[Senate Hearing 109-]
[From the U.S. Government Publishing Office]


 
                                                      S. Hrg. 109 - 895


                       ECONOMIC IMPACT ISSUES IN
                   EXPORT-IMPORT BANK REAUTHORIZATION

=======================================================================

                                HEARINGS

                               before the

                            SUBCOMMITTEE ON
                    INTERNATIONAL TRADE AND FINANCE

                                 of the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                                   ON

THE REAUTHORIZATION OF THE U.S. EXPORT-IMPORT BANK, FOCUSING ON WAYS TO 
             IMPROVE THE BANK'S ECONOMIC IMPACT PROCEDURES

                               __________

                       MARCH 8 AND MARCH 29, 2006

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs


   Available at: http: //www.access.gpo.gov /senate /senate05sh.html




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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                  RICHARD C. SHELBY, Alabama, Chairman

ROBERT F. BENNETT, Utah              PAUL S. SARBANES, Maryland
WAYNE ALLARD, Colorado               CHRISTOPHER J. DODD, Connecticut
MICHAEL B. ENZI, Wyoming             TIM JOHNSON, South Dakota
CHUCK HAGEL, Nebraska                JACK REED, Rhode Island
RICK SANTORUM, Pennsylvania          CHARLES E. SCHUMER, New York
JIM BUNNING, Kentucky                EVAN BAYH, Indiana
MIKE CRAPO, Idaho                    ZELL MILLER, Georgia
JOHN E. SUNUNU, New Hampshire        THOMAS R. CARPER, Delaware
ELIZABETH DOLE, North Carolina       DEBBIE STABENOW, Michigan
MEL MARTINEZ, Florida                ROBERT MENENDEZ, New Jersey

             Kathleen L. Casey, Staff Director and Counsel

     Steven B. Harris, Democratic Staff Director and Chief Counsel

                         Andrew Olmem, Counsel

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                 ______

            Subcommittee on International Trade and Finance

                      MIKE CRAPO, Idaho, Chairman

                   EVAN BAYH, Indiana, Ranking Member

CHUCK HAGEL, Nebraska                TIM JOHNSON, South Dakota
MICHAEL B. ENZI, Wyoming             ROBERT MENENDEZ, New Jersey
JOHN E. SUNUNU, New Hampshire
ELIZABETH DOLE, North Carolina

                     Gregg Richard, Staff Director

            Catherine Cruz Wojtasik, Minority Staff Director

                                  (ii)












                            C O N T E N T S

                              ----------                              

                        WEDNESDAY, MARCH 8, 2006

                                                                   Page

Opening statement of Senator Crapo...............................     1

Opening statements, comments, or prepared statements of:
    Senator Sarbanes.............................................     8
    Senator Enzi.................................................    23

                               WITNESSES

James H. Lambright, Acting Chairman and President, Export-Import 
  Bank of the United States......................................     2
    Prepared statement...........................................    23
Gerald F. Rama, Senior Vice President and Deputy Group Head 
  Global, PNC Bank on behalf of the Bankers' Association for 
  Finance and Trade..............................................    12
    Prepared statement...........................................    30
James ``Al'' Merritt, President and CEO, MD International, Inc. 
  Miami, FL......................................................    14
    Prepared statement...........................................    35
John Matthews, Managing Director, Boeing Capital Corporation, on 
  behalf of the National Association of Manufacturers, the 
  National Foreign Trade Council, and the Coalition for 
  Employment Through Exports.....................................    16
    Prepared statement...........................................    45

              Additional Material Supplied for the Record

Statement of John W. Douglass, President and Chief Executive 
  Officer, Aerospace Industries Association of America dated 
  March 20, 2006.................................................    47

                              ----------                              

                       WEDNESDAY, MARCH 29, 2006

Opening statement of Senator Crapo...............................    51

Opening statements, comments, or prepared statements of:
    Senator Enzi.................................................    75

                               WITNESSES

James H. Lambright, Acting Chairman and President, Export-Import 
  Bank of the United States......................................    52
    Prepared statement...........................................    75
Steven R. Appleton, Chairman of the Board, Chief Executive 
  Officer, and President, Micron Technology, Inc.................    63
    Prepared statement...........................................    78
Thomas M. Sneeringer, Director, Federal Governmental Affairs, 
  United States Steel Corporation on behalf of the American Iron 
  and Steel Institute............................................    64
    Prepared statement...........................................    81

              Additional Material Supplied for the Record

Letter from Barbara Cubin, a U.S. Representative in Congress from 
  the State of Wyoming, Michael B. Enzi, a U.S. Senator from the 
  State of Wyoming, and Craig Thomas, a U.S. Senator from the 
  State of Wyoming to James H. Lambright, Acting Chairman and 
  President, Export-Import Bank of the United States dated March 
  20, 2006.......................................................    91


                  REAUTHORIZATION OF THE EXPORT-IMPORT



                       BANK OF THE UNITED STATES

                              ----------                              


                        WEDNESDAY, MARCH 8, 2006

                               U.S. Senate,
   Subcommittee on International Trade and Finance,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Subcommittee met at 10:03 a.m., in room 538, Dirksen 
Senate Office Building, Senator Mike Crapo (Chairman of the 
Subcommittee) presiding.

            OPENING STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. This hearing will come to order. The 
Subcommittee on International Trade and Finance meets here 
today to discuss the reauthorization of the Export-Import Bank. 
The Export-Import Bank is operated under a renewable charter 
that expires on September 30, 2006. As the Subcommittee with 
jurisdiction over the Ex-Im Bank, this hearing is the first 
step in that important reauthorization process.
    The Ex-Im Bank was established in 1934 as the official 
Export Credit Agency of the United States and it helps the U.S. 
companies, small and large, by providing loans, guarantees, and 
insurance to finance the sale of U.S. exports.
    Last year, Ex-Im Bank supported close to $18 billion in 
U.S. export sales and these exports include airplanes, 
tractors, medical equipment, and agricultural equipment, to 
name just a few.
    There are three issues which are important to our 
reauthorization process, among others, that I intend to explore 
with our witnesses today. One, why has not the Bank met it is 
20 percent small business mandate and what steps are necessary 
to fix this? Are additional steps necessary? Two, what are the 
issues surrounding implementation of the economic impact 
procedures? And what can be done to improve that process? And 
three, are the principles, process, and standards governing the 
use of tied aid credit funds appropriate?
    I am sure there are going to be other issues and I do not 
want to discourage our panelists from raising issues that they 
think we need to address, but those are three that I am aware 
of that I am sure that we need to address.
    For our first panel today, we welcome James H. Lambright, 
the Acting Chairman and President of the Export-Import Bank. 
President Bush recently nominated James Lambright to be 
Chairman and President of the Import Bank and I cannot think of 
a better choice. I am hopeful that we can expedite your 
nomination and I am looking forward to getting that process 
concluded, as well. James Lambright's experience and expertise 
will be a great help to this Bank and to the Committee as we go 
forward.
    Our second panel today includes Mr. Gerald Rama, Senior 
Vice President and Deputy Group Head of Global PNC Bank; Mr. Al 
Merritt, the President of MD International, Inc.; and Mr. John 
Matthews, the Managing Director of Boeing Capital Corporation. 
We welcome all of you here with us today.
    I hope that you have all gotten the instructions, and I try 
to run kind of a tight ship here, and that is that you are 
asked to keep your oral presentation to 5 minutes. There is a 
clock in front of you and right up here, as well, that will 
turn yellow with one minute left and turn red when your time is 
up. And I ask you that you try to keep your remarks to the 5 
minutes. It is always tough. I know for me that I cannot 
exactly tell when 5 minutes is up. It seems to go faster when I 
am talking.
    So please keep your eye on that so we can have time for 
give and take during our exchange. And if there is something 
that you did not get to say that you really wanted to, do not 
worry, there will be plenty of questions and discussion really 
between us so that you can get your points in.
    Why don't we proceed then and we will start out with you, 
Mr. Chairman. Please proceed.

                STATEMENT OF JAMES H. LAMBRIGHT

                 ACTING CHAIRMAN AND PRESIDENT,

            EXPORT-IMPORT BANK OF THE UNITED STATES

    Mr. Lambright. Thank you very much, Mr. Chairman.
    I am pleased to be here today to testify on the 2006 
reauthorization of the Export-Import Bank of the United States.
    The mandate of the Bank, as expressed in our charter is to 
create and sustain U.S. jobs by supporting U.S. exports that 
otherwise would not go forward, either because of use of 
government supported competition or because the private sector 
is unwilling or unable to assume that risk. We do this through 
loans, guarantees and insurance. That mandate remains at the 
core of why the Bank exists and why it should be reauthorized.
    We are requesting an extension of this charter for 5 years 
to September 30, 2011. We are also requesting that our existing 
authority to approve dual-use transactions, as well as the life 
of the sub-Saharan African Advisory Committee be extended to 
that same date. Except for these changes, we at Ex-Im Bank 
believe that the current charter language provides the 
institution with sufficient powers and flexibility to meet the 
challenges of the next 5 years.
    Our charter provides guidance as to how to meet our 
mandate. We then must set our course by those beacons, one 
representing the aggressive support we provide workers and 
exporters, and the other representing responsible stewardship 
of taxpayer dollars.
    Since our 2000 reauthorization, we have authorized over $47 
billion in financing support of an estimated $63 billion in 
U.S. exports. Some of those have been big-ticket items, such as 
aircraft and power generation equipment, but over 80 percent of 
those transactions have been made available to directly support 
small business exports.
    For fiscal year 2005, every taxpayer dollar invested in the 
Bank's program and administrative budget has yielded financing 
support of over $50 in exports.
    Since I was appointed Acting President and Chairman about 8 
months ago, no topic has received more attention at Ex-Im Bank 
than small business. We have worked closely with Congress and 
small business representatives on a number of changes in this 
area, including the claims process, a new division for small 
business outreach, small business specialists designated in 
each division and expanding our online capabilities.
    We have already laid a strong foundation for growing our 
small business program. In fiscal year 2005, Ex-Im authorized 
47 percent more in dollar volume than in fiscal year 2002 and 
21 percent more in terms of transactions.
    Another focus of the Bank has been economic impact. Through 
the economic impact process, the Bank seeks to determine 
whether a transaction under consideration will adversely affect 
U.S. production and employment or result in the manufacture of 
a good subject to specified trade measures.
    In analyzing these cases, Ex-Im Bank must balance the 
benefits associated with the U.S. export against the long-range 
implications of increased foreign production. In recent years, 
economic impact decisions have affected Ex-Im Bank financing 
support for many exports, including steel-making equipment, 
glassmaking equipment, greenhouses, microchip manufacturing 
machinery, soda ash processing equipment and others. The 
inescapable responsibility of having to choose the interests of 
one set of U.S. workers over another makes these the most 
challenging cases the Bank must assess.
    In looking to the future, industrialized countries not part 
of the OECD such as Brazil, India, and China are emerging as 
significant exporters of capital goods. We have to decide what 
Ex-Im Bank's response should be as those governments provide 
aggressive financing. There is no more fundamental mandate than 
leveling the playing field for our exporters and keeping their 
jobs here in the United States. I have every confidence that 
Ex-Im Bank will continue to serve American workers and preserve 
American jobs for years to come.
    I look forward, Mr. Chairman, to working with you on this 
during the Bank's reauthorization process and I would be happy 
to take any questions.
    Thank you.
    Senator Crapo. Thank you very much, Mr. Lambright.
    Let us start out on the small business issue. Basically, I 
appreciated your statement that although the Bank is making 
progress, there is room for improvement on the small business 
front. I also applaud for recently establishing the Ex-Im Small 
Business Committee that I understand reports directly to you, 
as the President and the Chairman.
    Do you feel that more changes are needed? And should 
Congress direct the Bank to delegate more medium-term financing 
authority to commercial banks and export financial 
institutions? I have been told that SBA and OPIC have been 
successful in this delegation. And I am just curious as to 
whether you feel that we have adequate procedures and processes 
in place or whether we need to do something in addition, from 
either your perspective or ours here?
    Mr. Lambright. In terms of advancing the needs of small 
businesses, there is a lot that we have done in the last few 
months. Ex-Im Bank is demand driven and our charter directs us 
not to compete with the private sector. And so we have never 
turned down a small business transaction for budget reasons. 
What we are doing right now then is focusing on increasing 
awareness within the small business community so that they know 
that our programs are available.
    You mentioned the Small Business Committee that we also 
developed recently to focus explicitly on outreach and 
providing more awareness and education in the small business 
community. And the Small Business Committee will serve a number 
of needs of small businesses. We have designated specialists in 
each business unit so that small businesses see familiar faces 
when they come to the Bank and they are dealing with people 
sensitive to the needs of small businesses.
    As you mentioned, the Committee reports directly to me, as 
does the new Senior Vice President for Small Business. So there 
is a lot that we are doing in terms of future changes. I would 
like to see how these changes play out in reaching small 
businesses and boosting demand.
    You mentioned medium-term delegated authority as a 
particular mechanism, and that is something that I would be 
happy to explore with you. We do use delegated authority in 
other programs, particularly those used by small businesses and 
the medium-term program is another place that we can explore 
that.
    Senator Crapo. I have been noticing, I was looking at the 
statistics. The goal is, I guess, the lending mandate is now 20 
percent. In the last 3 years, we have hit, if I am reading this 
chart right, 19.8, 16.9, and 19.1 percent, respectively, which 
means we are getting close. We are in the ballpark.
    I did not fail to notice that you indicated that you have 
not rejected a small business loan for budget reasons. That 
seems to imply to me that Congress has set a pretty accurate 
target. You are getting close to it.
    If we are not, on a budgetary basis, rejecting loans it may 
suggest that we allow you to continue with the processes that 
you are using.
    Mr. Lambright. I would appreciate the opportunity for the 
Bank to continue along that path. The 20 percent measure was 
raised from 10 percent in the last rechartering. And while we 
since then have always been comfortably above the 10 percent, 
we have been stretching and not meeting the 20 percent. As you 
note, the number has been knocking around just below 20 percent 
in the last few years. And I think that the measures that we 
are taking now to increase outreach and improve some of our 
systems such as roll out an online application system that will 
make it easier for small businesses to work with the Bank. We 
hope that it would reach and even exceed 20 percent.
    I do not look at 20 percent as the end of the process. I 
would like to do as much as we can for small business. But I 
also do not think the 20 percent is the only measure against 
which to think about the Bank's performance. Since rechartering 
in 2002, each fiscal year we have shown a steady improvement in 
the amount of dollars that we make available for small 
businesses, as well as the number of transactions that serve 
small business. So each year we are doing more for small 
business and I would like to continue doing that.
    Senator Crapo. Thank you very much.
    I appreciate your focus on this, and we will look forward 
to watching how it proceeds and working with you on it.
    Let us move to the economic impact process. The last 
reauthorization changed the economic impact procedures to 
include the effect of outstanding trade orders, preliminary 
injury determinations, and Section 201 investigations before 
determining the Bank's financing of exports. This was an 
attempt to ensure that the Bank support for transactions not 
only helps U.S. exporters but also does not negatively impact 
domestic companies.
    The current system still has problems and tensions between 
the companies on both sides of the issue. It is my intention to 
hold a future hearing on this specific topic. But although the 
vast majority of loan guarantees before the Bank should not be 
slowed down, some of the larger and more controversial loan 
guarantees do need to be better vetted, in my opinion. 
Otherwise groups that believe they will be harmed by the loan 
guarantee start coming to Congress and asking us for 
intervention. We certainly would rather have you keep it all on 
your plate if we possibly can.
    To me a better approach than having it work that way would 
be to establish a system or a process which is fair and 
perceived to be fair by everybody, so that the facts are all 
well-presented to the board and they can act accordingly.
    I guess my first question is do you think that there are 
changes that are necessary or could be helpful in accomplishing 
that?
    Mr. Lambright. Senator, I think your description is fair 
that these cases are a challenge for the Bank to resolve 
because they pit the interests of one set of workers against 
another. They do generate a lot of interest from those who see 
the benefits of the immediate export and from those who see the 
potential longer-term implications to U.S. producers of the 
same commodity. And that is a balance that we have to struggle 
with.
    We do have a rigorous analytical process. I think that 
sometimes cases come to Congress's attention because this 
process can take a long time. It is not particularly 
predictable from the outset what the outcome will be because it 
weighs a variety of factors, it involves a lot of analysis and 
input from interested parties. We have a public notice and 
comment period which allows people to give us their viewpoints 
on the proper elements to be balancing.
    But I do think that where we could improve it would be to 
make it more predictable and transparent.
    Senator Crapo. I am not going to hold you to this but 
explain a little bit more about the transparency and 
predictability, how we could change to improve that.
    Mr. Lambright. We have a process that lays out a number of 
steps and asks questions that the Bank must determine before we 
can proceed with a transaction that implicates these 
procedures.
    And I guess the reason that it is not as transparent or 
predictable from the outset is it involves compiling a lot of 
information about our domestic industry but also about the 
industry of the borrower who would be increasing this 
production of a commodity. So that can take a long time to 
generate that information and digest it and come up with the 
answers to the questions laid out in our charter.
    I think that is one way we might be able to make it more 
predictable or transparent is to try to involve interested 
stakeholders more quickly in the process. What we have been 
trying to do is, through our homework, develop answers to these 
questions and then put them out for comment.
    I think that is an appropriate way to come to the right 
outcome, but it is not necessarily the best way to let 
interested parties know the likely outcome. So if we let people 
come into the process earlier, that may be a way for us to get 
all the issues on the table up front so that people see what is 
at stake and can react accordingly.
    Senator Crapo. Thank you.
    In your opinion what are the most contentious aspects of 
the economic impact procedures?
    Mr. Lambright. There are a number of steps in the process, 
from determining what is an exportable good to whether an item 
is substantially the same as one that is subject to a trade 
measure, asking then if the foreign production will lead to 
substantial injury in the domestic market? Will the commodity 
be in oversupply at the time the project comes on stream? Will 
the foreign producer produce enough of the commodity to 
displace American production?
    With each step there are questions that need to be answered 
and interested parties can weigh in on either side of any of 
those questions.
    Before getting you a more specific answer, and before we 
would take a position on any of these issues, we would want to 
work with you, your staff, and the rest of the Committee and 
exporters, labor groups, and industry representatives as to 
where they think perhaps there could be different 
interpretations of some of these provisions.
    Senator Crapo. Thank you. As a part of the economic 
analysis, do you think that adequate focus is been made on a 
foreign country providing subsidies or imposing some other kind 
of trade distorting practice or barrier that could have a 
negative impact on U.S. producers?
    Mr. Lambright. We try to account for a wide variety of 
elements that will end up increasing the displacement of 
American production and consequently put American workers in 
that industry at risk here in the United States. That is 
something that we would look at.
    Senator Crapo. Thank you very much. Let us go on to the 
tied aid issue. I expect that, in fact, is already included in 
the written testimony of some on the second panel.
    There is a concern, and I am going to be kind of 
paraphrasing or quoting here, that although the Bank's 2005 
Report to Congress expressed the view that the OECD tied aid 
rules have been a great success in reducing the level and 
distorting influence of tied aid, there is a general perception 
among American bankers and exporters that the use by other 
countries of tied aid and implicitly tied aid is growing.
    Are there principles, processes, and standards governing 
the use of tied aid, of the tied aid credit fund, appropriate 
use? And are they giving us an accurate picture?
    Mr. Lambright. If you think about the U.S. Government's 
efforts in this area over the last 15 years, there has been a 
dramatic success in reducing the amount of trade distorting 
tied aid that is seen globally through international 
negotiations, to the use of tied aid funds. So the tied aid 
funds that the Ex-Im Bank have are not meant to be a tool to be 
used with great frequency. They are used to be a credible 
deterrent against the use of tied aid by foreign governments 
and should be used selectively.
    As a result, the policy parameters surrounding the Ex-Im 
Bank make for a very small strike zone in proving what cases 
make the use of the war chest appropriate. And so while we 
still do hear of other governments, we see other governments 
doing this, we have pursued those cases on the transaction 
level but also at the international negotiation level.
    Senator Crapo. It is my understanding that no tied aid 
deals have been approved since the last reauthorization. Can 
you explain to me why?
    Mr. Lambright. You are correct that since the last 
reauthorization the Bank has had no approved transactions. We 
have had about 20 requests that we have pursued and there are a 
variety of reasons no approvals came to be.
    As I mentioned, there are a lot of policy elements that 
need to be proven. In some cases exporters decided to devote 
their energies elsewhere. In others, exporters have withdrawn 
for fear of the backlash from the buyer. Others, the market may 
have been too rich or too poor to necessitate the use of the 
funds. And some have had transactional elements fail, such as 
credit or environmental reasons. But it has been a wide variety 
of reasons.
    Senator Crapo. Thank you.
    I have one more question, and that is according to the Ex-
Im Bank's 2004 Competitiveness Report the status goal of 
official export credits is being challenged by the emergence of 
an alternative ECA world, particularly the recent rapid growth 
in the activity of Chinese, Brazilian, and Indian Export Credit 
Agencies.
    To what degree is the Ex-Im already seeing the impacts of 
emergence of these ECA's and demand for its own financing of 
U.S. exports?
    Mr. Lambright. We are starting to see aggressive government 
financing more and more, though Ex-Im Bank has not yet been 
asked to match one of these aggressive financings. The Chinese, 
in particular, have been using aggressive government financing 
for commercial reasons, especially to lock in long-term market 
share.
    So this is something that we expect to see more and more 
of. And our charter gives us not just the authority but the 
responsibility to level that playing field for exporters. But 
the Ex-Im Bank cannot act in a vacuum.
    As part of the Executive Branch, I have to be cognizant of 
other considerations, broader legitimate policy concerns within 
the U.S. Government. And so I think this is an issue that we in 
the Government will be facing during the whole course of this 
new charter reauthorization.
    Senator Crapo. Thank you very much. That is all the 
questions I have.
    Senator Sarbanes is here.
    Senator Sarbanes, if you would like to make an opening 
statement and ask questions, you are welcome to do so.

             STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Thank you very much, Mr. Chairman. I 
would like to do that.
    I am not going to be able to stay for the hearing and I 
apologize to these witnesses and I assure them that we will 
carefully review their testimony.
    Mr. Chairman, I want to thank you as the Chair of the 
Subcommittee, and Senator Bayh who is the Ranking Member, for 
arranging for this hearing, and also for a second hearing which 
I understand has been scheduled for later in the month 
concerning the reauthorization of the Export-Import Bank.
    The Bank's charter expires on September 30 of this year. 
And I think it is very important for this Committee to follow a 
schedule that will permit Congress to finish the 
reauthorization process by that date, actually even earlier 
would be better.
    I strongly support reauthorization of the Ex-Im Bank, as I 
have in the past. I have been very much involved in the 
previous reauthorizations. U.S. exporters can compete very 
effectively on the basis of price and quality, but they 
encounter a competitive disadvantage when foreign governments 
provide subsidies to their country's exporters that more than 
balance where our companies find themselves.
    The work of the Export-Import Bank also provides leverage 
to U.S. negotiators attempting to extend international 
agreements to limit the use of government export subsidies. If 
everyone limited them, we would have a different situation, but 
that is not the world in which we find ourselves. And I think 
we have to deal with the real world.
    There is another important reason to support the Ex-Im 
Bank. Some developing economies can pose credit risks from 
which commercial banks shy away, even when the transactions may 
represent significant opportunities for U.S. exporters. By 
evaluating the country risk involved, the Export-Import Bank 
can provide a guarantee for commercial export loans, opening 
the way for an export transaction that would otherwise not 
occur.
    The Bank has handled the risks associated with its 
activities quite well. Its losses are more no more than 2 
percent of its disbursements over its 72 year life. The fees it 
charges for its financing services have brought hundreds of 
millions of dollars into the Federal Government which have been 
returned to the Treasury.
    Obviously, our approach to the Ex-Im Bank should reflect 
whatever progress has been made in controlling the growth of 
exporter credits offered by a national government, but it 
appears that overall funding for the Export Credit Agencies of 
other governments have not declined and may, in fact, have been 
growing although different accounting and funding methods 
sometimes make comparisons difficult.
    In addition, foreign governments may continue to use market 
window and untied aid arrangements to avoid the OECD 
limitations on tied aid.
    In light of the size of our trade deficit and the 
continuing challenges to our trade competitiveness, I was 
disappointed by the Administration's proposal to substantially 
reduce funding for Ex-Im Bank. But we are told that in the 
short-term the Bank will be able to maintain its programs at 
current levels because it will have available carryover funds 
and funds freed up when anticipated transactions are not 
completed. But obviously the Bank is being put right at the 
margin, at the edge, and I am concerned about a possible 
downward trend in the Bank's funding. I do not think we are a 
point in international trading arrangements where a reduction 
in Ex-Im Bank funding is prudent.
    This is especially true if we want the Bank to extend the 
reach of its operations for support of exports by smaller U.S. 
business and exports to developing countries.
    Mr. Chairman, I want to share one other concern that I 
have, and that is that the Treasury Department may be taking an 
unduly intrusive role in the Ex-Im Bank's use of the tied aid 
war chest. I am going to ask about this, but it appears that 
there have not been any transactions from the war chest 
authorized over the past 4 years.
    Now, the Treasury has the legal responsibility to negotiate 
arrangements in the OECD to limit tied aid export credits, and 
that is an important objective. But one of the objectives of 
the Congress in the 2002 reauthorization was to limit the 
Treasury's role in the Bank to the formulation, along with the 
Bank, of general guidelines for tied aid transactions. Case-by-
case decisions about tied aid were to be left to the Bank, 
subject to rejection by the President. This is a complex 
subject, but I think we need to explore it in the course of 
these hearings.
    I said back then, when we did the reauthorization, and I 
want to repeat it, the tied aid credit war chest is a very 
important resource to meet the challenge posed by foreign 
export credits and its use should not be hampered by 
disagreements among Executive Branch agencies.
    Mr. Lambright, let me ask you, how many transactions have 
been financed with funds from the war chest since September 
2002?
    Mr. Lambright. None.
    Senator Sarbanes. None? How do you explain that no war 
chest transactions have been authorized?
    Mr. Lambright. Given the U.S. Government's success over the 
last 15 years to reduce the amount of tied aid use globally, we 
now have a war chest that is a tool to be a deterrent but not 
to be used with great frequency. And as a result, the policy 
parameters surrounding when it would be appropriate----
    Senator Sarbanes. But does it continue to be a deterrent if 
you use it with no frequency?
    Mr. Lambright. That is a good question, Senator, but the 
global use of tied aid has come down. And so on any particular 
case that we assess we need to make sure that it meets all of 
the transactional and policy elements. And the cases that we 
have seen we have pursued, but they have dropped away for a 
variety of reasons, leaving us with no approved transactions, 
as you noted.
    Senator Sarbanes. When does the Treasury become involved in 
any transactions in this case-by-case examination?
    Mr. Lambright. The charter does give Treasury a 
consultative role in the process and they weigh in early in the 
process to assess the proper course of action. Sometimes the 
decision might be to pursue remedies in the OECD. Other times 
it might be to develop information on a case to decide whether 
or not Ex-Im war chest funds would be appropriate to use.
    Senator Sarbanes. Have there been instances in which Ex-Im 
thought that using the war chest was reasonable but it was 
blocked by Treasury?
    Mr. Lambright. I would not say that we put forward a formal 
proposal to use it and it was blocked. The way it works in 
practice is, as we develop a file on a case to answer all of 
the transactional and policy elements sometimes the cases just 
do not come to fruition. Even if at the beginning we would have 
thought that it did meet the criteria, sometimes exporters just 
do not stick it out with us through the whole process.
    And so while there may have been cases that would have fit 
the criteria, we never had any that went all of the way to 
winning an American contract.
    Senator Sarbanes. I mean, you are saying we have the OECD 
limitations and people are adhering to those. But it is my 
understanding that countries are developing all sorts of end 
runs around these limitations. Is that correct?
    Mr. Lambright. We certainly have heard of cases where there 
have been rule violations or new types of government financing 
that we have to deal with. Where there have been clear 
violations is where I think the procedures have worked best.
    We did have one case where there was a violation. Ex-Im 
Bank did make its war chest funds available but ultimately the 
exporter did not win the contract.
    Senator Sarbanes. What can you do to get a better handle in 
terms of knowledge and information about these alternative ways 
of financing that competitor countries are using?
    Mr. Lambright. Just next week, I am hosting my G-7 Export 
Credit Agency head counterparts where this will be a major 
focus of discussion. In our preliminary conversations with 
them, I think what we are seeing is more and more use of these, 
particularly by the Chinese. So we are going to be spending a 
great deal of time next week exploring the details of those 
kinds of financings and how traditional Export Credit Agencies 
can respond.
    Senator Sarbanes. I have to say to you, and I will close 
this line of questioning, it does not seem to me that the Bank 
is standing shoulder-to-shoulder with our exporters the way it 
should be doing in terms of the competition. If it is a level 
playing field out there, than it is up to the exporter to 
compete on price and quality. If that is the basis of it, I 
think our people can do quite well. And if they can do quite 
well then we need to examine why we are falling short.
    But it is my understanding that other countries are 
figuring out all kinds of ways to provide support to their 
exporters and that our people take it on the chin as a 
consequence.
    Mr. Lambright. Senator, I agree with you 100 percent on the 
competitiveness of the U.S. exporter. In terms of U.S. Ex-Im 
Bank with respect other Export Credit Agencies you are right, 
there has been some divergence in the flexibilities that 
various Export Credit Agencies hold.
    Certainly in Europe, many of the Export Credit Agencies 
have been given greater flexibilities to operate effectively 
off budget and that has freed them up to find a number of new 
tools to compete with the emergence of new forms of government 
finance.
    The U.S. Ex-Im Bank is a very traditional Export Credit 
Agency by our charter. We are focused on the U.S. jobs 
associated with exports and so our policies reflect that focus. 
But I can tell you that I personally come to work every day 
thinking about how to help U.S. exporters and keep jobs here in 
the United States.
    And if I see any way that the U.S. Ex-Im Bank can stand up 
on behalf of exporters, I will do that.
    Senator Sarbanes. You keep referencing Europe but my 
understanding is that China, Brazil, India are all engaged in 
these activities as well. Is that correct?
    Mr. Lambright. You are absolutely right and they are 
outside of the OECD and not constrained by the rules that we 
operate by. What I was suggesting is that some of the European 
ECA's are developing flexibility to try to compete with those 
emerging Export Credit Agencies.
    Senator Sarbanes. I know the Chairman asked about this or 
has expressed an interest in it. And that is what can the Bank 
do to strengthen its small business program? Is there a small 
business division within the Bank?
    Mr. Lambright. Just in the last few months, we have taken a 
number of steps to further our small business outreach. We now 
have a new small business unit headed by a Senior Vice 
President that has about a tenth of our staff focused 
exclusively on outreach to small businesses and advocacy within 
the Bank for small businesses. There are a number of other 
steps that we have taken to improve our technology, to 
designate specialists within each Bank division, who will be 
experts on small business.
    So there is a lot we are doing but we strive every day to 
do more and more for small businesses that need our help to 
export.
    Senator Sarbanes. Is the position of Executive Vice 
President and Chief Operating Officer, do you continue to hold 
those positions and Acting President as well?
    Mr. Lambright. Technically, in the paperwork, I suppose my 
title was changed to Acting President but those positions are 
not filled.
    Senator Sarbanes. Not filled?
    Mr. Lambright. Right.
    Senator Sarbanes. Is it the assumption that you will return 
to them because there has now been a nomination for President 
of the Ex-Im Bank; is that right?
    Mr. Lambright. Right, and----
    Senator Sarbanes. Okay, I am sorry. I was misinformed. You 
are waiting.
    Mr. Lambright. I am currently the Acting President of the 
Bank, as well as, just a few weeks ago, have been nominated to 
the position and I await Senate confirmation.
    Senator Sarbanes. I assume those positions will not be 
filled until the Senate acts on your nomination; is that 
correct?
    Mr. Lambright. That is most likely, yes, sir.
    Senator Sarbanes. Okay. Thank you very much.
    Thank you, Mr. Lambright.
    Mr. Lambright. Thank you, Senator.
    Senator Crapo. Again, thank you, Mr. Lambright.
    We appreciate your attention to these issues and coming 
before us today.
    That will conclude our first panel. You are excused, Mr. 
Lambright. We appreciate your attendance.
    Mr. Lambright. Thank you, Mr. Chairman.
    Senator Crapo. I will call up the next panel and while they 
are coming up let me introduce them.
    The next panel, as I indicated at the outset, is made up of 
Mr. Gerald Rama, who is the Senior Vice President and Deputy 
Group Head of Global at PNC Bank; Mr. Al Merritt, President of 
MD International, Inc.; and Mr. John Matthews, the Managing 
Director of Boeing Capital Corporation.
    Gentlemen, if you will please these take your seats at the 
appropriate part of the table as designated, and Mr. Rama, we 
will begin with you.
    I would like to remind all of our witnesses that we want to 
have you--by the way, I wanted to say you provided very 
excellent written testimony. You are not going to be able to 
say it all in 5 minutes but I encourage you to remember to 
watch the clock and then we will get into some good discussion.
    Mr. Rama, you may proceed.

