium rates (risk fees). Agreements on minimum  premium rates, or risk fees, are designed to encourage convergence  in pricing, further decreasing opportunities for subsidies among ECAs.  The first agreement on risk-based premium rates, in 1997, established  a set of minimum premium rates to reflect country credit risk.  Countries were free to charge higher rates than these minimums. A  new agreement, effective as of September 2011, expanded on this  earlier agreement by including buyer credit (commercial), as well as  country-based, aspects of risk. This agreement reduces ECAs’  flexibility in pricing commercial transactions, thus further narrowing  differences in ECA financing terms.

Tied aid. Two agreements have restricted the use of tied aid, that is,  aid conditioned on the purchase of goods and services from the donor  country. In 1987, Arrangement members agreed to raise the minimum  concessionality level for tied aid permitted under the Arrangement to  35 percent. In 1991, a further agreement prohibited tied and partially  untied aid to richer developing countries, as well as for projects that  were considered commercially viable.

Sector agreements. Sector agreements have been reached for civil  aircraft, nuclear power plants, renewable energies and water projects,  and ships. Some of these agreements have different rules for  minimum interest and premium rates and maximum repayments terms  than those that apply to standard transactions through the  Arrangement. The Aircraft Sector Understanding is especially  significant because it regulates aircraft support terms for ECAs of  major aircraft-exporting countries, including the United States, Brazil,  Canada, France, Germany, and the United Kingdom. A large share of  some countries’ ECA support is in the aircraft sector.

The Arrangement also has a variety of reporting requirements in  conjunction with its overall and sector agreements that provide  transparency about ECA activities to Arrangement members. ECAs must  report all of their long-term officially supported export credit transactions  to the OECD as they occur and, twice a year, report the amount of  outstanding officially supported export credits. Further, separate reporting  requirements apply with respect to minimum premium rates as well as the  aircraft sector agreement. OECD officials said they are hoping to  streamline these reporting requirements and are in the process of  approving a new data-reporting directive.

However, certain export credit transactions of member ECAs fall outside  the Arrangement and its reporting requirements, which lessens the  transparency of ECA activities. These include “market windows,” or  support that an ECA provides on market terms. Canada’s ECA currently  provides this type of support. The use of market windows has  historically been an issue of concern for the United States, because of  limited transparency and the potential for unfair advantage stemming from  an ECA’s government connection.

A second type of transaction outside the scope of the Arrangement is  non-export credit financing activities, such as untied lending and  investment finance. A majority of G-7 ECAs offer untied lending, which  takes the form of loans extended to other countries for strategic reasons.  While these loans are not directly linked to the purchase of exports from  the lending country, the terms can take whatever form the two countries  agree upon. For instance, Japan provided an untied loan to a commercial  bank in Malaysia in order to provide long-term financing to Japanese  companies located there, as well as local companies within their supply  chain. Ex-Im officials have expressed concern about the growing use of  this financing tool because of its potential linkage to exports and  uncertainty about how its utilization could affect Ex-Im.

Export Credits from Countries Outside the OECD Arrangement Are Increasing

Official export credits from emerging economies such as China, India,  and Brazil have experienced rapid growth. As nonparticipants in the  OECD Arrangement, these countries can offer terms more favorable than  terms under the Arrangement. More favorable terms to buyers do not  necessarily constitute subsidies—the terms may be market-based and  compliant with World Trade Organization requirements—but can be more  generous than those allowed by the Arrangement, according to Ex-Im.  However, since these countries are exempt from the Arrangement’s  requirement to report each transaction, there is uncertainty regarding the  terms that they offer.

As total exports from emerging economies have increased, so have their  officially supported export credits. From 2006 to 2010, total exports from  China, India, and Brazil increased over 60 percent, while medium- and  long-term official export credits for China and Brazil are estimated to have  more than doubled—and for India nearly doubled—during the same time  period (see fig. 11). China is now estimated to be the largest supplier of  medium- and long-term export credits. Ex-Im estimated that China  offered $45 billion in official medium- and long-term export credits in  2010, twice as much as Germany, the largest provider among G-7 ECAs.

According to China Ex-Im Bank annual reports, it provided more than $36  billion in total export credit support in 2010, more than five times the $4  billion provided in 2000. India’s Ex-Im Bank experienced similar growth,  increasing its activities from about $500 million in 2000 to $11 billion in  2010. Over the same time period, U.S. Ex-Im’s financing increased from  about $13 billion to $24.5 billion. Figure 12 compares the activities and  relative growth of the Export-Import Banks of China, India, and the United  States.

SINOSURE, China’s other ECA, also has experienced sharp growth.  SINOSURE stated in its 2010 annual report that it underwrote an  aggregate amount of $196.4 billion for that year, an increase of 68.5  percent over 2009. This follows a growth of 85.8 percent from 2008 to  2009.

Given the increase in China’s officially supported export credits, officials  from some G-7 countries have expressed interest in additional  information about the terms and volume of China’s activities, but officials  reported that obtaining such information is difficult. Some information on  total volume of export credits is provided through annual reports, but in  limited detail. As discussed above, China’s position outside the OECD  Arrangement limits its reporting requirements relative to G-7 ECAs. Thus,  determining the nature of its activities and the extent to which financing  terms (in contrast to other factors, such as production cost) are the key  reason for Chinese companies’ securing deals is difficult. An expert on  China reported having obtained information on China’s export financing  activities from recipient countries rather than from China. In addition,  officials from several G-7 countries told us that they obtain anecdotal  information on China’s activities from their exporters, who may be facing  Chinese competition. One OECD official expressed the view that China  will become more competitive with the G-7 ECAs over the next 10 years  as the technology differential between Chinese and G-7 exports  decreases.

Engagement with China and Other Emerging Economies Presents Challenges for the OECD Arrangement

According to officials from the OECD and several G-7 ECAs, engagement  with emerging economies, especially China, on practices related to export  credit financing is increasingly important and presents challenges for the  OECD Arrangement and its participants. A senior OECD official stated  that the rise of this export financing competition threatens the  Arrangement’s ability to maintain a level playing field among exporting  nations.

Various ECAs, governments, and the OECD have made efforts to engage  China on export credit issues, including encouraging participation in  various forums, but have generally reported limited success. For  example, Canadian officials reported encouraging their Chinese  counterparts to join multilateral forums. Japanese officials said they reach  out to Chinese officials on a regular basis, including at meetings among  Asian ECAs. U.S. Treasury officials noted that export credits were  mentioned at the U.S.-China Strategic and Economic Dialogue, a high- level forum between U.S. and Chinese government officials. They also  reported that OECD and country officials have made attempts to invite  China to export credit-related meetings. However, several ECA,  government and OECD officials reported that China is often unwilling to  attend or sends lower-level representatives to these meetings, such as a  recent G-20 meeting in Paris.

In some cases, an ECA in an emerging economy will see an incentive to  joining international agreements or institutions. In 2004, Brazil  participated in the negotiations on the Aircraft Sector Understanding and  in 2007 joined the actual agreement. One U.S. official points to Brazil’s  interest in obtaining information on Canada, its primary competitor, and a  desire to help shape the rules, as strong incentives that brought it to the  negotiating table. Another institution, the Berne Union, which is an  association of export credit and investment insurance providers, has a  broad base of membership, including some of the ECAs from China,  India, and Brazil. Through membership, they have agreed to follow  certain principles, including a pledge not to subsidize exports. This  institution may provide an additional venue by which these emerging  economies can be engaged in discussions concerning export support and  related issues. However, some ECA and other officials point to China’s  current lack of incentive to engage. OECD and other officials have  stressed to China one benefit of joining the Arrangement now: the  opportunity to shape the rules by which their competitors must abide.

Established with a mission to support U.S. jobs and an explicit charge to  provide export financing competitive with that of other governments, Ex- Im is expected to play a key role in increasing U.S. exports, be self- sustaining in terms of its budget, and fulfill a number of policy directives  beyond those of other G-7 ECAs. In terms of its volume of export credit  support, Ex-Im’s performance in recent years has been quite strong; the  bank’s total authorizations have increased steadily as demand for its  services has been high during a period of global financial turmoil.  Whether Ex-Im will see an increasing tension across its mission and  requirements remains to be seen, but there is some evidence of that now,  as the bank’s small business financing share for fiscal year 2011 was  below its 20 percent target for the first time in 5 years. Although small  business financing grew in 2011, it grew less than Ex-Im’s overall  financing.