                  STATEMENT OF GERALD F. RAMA

                   SENIOR VICE PRESIDENT AND

               DEPUTY GROUP HEAD GLOBAL, PNC BANK

                          ON BEHALF OF

         THE BANKERS' ASSOCIATION FOR FINANCE AND TRADE

    Mr. Rama. I am pleased to be here today to express the 
banking industry's view on the reauthorization of the U.S. Ex-
Im Bank, particularly since I have had the opportunity of work 
consistently with the Ex-Im Bank over the last 32 years. The 
agency and staff, in my mind, are some of the most committed 
and hard-working public servants.
    The credit support Ex-Im provides is a vital and integral 
component in the competitiveness of American products in the 
international market. Its reauthorization is designed to keep 
American products competitive in the global marketplace.
    My written statement includes comments on a variety of 
topics. This morning I will focus on the two topics I believe 
are the most important, economic impact and domestic content.
    The Export-Import Bank is required to consider the extent 
to which transactions are likely to have an adverse effect on 
industries and employment in the United States. Though the 
rationale for this requirement is understandable I am unaware 
of another ECA that is subject to a similar requirement. In 
most cases, the domestic harm that might result from a 
transaction will occur whether or not the U.S. exporter seeking 
Ex-Im support makes the sale. If the U.S. exporter does not 
make the sale, one of its competitors from another country 
will.
    In evaluating economic impact however, Ex-Im staff does not 
consider the availability of goods from foreign sources. We 
strongly feel that the Bank should take into account whether a 
project will go forward, particularly since we may be limiting 
an exporters ability to be considered a consistent and 
righteous provider in future sales and in this sale.
    We appreciate the mission of the Export-Import Bank and the 
U.S. jobs created through exports. We feel that the Bank has 
adopted an overly restrictive policy of only providing credit 
support for the value of the U.S. content and capital goods 
term sales. The Bank limits its involvement in the transactions 
for the lesser of 85 percent of the value of eligible goods and 
services and 100 percent of the U.S. content in those goods and 
services. If the U.S. export consists of 50 percent U.S.-made 
components and 50 percent non-U.S. made, the Bank support is 
limited to 50 percent of the contract price. This is 
problematic because as the complexity increases in the 
manufacturing processes and the sourcing of components it is 
more difficult to track the levels of sources of non-U.S. 
content.
    This is particularly true for small businesses who lack the 
resources to do such research. Requiring strict proportionality 
results in fewer U.S. exports than could otherwise be achieved.
    Other countries have concluded that strict porportionality 
and less strict accounting for content is not required. For 
example, Japan's ECA does not reduce its support of 
transactions that have at least 30 percent Japanese content and 
Canada decides its level of support on a case-by-case basis. 
Italy's ECA announced in 2004 that it would shift its standard 
from made in Italy to made by Italy. And Ex-Im reported that 
other countries are moving to this approach as well.
    Ex-Im should adopt a case-by-case approach that balances 
the costs and benefits of individual transactions rather than 
adhering to a strict formula that requires precise tracking of 
U.S. content and we urge Congress to express its support for 
that approach as well.
    The Export-Import Bank, I am saying this again, plays a key 
role in helping U.S. businesses of all sizes compete in markets 
around the world. Ex-Im has recently been critiqued as being 
too slow and overly conservative. Within the constraints of its 
budget and resources we feel that Ex-Im Bank and its current 
management is doing a good job, particularly as the staff has 
lost experienced personnel through attrition. But improvements 
can always be made.
    We believe the Bank is hampered by having too few people 
and too many requirements imposed on it by Congress and by the 
Government requiring seasoned staff to do that work that do not 
relate to its primary mission. We urge Congress to provide the 
Bank with significant additional resources in its 
administrative budget and to act on our recommendation to 
reduce the Bank's administrative burdens.
    We look forward to continuing to work with Members of 
Congress and with the Bank to maximize its effectiveness in 
promoting American exports.
    Thank you.
    Senator Crapo. Thank you very much, Mr. Rama.
    Mr. Merritt.

               STATEMENT OF JAMES ``AL'' MERRITT

                       PRESIDENT AND CEO,

             MD INTERNATIONAL, INC., MIAMI, FLORIDA

    Mr. Merritt. Thank you, Chairman Crapo and Senator Bayh and 
Members of the Subcommittee. Thank you for asking me to appear 
here today. This is a thrill for a small business owner from 
Miami to come up here to Washington and be in this fancy room. 
So thank you.
    Senator Crapo. We welcome you here.
    Mr. Merritt. I am Al Merritt, President, Owner, and Founder 
of MD International, a small business based in Miami, Florida. 
We export medical equipment and services, primarily to Latin 
America.
    MD International has used Ex-Im Bank financing on numerous 
occasions during our 19-year history. In 2003, we had the honor 
of being named Ex-Im Small Business Exporter of the Year, which 
was very thrilling with a ceremony here in Washington, DC.
    We are proud of the relationship we have had with Ex-Im and 
we look forward to working with them in the future.
    I also appear here as a board member of the Small Business 
Exporters Association of the United States. SBEA is the 
Nation's oldest and largest nonprofit association of small and 
mid-sized companies.
    We had a meeting in Miami in my offices 2 weeks ago and 
people flew in from around the country from our association to 
prepare for this and discuss the issues, so I am truly speaking 
for the association as well as my own company.
    SBEA represents the more than 22,000 companies of the NSBA 
that export. The NSBA is the National Small Business 
Association that has 22,000 members in the United States.
    As in prior years, SBEA and NSBA strongly support the 2000 
reauthorization of the Ex-Im Bank by Congress. We are 
optimistic about Ex-Im's future under the leadership of Jim 
Lambright and we appreciate the open and honest dialogue that 
we have had with him thus far and the other Ex-Im Bank board 
members and the Ex-Im Bank senior management.
    A strong Ex-Im Bank is very much in the interest of smaller 
companies and the Nation as a whole. Ex-Im is not simply the 
bank of last resort but for many small exporting companies it 
is the bank of only resort.
    Yet while we honor Ex-Im Bank for financing billions of 
dollars in export sales by smaller companies, we also want to 
offer some recommendations for improving the Bank's performance 
in a rapidly growing globalizing and competitive world.
    This subject is treated extensively in my written 
testimony, which I will simply summarize.
    First, we backed the mandate enacted by Congress in 2002 
that Ex-Im devote 20 percent of its financing dollars strictly 
to small business. The 20 percent mandate remains a reliable 
indicator of the Bank's focus on small business and the 
effectiveness of its efforts.
    The Bank exceeded this mark several times in the 1990's and 
it reached 19 percent or better several times since. The fact 
that the Bank has fallen below the mandate since 2002 is no 
reason to change this measurement.
    SBEA believes that the Bank can achieve the 20 percent 
mandate consistently if it organizes its efforts under a small 
and medium-size enterprise division comparable to the highly 
successful ones at the Overseas Private Investment Corporation 
and the Canadian Export Credit Agency. Ex-Im needs permanence 
and stability in its SME operation.
    By our count, Ex-Im has had 15 major changes in the 
structure, leadership, and responsibilities of its small 
business operations just in the past 10 years. Ten of those 
changes have occurred since the last reauthorization. I think 
that is a key point.
    At various points since 2002, a Group Vice President, a 
Senior Vice President, a Vice President, and an Office Director 
have headed the Bank's small business organization.
    At times since 2002, the operation has reported directly to 
the Bank President, at times to lower middle management figures 
and at times there has been no small business office at all.
    During periods when the Bank has had a designated small 
business operation its responsibilities have fluctuated 
considerably, as has its authority to make decisions about 
transactions. Normally, we prefer to let Ex-Im Bank handle 
small business on its own and we certainly commend Chairman 
Lambright and the Bank's management staff for the effort that 
went into the recent Small Business Committee proposal. But on 
this point the Bank needs some additional Congressional 
guidance, in our opinion.
    The commercial banking community, exporters, and the Bank 
staff need to know that the small business operation is 
permanent and stable. They need transparency and a sustained 
focus. Congress needs clear accountability. We recommend that 
Congress create a small and medium-sized enterprise division at 
Ex-Im Bank. We recommend that the division handle all of Ex-Im 
small business financing and credit decisions, that it have 
full-time staff including underwriters dedicated exclusively to 
small business transactions and that the head of the division 
report directly to the Ex-Im Bank board.
    A similar structure has helped OPIC go from $10 million in 
small business financing in 2001 to $347 million in 2005. It 
lifted Canada's Export Credit Agency from dealing with less 
than 500 SME's to dealing with 7,000, one-fifth of Canada's 
exporting companies. Ex-Im deals with about 1 percent of the 
SME exporters in this country.
    We suggested two ways that Ex-Im can use this proposed SME 
division to increase U.S. exports. First, it can focus on the 
60 percent of SME exporters who are only shipping to one 
country and encourage them to ship to two or three. The 
Commerce Department can help Ex-Im with this.
    Second, Congress can direct Ex-Im to begin delegating 
authority for medium-term transactions to commercial banks and 
export finance institutions. Medium-term financing covers 
periods of 6 months to 7 years. It is what buyers of U.S. 
manufactured capital equipment want. Those capital equipment 
exports offer the quickest payoffs in high-paying jobs at home, 
trade deficit reduction, and benefitting for U.S. 
manufacturing.
    Yet, while SBA delegates authority for its small export 
finance transactions and OPIC is delegating authority for its 
larger transactions, and even Ex-Im itself delegates authority 
for other transactions, the Bank still does all of the nuts and 
bolts work for medium-term transactions at its headquarters.
    One consequence is that medium-term transactions take 
inordinate amounts of time, sometimes more than a year. The 
slow paperwork, heavy process is costing our country important 
export sales.
    Giving commercial banks more authority to move these 
transactions along subject to final Ex-Im approval would be 
enormous benefit to exporting companies of all sizes.
    That concludes my remarks and I would be happy to take any 
questions.
    Senator Crapo. Thank you very much, Mr. Merritt.
    Mr. Matthews.

                   STATEMENT OF JOHN MATTHEWS

         MANAGING DIRECTOR, BOEING CAPITAL CORPORATION

                          ON BEHALF OF

           THE NATIONAL ASSOCIATION OF MANUFACTURERS,

            THE NATIONAL FOREIGN TRADE COUNCIL, AND

          THE COALITION FOR EMPLOYMENT THROUGH EXPORTS

    Mr. Matthews. Mr. Chairman and Members of the Subcommittee, 
I am John Matthews, Managing Director of Boeing Capital 
Corporation, the financing arm of the Boeing Company.
    We at Boeing and the other members of NAM, NFTC, and CEE 
strongly support the reauthorization of Ex-Im Bank. Each year, 
Ex-Im Bank supports some 3,000 overseas sales of American-made 
goods and American-provided services. During fiscal year 2005, 
Ex-Im issued $13.9 billion in financing, mostly guarantees and 
insurance of commercial loans. That financing supported $17.8 
billion in U.S. exports. Those export sales, in turn, supported 
thousands of jobs for American workers.
    Most of these transactions are sales by small and medium-
sized companies. But even for large corporations like Boeing, 
Ex-Im Bank plays an essential role not only for our 50,000 
commercial aircraft employees but also for our 26,000 U.S. 
suppliers and vendors throughout all 50 States.
    In 2005, the Boeing Company purchased approximately $5 
billion from more than 11,500 small business suppliers in the 
United States. Of that total our commercial unit, Boeing 
Commercial Airplanes, paid $1.4 billion to over 2,900 American 
small businesses.
    Today, I would like to focus on three key points. One, 
financing is the key element of global competition. Two, Export 
Credit Agencies are growing around the world. And three, Ex-Im 
Bank is financially sound.
    First, financing. Traditionally, companies competed on 
product quality, price, and service. In today's world, 
financing is an increasingly important competitive element. Ex-
Im Bank has two central missions: To level the playing field 
first when U.S. exporters are confronted with competitors that 
have ECA financing; and second, when commercial banking is not 
available. Each year, 70 percent of all Boeing's commercial 
aircraft sales are to overseas customers. Historically, 30 
percent of these Boeing exports have relied upon Ex-Im to 
provide loan guarantees. In fiscal year 2005 alone, Ex-Im 
authorized financing to support the export of 78 Boeing 
commercial aircraft to 19 airlines located in 18 different 
countries around the globe, including nations in Africa and 
Latin America. This represented 33 percent of all of our 
exports for that year.
    Second, Export Credit Agencies. Virtually all trading 
nations operate Export Credit Agencies. The most recent data 
show that ECA financing is increasing worldwide. Last October, 
the International Union of Credit and Investment Insurers, the 
Berne Union, reported that its 52 member ECA's executed a total 
of $788 billion in financing during 2004, the highest total 
ever measured.
    That total approaches 10 percent of global trade flows in 
that year. Even more telling, the 2004 total marked a 60 
percent increase over the 2001 level of $470 billion. While the 
structure of ECA's varies from country to country, virtually 
all operate in close corporation with their national government 
and most operate with government financial support of some 
type.
    Faced with that financial backing for its foreign 
competitor, no U.S. company, no matter how large, can compete 
on its own. When foreign ECA support is present, we must have 
the backing of Ex-Im Bank.
    Third, Ex-Im Bank is financially sound. At the end of 
fiscal year 2004, the most recent public data, Ex-Im Bank had a 
total exposure of $61.1 billion. Against that exposure the Bank 
had $9.6 billion in reserves, a very strong reserve position.
    Exporters and our overseas customers pay fees for Ex-Im's 
participation in overseas sales, which in the last several 
years have covered the Government's costs of operating the 
Bank.
    Ex-Im charges interest on its direct loans and premiums for 
its guarantees and insurance. Ex-Im does not subsidize interest 
rates. In financial terms, Ex-Im's commercial role is in 
mitigating risk, especially in markets where commercial 
financing is not available.
    Specifically in aircraft transactions, Ex-Im generally does 
not provide direct loans. Rather, Ex-Im guarantees that if the 
airline customer defaults on the loan, Ex-Im will assume the 
financial liability. These guarantees make it possible for 
certain foreign airlines, especially in developing countries, 
to secure commercial bank loans they might otherwise not 
qualify for at those commercial banks. Ex-Im has not incurred 
any losses on its commercial airplane guarantees over the past 
15 years. This is a real testament to the continuing effective 
due diligence performed by the Bank before it provides 
guarantees to foreign airlines.
    According to the Bank's Annual Report, Ex-Im generated a 
net income of $2 billion during fiscal year 2004 through its 
interest charges, premiums, and fees. Unfortunately, under the 
Credit Reform Act of 1990, the Bank cannot utilize its own 
revenues to cover its costs. Instead, the Bank must obtain 
annual appropriations for both its operating expenses and its 
loan loss reserves. As a result, the Bank is handicapped by the 
Government's own budget rules.
    In conclusion, Mr. Chairman, I want to thank you for the 
opportunity to testify today. The Bank is indispensable to 
Boeing and has been innovative and reliable in times of crisis, 
such as the financial markets' retrenchment in the aftermath of 
September 11. It is critical to our ability to compete against 
a subsidized competitor while sustaining high-paying U.S. jobs.
    We commend this Committee for its timely consideration of 
Ex-Im Bank's reauthorization, and we urge that the Committee 
act expeditiously to report the reauthorization bill to the 
Senate so that Congress can complete the legislative process 
prior to the September 30 expiration of the Bank's charter.
    I would be happy to answer any questions.
    Senator Crapo. Thank you very much, Mr. Matthews. And again 
to each of you, I thank you for not only your testimony here 
today but also the written testimony that you have provided, 
which has gone into a number of issues in more detail that you 
have been able to do in your comments and it will be very 
helpful to us.
    I want to just start out with you, Mr. Rama. I was 
interested in both your discussion of the economic impact and 
the domestic content issues. Starting out with domestic 
content, could you review with me again just what the U.S. rule 
is, what is required?
    Mr. Rama. We will only support on term capital goods, 
capital goods sales, medium-term not short-term up to the U.S. 
content with the foreign content being no more than 85 percent. 
So that if you have a $100 million sale, $60 million of which 
is U.S. made, $40 million is non-U.S. made, Ex-Im will only 
support the $60 million level.
    The second problem with the U.S. content is you have many 
small businesses that do not know what the sources of their 
primary material are and are unable to complete the forms 
necessary to access Ex-Im Bank. There is a major supplier in 
the Pennsylvania area of rebuilt carburetors employing 
thousands of people, selling both domestically and 
internationally, that cannot tell you where the original 
carburetor came from or where the original auto part came from 
and cannot access to Ex-Im.
    Senator Crapo. I was interested in, was it Japan or Italy 
that was changing----
    Mr. Rama. All of the above.
    Senator Crapo. They are doing made by as opposed to made 
in.
    Mr. Rama. That is correct.
    Senator Crapo. The notion there is that if the manufacture 
takes place there that they are not focusing so much on where 
the individual parts came from.
    Mr. Rama. We stand, as a bank, PNC--and I am representing 
BAFT, but I can speak specifically for PNC. We were the most 
active in the number of transactions in medium-term 
transactions with Ex-Im last year. We devote inordinate amounts 
of time working with exporters and with Ex-Im trying to figure 
out whether the goods qualify. Sometimes they simply do not and 
it is a lost sale and a lost financing.
    Senator Crapo. What is the source of the U.S. domestic 
content rule? Is that in statute?
    I see someone behind you shaking their head yes.
    So basically, the Ex-Im Bank is operating under a statutory 
requirement that they deal with these----
    Mr. Rama. I think the reality of the global marketplace, 
that particular issue, people simply do not know where their 
primary products when they are manufacturing is coming from. 
And they are being asked to make an attestation and oftentimes 
they simply cannot. The bigger companies can because they have 
the research, et cetera. The small companies simply cannot. And 
sales are lost and opportunities are lost, in our mind.
    Senator Crapo. I suppose that one of your recommendations 
would be regardless of whether this is a statutory requirement 
or not, we should probably address the question as we deal with 
reauthorization?
    Mr. Rama. Yes, sir.
    Senator Crapo. Thank you very much.
    Let us move to your discussion of economic impact, as well. 
You indicated in your testimony that your concern with it was 
that even in those cases--and let me get to it--where if a U.S. 
exporter does not make the sale, one of its competitors from 
another country will.
    Mr. Rama. That is correct, sir. That is our opinion.
    Senator Crapo. I underlined your, as I was reading it, the 
notion that the competitor from another country will. How does 
the Ex-Im Bank make that determination with confidence, that 
another competitor from another country will be the one that 
steps in and makes that sale?
    Mr. Rama. In my mind, there is a partnership with Ex-Im 
Bank and it is a tripartite partnership with the importer, the 
exporter, and oftentimes the Bank. When the importer is saying 
I can buy this product elsewhere and they are showing you a 
quote, I think that answers the question.
    Certainly, I am not doing major financing in my own bank, 
but we have been involved with issues involving economic 
impact. And when we lost that sale, when the U.S. company lost 
the sale, the project was made anyway.
    In talking at--I am a member of BAFT, which is part of the 
ABA--our last Trade Finance Committee meeting it was generally 
stated that no one could say one project that was not done by 
Ex-Im because of economic impact that was not done anyway with 
sourcing from other places.
    It becomes also problematic when that supplier is further 
deemed to be unreliable in the global marketplace because the 
importers do not know whether Ex-Im will support them.
    Senator Crapo. I understand the points you are making and I 
also see the potential problem if the United States began 
subsidizing or supporting transactions that truly are 
competitive with the U.S. producer, if there is a U.S. producer 
who could fill that order. And it seems to me that that is an 
issue we want to address because, as you indicate, if in fact 
the transaction will take place with a non-U.S. producer no 
matter what, that is pretty relevant. But on the other hand if, 
in fact, a U.S. producer has the most likely opportunity to 
pick up a transaction if we do not finance it from some other 
source, that should be a very relevant factor in the Ex-Im Bank 
deliberations.
    And so somehow we have to get to a median level here where 
we are analyzing the right things and making the determinations 
on the right basis. I understand your point.
    Mr. Rama. And I agree, sir, the question is particularly 
difficult. But again I think the research will prove, at least 
from the banker's perspective, that the deals are getting done. 
However the resolution occurs, I do not have an answer. I am 
simply raising the point.
    Senator Crapo. Thank you very much.
    Mr. Merritt, I would like to turn to for a moment. You are 
a very strong and eloquent advocate for the small business 
mandate. There are some who say that the calculation of how we 
hit the 20 percent is not been made or does not take into 
consideration the small business benefits from a lot of other 
transactions that are considered to be large transactions and 
so forth.
    To me, one of the facts that was the most significant about 
the testimony of Chairman Lambright was that no small business 
loan had been denied on a budget basis. In other words, if they 
had been denied it was on other grounds. What does that say to 
you?
    Mr. Merritt. I do not really know how they calculate those 
numbers. I think that if Boeing has small business suppliers to 
them, I believe that they included those in that 20 percent.
    They do not? Okay, so I really do not know how they make 
those calculations.
    I understand that about 28 percent of all U.S. exports are 
made by small companies, companies with less than 500 people. 
And the Bank has no office to support those transactions, with 
no authority to make credit decisions.
    Senator Crapo. I also found or have significant interest in 
your suggestions as to this office that you would like to see 
the Bank establish. You went into this a little bit in your 
testimony and I would like you to expand on it.
    Chairman Lambright has taken some steps in that direction 
and has established this new unit that will report and has a 
person with I think the same level of seniority in the company 
that you were recommending. What are your thoughts about what 
they have done so far and what, in addition to that 
specifically, do you think that we would need to encourage them 
to do?
    Mr. Merritt. I think, with all respect, that started 2 
months ago immediately prior to the Bank's reauthorization. 
There has been 15 changes, 10 in the last 5 years. So, I really 
do not think that the Bank is structured competitively for the 
people like us in a small business.
    I think the best way to measure things is by comparison. In 
Canada, as a comparison, their Ex-Im Bank equivalent financed 
$57 billion in export transactions and of those, $11 billion 
were small business. Our bank did $18 billion and of those $2.7 
billion were small business. Canada's economy is one-seventh 
the size of our economy.
    The reason that the Bank has been so successful is about 10 
or 12 years ago they set up an office like what we are asking 
the Bank to do, which is dedicated to small business, a 
separate team of people with a career track, with authority to 
make credit decisions that structure for small businesses, for 
this 28 percent of our economy, 28 percent of the exporters 
that are represented by small businesses. Our Bank does not 
have an office like that.
    Senator Crapo. So basically your point is that there is 
plenty of fertile ground out there for these types of loans if 
we can simply----
    Mr. Merritt. You better believe it. I can tell you, many 
companies like our size, we do not have the time to go through 
the process and try to figure out who we should talk to this 
year at the Bank.
    We were talking about the tied aid before. It is a very 
similar situation with tied aid. When we see tied aid cases, 
the effort that it takes a small business, a company with $10 
million, $20 million, or $30 million in sales to fight that 
battle in Washington, we just do not have the ability to do 
that.
    If we had an advocacy office in the Bank that looked after 
our interests, that came to know us as clients, it would be a 
very different story, I believe.
    We made some calculations yesterday and the small business 
exporters, if we only increase 10 percent the amount that they 
are exporting, it will take a $280 billion bite out of our 
Nation's $700 billion deficit. We have an enormous problem in 
this country, and this Bank is a key element in the solution, 
along with Commerce Department and trade promotion, to solve 
that problem.
    Senator Crapo. Thank you very much. I appreciate that.
    Mr. Matthews, in your testimony you talked a little bit 
about the way in which we handicap the Ex-Im Bank by our own 
budget rules. Your point, if I understand it correctly, and I 
would like you to explain it to me a little bit, is that the 
Ex-Im Bank generates a significant amount of income through its 
interest charges, premiums, and fees. And yet it is not allowed 
to use those varied resources, its own revenues, to cover its 
own costs. And it has to come back to Congress on an annual 
basis to get appropriations and so forth.
    First of all, tell me if I have explained the issue 
correctly and clarify it a little bit, if you would like to.
    But also, would you recommend that we change the operations 
of the Bank so that we allow them to use their own revenues for 
these costs and then to engage in more transactions?
    Mr. Matthews. Thank you, Senator.
    Yes, as I mentioned, the Bank generated over $2 billion in 
fees and interest in 2004, and that was more than enough to 
cover its costs of operation. So we believe that if the Bank is 
able to retain those earnings and revenue over time the surplus 
would grow and they would be able to do more business without 
imposing any financial impact on the Government.
    As far as whether we would recommend changing that, I think 
we would but we would like to get back to you in writing with 
more detail on that.
    Senator Crapo. Certainly, and I appreciate that.
    Let me say to the entire panel, just because of time I am 
going to have to wrap up here. There is a lot of questions on 
each one of your testimony that I would like to pursue further 
with you, although the testimony itself is very helpful. And we 
can go into a number of the aspects of it simply with your 
written testimony.
    But I would encourage you, if there are additional points 
or if you want to clarify or enhance anything or any points 
that you have made, please do not hesitate to submit further 
supplemental testimony to us if you will, as we move forward.
    We are going to hold another hearing on the economic impact 
issues specifically, but just in reviewing your testimony I 
have seen a number of other issues I personally was not aware 
of and will be very interested in pursuing.
    So again, thank you for the time and effort that you have 
put into preparing you written and your oral testimony today 
and your interest in the Bank. I do know that although each of 
you have raised issues about how we can improve and strengthen 
the system, each of you have very strongly indicated that we 
should proceed expeditiously with the reauthorization of the 
Bank and try to strengthen it because it is a very key part of 
our competitiveness globally. And I want to let you know that I 
agree with that. I believe our whole panel, our whole 
Subcommittee, and full Banking Committee agrees with that. And 
we just need to figure out the things that we need to do to 
improve and strengthen the operations of the Ex-Im Bank.
    So with that, again I thank you all for coming and this 
hearing will be adjourned.
    Thank you.
    [Whereupon, at 11:15 a.m., the hearing was adjourned.]
    [Prepared statements and additional material supplied for 
the record follow:]
             PREPARED STATEMENT OF SENATOR MICHAEL B. ENZI
    I would like to thank Senator Crapo for scheduling this important 
hearing on the reauthorization of the Export-Import Bank. I also want 
to thank Mr. James Lambright, acting Chairman and President of the 
Export-Import Bank, Mr. Gerald Rama, Mr. Al Merritt, and Mr. John 
Matthews for agreeing to testify today.
    As the official export credit agency of the United States, the 
mission of the Export-Import Bank is to assist in the financing of 
goods and services from the United States for export. Since the Bank 
operates under a renewable charter that is authorized through September 
2006, it is important that the process for reauthorization begin and I 
applaud the work of Senator Crapo for holding this hearing.
    I am a strong supporter of encouraging U.S. exports abroad. By 
expanding our Nation's ability to export, we are in turn creating more 
jobs and stimulating the economy here at home. It is clear that some 
businesses cannot obtain the funding necessary to expand their export 
business without the financial support of the Export-Import Bank. In 
addition, as a former small businessman, I am particularly supportive 
of the small business lending mandate that was increased in the 2002 
reauthorization. I hope that the Bank will work with the small business 
community to encourage additional applications. I also hope that small 
businesses are receiving the support they need from the Bank in order 
to increase their ability to export.
    One issue that I have major concerns with is the economic impact 
determination. As you know, when the Board of Directors reviews an 
application, the Board will look to see if the benefits of approving 
the proposal outweigh the costs. It is my understanding that the Board 
will only look at the benefits/burden analysis during the repayment 
period. By only looking at the economic impact during the repayment 
period, the Board is receiving a skewed version of just how detrimental 
certain loans can be to the U.S. economy. The Bank is currently 
reviewing an application to finance the export of refurbished 
locomotives to a soda ash facility in Kenya. I am strongly opposed to 
this application. If approved, U.S. taxpayers will be subsidizing a 
soda ash facility overseas that will be in direct competition with 
domestic soda ash producers. Soda ash, which is a primary raw material 
in the manufacture of glass and detergents, is America's largest 
inorganic chemical export. About 90 percent of soda ash production in 
the United States is located in my home State of Wyoming. This industry 
is a crucial supplier of jobs and economic expansion in communities 
throughout Wyoming. By aiding this facility in Kenya, the Export-Import 
Bank would be supporting a company that is a direct competitor of U.S. 
companies in the soda ash export market.
    Under the application discussed above, the Board will only review 
the costs associated with increasing global production of soda ash over 
6 years, or the life of the loan in question. It is clear that 
refurbished locomotives can be used for far longer than the 6-year 
period. By limiting the economic impact period to the life of the loan, 
the Bank is giving its economic support to projects that in the long-
run will have a detrimental impact on the U.S. economy. This practice 
must change.
    This proposal is one example of the flaws in the current economic 
impact process. Under its own Economic Impact Fact Sheet, the Export-
Import Bank stresses the fact that its charter requires that the Bank 
``assess whether the extension of its financing support is likely to 
yield a net adverse economic impact on U.S. production and employment 
or would result in the production of substantially the same product 
that is the subject of specified trade measures.'' In order to ensure 
that the Bank is not approving applications which would adversely 
affect the American economy, the Bank must look at the economic impact 
of a proposal over a timeframe that is similar to the life of the 
export.
    As the Banking Committee considers the reauthorization of the 
Export-Import Bank, I urge my fellow Members of this Committee to 
ensure that the Bank is upholding its duty to properly balance the 
benefits of an application with any negative economic impact on the 
U.S. economy.
    Thank you again to Senator Crapo for holding this important hearing 
today.
                               ----------
                PREPARED STATEMENT OF JAMES H. LAMBRIGHT
                     Acting Chairman and President
                Export-Import Bank of the United States
                             March 8, 2006
    Mr. Chairman, Senator Bayh, Members of the Subcommittee, I am 
pleased to be here today to testify on the 2006 reauthorization of the 
Export-Import Bank of the United States (hereinafter Ex-Im Bank, or 
Bank). Ex-Im Bank was originally chartered in 1934 and has played an 
active role in assisting in the financing of U.S. exports ever since. 
The mandate of the Bank as expressed in our charter is to create and 
sustain U.S. jobs by supporting U.S. exports that otherwise would not 
go forward. And while there are many issues pertaining to Ex-Im Bank 
policies that I will discuss in this testimony, that mandate remains at 
the core of why the Bank exists and why it should be reauthorized.
    There is little argument that we are living in a very competitive 
global economic environment, and there are many instances when our 
exporters cannot be left to go it alone if we are to sustain the well-
paying jobs behind those exports. In this kind of environment, the 
United States cannot afford to unilaterally disarm. The specific role 
of the Bank is to help provide export financing in instances where 
otherwise creditworthy transactions would not go forward. That can 
occur when private sector banks find a market or a buyer too risky for 
commercial financing, or when the export credit agencies of other 
countries offer support to their exporters in order to secure a sale 
for their workers and industries.
    Make no mistake about it--I believe that U.S. workers make goods 
and services that can more than match the price and quality of any of 
our major competitors. But when other export credit agencies such as 
COFACE of France, Hermes of Germany, or ECGD of Great Britain offer 
financial support to their exporters, Ex-Im Bank steps in to ``level 
the playing field'' for our exporters and our workers. We want to make 
it possible to keep those jobs here in the United States.
    We do this by offering direct loans to foreign buyers of U.S. goods 
and services, guaranteeing commercial bank loans to those same buyers, 
guaranteeing working capital loans to U.S. exporters to make it 
possible for them to make the exports and offering insurance policies 
so exporters, especially small business exporters, can offer extended 
payment terms to their foreign buyers. It is through working capital 
guarantees and our insurance policies that we do the great bulk of our 
small business transactions, a topic I will discuss in depth below.
    The Congress, through our charter, has offered us clear guidance on 
how to meet our mandate. I liken it to steering a ship between two 
beacons. One beacon represents the benefits we offer to U.S. workers 
and exporters when we assist in the financing of exports that otherwise 
would not occur, while the other represents the risks associated with 
credit. Over the years, those exports have helped to sustain U.S. jobs, 
jobs that on the average offer higher wages than nonexport jobs. Since 
our 2002 reauthorization, we have authorized $47.9 billion in financing 
support of an estimated $63 billion in U.S. exports. Some of those have 
been big ticket items such as aircraft or power generation equipment. 
But over 80 percent of those transactions have been made available to 
directly support small business exports.
    But we adhere just as strictly to the other beacon--the one that 
represents assuming reasonable risk and responsible stewardship of the 
resources provided by taxpayers necessary to bear those risks. The 
beacon of risk is ``reasonable assurance of repayment,'' a term 
Congress has explicitly put in our charter as our standard for making 
credit judgments. Once we decide to finance a transaction, we set aside 
a ``loss reserve'' to cover expected future losses. This reserve is 
provided for by the appropriations for our ``program budget,'' which 
represents the taxpayers' contribution necessary to, when added to fees 
paid by our customers, serve as an estimated loan loss reserve against 
expected losses on transactions underwritten in a given year. So the 
taxpayers assume the risk represented by the program budget and also 
provide for our administrative budget. The results have been a bargain. 
Currently, every taxpayer dollar invested in the Bank's program and 
administrative budgets makes financing available for over $50 in U.S. 
exports. The overall loss rate for Ex-Im Bank over the course of its 
history has been less than 2 percent. That compares favorably to rates 
for commercial banks. Loss rates vary between markets and products, and 
we keep a close eye on what is occurring with every type of 
transaction. We believe Ex-Im Bank's financial success is attributable 
to (i) productive international negotiations to create a level playing 
field with other Organisation for Economic Co-operation and Development 
(OECD) countries, (ii) responsible credit underwriting standards that 
seek reasonable assurance of repayment and (iii) rigorous management of 
our portfolio.
    The conclusion is that we are conscientious fiduciaries of 
taxpayers' dollars. When we manage to steer a course between the 
beacons of supporting exporters and workers on the one hand, and 
assuming reasonable risk on the other, we are of real benefit to the 
U.S. economy.
    Congress also guides us on some course refinements along the way. 
It has instructed us to make 20 percent of our financing authority 
available for small business transactions, and though the 20 percent 
has never been fully realized, we have never turned down a small 
business transaction due to lack of resources. We are still seeking the 
best course to steer in order to maximize support for small businesses, 
within the context that Congress has instructed us to be a demand-
driven institution and not to compete with the private sector. We are 
happy to follow Congress' guidance on that issue. Congress has also 
told us to include efforts to promote exports to sub-Saharan Africa. As 
a result, Ex-Im Bank supported 115 transactions in 20 countries in the 
region, totaling $461.8 million, a 36.4 percent increase over the 
fiscal year 2004 volume. In addition, Congress told us to support 
exports from businesses owned by women and minorities, which I will 
discuss later.
    I was privileged to become Acting President and Chairman in July 
2005, and I am happy to continue in that role until the Senate acts on 
my nomination to be President and Chairman. If I am confirmed, I will 
continue to steer the Bank between those beacons, to keep an even and 
predictable course. But I won't be able to do it by myself. I will need 
the help of our very capable Bank staff, upon whom all Board members 
depend for the vital information that makes it possible for the Bank to 
function. Moreover, I want to emphasize that the Chairman and President 
of the Bank cannot act in isolation from the other Board members and 
expect to have an effective, smooth-running institution. I depend upon 
my fellow Board members for advice and counsel right now, and I can 
promise that I will continue in that practice if I am confirmed. That 
includes assuring that members of the Board have access to all of the 
information available on transactions and Bank policies, and have 
access to Bank staff to supply that information. That is the way I work 
now, and that is the way I will work in the future, if confirmed.
    In the 8 months I have held the position of Acting President and 
Chairman, and the 4 years I served on the staff level at the Bank, I 
have participated in Bank decisionmaking and become familiar with Bank 
policies. The Administration's decision not to request any substantive 
changes in the policies laid out in our charter is appropriate to our 
needs. Although the role and need for official export credit are 
constantly evolving in the face of the changing nature of export credit 
competitors (from France and Japan to China and Brazil) and the massive 
flows of private capital into the emerging markets since 2000, we at 
Ex-Im Bank believe the current charter language provides the 
institution with sufficient powers and flexibility to adjust our 
programs and policies to meet those challenges.
    We are requesting an extension of the charter for 5 years, to 
September 30, 2011. We are also requesting that our existing authority 
to approve dual-use transactions, as well as the life of the Sub-
Saharan Africa Advisory Committee, be extended to that same date.
    Ex-Im Bank currently has the authority to approve transactions 
supporting the financing of dual-use exports as long as the items are 
of a nonlethal nature and are used primarily for civilian activities. 
While not widely used, that authority is important to some of our 
exporters. And the Sub-Saharan Africa Advisory Committee has proved to 
be a valuable source of knowledge to the Bank as we attempt to increase 
our exports to this important part of the world that offers great 
potential for our exporters.
Appropriations
    For fiscal year 2007, Ex-Im Bank is requesting $26.4 million for 
its program budget. When added to other available budget authority, 
that will give us a total estimated program budget of $176.5 million. 
We further estimate that it will allow us to authorize financing of 
approximately $17.5 billion in support of $22.5 billion in U.S. 
exports. From fiscal year 2002 through fiscal year 2005, the Bank has 
authorized financing of $48 billion in support of U.S. exports using 
$1.6 billion in program budget. That is a bargain for the U.S. 
taxpayer.
    The Administration is also requesting $75.2 million for our 
administrative budget, compared to $72.5 million enacted for fiscal 
year 2006. This pays for every aspect of our operations, from salaries 
to rent. I would like to emphasize that it is the administrative budget 
that is most important for our small business initiatives. It covers 
our outreach efforts and technological upgrades.
Small Business
    Since I was appointed Acting President and Chairman about 7 months 
ago, no topic has received more attention at Ex-Im Bank than small 
business. We have been working with Congress on its concerns as well as 
with the U.S. Government Accountability Office (GAO) as they prepared a 
report on how we interpret our small business legislation and account 
for our small business transactions. We have conferred with small 
business representatives on changes I am about to discuss. And while I 
cannot say we have reached total agreement on all issues with all of 
the parties involved, we are embarking on major changes in our 
administrative structure with the purpose of continuing to increase our 
support for small businesses.
    I say continuing to increase because we have already laid a strong 
foundation for growing our small business program. In fiscal year 2005, 
Ex-Im authorized 2,617 transactions that were made available for the 
direct benefit of small business, compared to 2,154 in fiscal year 
2002, which represents a 21 percent increase. In terms of dollar 
volume, the Bank supported $2.66 billion in small business transactions 
in fiscal year 2005 compared to $1.8 billion in fiscal year 2002, a 47 
percent increase. And the Bank's Working Capital Guarantee Program, 
which benefits primarily small business exporters, had a record year in 
fiscal year 2005. Of the Bank's total Working Capital authorizations of 
$1.096 billion, 78 percent, or $850 million, directly benefited small 
business exporters.
    While I recognize that we have been making progress, I am also 
aware that there is room for improvement. As I stated above, Congress 
has placed in our charter the mandate to make available 20 percent of 
our resources for direct support for small business. We have 
consistently made these resources available but they have never been 
utilized at the 20 percent level. We feel the way to move to the 20 
percent level and beyond is to improve our outreach programs in order 
to increase demand. I have appointed John Emens to the new position of 
Senior Vice President for Small Business to manage his own unit, a 
staff focused solely on small business outreach. He will report 
directly to the President and Chairman of the Bank. The person holding 
the position of Senior Vice President will serve as the primary small 
business advocate on the staff level, and will of course work closely 
with the Board member given responsibility for small business matters. 
In addition, the Bank's regional offices in New York, Florida, 
Illinois, Texas, and California are now dedicated exclusively to small 
business outreach and support. Since his appointment in August as Vice 
President for Small Business, Mr. Emens has had a total of 129 meetings 
with, and sales calls to, small businesses.
    Because the new Senior Vice President for Small Business is 
responsible to the President and Chairman for outreach to small 
business, and therefore has the lead responsibility for increasing the 
number of our small business transactions and the overall dollar amount 
of those transactions, we are separating those responsibilities from 
Bank personnel who are responsible for actually processing the 
transactions--that is, those in what we call the ``business units.'' 
That reflects what we do for all businesses, large and small, within 
the Bank. It is part of our credit culture, and reflective of the 
culture in the private sector, that those who must objectively evaluate 
credit not be the same as those responsible for business outreach.
    However, I want to assure you that small business transactions are 
processed only by personnel experienced in small business and who are 
sensitive to the special needs of the small business exporter. To 
further enhance our services to small business, I have designated all 
such employees throughout our business units as ``small business 
specialists,'' so that when representatives of small business come into 
the Bank to discuss their transactions, they will interact with 
personnel who are familiar to them and knowledgeable about what their 
needs are.
    The GAO report mentioned earlier finds that Ex-Im Bank ``generally 
classifies small business status correctly.'' Ex-Im Bank employs a 
transparent and reliable methodology for determining our customers' 
small business status and reporting our direct support for small 
business. We have appreciated GAO's cooperative approach to the small 
business review. It has been a positive experience for Ex-Im Bank, both 
in terms of reaffirming our methodology and from the perspective of 
identifying areas in which Ex-Im can improve the efficiency with which 
we determine and report our direct small business support. For example, 
in conjunction with the introduction of our Ex-Im Online program, we 
are this fiscal year updating electronic participant records, 
strengthening internal controls around small business reporting, and 
arranging for an independent external audit of the Bank's direct small 
business reporting starting with fiscal year 2006.
Ex-Im Bank's Small Business Committee
    We also realize that outreach to small businesses and processing 
small business transactions involve almost every division within the 
Bank. Therefore, we have established an Ex-Im Bank Small Business 
Committee (SBC) to coordinate, evaluate and make recommendations 
regarding the many Bank functions necessary for a successful small 
business strategy. The SBC will be co-chaired by the Senior Vice 
President of Export Finance and Senior Vice President for Small 
Business, who will report to the President and Chairman of the Bank. 
And we have institutionalized this structure by having the Board 
formally approve it. The SBC will be composed of representatives from 
Domestic Business Development under the Senior Vice President for Small 
Business as well as the principal processing units within our Small 
Business Group--Export Finance (Business Credit, Trade Finance and 
Insurance and Multi-Buyer Insurance), Credit Underwriting, the Office 
of the General Counsel and Asset Management. Other divisions within the 
Bank, including Congressional Affairs, will also participate at 
meetings.
    The goals for the SBC are to:

 Provide a Bank-wide focus on small business;
 Report and evaluate each unit's small business performance;
 Identify opportunities for cross-selling and expanding the use 
    of Bank programs for small business;
 Measure the progress and take steps toward meeting small 
    business plan objectives; and
 Serve as a forum for exploring new small business initiatives.
Claims Committee
    In addition, we have established a new claims reconsideration 
procedure and ``Claims Committee.'' The Claims Committee will be 
responsible for evaluating and making final decisions with respect to 
claims originally denied by the Office of the Chief Financial Officer. 
I believe these changes will help all of our customers, but will be 
particularly useful to small businesses, by improving transparency in 
the claims reconsideration process. In addition, the new procedure 
establishes formal consultation among the business units of the Bank 
and the Asset Management Division as part of the reconsideration 
process. The Claims Committee will comprise (i) the Senior Vice 
President for Small Business, (ii) the Senior Vice President for Export 
Finance, (iii) the General Counsel, (iv) the Chief Financial Officer, 
and (iv) the Senior Vice President for Credit and Risk Management.
    To strengthen customer education about the reconsideration process, 
a small-business portal with information pages will be created on Ex-Im 
Bank's website. The Claims Committee will hold its first meeting in 
mid-March.
Technology Upgrades
    I also want to discuss with you the progress we are making 
regarding our technology improvements. The Bank has responded to the 
Congressional mandate in our last reauthorization to ``implement 
technology improvements that are designed to improve small business 
outreach, including allowing customers to use the Internet to apply for 
the Bank's small business programs.'' The Bank has substantially 
expanded its online capabilities for its customers, especially small 
businesses. The Bank has been implementing online capabilities in 
stages. In the past 5 years, we have done the following:

 Forms automation. Ex-Im Bank has updated its website to 
    provide all customers, particularly small businesses, with improved 
    access to information, applications, and forms. All of Ex-Im Bank's 
    applications and forms are available through the website.
 Electronic claim filing. Ex-Im Bank has established an 
    electronic claim filing system to expedite claim filing and enable 
    customers to obtain a quicker claim payment.
 Electronic compliance. Ex-Im Bank has developed an online 
    Medium-Term Electronic Compliance Program, which greatly improves 
    the efficiency and turnaround time in approving disbursements.
 Letter of Interest. Ex-Im Bank has implemented an online 
    application for its letter of interest. The online letter of 
    interest system provides a paperless workflow and application 
    process for small businesses. This capability streamlines the 
    process for small businesses and saves them time in tracking the 
    status of their submitted applications.
 Registration and subscription services. Customers can sign up 
    online to receive Ex-Im Bank publications, e-mail updates, and 
    other information and to manage their subscriptions.
Ex-Im Online
    Ex-Im Online, our major business reengineering and automation 
project, is the next step. In June, small business customers will begin 
using Ex-Im Online for multibuyer products, including support for 
special buyer credit limits. These are the products most heavily used 
by small business: More than 80 percent of the customers are small 
businesses, and these products represent half of Ex-Im's annual 
transaction volume. Customers will apply online, get quick decisions, 
and receive online status information. Programming for the system is 
complete. The system has been fully tested and customers are being 
trained.
    Ex-Im Online will reengineer, automate, and modernize Ex-Im Bank's 
primary business processes, particularly for the products used by small 
businesses (short-term export credit insurance) and the products that 
provide significant indirect 
support for small business exporters and suppliers (medium-term 
insurance and guarantees).
    Ex-Im Online will provide exporters, in particular small 
businesses, the benefits of electronic application submission, 
processing, and insurance policy management. Ex-Im Online will reduce 
customers' paperwork, improve Ex-Im's response time, increase 
productivity and improve risk management.
    Ex-Im Online will allow customers to:

 Apply online. Applications and all supporting documentation 
    can be submitted and processed electronically.
 Get quick decisions. Online retrieval of credit and 
    demographic information and automated underwriting will reduce 
    review and decision time for short-term transactions.
 Receive online information on application status. Applicants 
    will receive email notification of the status of their application.
 Reduce paperwork burden. Automatic data entry and reuse of 
    existing data will permit ``enter once-use many times'' management 
    of customer information.
 Manage export accounts receivable online.
 Strengthen product development. Ex-Im will be able to consider 
    a broader range of product enhancements and modifications, 
    particularly in the short-term insurance area, as a consequence of 
    better risk quantification and management capabilities using online 
    systems.

    There will also be benefits to Ex-Im Bank:

 Increased productivity and better resource use. Replacing 
    manual processes will allow staff to focus on meeting growing small 
    business needs and extending outreach to new customers. Ex-Im will 
    redeploy staff from processing to customer service. As small 
    business transactions and volume grow as expected from increased 
    outreach, we will be able to manage the growth without adding 
    staff. In addition, staff shifted from processing to customer 
    service will provide more person-to-person service for small 
    business customers, especially new exporters.
 Increased customer satisfaction. Streamlined application 
    submission, automated case processing, and quicker decisions will 
    increase satisfaction with Ex-Im services, supporting our outreach 
    and marketing.
 Stronger risk management. Business intelligence tools and 
    better sharing of information will improve management of the 
    portfolio.