Ex-Im’s domestic content requirement for receiving full medium- and long-  term financing, which Ex-Im determines, is generally higher than that of  other ECAs and less flexible. While other ECAs have loosened their  domestic content policies in recent years, key elements of Ex-Im’s policy  remain relatively unchanged. Ex-Im officials state that Ex-Im’s policy  reflects its attempt to balance the interests of multiple stakeholders and  its mission to support U.S. jobs. However, to what extent Ex-Im’s current  policy affects its support of U.S. jobs is not clear-cut. It may provide an  incentive for certain exporters to buy from U.S. suppliers. On the other  hand, to the degree that the requirement limits the ability of a larger  number of exporters to obtain full Ex-Im financing, it may deter foreign  buyers from sourcing from U.S. firms. Given these factors, and trends  toward increasing global economic production, a better understanding of  how Ex-Im’s policy may affect U.S. exporters and jobs is needed.

Strong increases in export financing by several emerging countries  present competitive challenges that Ex-Im alone cannot readily address.  The OECD Arrangement has made important strides toward decreasing  subsidies in export credits and leveling the playing field for exporters.  However, emerging economies with rapidly growing export credit support  levels that are outside the Arrangement are exempt from its reporting  requirements and rules and can offer terms that are more generous than  parties to the Arrangement can. Member countries have taken some  steps within the OECD and beyond it to engage countries including Brazil,  China, and India on export credit issues. However, some acknowledge  that China is not currently motivated to join any type of agreement. There  is concern that, in particular, the rise of China’s export financing threatens  the Arrangement’s ability to support a level playing field among exporting  nations.

To maintain Ex-Im’s competitiveness and enhance its ability to support  U.S. exports, we recommend that the Ex-Im Bank conduct a systematic  review of its domestic content policy in the context of changing production  patterns to ensure this policy effectively serves the objective of creating  U.S. jobs while also providing financing that is competitive with that of  other ECAs.

To preserve and enhance the competitiveness of U.S. exports and to  promote transparency, we recommend that the Secretary of the Treasury,  in conjunction with Ex-Im and working with international counterparts,  develop strategies to further encourage and increase engagement of  emerging economy countries in discussions and agreements on export  credit support.

Ex-Im and Treasury provided comments on a draft of this report. In its  written comments, which are reproduced in appendix II, Ex-Im stated that  GAO’s findings are generally consistent with Ex-Im’s findings in its 2010  Competitiveness Report and that the lack of transparency from non- OECD ECAs is the major challenge to a level playing field globally. Ex-Im  did not directly address GAO’s recommendation that it conduct a  systematic review of its domestic content policy and its impacts but stated  that it disagreed with GAO’s characterization of how Ex-Im has addressed  the issue of domestic content. Treasury provided a statement concerning  its full support of engaging market economy countries on export credit  issues, but did not state whether it agreed or disagreed with our  recommendation.

With respect to its domestic content policy, Ex-Im stated that the policy  should be considered in light of Ex-Im’s specific mandate to focus on  jobs. Our report emphasizes that Ex-Im’s explicit mandate to support U.S.  jobs is unique among G-7 ECAs. In addition, the report states that Ex- Im’s policy is the result of an attempt to balance the interests of multiple  stakeholders with its mission to support U.S. jobs through export  financing.

Ex-Im also stated that its co-financing and local cost policies are  important in evaluating the competitiveness of its domestic content  policies. In discussing foreign content policy, our report acknowledges the  role of co-financing as a tool for some exporters, and explicitly notes that  Ex-Im provided more than $6.5 billion for co-financing in 2010. With  respect to local cost, we agree that the treatment of local cost financing is  relevant to the discussion of foreign content, and we have added related  information to the report.

Ex-Im stated it disagrees with the report’s characterization of how Ex-Im  has addressed the issue of content, stating that it has regularly reviewed  the policy as part of its annual competitiveness report, and has made  changes. We do not believe that Ex-Im’s competitiveness reports  constitute the systematic review of the content policy recommended in  our report, and we maintain that a more comprehensive review, including  its impact on U.S. jobs, is needed. Ex-Im’s competitiveness reports have  consistently identified its content policy as a major competitive barrier,  with Ex-Im stating in its latest report, published in June 2011, that “Ex-Im  Bank’s content requirements and implementation of those requirements  are significantly more restrictive than those of its G-7 counterparts” and  that “in cases where foreign content exceeds 15 percent Ex-Im Bank’s  policy and practice can have a negative impact on U.S. competitiveness  because it may deter exporters from using Ex-Im’s products.” Ex-Im  reported that its exporters and lenders identified foreign content as their  “most significant impediment to competitiveness.” In terms of changes  made to Ex-Im’s policy over time, our report states that Ex-Im last  changed its level of minimum domestic content required for receiving full  financing for medium- and long-term transactions (85 percent) in 1987  and in 2001 changed its method for calculating the percentage of  domestic content in a transaction. The report also clearly lays out Ex-Im’s  content policy for short-term financing, including specific provisions for  small businesses. We have clarified summary language regarding what  aspects of the policy have not changed since 1987. Ex-Im also provided  technical comments, which we incorporated as appropriate.