    This program is the result of approximately $10.8 million in 
spending over 5 years, and while it has taken a long time to get it in 
place, I am confident it will bear fruit by easing small business 
customers' interaction with the Bank.
    Pursuant to direction in our 2002 reauthorization, the Bank has 
realigned its budget to support small business technology. Technology 
expenditures in fiscal years 2001 and 2002 increased from $7.6 million 
to $12.0 million, an increase of more than 50 percent, with smaller 
increases in fiscal year 2003 and fiscal year 2004. In the last three 
fiscal years, Ex-Im's administrative expense budget has been generally 
flat, and Ex-Im has funded improvements to its portfolio of online 
applications and services from its general technology budget.
    In the end, I would like to be able to guarantee that these efforts 
will result in 20 percent of our funds being utilized by small business 
exporters, and that our small business figures will continue to grow in 
absolute terms. Unfortunately, I cannot. At Congress' direction, we are 
a demand-driven enterprise. I cannot predict business cycles, or 
whether applications that come in tomorrow will be appropriate for the 
financing we have to offer. But what I can guarantee is that we will do 
everything within our power to increase demand through improved 
outreach programs. And I promise you that Ex-Im Bank is going to listen 
to small business input concerning our programs, that we will 
communicate with Congress and take your concerns seriously, and that 
our renewed efforts in small business are going to be sustained.
Economic Impact
    Through the economic impact process the Bank seeks to determine 
whether a transaction under consideration would adversely affect U.S. 
production or employment, or result in the manufacture of a good 
subject to specified trade measures. In analyzing these cases, Ex-Im 
Bank must balance the benefits associated with the U.S. export against 
the long range implications of increased foreign production. Given Ex-
Im Bank's objective of maintaining and increasing employment of U.S. 
workers, Ex-Im Bank has long accepted the principle that it should not 
extend financing support when such support would adversely affect the 
U.S. economy.
    While Ex-Im Bank's consideration of economic impact predates the 
Bank's 2002 reauthorization, Congress made substantive changes to the 
economic impact section of our charter in 2002. After extensive vetting 
and coordination with our stakeholders--including the U.S. export 
community, industry, labor interests, and Congress--Ex-Im Bank issued 
revised economic impact procedures in March 2003.
    The economic impact procedures are intended to lay out a reasonable 
and logical process to analyze the impact of Ex-Im Bank support for a 
particular transaction. The economic impact analysis considers issues 
such as whether the goods and services Ex-Im Bank is asked to support 
would establish or expand foreign production capacity of an exportable 
good, the relevance of trade measures, the global supply and demand for 
the good to be produced and the competitive impact on U.S. industry 
from increased production. The process includes review by other U.S. 
Government agencies, as well as input solicited from interested parties 
through Federal Register notification.
    In recent years, economic impact decisions have affected Ex-Im Bank 
financing support for many exports, including steel-making equipment, 
glass-making equipment, greenhouses, microchip manufacturing machinery, 
soda ash processing equipment, and others.
Keeping the Competitive Edge in New Products and Special Markets
Environmentally Beneficial Exports
    Ex-Im Bank established the Environmental Exports program to 
increase support of environmentally beneficial goods and services. 
Since the program's inception in 1994, Ex-Im Bank's environmental 
transactions have grown significantly, with a total portfolio in excess 
of $2 billion. That has allowed U.S. environmental companies to compete 
in promising emerging markets. From fiscal year 2002 to fiscal year 
2005, Ex-Im Bank has supported more than $1.3 billion in 
environmentally beneficial exports. The Ex-Im environmental portfolio 
includes transactions financing U.S. exports of renewable energy 
equipment, wastewater treatment projects, air pollution technologies, 
waste management services, and many other goods and services. Renewable 
energy and water project exports are eligible for repayment terms of up 
to 15 years under an OECD agreement that became effective July 1, 2005, 
for a trial period of 2 years. It is our goal to use these new terms 
and our outreach programs to expand our exports in this sector, where 
we feel the United States has a real technological edge over its 
competition.
Women and Minorities
    As a nation, our institutions work best if they reflect the society 
in which we live. This holds true especially for business. It is easier 
to successfully market a product or services to a community if you know 
that community and are part of it. With this in mind, we at Ex-Im Bank 
are striving to help the American export community be more competitive 
by working to increase our transactions involving women- and minority-
owned businesses. For fiscal year 2005, our authorizations in this area 
were $353 million, compared to $296 million in fiscal year 2004. We 
have increased our outreach to achieve this goal, and plan to increase 
it even more this year. In fiscal year 2005, Ex-Im Bank staff 
participated in 57 speaking engagements and attended thirteen 
conferences expressly aimed at these targeted audiences. We are 
committed to continuing and expanding these efforts.
Future Challenges
    Any testimony about Ex-Im Bank must include a discussion of the 
challenges Ex-Im Bank will be facing over the next 5 years, the length 
of our request for reauthorization. That is no easy task, because it is 
extremely difficult to predict even such major events as the Asian 
financial crisis of the late 1990's, or the rise and fall of some or 
our major markets in South America such as Venezuela and Argentina. But 
there are issues that bear watching and which may have to be dealt over 
the next 5 years.
    Developing countries on the upper part of the industrialization 
scale (for example Brazil, Russia, India, and China) are emerging as 
significant exporters of capital goods such as airplanes, trains, and 
construction and telecommunications equipment. Those products are 
generally priced very attractively, are steadily improving in their 
quality and are typically supported by official financing. This 
financing is often on better terms better than agreed to by members of 
the OECD. U.S. companies, and those in all G-7 countries for that 
matter, are noting that these emerging exporters are displacing them in 
a variety of markets around the world--and financing is sometimes a key 
element in that displacement. We have to decide what should Ex-Im 
Bank's response be.
    Looking at this issue from the standpoint of our Congressional 
mandate, there is little doubt that the guidance would be for Ex-Im to 
offset the financing if requested to do so, keeping in mind that we 
also must find a reasonable assurance of repayment, comply with our 
environmental guidelines, live within a limited budget and meet our 
economic impact requirements. There is no clearer or more fundamental 
mandate than leveling the playing field for our exporters and keeping 
jobs here in the United States.
Conclusion
    I have every confidence that this institution that I have grown to 
admire and respect will continue to serve U.S. workers and taxpayers 
for years to come. A flexible charter allowing Ex-Im Bank--with the 
guidance of Congress and the exporting community, to develop answers to 
the pressing issues facing us now and in the future--is key. The 
beacons to help a steer a true course have been set so we can do our 
job for the U.S. economy. There is no more important economic issue 
than preserving our job base, and with the help of Congress in this 
year of our reauthorization, we will continue to fulfill that mandate.
    I will be happy to answer your questions.
                               ----------
                  PREPARED STATEMENT OF GERALD F. RAMA
      Senior Vice President and Deputy Group Head Global, PNC Bank
                            on behalf of the
               Bankers' Association for Finance and Trade
                             March 8, 2006
Introduction
    I am pleased to be with you today to discuss the banking industry's 
views on reauthorization of the Export-Import Bank of the United 
States. I am testifying today as a banker who has worked with the Ex-Im 
Bank for over 32 years and as a member of Trade Finance Committee of 
the Bankers' Association for Finance and Trade (BAFT), an organization 
founded in 1921. Today, BAFT is an affiliate of the American Bankers 
Association and its membership includes most of the major American 
banks that are active in trade finance and other international banking 
activities and also many of the major international banks chartered 
outside of this country.
    My employer, PNC Bank, is part of the PNC Financial Services Group, 
one of the Nation's largest financial services firms. PNC is 
headquartered in Pittsburgh, Pennsylvania, and has a diversified 
business mix, which includes providing a broad range of international 
banking solutions such as trade finance, foreign exchange, 
correspondent banking, international cash management, and online trade 
services applications. For more than 30 years, PNC Bank has supported 
export growth by providing export financing and trade facilitation to 
companies nationwide. In 2005, our bank received the Presidential ``E'' 
Award for export service on the basis of the bank's record of export 
promotion and continuing efforts to educate U.S. companies about trade 
finance resources.
Why We Need the Export-Import Bank
    Every so often, and particularly during the process of 
reauthorizing the Export-Import Bank, someone will express the view 
that the United States does not need and should not have such an 
agency. They contend that the Bank is unnecessary and constitutes 
nothing more or less than corporate welfare. If the Bank actually were 
serving an important purpose, they argue, the private sector would meet 
that need without requiring any taxpayer support. In their view, the 
Bank simply is a mechanism to hand out taxpayer money to special 
interests.
    In my view, these critics are wrong. The reality is that the Bank 
serves the interests of our Nation by providing credit support that is 
a vital component in the competitiveness of American products in 
international markets. For example:

 An American software developer with 60 high-paying U.S. jobs 
    in the Southeast started exporting products in 2004. The company 
    had a contract to provide software priced at $1.6 million to a 
    foreign purchaser but could neither get financing approval from its 
    principal bank nor find another lender. The company went to the Ex-
    Im Bank and obtained single-buyer export insurance for $1.6 million 
    and a $900,000 Working Capital Guarantee Program transaction-
    specific guarantee. It then was able to obtain financing from a 
    local bank. The insurance policy from the Ex-Im Bank was critically 
    important to the software company's success for several reasons: 
    (i) it is a pay-as-you-go policy which the private sector does not 
    provide (small businesses often cannot afford the large up-front 
    premiums the private sector requires regardless of usage); (ii) it 
    covers countries and situations that the private sector will not 
    (because of long lead-times to project completion and 
    installation); and (iii) Ex-Im was able to provide a fast and very 
    reasonable response to a small, but complex transaction.
 A small family held company in the Northeast, which employs 
    100 people, manufactures machine tools used to maintain 
    transportation equipment. The company also has a larger, German 
    affiliate that manufactures the same equipment (and which can 
    obtain export credit financing from Germany's export credit 
    agency). The company has a large customer in Eastern Europe on 
    which it relies for a significant portion of its annual revenue, 
    and this customer's needs can be met by products made by the 
    company in America or by its affiliate in Germany. The customer is 
    undertaking an extensive, long-term refurbishment of its operations 
    and when it makes equipment purchases it specifically seeks export 
    credit financing. Medium-term guarantees from the Ex-Im Bank on two 
    occasions (approximately $10 million and $6 million) played an 
    important part in the company's sales of equipment manufactured in 
    the United States.
 A guarantee provided by the Ex-Im Bank has enabled a company 
    in Arizona that manufactures electronic test products to obtain 
    working capital financing that otherwise would not have been 
    available. The company's sales in foreign markets have expanded in 
    the face of international competition and exports now contribute 
    about 45 percent of the company's total sales. The total number of 
    employees at the company has grown by 25 percent per year since 
    2003, largely on the basis of the expanded foreign sales made 
    possible by the Ex-Im Bank's guarantee.
 An American company that employs 70 people in the Southeast 
    emerged from bankruptcy in 2005. It is the last producer of its 
    product in the United States and Europe, and it is facing 
    substantial competition from producers in Japan. More than 30 
    percent of the company's sales are outside the United States and it 
    expects that to grow to 50 percent in the next few years. Without 
    Ex-Im Bank multibuyer insurance coverage, the company's asset-based 
    lender would not be willing to include the foreign receivables in 
    the company's borrowing base and it could not survive. The pay-as-
    you-go feature and Ex-Im's quick response time on special buyer 
    credit limits were essential to meeting this company's financial 
    needs.
 An American company based in the Midwest employs 77 people in 
    manufacturing operations that produce processing equipment. It 
    competes with companies from Taiwan, Japan, and China. The company 
    sold equipment to a buyer in Eastern Europe. The buyer made a down 
    payment of 15 percent of the purchase price. An American bank was 
    willing to finance the remaining 85 percent only because the 
    company obtained an Ex-Im Bank guarantee under its medium-term 
    financing program. The bank also used the Ex-Im Bank's Working 
    Capital Guarantee Program to extend a $1.5 million transaction-
    specific line of credit to the company to enable it to meet the 
    payment guarantee bond and work-in-process financing needs of this 
    transaction. Ex-Im's credit support of this company has enabled it 
    to be successful against its foreign competition in the global 
    marketplace.

    Each of these situations represents incremental export sales by 
American companies that support the jobs of American workers and help 
to reduce our national trade deficit.
    Many other examples could be cited. These are the ``special 
interests'' the Ex-Im Bank serves and I would like to suggest it is in 
our national interest for it to continue doing so.
    It is important for Congress to remember that American businesses 
are engaged in fierce competition with foreign companies in the global 
market. Many of those foreign companies come into the market with 
various advantages, including credit support from their home country 
export credit agency (ECA). In the midst of this competition we cannot 
afford to abandon one of the most important factors that helps American 
business compete--the Export-Import Bank--nor can we afford to impose 
any new or more onerous restrictions on its ability to support American 
exports. If we did, the inevitable result would be fewer export sales, 
loss of jobs, and an even wider trade deficit.
    Something that I and other trade bankers have observed in recent 
years is that the ECA's from other countries are getting to be more 
strategic and flexible in their approaches to export finance. In 
addition, new competition is coming from emerging market ECA's, such as 
those in China, India, Eastern Europe, and Brazil. They all understand 
the extent of international competition and they are taking new 
approaches that will enable their exporters to win in the global 
marketplace. For example, many ECA's are becoming more aggressive when 
it comes to taking on risk and more willing to provide financing for 
transactions that generally benefit their country, even if the 
transaction does not directly involve the export of locally produced 
goods. I believe that U.S. companies' efforts to compete in 
international markets will be hampered if our Ex-Im Bank does not take 
a similarly aggressive approach. (This is not to say that Ex-Im has not 
been aggressive in certain respects in the past. Trade bankers have 
noted the Bank's willingness to take on credits that commercial banks 
have been unwilling to accept.) I hope that in reauthorizing the Bank, 
Congress will clearly express its support for an aggressive effort by 
the Export-Import Bank to meet the needs of American businesses--large 
and small--competing in global markets.
Issues Related to Ex-Im Bank Operations
    I would like to comment on a number of issues that arise out of the 
Ex-Im Bank's operations and the various requirements imposed on the 
Bank under current law.
Small Business
    The Export-Import Bank is required by law to make available an 
amount equal to at least 20 percent of its aggregate loan, guarantee, 
and insurance authority in each fiscal year to finance exports made 
directly by small business concerns. The Bank frequently is criticized 
on Capitol Hill for its repeated failures to satisfy this requirement. 
We think the criticism is unfair.
    In the first place, it should be acknowledged that the 20 percent 
standard is a limited and arbitrary measure of the Bank's service to 
small business. Small business transactions, by number, typically make 
up more than 80 percent of the transactions approved by the Ex-Im Bank 
each year. But when the sole measure is total dollar amount, large 
business transactions overwhelm those done by small business. By their 
very nature, the large export products that generally are produced by 
larger companies (airplanes, heavy equipment, and project work) mean 
large dollar volumes. If Ex-Im were evaluated on the amount of effort 
it puts into small business transactions, the 20 percent standard would 
be easy to meet because the work put in by the Bank on a small 
transaction can be as much or more than a large one. Another 
shortcoming of the test is that it fails to take into account the 
participation of small business in large business transactions. A 
single airplane sold by Boeing has myriad components produced by small 
business, yet Ex-Im gets no credit in its small business ledger for the 
support it provides to Boeing that indirectly benefits those small 
businesses. Finally, it also is difficult to understand why 20 percent 
is an appropriate test. As a banker, I find it difficult to comprehend 
why Ex-Im should be considered a failure at 19 percent and a success at 
21 percent.
    I also believe that critics of the Bank are misconstruing the 20 
percent test. The Bank is required to ``make available'' to small 
business a specified amount of its authority--the law does not require 
the Bank to actually extend loans, guarantees, and insurance equal to 
that amount. This is appropriate because the Bank is a demand-driven 
organization. It has no control over the source of credit support 
requests it receives. All that it can do is educate small businesses 
about its programs, encourage them to use its programs, and assist them 
in negotiating their way through the process. We believe that through 
its small business outreach efforts the Bank is making available to 
small business the full amount its authority, thus in reality it is 
satisfying the statutory requirement.
    Thinking of this provision as if it were a mandatory 20 percent 
requirement also puts the Ex-Im Bank in an untenable position. Suppose 
that the Bank's loans, guarantees, and insurance extended to support 
small business exports in a particular fiscal year exceeded 20 percent 
of its authority by a small amount near the end of the year. If an 
exporter that does not qualify as a small business brings a large 
export transaction to the Bank, the 20 percent standard gives the Bank 
an incentive to delay or not do the transaction in order to stay above 
20 percent. That does not make sense if the real purpose of the Ex-Im 
Bank is to promote U.S. exports. At the same time, the 20 percent 
standard also creates an incentive for poor credit decisions if the 
Bank is below 20 percent and needs more transactions to satisfy the 
test. Neither incentive is a healthy one for the Bank.
    Congress should rethink this requirement and devise a better way to 
measure the Ex-Im Bank's success in working with small business.
Economic Impact
    The Export-Import Bank is required by law to consider the extent to 
which transactions are likely to have an adverse effect on industries 
and employment in the United States. The rationale for this requirement 
is understandable (although I am not aware of any other ECA that is 
subject to a similar requirement): Taxpayer money should not be used to 
support a transaction if its benefits for U.S. industry and employment 
are outweighed by the transaction's adverse impact on U.S. producers 
and employment. In most cases, however, the harm that might result from 
a transaction will occur whether or not the U.S. exporter seeking Ex-Im 
support makes the sale. If the U.S. exporter does not make the sale, 
one of its competitors from another country will. The adverse impact on 
U.S. industry will occur in either case. Thus, it seems that unless the 
U.S. exporter is the only possible source of the equipment to be sold, 
the economic impact on the United States of an export sale will always 
be positive. Unfortunately, when it evaluates the economic impact of a 
transaction, the Ex-Im Bank staff does not consider the availability 
from another source of the goods to be sold. We believe this is a valid 
consideration that the Bank should take into account in its analysis 
and we urge Congress to provide direction to the Bank in that regard.
    I have another concern that the Ex-Im Bank and Congress should 
consider as well--the reputation risk created by the economic impact 
test. Whenever the Bank turns down a transaction on the basis of 
economic impact, it has an adverse effect on the perception of U.S. 
exporters as reliable suppliers: The financing support that was 
expected did not come through. If a foreign purchaser has doubts about 
whether Ex-Im support for the financing of their purchase actually will 
be made available, the likelihood of the U.S. exporter getting the sale 
is diminished. For this reason we believe that the economic impact test 
should be used as little as possible. A step in the right direction 
would be to raise the minimum transaction size for economic impact 
assessment from $10 million to $25 million, to take into account the 
effects of inflation over time.
Co-Financing
    Co-financing is an arrangement whereby exports that are sourced 
from more than one country can receive credit or credit support from 
two or more ECA's in an efficient manner. Typically, the ECA for the 
country that is the principal source of the products or services takes 
the lead and is the sole agency with which the purchaser must interact. 
The cofinancing arrangement allows for one set of documents and one 
source of disbursements, in each case provided by the lead ECA which 
obtains supporting financial commitments directly from the other 
participating ECA's.
    Bankers that finance these transactions like cofinancing 
arrangements because they are an efficient and convenient way of 
providing credit support for what otherwise could be extremely complex 
transactions. As the Export-Import Bank noted in its June 2005 Report 
to the U.S. Congress on Export Credit Competition (the 2005 Report to 
Congress), the ``availability and ease of ECA cofinancing has become an 
important and measurable competitive issue.''
    According to the Ex-Im Bank's website, it currently has bilateral 
cofinancing agreements with ECA's in four other countries: Canada, 
Italy, Japan, and the United Kingdom (and a limited agreement with K-
Exim of Korea). At a hearing before the Senate Banking Committee prior 
to the Bank's last reauthorization in 2001, Ex-Im Chairman John Robson 
reported that the Bank had entered into a bilateral agreement with ECGD 
of the United Kingdom and that discussions with EDC of Canada were 
close to completion. We are disappointed that agreements have been 
signed with only two other countries in the ensuing 4 years (a 1998 GAO 
report said there were more than 70 ECA's operating throughout the 
world; the UK's ECGD has agreements with ECA's in 24 different 
countries). Although the Bank has participated in cofinancing 
arrangements on a one-off basis with ECA's in countries with which it 
does not have a cofinancing agreement, having signed agreements is 
preferable. The agreements make it clear to potential purchasers that 
cofinancing is available and they establish a framework that 
facilitates cofinancing implementation for an actual transaction. When 
the Bank signed its cofinancing agreement with Canada in May 2001, its 
press release said, ``This is another step in the right direction by 
Ex-Im Bank to deliver the same type of flexibility offered by a number 
of ECA's.'' We urge the Bank to take more of these steps and to make 
cofinancing agreements with other ECA's a priority.
MARAD
    Transactions supported by Export-Import Bank guarantees in excess 
of $20 million or that have a repayment period of more than 7 years are 
subject to a requirement (administered by the U.S. Maritime 
Administration--MARAD) that the goods being financed must be shipped on 
a U.S.-flag carrier if they are transported by sea. The exporter is 
required to use a U.S.-flag carrier even though other carriers might 
(i) be available at lower cost; (ii) have vessels that are more 
suitable for the particular cargo being shipped; and (iii) provide 
logistical advantages with respect to their availability and routing. 
This can result in situations that are nothing short of ridiculous. For 
example, a West Coast-based exporter that was selling goods to a 
purchaser in Jamaica was required to use a U.S.-flag carrier and as a 
result watched its goods in one shipment go from San Diego to Japan, to 
the Dominican Republic, then finally to Jamaica. Another shipment went 
from San Diego to Florida, to Spain, and then to Jamaica. If it were 
not required to use a U.S.-flagged vessel, the exporter could have 
arranged direct shipment from San Diego to Jamaica. The MARAD 
requirement added significant costs and weeks of shipping delays. The 
exporter summed it up as ``extortion.'' It certainly is nonsense.
    Although waivers are available in certain limited circumstances, 
the waiver process itself acts as a disincentive for potential 
purchasers of U.S. goods.
    At a time when the United States is recording record merchandise 
trade deficits, it seems foolish to burden U.S. exporters with 
requirements of this kind. According to the 2005 Report to Congress, 
``None of the other G-7 ECA's have similar cargo preference 
restrictions.'' Congress should seriously consider rethinking the MARAD 
requirement and, at the very least, restrict its application by raising 
the minimum amount from $20 million to $30 million or more.
Domestic Content
    The Export-Import Bank's mission is to support U.S. jobs through 
exports. In pursuing that mission, the Bank has adopted a restrictive 
policy of only providing credit support for the value of the U.S. 
content in an export. The Bank limits its involvement in a transaction 
to the lesser of: (i) 85 percent of the value of eligible goods and 
services, and (ii) 100 percent of the U.S. content in those goods and 
services. Thus, if a U.S. export consists of 50 percent U.S.-made 
components and 50 percent non-U.S. made, the Bank's support would be 
limited to 50 percent of the contract's value. This is problematic in 
several related respects. First, as complexity increases in 
manufacturing processes and the sourcing of components, it is becoming 
increasingly difficult to track the levels and sources of non-U.S. 
content. This is particularly true for small businesses that do not 
have the resources to devote to it. Second, requiring such strict 
proportionality likely results in fewer U.S. exports than could 
otherwise be achieved. The question is: How much support should Ex-Im 
be willing to provide in order for an export transaction to occur? It 
is not at all clear that the correct answer is tied to the proportion 
of U.S. content. What is clear is that other countries have concluded 
that strict proportionality--and thus strict accounting for content--is 
not required. For example, the 2005 Report to Congress indicates that 
Japan's ECA does not reduce its support of transactions that have at 
least 30 percent Japanese content and Canada decides its level of 
support on a case-by-case basis. Italy's ECA announced in 2004 that it 
would shift its standard from ``Made in Italy'' to ``Made by Italy'' 
and Ex-Im reported that other countries were moving to this approach as 
well. We believe that Ex-Im should adopt a case-by-case approach that 
balances the costs and benefits of individual transactions, rather than 
adhering to a strict formula that requires precise tracking of U.S. 
content, and we urge Congress to express its support for that approach 
as well.
Tied Aid
    The Export-Import Bank's tied aid war chest was established to 
enable the Bank to combat export subsidies provided by foreign 
governments in the form of financing for public-sector projects that is 
tied to the purchase of goods and services from exporters in the donor 
country. Although the Bank's 2005 Report to Congress expressed the view 
that OECD tied aid rules have been a ``great success in reducing the 
level and distortive influence of tied aid,'' there is a general 
perception among American bankers and exporters that the use by other 
countries of tied aid and implicitly tied aid (referred to as ``untied 
aid'') is growing. The particular countries that are mentioned include 
China, Japan, Germany, and Denmark. We are concerned that the Bank has 
not utilized any tied aid funds since 2002, possibly because the Bank 
is unwilling to act unless it has overt proof and possibly because of 
the unwieldy procedures that govern the relationship between the 
Treasury Department and the Bank regarding use of the war chest (and 
the Treasury Department's unwillingness to use the war chest funds). We 
believe that the Bank should reexamine what is happening in the market 
and then determine whether greater use of the war chest is needed. 
Congress should review the procedures followed by the Treasury 
Department and Ex-Im Bank for utilizing the war chest and consider 
whether they could be simplified and whether clarifying the Bank's 
authority to utilize the war chest would facilitate the use of those 
funds to combat the use of tied aid by other countries.
Dual-Use Products
    The Export-Import Bank generally is prohibited from providing 
credit or credit support in connection with the sale of defense 
articles or services to any country, with the exception that the Bank 
may provide such support if it determines that the articles or services 
are nonlethal and that their primary end use will be for civilian 
purposes. This exception, which we believe is useful and appropriate, 
sunsets and requires periodic renewal. It currently is set to expire on 
October 1, 2006. In 1997, the U.S. General Accounting Office reported, 
``the Ex-Im Bank appears to have established procedures that provide a 
sound basis for determining whether these exports are nonlethal and 
primarily used for civilian purposes, as required by law.'' We believe 
the time has come to make this a permanent provision that does not 
require periodic renewal.
Conclusion
    We believe that, within the constraints of its budget and other 
resources, the Export-Import Bank generally is doing a good job in 
promoting the export of American goods and services to international 
markets, but improvements always can be made. The Export-Import Bank 
plays a key role in helping U.S. businesses of all sizes compete in 
markets around the world, but we believe the Bank is hampered by having 
too few people and too many requirements imposed on it that do not 
relate to its primary mission. Consequently, we urge the Congress to 
provide the Bank with significant additional resources in its 
administrative budget, and to act on our recommendations to reduce the 
Bank's administrative burdens that inhibit its functions. We look 
forward to continuing to work with Members of Congress and with the 
Bank to maximize its effectiveness in promoting American exports.
                               ----------
               PREPARED STATEMENT OF JAMES ``AL'' MERRITT
          President and CEO, MD International, Inc. Miami, FL
                             March 8, 2006
    Senator Crapo, Senator Bayh, Members of the Subcommittee, thank you 
for inviting me to appear here today. I am Al Merritt, President of MD 
International, Inc., of Miami. MD exports medical equipment and related 
services to Latin America, the Caribbean, and other markets. Areas of 
medical care that we address include general medicine, ENT obstetrics/ 
gynecology, ophthalmology, physical therapy, cardiology, surgery, 
critical care, anesthesiology, and imaging. We also provide turn-key 
and ongoing hospital renovation and remodeling projects throughout the 
world.
    Throughout its 19-year history, MD International has offered 
financing to foreign buyers, often with the support of the Export-
Import Bank of the United States. Without Ex-Im's assistance, our 
company would have lost important sales, and individuals throughout 
Latin America would have gone without access to modern medical 
technology.
    I also appear here today as a representative of the Small Business 
Exporters Association of the United States, on whose Board of Directors 
I serve. SBEA is the Nation's oldest and largest nonprofit organization 
of smaller exporting companies. As the international trade council of 
the National Small Business Association, SBEA also represents NSBA's 
22,000 exporting companies.
    Let me begin by stating unequivocally--on behalf of MD 
International and SBEA--that we strongly urge Congress to reauthorize 
Ex-Im Bank.
    We support Ex-Im and we want to make it even more effective.
The Need for Ex-Im Bank
    Sales of products and services to developing nations involve a 
significant degree of foreign risk, especially when the foreign buyers 
finance their purchases over several years. Commercial banks 
historically have been reluctant to assume a major share of this risk. 
For one thing, the collateral securing the loans is often in another 
country, where recovery can be difficult.
    Every exporting Nation grapples with this risk. Nearly all of them 
address it by providing guarantees to commercial lenders and brokers 
that agree to finance exports using certain criteria, or by providing 
credit directly to exporters.
    This is particularly vital for transactions by smaller companies. 
Not many banks are involved in export finance. And not many of those 
will handle smaller international transactions, especially when the 
exporter is a small business. Fewer still will accept ``walk-in'' small 
business exporters who are not long-time commercial customers. Without 
Ex-Im's (and SBA's) available backing for export finance, small 
business access to export finance would be close to zero. Congress 
envisioned Ex-Im as a ``bank of last resort'' for exporters; for small 
and medium-sized companies, it is frequently the ``bank of only 
resort.''
    Our company is a good example. We have been exporting successfully 
for nearly 20 years. We ship to forty countries. We employ 111 people. 
Yet even with our history, reach, and employees, many deals would be 
impossible for us without Ex-Im guarantees and insurance.
    Maybe I can illustrate this with an analogy. If you buy a tire for 
your car, you probably will pay cash for it. If you buy a new 
transmission for your car, you may well charge the cost to your credit 
card and pay it off over 3 or 4 months.
    But if you buy a new car, you probably are not going to pay cash 
for it or even pay it off in a few months. You will most likely want to 
finance it over a couple of years.
    Lots of small exporters in effect sell tires. Tire sales can be a 
good business. Plenty of foreign buyers want the equivalent of tires, 
and that can form a pretty good trading relationship. You can do a lot 
of ``tire exporting'' as a cash business without having to find 
financing for your buyers.
    With ``transmissions'' and products that cost more per unit, 
however, many buyers will want to take a few months to pay. Unless you 
as an exporter want to act like a bank--and most exporters cannot and 
do not--you will need short-term export financing.
    ``Transmissions'' and their equivalents are desirable exports that 
can support good jobs at home and form the foundation for solid and 
growing international trade channels. So it helps everybody when Ex-Im 
provides short-term guarantees and insurance for the financing of these 
exports.
    ``Cars'' (in other words, higher value exports like capital 
equipment) are a much bigger deal. The buyers want to take years to 
pay, but the benefits to the exporters and the United States as the 
exporting country are huge. Companies that build ``parts'' for the 
``cars'' get sales. Many jobs, both direct and indirect, get created 
and supported. ``Car''-type exporting is a very good business. Sales 
are larger. Margins are usually healthy. And the buyers eventually come 
back for ``tires'' and ``transmissions,'' not to mention servicing and 
training. ``Car'' transactions use medium-term financing. Without Ex-Im 
backing, these transactions are extremely hard to put together.
    (Ex-Im also provides long-term financing for very big ticket items. 
Let's call them ``airplanes.'' They are vital to the U.S. balance of 
trade, and necessary, but not a major focus for ``SME's.'' * Few small 
business exporters want to extend payments out beyond 7 years.)
---------------------------------------------------------------------------
    * Here, as elsewhere in this testimony, ``small and mid-sized 
enterprises'' (or exporters or ``SME's) refers to U.S. businesses with 
fewer than 500 employees, with certain limited exceptions as defined by 
the U.S. Small Business Administration (SBA).