Treasury provided the following response: “Treasury fully supports and  encourages emerging market economy countries with major  medium/long-term export credit programs to join in discussions and  agreements on export credit support, and is actively engaged in that  endeavor.” We describe in the report that member countries, including the  United States, have taken some steps within the OECD and beyond it to  engage emerging market economy countries on export credit issues, and  that the issue of export credits was raised at the U.S.-China Strategic and  Economic Dialogue, a high-level forum between U.S. and Chinese  government officials, including the Treasury Secretary. However, we  believe it is important that Treasury take further steps to encourage and  increase engagement of these countries on export credit issues. We  slightly modified the wording of the recommendation to reflect this.

We will send copies of this report to the appropriate congressional  committees as well as the Chairman of the Export-Import Bank and the  Secretaries of State and Treasury. If you or your staff have any questions  about this report or need additional information, please contact me at  (202) 512-4347 or yagerl@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. GAO staff who made major contributions to this report are  listed in appendix III.

Appendix I: Objectives, Scope, and Methodology

The objectives of this report were to examine (1) Ex-Im’s mission,  organization, market orientation, and product offerings compared with  those of other Group of Seven (G-7) export credit agencies (ECAs), (2)  Ex-Im’s policy requirements compared with those of other G-7 ECAs, (3)  Ex-Im’s domestic content policy compared with those of the other G-7  ECAs, and (4) the role of the Organisation for Economic Cooperation and  Development (OECD) Arrangement in governing ECA activities.

To assess how Ex-Im’s mission, organization, market orientation, and  product offerings compared with those of other G-7 ECAs, we reviewed  relevant documents, including ECA annual reports and other publications,  such as Ex-Im’s annual Competitiveness Reports, OECD reports, and  legislation authorizing various ECAs. We also reviewed ECAs’ websites  for additional information regarding product offerings. We interviewed  officials from each of the G-7 ECAs and government organizations that  have oversight over the ECAs. These organizations included Ex-Im in the  United States; Export Development Canada (EDC), Department of  Foreign Affairs and International Trade and Department of Finance in  Canada; Coface and the Ministry of Economy, Finance and Industry in  France; Euler Hermes, PricewaterhouseCoopers and the Interministerial  Council, represented by the Federal Ministry of Economics and  Technology, in Germany; Servizi Assicurativi del Commercio Estero  (SACE) and the Ministry of Economic Development in Italy; Japan Bank  for International Cooperation (JBIC) and Nippon Export and Investment  Insurance (NEXI) (via telephone) in Japan; and the Export Credits  Guarantee Department (ECGD) in the United Kingdom. We also  interviewed officials from the U.S. Departments of Treasury and State, as  well as the OECD and the Berne Union. In addition, we spoke with  several institutions that work in conjunction with official ECAs: Societa  Italiana per le Imprese all’Estero (SIMEST) in Italy and KfW IPEX-Bank in  Germany.

To assess how Ex-Im’s policy requirements compared with those of the  other G-7 ECAs, we first examined Ex-Im’s policy requirements by  reviewing Ex-Im annual reports; Ex-Im Competitiveness Reports; Ex-Im’  2010-2015 Strategic Plan; GAO reports on Ex-Im’s small business  mandate, environmentally beneficial mandate, and economic impact  analysis requirement; Congressional Research Service (CRS) reports;  testimony from congressional hearings; and academic articles. We also  interviewed Ex-Im officials to talk about the various policy requirements,  and we interviewed officials from the Small Business Administration  (SBA) to discuss Ex-Im’s small business mandate. To examine the other  G-7 ECAs’ policy requirements and how they compared with those of Ex- Im, we interviewed officials from the G-7 ECAs, as well as any  government organizations that play an oversight role for these ECAs. We  asked them directly whether they shared any of Ex-Im’s policy  requirements, and more generally, whether they had other policy  requirements, such as requirements to focus on promoting certain types  of exports, export destinations, or exporters, and whether this resulted  from external directives or internal decisions. We also asked about the  nature of their relationships with oversight organizations and the extent to  which they received external policy guidance from these organizations or  their legislatures. In cases where ECA officials told us that there was  legislation that authorized or otherwise governed their activities, and there  were English versions available, we reviewed this legislation. We also  reviewed ECA annual reports. We sent follow-up questions to all of the  ECAs to confirm the information they had given us during interviews  regarding their policy requirements. We also provided ECAs the  opportunity to provide technical comments on portions of the report that  contain information pertaining to the ECA.