    In sum, American companies of all sizes would lose countless 
billions of dollars in export sales--and the high-paying export-related 
jobs that go with them--without Ex-Im, the official export credit 
agency of the United States.
    But there is another side of it, too. I like to think that 
companies like mine help the United States put its best foot forward 
overseas. Companies that construct roads, purify water, build homes and 
schools, and improve health care. We show our neighbors that we care 
about the quality of their lives. We demonstrate that our government 
and our private sector want to help them achieve health and prosperity. 
Without Ex-Im, that capability, too, would be greatly diminished in the 
developing world.
    Here are two examples of MD International transactions that Ex-Im 
financed.

 (A ``transmission'') We sold a fluoroscopic diagnostic device, 
    manufactured in Utah, to a Mexican hospital for $150,000. Ex-Im 
    provided the hospital with financing.
 (A ``car'') We completely outfitted a women's hospital in the 
    Dominican Republic with $7 million worth of U.S. manufactured 
    medical equipment. Thanks to 7 year financing from Ex-Im, we made 
    the sale despite stiff competition from German and Spanish 
    companies, selling EU-manufactured equipment, and backed by the 
    export credit agencies of Germany and Spain.

    So MD International and many other SBEA members keep a close watch 
on Ex-Im.
How To Improve Ex-Im
    MD International and other SME exporters appreciate the assistance 
that Ex-Im has provided. But it is no secret that Congress gave Ex-Im a 
mandate in 2002 to allocate 20 percent of its financing dollars to SME 
transactions, and that the Bank has so far failed to meet that mandate.
    SBEA would like to suggest some reasons why, based on the 
experiences of companies like mine, and to recommend steps that 
Congress and the Bank could take to meet this entirely achievable 
threshold.
    Ex-Im starts with an great resource--many dedicated, hard-working 
people. There are also several Ex-Im products that are well-suited to 
smaller companies. These include the agency's export working capital 
(preshipment) financing and its short-term insurance against buyer 
default.
    While these products--and the SME awareness of them--could always 
be improved, overall they tend to work well. The criteria for obtaining 
the financing are relatively transparent and the authority to get the 
transactions underway is delegated to a network of banks and brokers.
    Ex-Im's principal challenge with these products is finding and 
educating its potential customers. A secondary challenge is making sure 
that those customers, once inside, are retained and return again.
    So our first recommendation is to the Bank: Broaden outreach to 
SME's on these products and use their feedback to make improvements in 
them.
    While we would encourage Congress to stress this point in the 
Report accompanying the reauthorization legislation, we do not feel it 
is necessary to be included in the statute itself.
    To its credit, Ex-Im has developed an ambitious plan for outreach, 
as part of its recent ``Small Business Committee'' initiative.
    In terms of identifying further new SME customers, I would simply 
repeat what my SBEA Board colleague Jim Wilfong said at last week's Ex-
Im Advisory Committee meeting. Over 60 percent of the SME's that are 
currently exporting ship to only one country. Getting them into a 
second or third country would increase the demand for Ex-Im products--
without the sometimes steep learning curve involved in a company's 
first export transaction. The Commerce Department's U.S. Export 
Assistance Centers, located in over 100 cities across the country, 
could be helpful partner to Ex-Im in this process.
    Our second point is that the Bank's emphasis on SME transactions 
has tended to ebb and flow over the years, based on the priority that 
the Bank leadership has attached to them. Unfortunately, this has 
resulted in considerable SME management instability.
    When we consulted with current and former Bank staffers about Ex-
Im's approach to SME management over the past decade, a rather confused 
picture emerged.
    By our count, Ex-Im has had 15 different management structures for 
addressing SME's since 1997, or more than two a year, on average. The 
point person for SME's has been at various times a Group Vice 
President, a Senior Vice President, a Vice President, and an Office 
Director. For at least two substantial periods of time since 1997, no 
one was in charge of SME responsibilities. ``Business Development'' has 
been included in and excluded from the small business operation (when 
the Bank has had one), at one point being separated into international 
business development, which was excluded, and domestic business 
development, which was included. The Ex-Im field offices have been told 
to concentrate on small business, to concentrate on large business, and 
again to concentrate on small business. The SME operation has been near 
the top of the organization chart, answering to the President, in the 
middle, answering to various Senior Vice Presidents, near the bottom, 
and for a while in 2004-5, essentially off the chart, directing no one 
and essentially directed by no one. The staffing levels have ranged 
from one to more than twenty. Sometimes the person in charge of SME's 
could intervene in specific transactions, but sometimes not. Sometimes 
the SME operation has handled insurance products, sometimes guarantee 
products, sometimes both, and sometimes neither. Sometimes the SME 
operation has had the authority to approve credit and authorize 
transactions, but sometimes not. Sometimes the head of the Bank's SME 
operation has long been involved in the Ex-Im's small business 
transactions; sometimes the person has had no significant recent SME 
experience.
    Ex-Im's SME management reached one of its ``high points''--with a 
Group Vice President answering directly to the Bank President--prior to 
the Bank's 2002 reauthorization. Shortly afterward, the entire 
operation was abolished. What followed was one of the periods in which 
the Bank had no SME operation as such.
    Our normal preference would be to let Ex-Im handle SME's on its 
own, and we certainly commend Chairman Lambright and the Bank's 
management and staff for the effort that went into the recent ``Small 
Business Committee'' proposal.
    But we do believe that the lack of a permanent, stable structure 
with responsibility and accountability for the Bank's SME performance 
has reduced the effectiveness of the Bank's SME work. It also has 
confused commercial banks and exporters, as well as the Bank's own 
staff. So we request that Congress provide Ex-Im with additional 
guidance in this area.
    We recommend that Congress:

 create a permanent Small and Medium Size Enterprise Division 
    at the Bank,
 direct this Division to have its own staff of underwriters and 
    business development specialists, devoted exclusively to SME 
    transactions,
 authorize the Division to create its own credit standards and 
    to process its own transactions (subject to approval by the Ex-Im 
    Board),
 require this Division to have a system of compensation, 
    benefits, incentives, and promotions comparable to other career 
    tracks at the Bank,
 put a Senior Vice President or higher in charge of the 
    Division,
 stipulate that the person holding that position have 
    significant recent SME experience, and
 have this person report directly to President and Board of the 
    Bank.

    We believe that this approach would offer significant advantages.
    First, it offers a framework of transparency, responsibility and 
accountability for SME transactions at the Bank. It puts the Bank's 
senior SME management in charge of the Bank's SME products and 
transactions.
    Second, it creates an environment of stability in a domain of Ex-Im 
management that has been subject to frequent upheavals. It permits 
planning and benchmarking.
    Third, it provides a secure setting for Bank employees who want to 
focus on SME's but fear more sudden shifts in the winds.
    Fourth, it shortens the ``feedback loops'' between the Bank's SME 
customers and its SME policies, as well as between the Bank's SME 
officials and its Board. Process streamlining, turnaround time 
reduction and new product offerings will be simplified. Outreach 
becomes strategic and sustainable.
    Fifth, it facilitates oversight by the Bank and Congress as Ex-Im 
carries out such Congressional mandates as the requirement to devote 20 
percent of the Bank's financing dollars directly to SME's.
    We suggest that the SME Division's funding allocation be left up to 
the Bank. Adjustments can be made, if necessary by Congress, according 
to the Division's success in hitting its benchmarks.
    We believe that this approach to the management of Ex-Im SME 
transactions will be successful in part because we have seen something 
very similar to it succeed spectacularly at the Overseas Private 
Investment Corporation.
    OPIC's mission is in many ways more difficult than Ex-Im's. Rather 
than finding American companies that want to sell goods overseas, OPIC 
must find ones that want to invest overseas.
    These investments must promote American companies and not cost a 
single American job. They must aid in the progress of developing 
countries (OPIC was once part of USAID), and they must make economic 
sense on their own.
    If the universe of SME's that export is small--5-10 percent of all 
U.S. SME's--the universe of SME's that want to invest overseas, and 
with these stipulations, is a fraction even of that.
    Five years ago, a debate raged within OPIC about whether to stop 
handling SME transactions altogether.
    OPIC's President at the time, Dr. Peter Watson, made the decision 
to go in the other direction. He set up a Small and Medium Enterprise 
Finance Department, installed an focused and energetic leader to head 
it, allocated significant agency resources to it (including full-time 
dedicated underwriters), and gave it his strong public and private 
backing.
    In fiscal year 2001, OPIC handled SME transactions valued at $10 
million. Last week, the agency released its numbers from fiscal year 
2005: $347 million in SME transactions.
    At the same time, the agency announced a new Enterprise Development 
Network that will use delegated authority financing to raise these 
figures even higher.
    A similar approach also had a dramatic impact at Canada's export 
credit agency, Export Development Canada (EDC). In 1994, the Canadian 
Government decided to create an SME unit within EDC, with its own 
underwriters and business development staff, with full responsibility 
for EDC's SME products, and with its reporting directly to EDC's 
President.
    Since then, EDC has grown from servicing fewer than 500 SME's to 
more than 7,000,--or one-fifth of Canada's 35,000 total exporters. 
Providing export financing through commercial banks (80 percent) and 
directly (20 percent), EDC last year provided CAN$11 billion in SME 
export financing.
    From a base of 220,000 SME exporters in the United States, Ex-Im 
provided export financing to around 2,300, in the amount of US$2.7 
billion. This is only about a fourth of the export financing that 
Canada provided to its SME's, despite the fact that the overall U.S. 
economy is seven times larger than the Canadian economy.
    Ex-Im has the raw material--in the U.S. economy and in its own 
staff--to greatly expand its SME financing. It needs an appropriate 
management structure, the right allocation of resources, and strong 
backing from Congress.
    On that note, our next recommendation relates to the Bank's 
allocation of staffing.
    To step back a bit, Ex-Im as an institution reflects the 
environment in which it developed. Founded in the 1930's, the Bank 
evolved mainly in the 1950's through the 1970's--a time when larger 
companies represented nearly all of the demand for buyer financing 
instruments, especially those involving terms of longer than a few 
months.
    As more American ``SME's'' have gone global in recent decades, that 
demand pattern has shifted. SME's here are finding overseas customers 
quite willing to place larger orders, and orders for more expensive 
items (cars), but in need of more flexible and longer-term financing.
    In 1986, the year before MD International began exporting, there 
were about 65,000 small business exporters in the United States. Today, 
there are nearly 220,000. The value of American small business exports 
now tops $200 billion annually. (And that's just counting merchandise 
exports, not most service exports. Many small businesses like MD 
International sell services separately or packaged with goods exports.)
    Today, over 97 percent of all U.S. exporters are small businesses. 
Their activity is broadly dispersed across the country. Take my home 
State of Florida. Over half the value of Florida's exports comes from 
SME's. The same is true, remarkably enough, in the economic powerhouse 
of New York State. In California, the figure is almost half--and the 
number of SME exporters tops 50,000. Across the Nation, more than one-
fourth of all U.S. zip codes show merchandise exports of over $500 
million a year.
    Ex-Im as a whole has not really reflected these changes in the 
business environment.
    The Bank's staff is highly concentrated in Washington, DC. No more 
than 25 Bank employees--highly dedicated and overworked ones, we might 
emphasize--are in the field. And virtually none of them have the 
authority to underwrite and approve transactions.
    In terms of ``being where the customers are,'' the Bank is almost 
the polar opposite of the Small Business Administration, about 20 
percent of whose staff is in Washington, with 80 percent in the field. 
Even SBA's modest Office of International Trade has only 6 people in 
Washington, with 17 in the field.
    As noted, the Commerce Department maintains a network of over 100 
U.S. Export Assistance Centers across the Nation. These would be 
logical settings for Ex-Im personnel.
    So our third recommendation to Congress is to have Ex-Im provide 
you with a report on how it could shift more underwriting and business 
development staff, especially those handling SME transactions, into the 
field.
    But field staff alone cannot reach every SME exporter with 
financing needs. The Bank operates through a network of brokers and 
delegated authority lenders. Except when it does not.
    And here I return to my point from earlier, about tires, 
transmissions, and cars.
    Companies like mine--capital equipment exporters with bundled 
services--are selling ``cars.'' More and more SME exporters are 
migrating into cars--higher value equipment and service exports. But 
buyers want to take several years to pay for cars.
    This upside potential is extremely significant for several reasons. 
First, capital equipment exports support U.S. manufacturing. MD 
International, for example, buys from smaller U.S. manufacturers like 
Welch-Allyn in New York, Wallach Surgical in Connecticut, Miltex 
Surgical Instruments in Pennsylvania, Health-O-Meter Scales in Chicago, 
Gendex Del X-Ray Company in Chicago, Midmark in Ohio, Simmons in 
Atlanta, Mettler Electronics in California, Protocol Monitoring in 
Oregon, and Medical Research Labs in Illinois. Altogether, we buy from 
over 100 U.S. manufacturers based all across the country--almost all of 
them SME's.
    Second, these exports are closely linked to higher-paying jobs in 
the United States--jobs that pay 15-20 percent higher, on average, than 
comparable work in nonexporting companies, according the Commerce 
Department statistics.
    Third, these exports establish longer-term buying relationships 
with foreign customers, as those customers order parts, upgrades, 
servicing, training, and ancillary equipment over time.
    Fourth, they also help establish American technical standards and 
specifications in overseas markets, a boon to a wide array of 
exporters.
    Fifth, capital equipment exports are simply worth more money, on 
average, than most other types of exports.
    So if the SME Division of Ex-Im that we are proposing needs an 
early focus, expanding SME capital equipment exports should be it, in 
our opinion. Nothing will get the Bank's SME numbers up above 20 
percent faster, nothing will yield a quicker payoff in job creation, 
and nothing offers greater potential to make an early dent in the U.S. 
trade deficit.
    But there is a rub.
    Because foreign buyers of capital equipment (car buyers) want and 
need to spread their payments over many months or even several years, 
exporters like me and quite a few other SBEA members need to access Ex-
Im's ``medium-term'' financing, covering repayment periods of 6 months 
to 7 years.
    Ex-Im does not delegate authority for its medium-term products to 
private sector lenders. As a result, the agency's transparency and 
decision cycle times for these products leave much to be desired.
    The Bank says that medium-term transactions take about 40 days. I 
will have to tell you that just about every capital equipment exporter 
I know tells me they endure much longer waits--months and even years. I 
know I often do.
    Given the many good transactions with Ex-Im that I have had, I hate 
to say this, but the Bank has developed a bad reputation among foreign 
buyers for its medium-term financing. Knowledgeable buyers that my 
company encounters often flinch when we say we want to finance through 
Ex-Im. They tell us stories of shuffling paper back and forth with Ex-
Im for a year or 18 months--and then being turned down. They tell us 
they turn to the Europeans and Japanese and get their transactions 
settled in a matter of weeks.
    SME's cannot handle delays of this duration. Customers walk away. 
Cash flow problems develop. Business reputations get damaged.
    While the Bank does not break out its figures for the small 
business share of medium term financing, we have heard Bank officials 
estimate it at about $100 million out of $1.7 billion in overall 
medium-term financing. If this is correct, the SME share is less than 6 
percent.
    This medium-term bottleneck will persist, in our opinion, as long 
as Ex-Im itself continues trying to handle the nuts and bolts of every 
transaction at its headquarters. There simply are not enough people at 
811 Vermont Avenue, and there never will be.
    The only way to truly solve the problem is to make the commercial 
banks genuine partners by delegating more authority to them for medium-
term transactions.
    If delegating authority works for SBA, with smaller transactions, 
and for OPIC, with larger transactions--as well as for Ex-Im itself 
with other products--it can be made to work with the Bank's medium-term 
financing.
    Accordingly, we urge Congress to direct the Bank to delegate more 
medium-term export financing authority to commercial banks and export 
finance institutions.
    I might note that this proposal is also strongly backed by the 
Bank's larger company customers.
    What we are ultimately talking about here is faster turnaround 
times, higher customer satisfaction levels, and lower transaction 
costs.
    Those are three pretty good measures for service improvements at 
the Bank.
    Another way to accomplish both is by putting more of the Bank's 
transactions online.
    Happily, the Bank's new ``Small Business Committee'' plan 
anticipates this.
    We would encourage Congress to hold Ex-Im to this commitment by 
stipulating, at least in Report language if not in the law, that the 
Bank's online system for exporters be up and running by July 2006, as 
promised, and that it soon include a password-protected area of the Ex-
Im website displaying:

 where each exporter's application(s) for financing stand,
 what decisions have been made on the application(s) and what 
    decisions remain,
 whether any further information will be needed from the 
    applicant,
 the person or persons at the Bank responsible at each step of 
    the process,
 the anticipated timeline for final action on the application, 
    and
 the anticipated date for the disbursal of funds.

    Such a system would not only improve turnaround times and lower 
transaction costs, but would also enhance transparency at the Bank and 
provide a valuable benchmarking tool for senior management.
    Finally, there is one Ex-Im metric that we believe Congress should 
not change.
    It is the requirement for the Bank to devote 20 percent of its 
financing dollars directly to small business.
    The Bank surpassed this percentage at least three times during the 
1990's, and it is perfectly able to do so again, particularly if it 
manages for a goal of 21 percent or 22 percent.
    For fiscal year 2005, the Bank says the SME share is at 19.7 
percent.
    The SME share metric supplies a necessary spur to Ex-Im to keep a 
strong focus on SME financing. It works hand-in-glove with the SME 
Division that we are proposing. Each reinforces the other.
    Other metrics have significant disadvantages, in our view. For 
example, the Bank's SME dollar volumes, while generally useful, reflect 
a mixture of factors. General trends in world trade and exchange rate 
variations can play as much of a role in shifting the Bank's dollar 
volumes as the efforts of the Bank itself.
    Focusing too closely on the number of transactions will perversely 
incentivize the Bank to emphasize simple, very low risk transactions 
with rapid approval times. More complex transactions, particularly 
medium-term transactions with higher dollar values--where the Bank's 
approval processes are already far too long--could well be pushed to 
the back burner. Yet, as noted, these types of transactions generally 
have far greater paybacks in high-paying U.S. export jobs.
    A concern is sometimes expressed that the 20 percent requirement 
for SME's might cause larger exporters to be refused financing if their 
transactions occurred toward the end of a fiscal year and would thus 
drop the Bank's final SME percentage below 20 percent. While SBEA 
believes that the Bank could avoid such unforeseen difficulties by 
managing for a goal of 21 percent or 22 percent rather than 20 percent 
(which allows little room for error), we share the view that the Bank 
itself--and not exporters--should be held responsible for any failure 
to meet the 20 percent mandate.
    Accordingly, we propose the following process for assuring Bank 
compliance with the 20 percent mandate:

 In any Fiscal year that the Bank fails to allot 20 percent of 
    its transaction dollars to SME's, the Bank shall submit a report to 
    Congress within 60 days acknowledging the shortfall and describing 
    a specific plan of action for rectifying it. This plan must, at a 
    minimum, specify additional funds that will be allocated from the 
    Bank's administrative budget to the SME Division.
 Within 30 days after the above plan is submitted to Congress, 
    the Bank shall report to Congress on its implementation.
 During the fiscal year following the one in which the Bank 
    fails to meet the 20 percent mandate, it shall report quarterly to 
    Congress on the percentage of its dollars that have financed SME 
    transactions.

    We believe that this approach will communicate the seriousness with 
which Congress views the Bank's SME responsibilities without adversely 
affecting any other exporters. The requirement for Ex-Im to allocate 
more administrative funds to the SME Division if the mandate is not met 
will help keep the agency's management focused on the SME goals. The 
quarterly reporting requirement assures that Congress does not have to 
wait till the end of the next fiscal year to see whether the Bank has 
corrected any deficiencies.
    In sum, Ex-Im has inherent strengths and the Bank does some things 
very well. As a Nation, we would be seriously set back without it.
    SBEA strongly supports Ex-Im's reauthorization, and we intend to 
strongly support it in the appropriations process.
    But Ex-Im can be improved, and we hope Congress will do so.
    This concludes my testimony. I would be happy to take any questions 
at this time.
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                  PREPARED STATEMENT OF JOHN MATTHEWS
             Managing Director, Boeing Capital Corporation,
                              on Behalf of
               The National Association of Manufacturers,
                The National Foreign Trade Council, and
              The Coalition for Employment Through Exports
                             March 8, 2006
    Mr. Chairman and Members of the Subcommittee, I am John Matthews, 
Managing Director of Boeing Capital Corporation, the financing arm of 
The Boeing Company.
    We at Boeing, and the other members of NAM, NFTC, and CEE, strongly 
support the reauthorization of Ex-Im Bank. Each year, Ex-Im Bank 
supports some 3,000 overseas sales of American-made goods and American-
provided services. During fiscal year 2005, Ex-Im issued $13.9 billion 
in financing--mostly guarantees and insurance of commercial loans. That 
financing supported $17.8 billion in U.S. exports. Those export sales 
in turn supported thousands of jobs for American workers.
    Most of these transactions are sales by small- and medium-sized 
companies. But even for large corporations like Boeing, Ex-Im Bank 
plays an essential role, not only for our 50,000 commercial aircraft 
employees, but also for our 26,000 U.S. suppliers and vendors 
throughout all 50 States. In 2005, the Boeing Company purchased 
approximately $5B from more than 11,500 small business suppliers in the 
United States. Of that total, our commercial unit, Boeing Commercial 
Airplanes (BCA), paid $1.4B to over 2,900 American small businesses.
    Today, I would like to focus on three key points: (1) Financing is 
a key element of global competition; (2) Export credit agencies are 
growing around the world; and (3) Ex-Im Bank is financially sound.
Financing is a Key Element of Global Competition
    Traditionally, companies competed on product quality, price, and 
service. In today's world, financing is an increasingly important 
competitive element. Ex-Im Bank has two central missions: To level the 
playing field when U.S. exporters are confronted with competitors that 
have ECA financing; and when commercial financing is not available.
    Each year, 70 percent of all Boeing's commercial aircraft sales are 
to overseas customers. Historically, 30 percent of these Boeing exports 
have relied upon Ex-Im to provide loan guarantees.
    In fiscal year 2005 alone, Ex-Im authorized financing to support 
the export of 78 Boeing commercial aircraft to 19 airlines located in 
18 different countries around the globe, including nations in Africa 
and in Latin America. This represented 33 percent of all our exports 
for that year.
Export Credit Agencies are Growing Around the World
    Virtually all major trading nations operate export credit agencies. 
The most recent data show that ECA financing is increasing worldwide. 
Last October, the International Union of Credit and Investment 
Insurers--the Berne Union--reported that its 52 member ECA's issued a 
total of $788 billion in financing during 2004, the highest total ever 
measured. That total approaches 10 percent of global trade flows in 
that year. Even more telling, the 2004 total marked a 60 percent 
increase over the 2001 level of $470 billion.
    While the structure of ECA's varies from country to country, 
virtually all operate in close cooperation with their national 
government, and most operate with government financial support of some 
type. Faced with that financial backing for its foreign competitor, no 
U.S. company, no matter how large, can compete on its own. When foreign 
ECA support is present, we must have the backing of Ex-Im Bank.
Ex-Im Bank is Financially Sound
    Ex-Im Bank is financially sound. At the end of fiscal year 2004, 
the most recent public data, Ex-Im Bank had a total exposure of $61.1 
billion. Against that exposure, the Bank had $9.6 billion in reserves--
a very strong reserve position.
    Exporters and our overseas customers pay fees for Ex-Im's 
participation in export sales, which in the last several years have 
covered the government's costs of operating the Bank. Ex-Im charges 
interest on its direct loans and premiums for its guarantees and 
insurance. Ex-Im does not subsidize interest rates. In financial terms, 
Ex-Im's crucial role is in mitigating risk, especially in markets where 
commercial financing is not available.
    Specifically, in aircraft transactions, Ex-Im generally does not 
provide direct loans. Rather, Ex-Im guarantees that if the airline 
customer defaults on the loan, Ex-Im will assume the financial 
liability. These guarantees make it possible for certain foreign 
airlines, especially in developing countries, to secure commercial bank 
loans they might otherwise not qualify for at those commercial banks. 
Ex-Im has not incurred any losses on commercial airplane guarantees 
over the past 15 years. This is a real testament to the continuing 
effective due diligence performed by the Bank before it provides 
guarantees to foreign airlines.
    According to the Bank's fiscal year 2004 annual report, Ex-Im 
generated a net income of $2 billion, through its interest charges, 
premiums, and fees. Unfortunately, under the Credit Reform Act of 1990, 
the Bank cannot utilize its own revenues to cover its costs. Instead, 
the Bank must obtain annual appropriations for both its operating 
expenses and its loan-loss reserves. As a result, the Bank is 
handicapped by the Government's own budget rules.
Conclusion
    Mr. Chairman, thank you for the opportunity to testify today. The 
Bank is indispensable to Boeing. It has been innovative and reliable in 
times of crisis such as the financial market's retrenchment in the 
aftermath of September 11. It is critical to our ability to compete 
against a subsidized competitor while sustaining high-paying U.S. jobs. 
We commend this Subcommittee for its timely consideration of Ex-Im 
Bank's reauthorization and we urge that the Committee act expeditiously 
to report a reauthorization bill to the Senate, so that Congress can 
complete the legislative process prior to the September 30 expiration 
of the Bank's charter.
    I would be happy to answer any questions about the broader 
exporting community or provide more specific examples of the Bank's 
criticality to Boeing's ability to compete.
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      ECONOMIC IMPACT ISSUES IN EXPORT-IMPORT BANK REAUTHORIZATION

                              ----------                              


                       WEDNESDAY, MARCH 29, 2006

                               U.S. Senate,
   Subcommittee on International Trade and Finance,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.

    The Subcommittee met at 10:02 a.m., in room SD-538, Dirksen 
Senate Office Building, Senator Mike Crapo (Chairman of the 
Subcommittee) presiding.

            OPENING STATEMENT OF SENATOR MIKE CRAPO

    Senator Crapo. This hearing will come to order.
    Today, the Subcommittee on International Trade and Finance 
meets to discuss the reauthorization of the Export-Import Bank. 
This is our second hearing and today we are going to focus on 
ways to improve the Bank's economic impact procedures.
    The last reauthorization changed the economic impact 
procedures to include the effect of outstanding trade orders, 
preliminary injury determinations, and Section 201 
investigations before determining the Bank's financing of 
exports. This was an attempt to ensure that the Bank support 
for transactions not only helps U.S. exporters but also does 
not negatively impact domestic companies.
    The current system still has problems and tensions continue 
between companies on both sides of the issues. This has been 
demonstrated on loan guarantees involving steel, 
semiconductors, ethanol, and soda ash to name a couple. 
Although the vast majority of loan guarantees before the Bank 
should not be slowed down, some of the larger and more 
controversial loan guarantees do need to be better vetted. 
Otherwise, groups that believe they will be harmed by the loan 
guarantee are then forced to come to Congress and ask us for 
intervention. A better approach would be to establish a process 
which is fair and perceived to be fair by everybody so that the 
facts are all well-presented to the board and they can act 
accordingly.
    For our first panel today, we welcome Jim Lambright, the 
Acting Chairman and President of the Export-Import Bank. 
Welcome, Mr. Lambright. At our last hearing, Jim Lambright 
suggested that Ex-Im could improve the economic impact process 
by making it more predictable, transparent, and by involving 
interested stakeholders in the process earlier. I completely 
agree with this and I appreciate Mr. Lambright's willingness to 
work with our Subcommittee on these issues.
    Our second panel includes Steve Appleton, the CEO of Micron 
Technology, Inc. and Thomas Sneeringer, Governmental Affairs 
Director of United Steel Corporation. Both of these witnesses 
have considerable experience with the Export-Import Bank's 
economic impact procedures and have specific suggestions on how 
procedures could be improved to provide greater fairness and 
transparency.
    I thank each of you for coming before the Committee this 
morning and I look forward to your testimony.
    Let me turn off my Blackberry so it does not keep beeping 
into the microphone.
    We will now proceed. I know that the witnesses have all 
received the instructions about testimony today. What we like 
to do, we have a little system of lights here to help you try 
to keep focused on the time limits. We ask you to keep your 
oral presentations to 5 minutes and that will give us time to 
go through questions and answers. I always remind witnesses 
that if you are like me and like 99 percent of all other 
witnesses, the 5 minutes run out before you run out of things 
to say. Please be assured that we will have an opportunity 
during the question and answer period with me and with other 
senators who will be here to get in the points that you want to 
make. So we just ask you to pay attention to the clock.
    With that Mr. Lambright, please proceed.

                STATEMENT OF JAMES H. LAMBRIGHT

                 ACTING CHAIRMAN AND PRESIDENT

            EXPORT-IMPORT BANK OF THE UNITED STATES

    Mr. Lambright. Thank you very much, Mr. Chairman. I am 
happy to be here today to testify on Ex-Im Bank's procedures 
involving economic impact.
    As I stated in my testimony of March 8, the mandate of the 
Bank is to preserve and create U.S. jobs by supporting U.S. 
exports that would not otherwise go forward. Consistent with 
this mandate Ex-Im Bank fully agrees with the principle that it 
should not approve a transaction that would, on balance, harm 
the U.S. economy. This is the foundation of our economic impact 
procedures.
    Decisions that raise economic impact considerations, 
however, are the most difficult the Bank must make because it 
weighs the interests of American workers against those of 
another.
    The Bank's economic impact procedures are intended to lay 
out a reasonable and logical process for analyzing the impact 
of Ex-Im Bank support for a particular export transaction. Ex-
Im Bank endeavors to implement the Congressional mandate in a 
thoughtful, considered, and transparent manner with full 
participation of interested stakeholders.
    In 2001, Ex-Im Bank recognized the shortcomings in the 
then-existing economic impact procedures and initiated a 
process to improve them. The process of vetting changes was 
extensive and included representation of all stakeholders.
    In March 2003, Ex-Im Bank released new procedures 
reflecting changes developed through public consultation as 
well as changes mandated by Congress in the Bank's 2002 
reauthorization. Many of the shortcomings of the prior economic 
impact analysis were addressed, including clearer criteria and 
definitions, broad consideration of trade measures, enhanced 
interagency consultation, and provision of notice to interested 
parties. As you noted in your opening, Mr. Chairman, since the 
new procedures took effect economic impact issues have arisen 
in a number of transactions, including those related to the 
production of textiles, chemicals, steel, semiconductors, soda 
ash, and solar panels.
    Ex-Im Bank must balance the need for inclusiveness with 
commercial practices that require efficiency and timeliness on 
transactions. While the Ex-Im Bank makes every effort to 
complete the economic impact analysis expeditiously, it 
requires a substantial dedication of staff resources, usually 
takes 8 to 10 weeks, and has even taken up to 1 year, depending 
on the extent to which the feedback and information obtained 
through the notice and comment period comport with the Bank's 
analytical findings.
    For example, a lack of consensus among industry observers 
about the outlook on supply and demand balances can lead to an 
inconclusive finding on oversupply and may complicate the 
Bank's analysis.
    Exporters have indicated that the delay and uncertainty 
associated with the Bank's economic impact policy have, in some 
instances, frustrated their commercial relationships and caused 
them to lose export sales to foreign competitors. At the same 
time, the Bank must ensure that potential transactions are 
thoroughly vetted and all interested parties have an 
opportunity to be heard.
    The revisions of the economic impact procedures implemented 
in 2003 have been successful from a number of perspectives. 
They clarified the criteria for Ex-Im Bank's analysis and 
expanded participation by other U.S. Government agencies and 
stakeholders in the process.
    Yet, as you noted, the economic impact analysis continues 
to present challenging issues for Ex-Im Bank. Despite these 
challenges, Ex-Im Bank strives to implement the economic impact 
procedures so that they are transparent, predictable, 
effective, and fair to exporters, affected industries, and 
other interested parties.
    I look forward to working with you and the Committee to 
achieve these objectives and I would be happy to take any 
questions. Thank you.
    Senator Crapo. Thank you very much, Mr. Lambright.
    I do have a number of questions. I have been studying the 
flow chart of the economic impact policy to try to understand 
just exactly how economic impact decisions and trigger points 
are reached. And it actually is not one of the more complicated 
Government flow charts that I have seen. It is relatively 
comprehensible and I think that you guys should be commended 
for that. We need to just be sure that the substance in it is 
what we want to have.
    At our last hearing, you suggested that the Ex-Im Bank 
could improve the economic impact process by making it more 
predictable, transparent, and involving more stakeholders in 
the process at an earlier date. Could you elaborate on those 
points and give me a little more detail about what exactly it 
is you think that can be done to improve in those areas?
    Mr. Lambright. Certainly, Mr. Chairman. While you note that 
we have worked hard to develop a clear flow chart of the 
decisions that need to be made, unfortunately at nearly every 
stage in that flow chart a debate can arise, depending on the 
facts of a particular case.
    Take the very first step. Some cases are subject to debate 
as to whether they implicate the procedures at all. For 
example, if the export is part of a plant but is only ancillary 
to production, does it expand production capacity? As an 
illustration, think of a dedicated power supply to a widget 
factory where our export would not be involved in making more 
widgets but it is certainly part of the overall operation.
    Right now, Ex-Im Bank errs on the side of inclusion but I 
think that exporters would benefit from more clarity in this 
case as to what even falls under the procedures. And we would 
be happy to work with the Committee on developing guidance on 
that front.
    Senator Crapo. Thank you.
    We are going to get into some more details on each of these 
issues but, as you know, one of the questions or issues is 
whether a product in question will be in surplus or in 
oversupply at the time when it is marketed or when it is sold. 
It seems to me that is a really difficult calculation to make, 
and frankly reasonable people are going to have different 
points of view on that.
    How does the Ex-Im Bank or how should the Ex-Im Bank 
resolve that question?
    Mr. Lambright. During the last reauthorization, the Bank 
went into the process of reauthorization with no definition and 
no indicators of how to think about that term surplus or 
oversupply. What was added in the last reauthorization was a 
list of possible indicators that the Bank should look to as 
guidance in assessing this oversupply question. But there is 
still no explicit definition.
    So we look to this list of indicators that includes Section 
201 investigations or preliminary trade measure determinations, 
price dynamics--are they rising or falling? We look at 
bankruptcy or unemployment trends. We can even look at whether 
there are trade adjustment and assistance program petitions.
    In many cases, these indicators form a consensus view and 
it is an easy decision. As you noted, many of them are very 
difficult. But I think one thing that we may do to make it 
easier could be to explore finding a clearer definition that 
would add some more predictability or clarity.
    But I am not sure that there is an elegant solution that 
would eliminate contentiousness entirely, Mr. Chairman, because 
this is a test about predicting the future, forecasting global 
supply and demand dynamics of an industry several years out. 
And as you might imagine, especially when jobs are at stake, 
opinions can diverge dramatically as to what that future will 
look like.
    From my days in banking, I saw people make and lose 
fortunes speculating on the future dynamics of a commodity. So 
finding a consensus might be difficult.
    And so what we do with these indicators that guide us is we 
must judiciously assess all of the positions that are put 
forward in the process and work to develop the most reasonable 
set of assumptions for the board to consider.
    Senator Crapo. Do you think we need to change or alter the 
process which the statute now sets forth and the indicators 
that the statute now requires?
    Mr. Lambright. Because there is an inherent likelihood for 
diverging opinions, given that this is looking forward to the 
future, there is some prognostication involved, and as you 
noted reasonable people can disagree. I do not know that we can 
eliminate that contentiousness entirely. But I do think that we 
could work with various industries, exporters, to try to 
explore a definition that perhaps we could all agree on, even 
though some people will still likely disagree in its 
application.
    Senator Crapo. I think that would be very helpful because, 
as you indicated, people have made and lost fortunes trying to 
figure out what the market is going to do in a particular 
product. And yet that is exactly what you are asked to do, to 
determine whether to proceed with a loan or a loan guarantee.
    I do not know that I have the answer but I think it would 
be very helpful if some type of review process were undertaken 
in which participants were involved in a decisionmaking process 
or at least a review process to help identify not only the 
factors but also the decision points that need to be reached in 
terms of making that decision.
    Obviously nobody has a final answer to this or they would 
be probably the most sought-after investment adviser in the 
world. But I think that we can get to the point where we 
generate a process by which we have a much higher level of 
confidence. And so I would be encouraged by your suggestion 
that perhaps getting people together to analyze that would be a 
good idea.
    Mr. Lambright. I would be happy to work on that in any way 
that the Committee would advise.
    Senator Crapo. Thank you very much.
    Let us go on. Another issue that comes up is in determining 
whether the product in question competes with U.S. production 
of a same or similar product. That is an easy thing to answer 
if it is the same product that we are talking about. But often 
what we find out, I am learning, is that there are similar 
products or products in the chain that manufacturing equipment 
can be utilized to make or that can be facilitated by the loan, 
even though they are not directly related to the proposed 
product that is at issue in the loan.
    The question that I have is how do you make the 
determination as to whether the product in question competes 
with another U.S. product that is the same or similar? And how 
do we improve that determination, if there is a way to do so?
    Mr. Lambright. It seems like there were two parts of your 
question. The first is making the determination. If I 
understood the second part of your question correctly, it was 
also making sure that a borrower is going to use a machine as 
they say they would so that it is not producing other products 
that might also compete with U.S. firms.
    But both of those are things that we do investigate in the 
course of underwriting a transaction. First of all, we 
determine the magnitude of the competitive threat to U.S. firms 
by looking at where the foreign producer will sell this new 
output and then comparing that with the markets where U.S. 
firms are active so that we can try to measure the displacement 
of U.S. production that is at risk.
    In terms of determining whether a product is the same or 
similar, we have engineers that assess the technical elements 
of the export and advise us on the various uses to which that 
export could be put. We also work with other U.S. Government 
agencies that may have expertise in certain industries in 
coming to a conclusion of whether this is a competitive 
product. But we try to be inclusive in that definition so that 
we are not ignoring a potential threat to U.S. industry.
    Senator Crapo. It would seem to me that this is one area 
where getting the proposals publicly vetted at an early stage 
would significantly benefit the Ex-Im Bank analysts because, as 
wonderful and as smart as they are, I do not think that they 
are necessarily experts in every product in every market. If we 
were to have the public availability of what is being 
considered accomplished at an earlier stage, then those who 
might feel that there is a competing product or a circumstance 
involved could then provide that information and help the 
analysis at an earlier stage.
    Would you agree with that?
    Mr. Lambright. There seems to be a lot of merit in that and 
we can explore ways to introduce that part of the process 
earlier.
    Senator Crapo. Thank you.
    Another aspect of this, which I do not even have any idea 
how we would solve is that often, although we might be trying 
to analyze whether a certain set of manufacturing equipment can 
be used for this process or that process or product, in a 
significant sense financing is fungible. And if money is 
utilized for a totally unrelated aspect of a business but is 
provided for that, then that can free up money inside that 
company or that business for what may not be a related product 
but would be money that is related because the company is 
manufacturing it and they have freed up assets in another area.
    Is that kind of issue discussed?
    Mr. Lambright. It is certainly discussed but, as you noted, 
it can be a difficult question to resolve because money is 
fungible and it may be difficult to identify all the potential 
uses to which a firm might put its funds. But we certainly do 
look at whether an overseas firm or even a country generally is 
subject to any kind of a U.S. Government trade measure so that 
if a foreign entity has been determined by the U.S. Government 
to be an unfair competitor, then that would certainly limit our 
interest in working with that borrower.
    Senator Crapo. I can see that in terms of any trade 
circumstances where a competitor has already been identified as 
being in violation of some kind of a trade rule but it seems to 
me the question goes even more broadly to those who are not 
engaging in unfair conduct in any way, it is just that they are 
competitors and money is fungible. And it seems to me to be a 
very difficult--I do not have an answer for you. It just seems 
to me to be a very difficult issue.
    I wonder is that issue even a factor in the economic 
analysis at this point?
    Mr. Lambright. It is not a formal factor mentioned in our 
procedures, but certainly if interested parties raise that 
issue with us it is something we can take into account.
    Senator Crapo. Then you can and do take it into account.
    Mr. Lambright. We can take it into account although, as you 
noted, it can be difficult to decide what to do with that 
information. But it is certainly something that we can explore.
    Senator Crapo. Right.
    To move on, when loan applicants claim that the Ex-Im Bank 
financing is warranted because private sector financing is not 
available or because there is some market failure of some kind, 
what kind of documentation do you currently require from 
applicants to demonstrate that this is the case?
    Mr. Lambright. This is certainly a concern of ours and it 
is part of our due diligence up front in a transaction. We pay 
close attention to the markets. We follow a number of banks and 
we look for an absence of commercial financing in these 
transactions.
    Programmatically as well, we are comfortable that our 
transactions have the element of additionality which is the 
term we use for the characteristics you are describing.
    We do very little direct lending. There is always a 
commercial bank involved in our transactions. And so the 
commercial banks can let us know when this is a transaction 
ripe for commercial lending.
    But to your question about documentation, this is something 
that we do as part of our due diligence. I am not aware that we 
require anything formally in writing.
    Senator Crapo. So maybe you have just answered this 
question, but do you require the applicant, for example, to 
provide to you, for example, the last 3 years of their capital 
raising efforts and the success or failure of them? Or do you 
require them to provide to you applications for commercial 
financing that have been rejected so that they can establish 
that they have not been able to get financing?
    Mr. Lambright. No, Mr. Chairman, we do not go so far as 
that in our analysis of additionality. What we have found is 
that these are hard fought transactions and if it is too 
difficult or too unattractive for a borrower to document their 
failure to obtain funds, it might increase the attractiveness 
of foreign-made products. So we try to strike a balance in our 
due diligence of investigating the question. We understand that 
it is central to our mission and so we do not want to be doing 
transactions that violate this additionality standard. But we 
also need to realize that we are a participant in private 
sector transactions and try to keep pace with those 
transactions.
    Senator Crapo. Do you have any concerns that the banks, for 
example, that you might be working with would have a financial 
interest in having you conclude that the loan would be 
something you should proceed with?
    Mr. Lambright. Yes Senator, although generally they would 
make more money doing it themselves if they found it to be a 
creditworthy transaction. So, I think the profit they make on 
an Ex-Im Bank transaction is very thin. So we really step in as 
a lender of last resort.
    Programmatically our policies are structured so that we are 
not anybody's first choice for financing and really we come in 
where we are needed to fill a market gap or to meet 
competition.
    Senator Crapo. Another related issue is the question of 
whether a foreign export credit agency will provide the support 
if we do not. I know that is often a question that is raised or 
an issue that is raised.
    What proof is provided in those cases that a foreign export 
credit agency will provide financing if the Ex-Im Bank does not 
go forward and that the U.S. exporter would lose that business?
    Mr. Lambright. I think both the question and my answer will 
follow our last exchange because again this is an area that we 
investigate, and take very seriously. Again, it is a central 
tenet to our mission that we are here to level the playing 
field against foreign government supported financing.
    And yet, to your question, we are not receiving formal 
reports from borrowers as to the offer that a foreign export 
credit agency might have on the table.
    And again it gets to the issue that these are hard fought 
transactions. We work with our counterpart export credit 
agencies in the OECD to try to set up rules that level the 
playing field. And so we do have procedures that we can pursue 
through the OECD to make sure that these rules are being 
followed. But in a transaction specific instance, the pace of 
the transaction may not permit waiting for a fully authorized 
foreign offer. It may put the U.S. export at risk.
    Senator Crapo. You indicated some OECD procedures and so 
forth and that there was communication back and forth between 
you and other similar operations. Is that level of 
communication sufficient, in your opinion, that you can have 
confidence in the judgment that the Ex-Im Bank will make as to 
whether there is, in fact, an alternative source of financing?
    Mr. Lambright. I do not put that forward as an answer to a 
specific transaction. What I was suggesting is that it sets a 
general framework for export credit agency behavior. I know 
that the U.S. Ex-Im Bank follows those rules, as do most other 
export credit agencies in the world.
    So it sets a framework for behavior. It allows us to have 
relationships with these other export credit agencies so that 
we can investigate suggestions that there would be offers. But 
on any particular transaction we do need to go further than 
that. We try to work with the export credit agency to confirm 
the terms of the offer. Sometimes we are able to do that, 
sometimes we are not. We try not just to rely on a simple 
allegation made by one party. We do try to corroborate it.
    But at the end of the day we do not have a formal 
requirement for written proof of an offer.
    Senator Crapo. Would having such a formal requirement of 
written proof of the offer pose a problem? In other words, 
would it slow down the process or make it so that the system 
could not work well?
    Mr. Lambright. I would want to think about that and talk to 
some of our exporters, lenders, and borrowers about that. My 
sense is that we ask about it, we do investigate it but that we 
are not demanding formal written proof either because the pace 
of the transaction does not allow it. But my fear really, Mr. 
Chairman, would be that if we would have such a formal 
requirement that by waiting for verification from a foreign 
export credit agency to confirm a formal authorization the deal 
may be done and U.S. exporter competitiveness would be damaged.
    Senator Crapo. The deal being the alternate credit agency 
would actually do the deal? Is that what you are saying?
    Mr. Lambright. Right. Exactly.
    Senator Crapo. So it seems to me that if an applicant were 
to say look, if you do not do the deal with us, we are going to 
do at it with XYZ foreign credit agency, that it should be 
something that is relatively simple to say to the applicant 
have you made an application? And if so, can you produce it to 
us? Am I just oversimplifying the issue?
    Mr. Lambright. I understand your concerns, Mr. Chairman, 
and I think that it is a topic that we would certainly be 
willing to explore with you of where the appropriate line to 
draw would be.
    Senator Crapo. Thank you. And again, I do not profess to be 
an expert in these areas like you and your analysts are, and 
frankly a lot of the participants in the industry are. But it 
seems to me that from what I have observed there is a lot of 
representations and allegations that are made from all sides 
that seem to be able to be verifiable, if we had the time and 
the connections to be able to do so, or if we had the 
requirements that the applicant be prepared to document facts.
    I think the same would probably be true about those who 
were objecting, maybe not just the applicant but the objectors 
may be required to document some of the financial information 
or conclusions that they are suggesting that the analysts 
reached in the process.
    Another issue is input to our Ex-Im analysts from other 
sources. For example, would it be useful to the Bank and the 
Bank's economic impact assessment to be able to get greater 
input from agencies like the Department of Commerce and others 
that may have greater expertise in some of the industries that 
are subject to the economic analysis being done?
    Mr. Lambright. Mr. Chairman, we certainly put a great value 
on the input that we get from other agencies and it might be 
useful to explore the role of these other agencies' inputs. 
Today, our procedures reach out to other agencies at the end of 
the process. We could explore the practicality of changing the 
timing of that as well as the extent of the interagency 
involvement in the process and how their input is to fit into 
our decisionmaking.
    We certainly get a lot of value from the expertise that 
these agencies bring and any guidance on how to use that 
information in the process would be helpful.
    Senator Crapo. It does seem to me that is probably an 
avenue of significant help.
    Another issue, has the Bank ever looked into policies or 
practices of other Government agencies such as, for example, 
the International Trade Commission, to try to see how they 
approach these same types of issues in terms of due process and 
transparency or economic impact provisions?
    Mr. Lambright. Yes. At the time of the last 
reauthorization, the Ex-Im Bank staff conducted a broad survey 
of best practices that we could bring to bear on our process, 
and one of the valuable additions that we made at that time was 
introducing the public notice and comment period, so that 
interested parties, not just the participants of the 
transaction, but any interested party, would have an 
opportunity to voice concerns in the process.
    Senator Crapo. Thank you. This question, I suspect you 
might have guessed you were going to get. There are some who 
are concerned about previous economic impact analyses that the 
Bank has done, and on a subject related to economic impact 
procedures, some of my colleagues are concerned by that 
application by the Ex-Im Bank of the test as to whether the 
issuance of credit or financial guarantees by the Bank will 
cause substantial injury to producers. Namely, they are 
concerned that the credit insurance was issued to help finance 
the construction of an ethanol dehydration plant in Trinidad 
and Tobago, although this extension of credit resulted in 
substantial injury as defined by the Ex-Im Bank's authorizing 
statute to U.S. producers, and that is the concern that I know 
you are very aware that some of my colleagues have raised.
    I assume you are familiar with these issues. Are you 
confident that the Ex-Im Bank staff are aware of the current 
statutory limits on credit insurance?
    Mr. Lambright. I am familiar with the concerns of your 
colleagues, Mr. Chairman. I have drawn upon my staff to look 
into this matter thoroughly, and they have kept me well-
informed of Congressional concerns.
    As for Bank staff, I consider it my responsibility to 
ensure that staff are fully aware of the statutory constraints 
surrounding our ability to extend credit. I have done that. I 
consider it an important part of my job, and, yes, I am 
confident that staff is aware of those limits.
    Senator Crapo. As you may be aware, there is at least one 
Senator and probably others who would like to see some kind of 
an analysis of this particular transaction by the Inspector 
General's Office, but you do not have an Inspector General's 
Office operating right now; is that correct?
    Mr. Lambright. That is correct. We have appropriated funds, 
but we do not have a nominated or confirmed Inspector General.
    Senator Crapo. When did the funds get appropriated?
    Mr. Lambright. In this fiscal year cycle.
    Senator Crapo. This current fiscal year cycle?
    Mr. Lambright. Right, for the first time.
    Senator Crapo. So you now have the funds, but you do not 
have the nominee.
    Mr. Lambright. Right.
    Senator Crapo. Do you have any other employees in this 
office of the IG?
    Mr. Lambright. No. This would be the first time that we 
would have the Inspector General function inside the Bank.
    Senator Crapo. So for those who would like to see an IG 
investigation into this particular transaction, is there any 
way that we could proceed without having to wait for the 
nomination and then confirmation of the IG, him or herself?
    Mr. Lambright. Mr. Chairman, I am as interested as anyone 
in reaching a resolution on this matter, and I would like to 
move as quickly as possible in addressing the Senators' 
concerns on this transaction. And I stand ready to refer the 
matter to an Inspector General as soon as we have one, and I 
would be willing to explore any alternatives to that in terms 
of referring the matter to an outside party. I am not in a 
position to know whether we are able to do that or not.
    Senator Crapo. I appreciate your willingness to consider 
these other alternatives, because I, too, would like to get 
this issue resolved as promptly as possible, and see if we 
cannot move forward and really get past it. We seem to be stuck 
just with the procedural fact that the President and Congress 
have not appropriated the money and nominated and confirmed the 
nominee for Inspector General fast enough to be able to address 
it, at least at the pace that I would like to see it addressed.
    I am going to be exploring other alternatives with those 
who are concerned, and I appreciate your willingness to work 
with us on those alternatives. Hopefully, we can find an 
agreeable approach to this that does not require us to have to 
wait for the IG's office to become fully functional.
    I believe those are all the questions that I have right 
now. I want to come back to the very first question that I 
asked, and just ask you, again, looking at this from the 
perspective of this Committee and its effort at 
reauthorization--I guess what I am saying is looking at the 
potential for statutory reform, statutory provisions that will 
address the economic impact analysis process, are there any 
specific statutory provisions that you believe we need to 
include, either changing some existing provisions to improve 
them, or adding some new provisions that would help to improve 
the process?
    Mr. Lambright. Mr. Chairman, the Bank has come into the 
reauthorization process requesting a fairly clean bill. In the 
area of economic impact, while we recognize that the process 
certainly can benefit from refinement, I think most of the 
ideas that I have heard or that we have contemplated may not 
rise to the level of a statutory change. Rather, they are a 
process or implementation change. I would be open to hearing 
any ideas that you are hearing, or that you think may not rise 
to the level of a statutory change, but that the Bank should be 
considering nonetheless. And if in exploring any of the ideas 
that we have heard from interested parties, if any of them 
strike me as rising to the level of a statutory change, I will 
certainly continue to remain in contact with you and your 
office on this.
    Senator Crapo. I appreciate that, Mr. Lambright. I would 
like to first of all thank you. The willingness to work with 
the Committee that you have just expressed is something that 
you have proven by your conduct in the past to be something 
that you are sincere about, and I appreciate the fact that you 
are so willing to work with us, because it gets a lot easier 
when we are able to talk these things over, find solutions, and 
then agree on moving forward. In that way we have to do much 
less legislating, which I think in the end is better.
    With that, I do not have any further questions, and so we 
appreciate you coming today, Mr. Lambright, and you are 
excused.
    Mr. Lambright. Thank you very much, Mr. Chairman.
    Senator Crapo. We will now invite our second panel to come 
up to the table.
    Mr. Lambright, you did not get away from the table fast 
enough. One of my colleagues had asked me if I would ask you a 
question for him. Senator Enzi is not able to be here, so if it 
is okay, I would like to bring you back to the table and ask 
you to answer one more question.
    Mr. Appleton, you can stay right there because this should 
not take very long.
    I apologize. You should jump up fast when you are released 
from your testimony.
    [Laughter.]
    Senator Enzi has asked that I ask you the following 
question. He indicates that it is his understanding that the 
Export-Import Bank is considering an application to finance the 
purchase of refurbished locomotives by a soda ash facility in 
Kenya. It is his understanding also that the Export-Import Bank 
only considers the negative economic impact that these 
locomotives will have during the life of the loan. Locomotives 
will certainly last longer than the life of the loan, and it 
would seem to him, and I would agree with him, that the 
economic impact analysis should consider the full impact of 
such a transaction over the life of the entity, not over just 
the life of the loan.
    At any point during the process, does the Export-Import 
Bank evaluate the full impact of such a transaction, and if 
not, why?
    Mr. Lambright. The useful life of the export is a 
substantial factor in setting the term of our support, and 
while certain exports may have a life that extends beyond the 
term of our support, it does provide an objective method for 
calculation, and if we keyed our analysis to useful life, it 
may open us up to yet another point for debate as to exactly 
how long this piece of equipment might last, and under what 
circumstances it might have enhanced or diminished longevity.
    But let me assure you, Mr. Chairman, and your colleague, 
that our staff is quite cognizant of the potential threats from 
this transaction. They are working seriously on assessing those 
potential threats to U.S. industry. We have already had our 
public notice period where we have received comments from 
interested parties. It has not yet gone to other agencies for 
comment. And as it proceeds, we will continue to keep your 
office and his fully apprised of any developments.
    Senator Crapo. I appreciate that, and like I said, I have 
confidence when you make the representation that you will 
approach it in that way, that you will do so. This may be an 
issue that we would want to mandate that you evaluate. I know 
you just said that it is tough, but this may be one that the 
question of looking at the full life of the product or the 
process might be something that we will want to be sure that 
the Agency does figure out a way to evaluate.
    Mr. Lambright. And I would appreciate the opportunity to 
participate in that analysis of finding a way to address this 
concern.
    Senator Crapo. All right, Thank you very much.
    Mr. Lambright. Thank you.
    Senator Crapo. And now you are excused if you move fast.
    [Laughter.]
    Mr. Lambright. Thank you, again, Mr. Chairman.
    Senator Crapo. We would like to welcome our second panel 
here today. As I indicated earlier, our Panel No. 2 consists of 
Mr. Steve Appleton, who is the Chief Executive Officer of 
Micron Technology, Inc., and we welcome you here with us, Mr. 
Appleton; and Mr. Thomas Sneeringer, Governmental Affairs 
Director of the United States Steel Corporation. Mr. 
Sneeringer, we welcome you as well.
    We will begin with you, Mr. Appleton, and you may proceed.