To examine how Ex-Im’s domestic content policy compares with those of  other G-7 ECAs, we first collected information on Ex-Im’s policy from its  competitiveness reports and website. We reviewed testimony transcripts  from congressional hearings and literature on domestic content of exports  and global manufacturing production patterns. We also interviewed Ex-Im  officials responsible for administering the policy, as well as officials at the  Treasury Department and the Coalition for Employment through Exports,  an advocacy organization on matters affecting U.S. government export  finance. To obtain information on other G-7 ECAs’ domestic content  policies, we reviewed their annual reports. We interviewed G-7 ECA  officials, who explained their policies and provided additional  documentation. We analyzed global manufacturing production trends  using OECD data on the foreign content of the United States’ and other  countries’ exports by sector, from the mid-1990s to the mid-2000s. To  assess the reliability of the OECD data, we reviewed the data  documentation, tested for internal consistency of the data, and compared  the trends with other sources. We found that the data were sufficiently  reliable for the purposes of presenting global manufacturing trends,  demonstrating country and sector variances. We collected data from Ex- Im on the percentage of foreign content in the exports it finances. Ex-Im  reports this data annually in its Competitiveness Report. We found that  the data were sufficiently reliable for the purposes of presenting the  amount of foreign versus domestic content in exports it finances.

To analyze the role of the OECD Arrangement in governing ECA  activities, we reviewed the text of the OECD Arrangement as well as a  variety of OECD and other reports on the Arrangement, Export Credit  Group, and export credit activities. We interviewed OECD officials, as well  as G-7 ECA officials, to discuss the history and evolving role of the  Arrangement as well as current challenges. We conducted a literature  search and reviewed academic literature on the Arrangement and ECAs.  To obtain information on China’s export credit activities, we met with U.S.  Treasury and State Department officials in Washington and Beijing and  interviewed experts, including academic experts at American University  and the Brookings Institution. We also discussed China’s activities with G- 7 ECA and other officials. To obtain data on China’s, India’s, and Brazil’s  ECA activities, we reviewed information from the International Monetary  Fund, ECA annual reports, and Ex-Im’s 2010 Competitiveness Report.  We also used data published in the annual reports from China’s and  India’s Ex-Im Banks to compare the growth of export financing from China  and India to that of the U.S. Ex-Im Bank. We found the data were  sufficiently reliable for the purpose of comparing levels of growth.

We conducted this performance audit from February 2011 to February  2012 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.

Appendix II: Comments from the U.S. Export- Import Bank

Appendix III: GAO Contact and Staff Acknowledgments

In addition to the person named above, José Alfredo Gómez (Acting  Director), Celia Thomas (Assistant Director), Jennifer Young, Vaughn  Baltzly, Ming Chen, Laura Erion, and Arthur Lord made key contributions  to this report. Also contributing to this report were Lynn Cothern, David  Dornisch, and Ernie Jackson.

Question: What makes Ex-Im different from other ECAs?

Answer: The United States and other G-7 countries have ECAs that support domestic exports, but Ex-Im differs from other ECAs in several important ways, including its explicit mission to promote domestic employment.

Question: How does Ex-Im differ from European ECAs?

Answer: Ex-Im offers direct loans, which were increasingly utilized during the recent financial crisis, while European ECAs do not.

Question: What are most ECAs expected to do?

Answer: Most of these ECAs, including Ex-Im, are expected to supplement, not compete with, the private market.

Ex-Im Differs from the Other G-7 ECAs in Several Important Ways, Including Its Explicit Mission to Promote Domestic Employment

ECAs Differ in Their Missions and Organization Types

Question: How does Ex-Im differ from other G-7 ECAs in terms of mandates?

Answer: Ex-Im has specific mandates in areas where other G-7 ECAs have broad directives.

Question: How do Ex-Im export mandates differ from other ECAs' export mandates?

Answer: Ex-Im has specific mandates to support small business and environmentally beneficial exports, while other ECAs are broadly directed to support such exports.

Question: What mandates does Ex-Im possess that other ECAs do not?

Answer: In addition, Ex-Im has other mandates and legal requirements, such as shipping certain exports on U.S.-flagged carriers and conducting economic impact assessments for large transactions, which other G-7 ECAs do not.

Ex-Im Has Specific Mandates and Operates under More Policy Requirements than Other ECAs

Ex-Im Has Specific Mandates on Small Business and Environmentally Beneficial Exports where Other G-7 ECAs Have Broad Directives

Question: How do Ex-Im's requirements differ from those of other ECAs?

Answer: Ex-Im’s requirements for the level of domestic content in the exports it fully finances are higher and generally less flexible than those of other G-7 ECAs. Ex-Im requires 85 percent domestic content for medium- and long-term transactions to receive full financing, while other ECAs’ domestic content requirements generally range between zero and 51 percent. Ex-Im’s policy on supporting local costs can result in more foreign content support in some transactions.

Question: What modifications have been made to Ex-Im in recent years?

Answer: While Ex-Im has modified its method for calculating domestic content, its threshold for receiving full financing for medium- and long-term transactions has not changed since 1987, and the policy and its overall impact on jobs has not been studied systematically.

Question: What modifications have other ECAs made in recent years?

Answer: Other ECAs have modified their policies in recent years, citing increasing global content of industrial production.

Ex-Im’s Domestic Content Requirements Are Generally Higher and Less Flexible than Those of Other ECAs

Other ECAs Generally Have Lower and More Flexible Domestic Content Requirements than Ex-Im

Question: What are the effects of expanding the OECD Arrangement?

Answer: The OECD Arrangement has expanded to regulate additional aspects of officially supported export credits, but increasing activity of nonmembers threatens its ability to provide a level playing field for exporters.

Question: What kind of agreements have been made regarding subsidies and transparency among ECAs?

Answer: Several agreements have been made that decrease subsidies and increase transparency among ECAs.

Question: Why are the agreements that have been made to decrease subsidies and increase transparency flawed?

Answer: However, these agreements apply only to participant ECAs, and important emerging countries, including China, are not part of the Arrangement.

Question: How have officials responded to the challenges posed by these countries?

Answer: Officials from several G-7 ECAs and other institutions identified effective engagement with these countries on export credit issues as being increasingly important and presenting challenges for the OECD Arrangement and its participants.

The OECD Arrangement Has Decreased Export Credit Subsidies, but the Increasing Importance of Nonmembers Threatens Its Future Effectiveness

Question: What does the U.S. Export-Import Bank do?

Answer: The U.S. Export-Import Bank (Ex-Im), the United States’ official export credit agency (ECA), helps U.S. firms export goods and services by providing a range of financial products.

Question: What policy requirements does Ex-Im have?

Answer: Ex-Im, whose primary mission is to support jobs through exports, has a range of policy requirements, including support of small business.

Question: What does the OECD Arrangement do?

Answer: The Organisation for Economic Cooperation and Development (OECD) Arrangement governs aspects of U.S. and some foreign countries’ ECAs.

Question: What did GAO examine?

Answer: GAO examined (1) Ex-Im’s mission and organization compared with ECAs from other Group of Seven (G-7) countries (major industrialized countries that consult on economic issues), (2) Ex-Im’s policy requirements compared with other G-7 ECAs, (3) Ex-Im’s domestic content policy compared with other G-7 ECAs, and (4) the OECD Arrangement’s role in governing ECA activities.

Engagement with China and Other Emerging Economies Presents Challenges for the OECD Arrangement

Appendix I: Objectives, Scope, and Methodology

Question: What are GAO's recommendations?

Answer: GAO recommends (1) that Ex-Im conduct a systematic review to assess how well its domestic content policy continues to support Ex-Im’s mission, and (2) that the Department of the Treasury, with Ex-Im and international counterparts, develop strategies for further engagement on export credit issues with emerging economy countries.

Question: What was Ex-Im's response to GAO's recommendations?

Answer: Ex-Im stated it considers content policy in its annual competitiveness assessments, but did not comment directly on the recommendation.

Question: How did Treasury respond to GAO's recommendations?

Answer: Treasury stated it supports encouraging emerging market economies’ participation concerning export credit issues and is engaged in that activity, but did not state whether it agreed with the recommendation.