                STATEMENT OF STEVEN R. APPLETON

         CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE OFFICER

             AND PRESIDENT, MICRON TECHNOLOGY, INC.

    Mr. Appleton. Thank you, Mr. Chairman. Thank you for 
inviting me here today to testify before this Subcommittee 
regarding the reauthorization of the Export-Import Bank of 
United States. I will keep my comments brief, but I have 
submitted a more detailed version of my statement for your 
review.
    Senator Crapo. And I should have said all witnesses' full 
statements will be made a part of the record.
    Mr. Appleton. Thank you. Let me start by saying I 
appreciate the work of the Ex-Im Bank in encouraging exports 
from the United States, and the work of this Committee in 
authorizing and overseeing funding for the Bank. These 
activities have clearly had an advancing effect on the 
interests of the United States.
    However, I would like to also share a perspective that 
highlights how these efforts might be improved. First, a little 
background on Micron. I could spend all my time telling you 
Micron's history, but in recognition of your time and the 
others here, let me sum it up this way. In the last 25 years, 
there have been over 40 companies that have manufactured a 
computer memory chip known as a DRAM. Today, there are only 
five still developing this technology, one in the United 
States--that is us--one in Japan, one in Europe, and two in 
Korea.
    Most of this consolidation was the result of nonmarket 
artificial manipulations, in other words, directed Government 
subsidies, but that is another story for another day. So 
regardless of the reasons that there are not many of us left, 
Micron has survived as one of the most competitive and 
innovative memory producers in the world, with operations in 
Japan, Europe, the Far East, obviously in the United States in 
many location, Idaho, Utah, Virginia, California, Texas, 
Minnesota, et cetera. So we have a large presence and we are a 
very competitive company.
    So with that background in mind, you can appreciate my 
surprise when I discovered in August 2004, that the Ex-Im Bank 
was considering $500 million in loan guarantees to a DRAM 
competitor in China, a company called Semiconductor 
Manufacturing International Corporation, also known as SMIC. 
Now, SMIC is a foundry that manufactures product for both 
themselves and others, including memory like the DRAM and NAND 
flash chips that Micron makes and sells today.
    SMIC, at that time, had three semiconductor facilities in 
China. They were financed with a mix of private equity, loans 
from Chinese banks, and vendor financing. Most of the equipment 
it purchased for these three factories was from U.S.-based 
equipment suppliers, so it was even more perplexing to me that 
SMIC could claim to need Ex-Im Bank financing in order to 
purchase manufacturing equipment.
    So what happens when a constituent hears about something 
happening in Washington they have a lot of concerns about? They 
come to Washington, and indeed, I did. In fact, I met with most 
of the Ex-Im Bank Board Members and various agencies, and guess 
what I found out? The $500 million request had, without notice, 
turned into $1.2 billion for an already over-supplied market to 
produce product for our competitors, under the umbrella that 
the dollars would be used for making products that did not 
compete with us, with a claim that Japan was going to provide 
the financing if the United States did not, and force them to 
buy all Japanese equipment, along the lines of the issues you 
were asking Mr. Lambright before. Of course, this turned out to 
not be the case.
    As you might imagine, we objected based on the available 
data, and hired an economic consulting firm to further study 
the issue. They performed an independent economic impact 
analysis, which we submitted to the Ex-Im Bank. Fortunately, 
then-Chairman and President Phillip Merrill, reviewed all of 
the available data, and as you know, Mr. Chairman, including 
the submitted analysis by the economist that we had provided, 
and made the determination that the SMIC request did not meet 
some of the required criteria, and would need further review, 
at which point SMIC chose not to pursue the loan.
    As a result of this experience, I have detailed a number of 
recommendations that I mentioned in my written comments to 
improve the Ex-Im Bank process, but let me just focus on a 
couple of them.
    First, more detailed information should be provided in the 
Federal Register notice, and if there any significant changes--
as I mentioned there were in the loan amount--from the original 
notice, the Ex-Im Bank should be required to issue another 
request for public comment.
    Second, the public comment period should be extended from 
14 days to a minimum of 30 days, and the period of time the 
interagency group has to review the proposed deal should also 
be extended.
    So, in summary, I believe these changes, along with the 
others submitted, will be useful in future instances that may 
affect companies like Micron.
    Thank you, and I would be happy to answer any questions.
    Senator Crapo. Thank you very much, Mr. Appleton.
    Mr. Sneeringer, please proceed.

               STATEMENT OF THOMAS M. SNEERINGER

             DIRECTOR, FEDERAL GOVERNMENTAL AFFAIRS

                UNITED STATES STEEL CORPORATION

       ON BEHALF OF THE AMERICAN IRON AND STEEL INSTITUTE

    Mr. Sneeringer. Thank you, Mr. Chairman, and for this 
opportunity to appear. I am appearing for the American Iron and 
Steel Institute, of which U.S. Steel is a member, and we have 
been as active as we can be at the Ex-Im on steel issue. We 
also find a great value to the Bank, I will not take the time 
now to talk about that, but, as many people as are in this room 
cannot all be wrong. The Bank is obviously addressing a very 
important need in the economy.
    I would like to draw your attention and the Subcommittee's 
attention to some thoughts that occur to us after working on 
steel issues at the Ex-Im as long as we have, and I could 
summarize it in three points.
    Number one. The Ex-Im Bank should not be in the business of 
undermining a primary negotiating objective of the United 
States to eliminate steel subsidies around the world.
    Number two. The Ex-Im Bank should not be in the business of 
enabling circumvention of trade law remedy orders after they 
have been won.
    And third, those of us who wish to have a greater role in 
helping the Bank make the right decision, as Mr. Appleton has 
suggested, can think of a number of ways in which it would be 
easier for us to do that, and we think beneficial to the Bank. 
Let me cover each of these very quickly.
    On the subsidization issue, the steel industry operates in 
a distorted market. In a real market, a persistent or a 
permanent oversupply of product could not exist. When supply 
exceeds demand, the price falls, the least competitive 
companies fall off the bottom of the list, and some kind of 
equilibrium is attained. Never, ever, ever does that happen in 
the steel industry, and that is because the market is deeply 
distorted through governmental intervention. This can take the 
form of high tariffs, opaque nontariff barriers, currency 
manipulation, et cetera, but the primary cause of the market 
distortion in the steel world is subsidies.
    Our Government knows that. The Clinton Administration found 
it in a deeply detailed study done in 2000, and in 2001, newly 
elected-President Bush instructed the USTR and the Commerce 
Secretary to initiate worldwide talks to eliminate steel 
subsidies. The U.S. position, going into those talks, and 
maintained ever since, is that all governments should get out 
of all steel making. Those talks have been very unsatisfying, I 
am afraid to say, because what quickly happened is that the 
rest of the world divided into two camps. The developing 
countries wanted off the hook, and the developed countries 
wanted their existing subsidies grandfathered and their new 
subsidies green-lighted. If nothing else, it confirmed what we 
already know, and that is that governments all over that world 
are addicted to subsidizing their steel industries.
    Now comes the Ex-Im Bank. When the Ex-Im Bank subsidizes 
construction of excess capacity elsewhere in the world through 
finance support or any other means at its disposal, it does two 
things. It helps to create additional overcapacity in a flooded 
market, and it undermines the negotiating posture of the United 
States in trying to get other governments to give up their 
subsidies. Every time the Ex-Im Bank subsidizes steel capacity 
in other countries, the way I see it is it cuts another inch 
off the bottom of the negotiating chair at the steel subsidy 
talks on circumvention. All this excess steel that is floating 
around looking for a home finds its home in North America, and 
largely in the United States. That is because we have no 
tariffs, no real nontariff barriers, and we have customers who 
are always happy to pay less than the real price of steel in 
their cost-cutting efforts.
    So we bring trade law cases to defend ourselves. We win 
orders and, immediately, the respondents go into a deep 
circumvention exercise: Trans-shipping, yes; fraud, yes; but 
more often just shifting products and switching countries. Some 
of the ideas that have been put forward in anticipation of this 
hearing address that kind of circumvention. The Ex-Im Bank 
should not be in the business of helping people build capitol 
equipment that is going to help them take their steel products 
one more step downstream in order to avoid orders, and it 
should not help them build steel capacity in other countries to 
get around the order.
    Last, on administrative procedures, we have not found the 
procedures at the Ex-Im Bank to be particularly transparent. We 
do not feel that we have been reached out to the way the Bank 
promised we would be. It is very easy to contact the steel 
industry. Contacting one person at the American Iron and Steel 
Institute will do it. We are highly organized. I would add, 
finally, that all the suggestions that have been made in terms 
of notification to the Congress, et cetera, we support.
    Thank you very much.
    Senator Crapo. Thank you very much, Mr. Sneeringer. I have 
some questions--some will be specific, but several I think 
would be the type that both of you could respond to.
    Mr. Appleton, first of all, thank you again for coming 
before the Committee today and for helping us to analyze this 
issue. I know that because of the time limits you were not able 
to go into all of the recommendations that are contained in 
your written testimony. Could you give us an overview, maybe, 
and a little more detail of some of the changes that you think 
should be made to the Ex-Im Bank procedures to increase the 
fairness and the process for companies like yours?
    And, Mr. Sneeringer, I am going to ask you the same 
question.
    Mr. Appleton.
    Mr. Appleton. First of all, let me just start out by 
saying, and I think echoing some of the comments made by my 
peer, that the process of transparency in general needs to be 
improved. When we talk about the Register notice and what is in 
the Register notice, there is not a lot in there. In order to 
adequately respond, we need to be able to understand a lot more 
about what is being requested of the Ex-Im in order for us to 
go through the three things that are important on the 
transparency side. When you think about what the economic 
impact analysis is supposed to do, it is supposed to look at 
oversupply, it is supposed to look at competing product, and 
whether there is harm or injury, and those are relatively all 
detailed, involved items to look at, and we need time to do 
that, which was the other thing that I had mentioned about we 
need more time than what is allowed for the comment period.
    Now, specifically, if you look at some of the things 
surrounding--you know as you look around this impact economic 
analysis, what is it that we are trying to avoid, or what is it 
that we are trying to accomplish? An application is made today, 
and there are a lot of assertions, as you had mentioned, 
regrading things around the application, like is there really 
another Government agency that is willing to loan the money? In 
the example that I provided, that company said that another 
country was waiting in the wings in order to provide this 
money, and require them to all buy non-U.S. equipment or 
Japanese equipment, and they asserted that many times, both in 
the discussions I think over a number of months.
    And in fact, when the Ex-Im Bank loan guarantee did not 
occur, as a result of them not pursuing it, none of that ever 
happened. It just evaporated, although it was a guarantee, it 
was a done deal, if we were willing to step up. So your comment 
earlier, I think, of Mr. Lambright about what kind of proof do 
you require, we need written proof around those kinds of 
things, that in fact, there has been a market failure, that you 
cannot go to the market and access the money, that in fact, 
there is a Government agency that is in waiting and so forth. 
Those things and the specifics of them are very important, and 
I think you are on the right line of inquiry as to what we can 
do about that.
    Senator Crapo. Thank you very much.
    Mr. Sneeringer, same question?
    Mr. Sneeringer. Mr. Chairman, what we are looking for is an 
opportunity to share what we consider relevant information, and 
information that the Bank says it takes into consideration. I 
imagine they have their independent sources, but there is just 
no better source on what is going on in the steel market than 
the steel industry itself, because we study it every day.
    For example, on subsidies, we have comprehensive 
information on what the subsidy picture is going to look like 
and the capacity picture is going to look like in the future, 
because we vigilantly cover every announcement by every 
government about what it is going to build, how much the new 
``investment'' is going to lead to in terms of additional 
tonnage, who is going to own it, et cetera. Attached to my 
prepared testimony is the most recent paper that we submitted 
in to the OECD on exactly that subject. When an application is 
pending before the Ex-Im Bank relating to global steel 
production, we would like to explain what we know about 
subsidization and capacity growth in the markets involved.
    Similarly, on circumvention, I know that there has been 
some resistance at the Bank to employ this one or two steps 
upstream or downstream formulation that was in the legislative 
history of the last amendments, and that is suggested might be 
incorporated into the statute. In our case, it is easy to 
implement if you are in the normal process of steel making. If 
you have an order against hot-rolled steel, we know that people 
can take it one step downstream to cold-rolled, or they can 
coat it, or they can paint it, and any of these processed will 
allow them to get out from under the order. So, in the steel 
industry, this proposed rule can be relatively easy to apply. 
But it is not always easy to apply, and one could make a big 
mistake applying it mechanically. For example, if you went 
upstream in steel, say you had a hot-rolled order, you would 
have trouble getting the whole way upstream to iron ore or 
scrap, or a scrap substitute. So it does not always work.
    The objective, however, is to help the Bank understand when 
something might be being done for the purpose of circumvention. 
We have a very strong case to present to them on that. 
Basically, we do not know what cases will be considered. We get 
14 days when a proposed financing finally surfaces. Very 
minimal information is available. We do not know exactly what 
steel products are involved. We sometimes have trouble even 
telling what the country is until the very last minute.
    So, I embrace everything that Mr. Appleton said about 
extending the comment period from 14 to 30 days. I also wish 
there was more of a mandatory outreach to the trade 
associations that are involved. In addition, there are 
government agencies--going back to the subsidies negotiating 
objective principle--that are there at the table at these steel 
subsidy talks. I am sure they put their oar in the water 
ultimately at the Ex-Im Bank, but, they should be consulted 
right off the bat.
    Senator Crapo. Thank you very much. It seems to me that a 
theme that both of you have been talking about is apparent 
here, and that is that as the Ex-Im Bank approaches making, 
obviously, very difficult analysis, that it can be benefited in 
that by getting an early, aggressive, and complete expression 
of the issue out to the public so that those who know whether 
the potential for circumvention is there, and if so, why, can 
contact and let the Bank analysts know what is going on.
    Mr. Sneeringer. It does not necessarily mean that they are 
triggering an outcry of opposition. It might or it might not 
end up there, but we want to have a reasoned opportunity to 
present facts that we have and they do not have.
    Senator Crapo. Right. First of all, let me say, both of 
your sets of written testimony were very well-prepared and have 
a significant amount of very helpful information in it, and I 
appreciate that. I am assuming, because both of you have tended 
to focus on this aspect of the public involvement and the 
notice and comment opportunities, that is probably the most 
important--not that we would ignore the rest--but that is 
probably the most important area for us to focus on; am I 
correct in that, Mr. Appleton?
    Mr. Appleton. Yes. Clearly, as I mentioned, when I first 
had learned, inadvertently almost, what was happening in our 
particular case on a loan going to the competitor in China, you 
know, I came to Washington and spent some time here, and I am 
glad that I did. I learned a lot more that was without notice 
by spending time with those that were involved, things that 
probably never would have surfaced. There was no transparency 
to it. And, of course, it heightened the issue.
    Senator Crapo. One of the other suggestions that has been 
made is that when a final economic analysis is reached by the 
agency, that be made public and available for comment. Do you 
have any suggestions or thoughts on that?
    Mr. Appleton. Yes. If you do not mind, let me start.
    Mr. Sneeringer. Sure.
    Mr. Appleton. I completely agree. And because what happens 
is--by the way, we never did see it. We never do see what that 
is, so it is hard for an industry to voice input and provide 
concerns when it never sees the analysis. That kind of goes 
without saying.
    Mr. Sneeringer. I agree it should be made available to the 
public. But I also like the provision that has been suggested 
that it be reported to the Congressional Committees of 
jurisdiction. I think you have a right to know.
    Senator Crapo. And that the Committee receive the economic 
analysis.
    Mr. Sneeringer. Can I just make two other points?
    Yes, we are interested in procedural changes but there are 
two statutory changes that I would like to highlight. One is to 
be very clear that the $10 million threshold cannot be ducked 
under through disaggregation of projects. We have had that 
occur in the steel industry where there was an application for 
financing--I forget the exact number--it might have been $30 
million. But we were not hearing about it because it was being 
sliced into a series of projects that were under $10 million 
each. So we think that is a very important point.
    Also, going back to circumvention, again I do not know if 
one or two steps upstream or downstream can even be legislated. 
I know it would very difficult to word it. And it would be 
dangerous to try to employ it mechanically.
    On the other hand, I really think there should be some 
changes in the law that require the Bank to take into account 
the possibility that the project that they are subsidizing is 
for the purpose of circumventing a trade order. So that would 
cover both additional machinery in the country where the firm 
was caught dumping or creation of new capacity in a second 
country that would be owned by the firm under order so they 
could export product in the United States and avoid the order.
    Senator Crapo. Those are very helpful, thank you.
    Moving to another issue, what are you respective thoughts 
about the notion that I raised with Mr. Lambright about making 
sure that we have increased and adequate participation by other 
Government agencies that have expertise in the area of the 
particular proposal?
    Mr. Sneeringer. The agencies that we know the most about 
are the ones that are involved in trade cases and that would be 
Commerce and the ITC. Certainly when you talk about negotiating 
postures around the world, although Commerce is the lead 
agency, USTR would be involved. And I do believe that they 
ultimately, can and do put their oar in the water at the Bank.
    But I think early consultation with those agencies is very 
important and I am really not aware of the extent to which the 
Bank goes to the ITC. The ITC is also a fabulous wealth of 
information, in our case, on how the steel market operates, and 
what competes with what.
    When the ITC investigated our safeguard action, known as 
the Section 201 case, it divided the entire steel market into 
only four pieces because there is so much competition within 
each piece. Each industry segment covered as many as 20 or more 
products but the division took into account what competes with 
what. So, I think that type of information is important to the 
analysis conducted by the Bank.
    Mr. Appleton. I completely agree with his comments on the 
Agency and let me just add one other which we also found 
helpful in the time that we spent looking at some of these 
issues, and that was the Treasury Department, given their 
expertise in the financial markets.
    I know Mr. Lambright mentioned the evaluation that goes 
into the probabilities and the financial expertise of these 
other agencies and the capability and market principles and I 
think they could be helpful there as well.
    Senator Crapo. Thank you.
    In the same context, we have say the Commerce Department, 
the Treasury Department, the ITC, and others who I assume are 
in the business of making similar types of economic analysis in 
other contexts but similar types of analysis. Are there any 
examples there of those types of Government agencies who have 
already addressed these questions of transparency and due 
process that we could look to see how perhaps we could improve 
things at the Export-Import Bank?
    Mr. Appleton. Absolutely. If you look at the processes that 
are in place at both Commerce and ITC, and of course USTR, and 
how they work together, they have pretty good precedents and 
pretty good process for transparency and how to work through 
these.
    Mr. Sneeringer. I agree. And I know the Bank is concerned 
about proprietary information and that is one of the reasons we 
get so little information when we ask for it. The fact is they 
could look at the ITC's procedures for redacting and publishing 
parallel documents that leave Business Proprietary Information 
out. I think we should be able to learn more than we do at the 
Bank and without jeopardizing the economic well-being of the 
applicant.
    Senator Crapo. Thank you. I think these are some hopefully 
very productive areas we can look into to try to move this in 
the right direction.
    Another question, you have both discussed the economic 
analysis that you had to deal with in your particular 
circumstances. What factors did the Ex-Im Bank examine when 
looking at economic impact in your cases?
    Mr. Appleton. Let me just highlight one that I think is 
important that you noted earlier in a question that you had of 
Mr. Lambright.
    Right now there is an oversupply calculation, forecast that 
is required. I am sure it is this way for the steel industry 
and it is certainly that way for the semiconductor industry. 
These markets are difficult, if not impossible, to forecast 
beyond about six minutes, much less 6 months or a couple of 
years. And it seems to me that the focus has been on what is 
going to happen 2 years from now. And if there is a forecast 
that somehow says the market is going to be fine 2 years from 
now that then over weights what is going on currently in the 
industry.
    It just strikes me as odd that the current industry has 
little to no bearing, as opposed to a forecast of something 
that might happen on whether there is going to be an oversupply 
in the market.
    One other comment that I want to make really along the 
regards of fungibility. A lot of these assets are about can you 
be injured or not? And what are the assets going to be used to 
produce? And they are fungible. It is almost like pouring a cup 
of water into a bucket of water. It just disappears because in 
this particular case, in semiconductor equipment, when you are 
buying advance semiconductor equipment, you can use it to build 
a number of semiconductors. It does not just have to be the one 
that is particularly a competing product.
    That goes along the lines of how do you determine what is a 
competing or a similar or like product. And we think that in 
that analysis it needs to look at not only the potential but 
also the probability of the capacity being used for a competing 
product.
    Senator Crapo. Thank you.
    Mr. Sneeringer.
    Mr. Sneeringer. The question is what factors went into the 
economic analysis in cases we were interested in. At risk of 
sounding glib, for reasons stated earlier, we do not have the 
foggiest idea.
    Senator Crapo. So therefore the earlier comments about the 
public notice getting engaged earlier and perhaps being able to 
see the economic analysis or have access to the information, 
even if it has to be redacted, would be very helpful?
    Mr. Sneeringer. Yes, sir.
    Senator Crapo. Thank you very much.
    I want to go just a little further into the question that 
Mr. Appleton just raised or the issue that Mr. Appleton just 
raised and that is this notion of trying to predict into the 
future whether there is going to be an oversupply.
    I too think that it raises a question. If there is 
currently an oversupply, why would that not be the biggest 
factor rather than a projection about what may be the case a 
couple of years down the road?
    Mr. Appleton, you can elaborate on that if you want, and 
Mr. Sneeringer, I would like to have your thoughts on that as 
well.
    Mr. Sneeringer. I will go first. If we just took the 
existing capacity of the steel industry right now and looked at 
history where, as I said before, no matter how low the price 
gets the least competitive companies do not fall off the bottom 
of the list, I would say it is going to be static. But I do not 
have to rely on that kind of deduction.
    Attached to my statement is a detailed report on 
announcements made by foreign governments about capacity they 
are going to build well into the future, at least to 2012. It 
is pretty frightening. It is very detailed. Our experience is 
that a lot of this new capacity does get built and very little 
of the existing capacity gets taken down in the process.
    In the case of steel what is now an oversupply will only 
get worse. We can quote the foreign governments for that 
proposition.
    Senator Crapo. Mr. Appleton, do you want to go into that 
any further?
    Mr. Appleton. I just want to expand it slightly and that 
is, I think similar in our industry there are a lot of 
forecasts that are made about capacity and overcapacity and 
subsidized. And as my colleague is well aware of, just like we 
are, there are government activities, government actions if you 
will, and rules and regulations and WTO compliance to try to 
deal with a lot of that.
    But what happens--and if there is something currently in 
place, that is clear. But what happens at the Ex-Im Bank is 
they make forecasts that are very difficult to do or rely upon 
forecasts, if you will, that are very difficult to rely upon 
with any accuracy.
    And so we really do need to look at, I think as you 
mentioned, the current state of the industry should clearly be 
the greatest weighting.
    But we also need to look at the potential, recognizing that 
it may not be in overcapacity today but that it very well could 
be.
    Senator Crapo. Thank you. I am just about at the end of my 
questions, although I want to try to summarize in my own mind 
what we have gone over. I am going to ask you each a final 
question and that is going to be is there something else that 
we have not gotten into that you want to be sure we get on the 
table? Or do your own summary for me about what you would like 
to be sure we take from this hearing.
    But it seems to me, as we have looked at this, we have 
covered a bunch of issues but most prominent seems to be the 
importance of making sure that we get detailed information 
regarding proposed financing to the public at an early stage 
and in an adequate way so that input can be bough to bear by 
those who have expertise on the specific proposal and the 
industries involved.
    Giving more time to that process so that we allow again 
those who are interested and who have the expertise to be able 
to muster their forces and their analysis and engage in a 
timely fashion would be another.
    Another is extending the levels and nature of performance 
by the interagency group.
    Another would be making a final version of the economic 
impact analysis available to the public after the decisions 
have been made so that can be then commented on and evaluated.
    Another would be adopting really stronger criteria for the 
economic impact analysis itself. That is a little vague but a 
lot of different aspects of that have been discussed here 
today.
    Another could be requiring substantiation of competing 
offers or assertions about availability of competing offers 
and, with regard to the additionality criteria, requiring 
substantiation for the potential of the proposal to meet the 
additionality criteria.
    I have notes that I have been writing to myself all over 
the desk here and I am sure that I have missed some of the 
issues there but it seems to me that a number of these types of 
issues have been raised today and I think they are all helpful.
    What I would like to do is to just give each of you an 
opportunity to wrap up if you would like to, anything that you 
would like to add to this basket or to focus on and make sure 
that we have before us.
    Mr. Sneeringer, I will start with you.
    Mr. Sneeringer. Thank you, Mr. Chairman.
    Certainly the administrative procedure improvements that 
you have listed go beyond what I brought to the table so I 
would certainly endorse all of those.
    But to go back to the top two points that I mentioned, one 
is the fact that the U.S. Government's position on steel 
subsidies is that all governments ought to pull out of all 
steelmaking. I do not know if you can legislate that but it 
certainly needs to be taken into account by the Bank. I think 
that could be done through better and earlier consultation with 
other agencies and taking other agencies' word for these 
things, really taking the lead from agencies that are out there 
trying to negotiate the end of steel subsidies worldwide.
    Second on circumvention, again I hope there is something 
that can be legislated that would require the Bank to ask 
itself, ask others, take into account, and make findings, that 
what it is doing does not constitute enabling circumvention of 
trade remedies. Because how untoward would that be? Private 
companies spend millions of dollars and years, right through 
the appeals, finally getting these orders that are designed to 
stop dumping or stop subsidization, only to find that another 
arm of the Federal Government is helping the very same people 
get around those orders? I think it is wrong and I think it 
should be outlawed in some way.
    Senator Crapo. Thank you. Mr. Appleton.
    Mr. Appleton. Mr. Chairman, I will be brief and again let 
me thank you for inviting us here today to share some of our 
thoughts.
    First of all, we need transparency.
    Second, we need to be able to respond to that transparency.
    And third, and finally, we need to substantiate within that 
transparency the assertions and the data that are involved in 
the analysis. If we can get that accomplished we will have gone 
a long ways from where we are today.
    Senator Crapo. Thank you. That was a very good succinct 
analysis of the objectives that we need to accomplish.
    Before I wrap up, I was just noting, Mr. Sneeringer, when 
you were speaking about your first point about making sure that 
we do not support the violation of a trade measure in the 
United States.
    On the Ex-Im's chart for their economic impact analysis, 
one of the boxes is the economic good subject to specified 
trade measures? And so the issue is certainly raised already. 
But what I am hearing you say is that, at least in the case of 
steel, you do not think that the box is working.
    Mr. Sneeringer. Let me give two quick examples. Let us say 
the trade order is against dumped hot-rolled steel and now we 
find out that somebody, namely the very same firm that got hit 
with the order, has decided to build a cold mill by which they 
can take hot-rolled steel and make it cold-rolled steel or a 
hot dip line where they make it galvanized or corrosion 
resistant steel, something downstream that is not subject to 
the order.
    Why would we want the Bank to help subsidize that?
    Another example would be what if that firm owned or wanted 
to own a plant in another country and they decided that the 
hot-rolled steel they used to make in country A they will now 
make in country B because that is not covered by in the order. 
Why would we help build that plant?
    Senator Crapo. So we have to be more expansive in our 
evaluation of the trade implications rather than very narrow in 
terms of where there is a specific trade order?
    Mr. Sneeringer. Right.
    Senator Crapo. I think that is very helpful. I assume, Mr. 
Appleton, the same thing would be true in the semiconductor 
business?
    Mr. Appleton. That is right. At the risk of going on too 
long, I want to make one final comment.
    In all of this analysis that we go through, I think one of 
the key factors is to make sure that we are not unintentionally 
harming U.S. interests. And of course there is an interest in 
terms of exportation and there is an interest in terms of 
competition in making sure the United States stays healthy in a 
particular industry.
    That seems to be sometimes in the background and not as 
prominent as it should be.
    Senator Crapo. Thank you very much. And I do want to again 
say to both of you that your testimony was very well-prepared, 
the written testimony and your oral presentations have been 
very helpful here.
    As you both started out with, we all understand that the 
Export-Import Bank has a very important function and is very 
useful and helpful. And our purpose here is to make sure that 
it does actually achieve very effectively those objectives that 
we all can agree on that are the proper objectives.
    I think that the issues that we have raised here today 
clearly can be helpful in getting us much further down that 
road and your testimony has been very helpful in helping us to 
bring some specificity and some focus on the specific things 
that we can do.
    So again I thank you very much both for the presentation 
and the material and the support that you have given us but 
also for the time you have given to come here and the present 
your information to this Committee.
    With that, the hearing is adjourned. Thank you very much.
    [Whereupon, at 11:19 a.m., the hearing was adjourned.]
    [Prepared statements and additional material supplied for 
the record follow:]
              PREARED STATEMENT OF SENATOR MICHAEL B. ENZI
    I would like to thank Senator Crapo for holding this important 
hearing today to discuss economic impact issues in the context of the 
reauthorization of the Export-Import Bank. I also want to thank Mr. 
James Lambright, acting Chairman and President of the Export-Import 
Bank, Mr. Steve Appleton, and Mr. Thomas Sneeringer for agreeing to 
testify today.
    Earlier this month, Senator Crapo held a hearing in this 
Subcommittee on the reauthorization of the Export-Import Bank. At that 
hearing, I shared major concerns I have with the economic impact 
determination the Export-Import Bank uses to see if the benefits of 
approving a proposal outweigh the negative economic impact. I want to 
reiterate those concerns and discuss an application that is currently 
pending to show why the Bank's economic impact procedures do not make 
sense.
    Each time the Board of Directors of the Export-Import Bank meet to 
review an application, they do a cost-benefit analysis of that project 
to determine the projects impact on our economy. If the economic 
benefits outweigh the economic harm, the application should be 
approved. Vice versa, if the net benefit is negative, the application 
should be denied. It sounds simple, and as a strong supporter of 
sending U.S. exports abroad, I support financing projects that are 
beneficial to our Nation.
    Unfortunately, it is not as straightforward as it sounds because 
the process that is used to determine the net benefit of a project is 
suspect. The Board only examines a portion of the transaction and 
therefore, only does a portion of the analysis necessary to determine 
the economic impact. It is my understanding that the Board only 
examines the economic impact of the transaction during the repayment 
period. They do so even though the entity may be used for years and as 
such, may pose challenges to the U.S. economy for years beyond the 
repayment period.
    The problematic nature of this process can easily be seen through 
an application pending before the Board. The Board is currently 
reviewing an application to finance the purchase of refurbished 
locomotives for the Magadi Soda Company, a soda ash facility in Kenya. 
The application is for $14.4 million in financing, but it is my 
understanding that the economic impact analysis will only look at the 
burden on the U.S. economy over 6 years, the life of the loan.
    The refurbished locomotives will allow the Kenyan facility to 
supply an additional 325,000 metric tons of soda ash to the market, and 
those locomotives will obviously be functional for more than 6 years. 
Our domestic soda ash industry, which is primarily in my home State, 
will therefore face export markets with an additional 325,000 metric 
tons of soda ash each year. That additional product will have an impact 
on prices and will negatively impact our economy. Thus, I would argue 
that an economic impact analysis which takes into account the effect on 
our domestic market for only 6 years is inadequate.
    In order to give my colleagues additional information on this 
issue, I would also like to submit a letter the Wyoming delegation 
recently sent to the Export-Import Bank in opposition to the 
locomotives application. This letter discusses in more detail the 
negative economic impact that this pending application will have on 
Wyoming's soda ash communities. I hope the Board takes the information 
seriously and I hope my colleagues examine it to look at the problems 
with the Export-Import Bank's current process.
    The process right now just does not make sense. Without looking at 
the full impact of any transaction, we cannot know if the transaction 
is truly beneficial to our economy. As we work through the 
reauthorization of the Export-Import Bank, this is an issue that needs 
to be addressed. I look forward to working with my colleagues to 
improve the process for approving applications at the Export-Import 
Bank.
    Thank you again to Senator Crapo for holding this important hearing 
today.
                               ----------
                PREPARED STATEMENT OF JAMES H. LAMBRIGHT
                     Acting Chairman and President
                Export-Import Bank of the United States
                             March 29, 2006
    Mr. Chairman, Senator Bayh, and Members of the Subcommittee, I am 
happy to be here today to testify on Ex-Im Bank's procedures involving 
economic impact.
    As I stated in my testimony of March 8, the mandate of the Export-
Import Bank of the United States (Ex-Im Bank or the Bank) is to 
preserve and create U.S. jobs by supporting U.S. exports that would not 
otherwise go forward. Consistent with this mandate, Ex-Im Bank fully 
agrees with the principle that it should not approve a transaction that 
would harm the U.S. economy. This is the foundation of our economic 
impact procedures. But as the Bank acknowledges the importance of this 
principle and these procedures, these decisions are among the most 
difficult to make.
    Through the economic impact process, the Bank seeks to determine 
whether a transaction under consideration would adversely affect U.S. 
production or employment, or result in the manufacture of a good 
subject to specified trade measures. The statutory language requiring 
consideration of economic impact, which has existed in various forms 
for over 35 years, reflects Congressional intent to balance two 
competing priorities--supporting U.S. export transactions and denying 
support for otherwise creditworthy transactions due to the possibility 
of long-term adverse economic consequences to the United States.
    The Bank's economic impact procedures are intended to layout a 
reasonable and logical process for analyzing the impact of Ex-Im Bank 
support for a particular export transaction. The economic impact 
analysis considers issues such as whether the goods and services Ex-Im 
Bank is asked to support would establish or expand foreign production 
capacity of an exportable good, whether the product is the subject of 
trade measures, the global supply and demand for the good to be 
produced, and the competitive impact on U.S. industry from increased 
foreign production. The process includes review by other U.S. 
Government agencies, as well as input solicited from interested parties 
through notification in the Federal Register.
    The Bank does not take this obligation lightly, and thoroughly 
analyzes these transactions in an attempt to reach the right result. 
Ex-Im Bank strives to implement the Congressional mandate in a 
thoughtful, considered, and transparent manner, with full participation 
of interested stakeholders. At the same time, the Bank stands ready to 
work with the Congress, affected industries, exporters, organized 
labor, and others to refine the process for considering these 
transactions, based on experience over the past several years.
    I would like to take this opportunity to explain how Ex-Im Bank's 
current economic impact procedures were developed, how they are applied 
to export transactions, and the Bank's experience with these procedures 
over the last 4 years.
Procedures Prior to 2001
    In 2001, Ex-Im Bank recognized the shortcomings in the then-
existing economic impact procedures, and initiated a process to improve 
the procedures. At that time, the principal criticisms of the economic 
impact procedures were that they: (i) lacked clear definitions and 
criteria for important terms, such as ``surplus'' and competitive 
impacts; (ii) only considered final trade measures, as opposed to 
preliminary determinations and injury findings; (iii) did not provide 
for sufficient interagency consultation; and (iv) provided for 
inconsistent and inadequate notice to potentially interested parties.
    The process of vetting changes to the economic impact procedures 
was extensive and included representation of all stakeholders. Ex-Im 
Bank held a public hearing to discuss the procedures and consulted with 
Members of Congress, other U.S. Government agencies, as well as 
representatives of industry, exporters, and organized labor. In March 
2003, Ex-Im Bank released the new economic impact procedures reflecting 
changes developed through public consultation, as well as changes 
mandated by Congress in the Bank's 2002 reauthorization. These 
procedures addressed many of the shortcomings of the prior economic 
impact analysis, including:

        Clearer Criteria and Definitions. The procedures clarified 
        important concepts such as oversupply by establishing 
        indicators relevant to the determination. Such indicators 
        include commodity prices, capacity utilization rates, 
        employment levels, and bankruptcies. In addition, Ex-Im Bank 
        broadened its evaluation of the impact of new production on an 
        industry by consulting with a variety of knowledgeable industry 
        sources, including independent industry observers, trade 
        associations and U.S. Government agency experts.
        Broad Consideration of Trade Policies. In addition to final 
        trade measures, the economic impact procedures consider 
        preliminary antidumping and countervailing duty determinations, 
        suspensions agreements arising from trade investigations, and 
        Section 201 injury findings.
        Enhanced Interagency Consultation. Ex-Im Bank changed the 
        procedures to include regular consultation with other U.S. 
        Government agencies (including the Department of Commerce and 
        the Office of the U.S. Trade Representative.) Ex-Im Bank alerts 
        these agencies early in the process to all transactions that 
        may be subject to detailed economic impact analysis. The Bank 
        solicits agency views on the applicability of trade measures, 
        industry information, and the appropriateness of its findings.
        Notice to Interested Parties. Ex-Im Bank promptly notifies 
        interested parties of transactions that are subject to detailed 
        economic impact analysis. These notices are published in the 
        Federal Register and on the Bank's website. U.S. Government 
        agencies are separately notified of such transactions.
Current Analvtical Process
    Ex-Im Bank staff subjects each transaction to a series of questions 
to assess the potential adverse impact. First, staff ascertains whether 
an export to be supported by Ex-Im Bank will enable the foreign buyer 
to establish or expand production capacity of an exportable good. 
Transactions that enable a foreign buyer to establish or expand 
production capacity of an exportable good are subject to further 
analysis.
    Second, staff determines whether the resultant production will be 
``substantially the same product'' as a good that is the subject to an 
applicable trade measure, including antidumping orders, countervailing 
duty orders, and Section 201 safeguards. If a trade measure is 
applicable, then Ex-Im Bank is prohibited from supporting the 
transaction.
    If the resultant production is not the subject of a trade measure, 
and the Ex-Im Bank transaction is more than $10 million, then Ex-Im 
Bank staff considers whether the resultant production will meet the 
``substantial injury'' threshold of 1 percent or more of U.S. 
production. Transactions under $10 million are included in a post-
authorization annual review to determine whether the Bank authorized 
multiple transactions to a single buyer that, in the aggregate, 
exceeded $10 million.
    If a transaction meets the 1 percent threshold, then Ex-Im Bank 
staff conducts a detailed economic impact analysis that weighs the 
benefits of an export against the potential costs and harm to the U.S. 
economy from supporting the transaction. At this stage, Ex-Im Bank 
publishes the details of the transaction in the Federal Register and on 
its website and notifies relevant U.S. Government agencies. These 
public notices are intended to reach out to trade associations and 
other interested parties for comments on the proposed transaction.
    The staffs analysis seeks to determine: (1) the likelihood that the 
product in question will be in ``surplus'' (or oversupply) on global 
markets at the time it is first sold; and (2) whether the product in 
question competes with U.S. production of the same, similar or 
competing product.
    If either of these two circumstances exists, then Ex-Im Bank is 
prohibited from supporting the transaction unless the Board of 
Directors determines that the short- and long-term benefits to industry 
and employment in the United States are likely to outweigh the short- 
and long-term injury to U.S. producers and employment of the same, 
similar, or competing commodity. Comments received pursuant to public 
notice are included in the analysis that is presented to the Board of 
Directors for decision.
Recent Experience with Economic Impact Analvsis
    Since the new economic impact procedures took effect, Ex-Im Bank 
has received requests to support capital equipment sales to a variety 
of foreign buyers. Economic impact issues have arisen in a number of 
these transactions, including those relating to the production of 
textiles, chemicals, steel, semiconductors, soda ash, and solar panels.
    Ex-Im Bank must balance the need for inclusiveness with commercial 
practices that require efficiency and timeliness on transactions. While 
Ex-Im Bank makes every effort to complete the economic impact analysis 
expeditiously, it requires a substantial dedication of staff resources, 
and usually takes 8 to 10 weeks. Completion of an economic impact 
analysis may take up to 1 year, depending on the extent to which the 
feedback and information obtained through the notice and comment period 
are consistent with the Bank's analytical findings. The oversupply 
assessment requires an analysis of future supply and demand balances of 
the new production associated with Ex-Im Bank financing. However, a 
lack of consensus among industry observers about the outlook on supply 
and demand balances can lead to an inconclusive finding on oversupply 
and may impede the Bank's analysis.
    Trade measures, oversupply and trade flow impacts have figured 
prominently in Ex-Im Bank's analysis of these transactions. Since 2002, 
Ex-Im Bank has conducted a detailed economic impact analysis of 22 
transactions, a quarter of which involved sales primarily by small 
business exporters. Ex-Im Bank's Board of Directors has approved 11 
transactions, and two were denied on economic impact grounds. Seven 
transactions were withdrawn prior to Board consideration. While 
applicants may withdraw their transactions for any reason, exporters 
have indicated that the delay and uncertainty associated with the 
Bank's economic impact policy have in some instances frustrated their 
commercial relationships and caused them to lose export sales to 
foreign competitors. The Bank must ensure that potential transactions 
are properly vetted and all interested parties have an opportunity to 
be heard. At the same time, it is critical that Ex-Im Bank's processes 
permit U.S. exporters to remain competitive in the global marketplace.
Conclusion
    The revisions to the economic impact procedures implemented in 2003 
have been successful from a number of perspectives. They clarified the 
criteria for Ex-Im Bank's review and expanded participation by other 
U.S. Government agencies and stakeholders in the process. Despite this 
progress, economic impact analysis continues to present challenging 
issues for Ex-Im Bank. The analysis inherently pits one set of 
interests and U.S. jobs--those of the prospective exporter and its 
suppliers--against those of another U.S. company or industry that may 
be harmed by the export sale. Moreover, Ex-Im Bank continues to grapple 
with some of the core concepts raised by economic impact analysis, 
including the determination of oversupply and the evaluation of trade 
flow impacts. Despite these challenges, Ex-Im Bank strives to implement 
the economic impact procedures so that they are transparent, 
predictable, effective, and fair to exporters, affected industry, and 
other stakeholders.
    I look forward to working with you to achieve these objectives.
                               ----------
                PREPARED STATEMENT OF STEVEN R. APPLETON
     Chairman of the Board, Chief Executive Officer, and President
                        Micron Technology, Inc.
                             March 29, 2006
    Mr. Chairman, Senator Bayh, and Members of the Subcommittee, my 
name is Steve Appleton, and I am the Chairman of the Board, Chief 
Executive Officer and President of Micron Technology, Inc. (Micron.) 
Thank you for inviting me here today to testify before this 
Subcommittee regarding the 2006 reauthorization of the Export-Import 
Bank of the United States (Ex-Im Bank). I appreciate the important work 
of the Ex-Im Bank in encouraging exports from the United States, and 
the work of this Committee in authorizing and overseeing funding for 
the Bank. I welcome the opportunity to describe to the Subcommittee 
Micron's experience with the Bank and to share some thoughts on how the 
Ex-Im Bank's Economic Impact Analysis process and other related 
procedures could be enhanced to guarantee greater fairness and 
transparency.
    Let me start by giving you some background on Micron and the 
semiconductor industry. Micron is one of the world's largest and most 
innovative providers of advanced semiconductor solutions. Micron 
produces advanced DRAM, NAND Flash memory, and imaging semiconductors 
that are used in today's cutting-edge, mobile, computing, server, 
automotive, networking security, industrial, consumer, and medical 
applications. The company is based in Boise, Idaho and began operations 
in 1978. In the United States, Micron has major manufacturing 
facilities in Boise, and Manassas, Virginia, and Micron also is a 
partner with Intel Corporation in a Joint Venture manufacturing 
facility in Lehi, Utah. Additionally, Micron has design centers in 
Texas, Minnesota, California, and Idaho, and operations around the 
world, including fabrication facilities in Italy and Japan, a joint 
venture manufacturing facility in Singapore and a wholly owned assembly 
and test facility in Singapore. Micron employs nearly 21,000 people 
worldwide, over half of those employees in the United States. Micron's 
revenues last fiscal year were $4.88 billion and we invest a total of 
about $1-1.5 billion annually in our worldwide operations and on 
research & development.
    The semiconductor industry is extremely competitive. Only those 
companies able to aggressively control costs, increase productivity, 
and continuously innovate are able to survive. In 1985, there were 
about 11 major U.S.-based companies in the DRAM business--today, Micron 
is the only one still manufacturing DRAM. To compete, Micron has to 
produce faster and smaller devices that provide greater capability at 
the lowest possible price. At the same time, we have to be able to 
anticipate the development of a wide array of end use consumer products 
and electronic systems that might require our products and adapt 
accordingly.
    The semiconductor industry is also capital intensive. Manufacturing 
equipment is highly specialized and has a life span of only about 3 
years. Companies must continually reinvest to keep ahead of the 
innovation curve. This means making major investments in research and 
development as well. It costs around $2.5 to $3 billion to construct 
and equip a manufacturing facility from green field to full operations. 
And, the semiconductor industry spends an average of 40 percent of its 
revenues on new capital equipment and R&D each year.
    Due to the capital intensive nature of the business, the 
semiconductor industry is also sensitive to the availability and cost 
of capital. When our semiconductor competitors have special access to 
favorable financing through government-subsidized programs, it creates 
enormous and artificial advantages for that competitor. For decades, 
Micron has spoken out against illegal subsidies from foreign 
governments to develop and protect a domestic semiconductor industry. 
In many instances, this practice has led to massive overcapacity. In 
the DRAM industry, Micron has seen time and again--first in Japan, then 
in Korea, and then in Taiwan--government-subsidized capital poured into 
expanding capacity in an effort to gain market share or given to keep 
companies from otherwise going bankrupt. For example, in 2001-2003, the 
Government of Korea provided domestic manufacturer Hynix Semiconductor 
with over $16 billion in illegal subsidies. As a result of this, Micron 
filed and won antisubsidy cases against Hynix in the United States, 
Europe, and Japan.
    Given this background on Micron and the semiconductor industry, you 
can appreciate my surprise when I discovered in August 2004 that the 
Ex-Im Bank of the United States was contemplating providing $500 
million in loan guarantees to a DRAM competitor in China, a company 
called Semiconductor Manufacturing International Corporation; also know 
as ``SMIC.'' SMIC is a relatively new, but rapidly growing, entrant 
into the pureplay semiconductor foundry business. A pureplay foundry is 
a manufacturing facility designed to produce a variety of semiconductor 
products, including memory like the DRAM and NAND Flash chips that 
Micron makes and sells, as well as logic products and other types of 
integrated circuits. At the time of the proposed financing, SMIC was 
one of the fastest growing semiconductor manufacturers in the world. 
Most of its revenue came from DRAM, either manufacturing and selling 
product under its own label or manufacturing product for other 
companies to sell. Both from a design and a production perspective, 
SMIC had made DRAM a central part of its business plans. Within 3 
years, it had become the world's third largest semiconductor foundry.
    Even more perplexing to me was that SMIC could claim to need Ex-Im 
Bank financing in order to purchase manufacturing equipment. SMIC had 
recently completed the construction and ramp of three different 
semiconductor facilities in Shanghai and had done so with a mix of 
private equity, credit from Chinese banks, and vendor financing. Most 
of the equipment it purchased for these three factories was from U.S.-
based equipment suppliers. Moreover, in March 2004, only 3 months 
before applying for the Ex-Im Bank loan guarantee, SMIC had raised $500 
million on international capital markets through an initial public 
offering. Clearly, SMIC was a sophisticated company with access to 
international capital markets and a track record of raising money when 
needed. So, why did SMIC need to go to the Ex-Im Bank? The most likely 
answer was SMIC wanted to benefit from lower than market interest 
rates.
    As you know, the role of the Ex-Im Bank is to provide financing to 
help promote the export of U.S. goods and services with the stated 
purpose of maintaining and creating American jobs. Importantly, Ex-Im 
Bank however, does not provide export financing for just any 
transaction, but may do so under two scenarios. The first is to match 
export financing from the Export Credit Agencies of other countries. 
The second is to fill in gaps in private sector financing or to address 
some other market failure--that is, only when an export would not go 
forward without the assistance of the Bank. Accordingly, the Ex-Im Bank 
should not operate as a private sector financial institution and should 
not supplant or compete with financing from the private sector.
    Moreover, Ex-Im should not provide financing for transactions that 
would result in a net negative impact on the U.S. economy. Through its 
Economic Impact Analysis procedures, the Ex-Im Bank determines whether 
a transaction under consideration would adversely affect U.S. 
production or employment. For example, adverse effects would occur when 
the financing supports the creation or expansion of capacity of a 
product that could then be exported to the United States and cause 
injury. In carrying out its Economic Impact Analysis, the Ex-Im Bank 
looks at the following factors:

 Whether the commodity produced with the equipment financed by 
    the Ex-Im Bank will be in oversupply on world markets at the time 
    the resulting commodity is first sold;
 Whether the resulting production capacity is expected to 
    compete with U.S. production of the same, a similar, or a competing 
    commodity; and
 Whether the Ex-Im Bank determines that the extension of such 
    credit or guarantee will cause substantial injury to United States 
    producers of the same, a similar or a competing commodity.

    A Federal Register notice requesting public comment must be filed 
under the Ex-Im Bank's Economic Impact Analysis procedures. With 
respect to the proposed SMIC financing, a Federal Register notice was 
published in August 2004. Unfortunately, the notice itself provides 
very little information regarding the proposed financing, so it is 
difficult to provide meaningfully comments on a proposal. The SMIC 
related notice only indicated that the proposed financing was for $500 
million to a Chinese company to make 60,000 wafers a month of advanced 
semiconductors. Nonetheless, after doing some investigating of our own 
to flesh out more details, we filed comments objecting to the 
financing. We were able to assess the impact that the proposed 
financing guarantee would have on Micron's operations because DRAM was 
a central focus of SMIC's well-publicized business plan and a large 
proportion of its production. We provided the Ex-Im Bank detailed 
information on SMIC's competing DRAM production, the state of 
oversupply in the DRAM market, and SMIC's apparent access to private 
financial markets.
    In December 2004, I came to Washington to meet directly with 
members of the Ex-Im Bank Board to make this case. During these 
meetings, I was informed that the terms of the proposed financing had 
fundamentally changed--that the proposal was instead to provide SMIC 
with a $1.2 billion loan guarantee, more than double the original 
proposal. Moreover, SMIC was reportedly guaranteeing that it would 
produce only small quantities of DRAM and that instead its real 
intention was to make logic devices which it claimed were not in 
oversupply in the global market. From my perspective, SMIC's guarantees 
were not reassuring. First, the same equipment used to produce logic 
semiconductors can be used to produce DRAM. Second, even if the 
equipment were dedicated to logic production, it still freed up SMIC's 
capital to invest its own money in DRAM production.
    When I asked the Ex-Im Bank Board if Micron would have an 
opportunity to comment on the revised proposed financing, there was 
resistance. It was only after we persisted that the Board agreed to 
publish a new Federal Register notice. We asked to see the draft 
Economic Impact Analysis report, but that request was denied. 
Consequently, Micron hired a private firm, CapAnalysis, to conduct a 
comprehensive economic impact assessment. Based on a report by 
CapAnalysis, the economists concluded that: (1) the world market was in 
oversupply for both DRAM and logic chips: (2) SMIC was capable of 
accessing financing on its own without an Ex-Im Bank guarantee; and (3) 
the proposed financing would have a net negative impact on the U.S. 
economy and U.S. jobs.
    Ultimately, the proposed financing never went to a vote of the Ex-
Im Bank Board. As then-Chairman and President Phillip Merrill noted, 
this was a large and complex transaction that implicated a number of 
requirements under the Ex-Im Charter including the economic impact 
test, the additionality standard, and reasonable assurance of 
repayment.
    As a result of our experience with the Ex-Im Bank process, I 
believe there are a number of steps that could be implemented to 
improve the economic impact assessment procedure and help ensure that 
other Ex-Im Bank requirements are being met.
    With respect to the economic impact procedures, I would make the 
following suggestions to improve the transparency of the process:

 More detailed information should be provided in the Federal 
    Register notice so as to enable potentially affected U.S. producers 
    to comment meaningfully on the proposed transaction.
 The comment period should be extended from 14 days to a 
    minimum of 30 days (and, for large financings, such as the one 
    involving SMIC, 45 days or more) to allow for a more thorough 
    analysis by potentially affected U.S. producers and other 
    interested members.
 The period of time the Interagency Group has to review the 
    proposed deal and the completed Economic Impact Analysis should 
    also be lengthened. Based on our experience, members of the 
    Interagency Group were frustrated that their questions and concerns 
    were not being adequately addressed, and that they were consulted 
    only at the last minute. Moreover, certain agencies on the 
    Interagency Group, especially the Department of Commerce, should be 
    consulted early in the application procedure because they often 
    have industry expertise--for example, concerning the semiconductor 
    industry--that does not exist in-house at the Ex-Im Bank. This 
    especially makes sense given that the Secretary of Commerce is an 
    ex officio member of the Ex-Im Board.
 The Ex-Im Bank should be required to issue another request for 
    public comment if there are significant changes to the terms or the 
    amount of the financing.
 And finally, a public version of the final Economic Impact 
    Analysis should be made available for inspection and comment before 
    a Board vote on a particular financing proposal. Right now, 
    affected U.S. companies are never given the chance to see the final 
    analysis, the comments of other parties or the input from the 
    private experts retained by the Ex-Im Bank. This lack of 
    transparency puts the potentially affected producer at a 
    significant disadvantage in terms of transparency and due process. 
    These due process procedures are only what are minimally required 
    in other agency contexts such as the International Trade Commission 
    or the Department of Commerce, as well as with the Regulatory 
    Impact Analysis review procedures followed by OMB in the context of 
    E.O. 12866.

    I also believe that the Ex-Im Bank should implement targeted 
provisions to ensure that its mandate is being met. First, as I noted 
previously, pursuant to its rules, Ex-Im Bank can provide financing to 
match the competition from foreign Export Credit Agencies that provide 
financing or guarantees to their own exporters. During the SMIC 
application, we were told that SMIC had informed the Ex-Im Bank that if 
it did not get a loan guarantee from the United States, it would get 
financing from JABIC, the Japanese Export-Import Bank and that the 
United States exporters would lose business. When we asked what proof 
was provided, we were told that the borrower was not required to 
provide documentation showing the availability of alternative 
financing--instead, an applicant merely had to provide assurance that 
this was the case. In our experience, SMIC never received financing 
from JABIC despite its assurances to Ex-Im Bank. Applicants should be 
required to provide some proof of alternative financing from a foreign 
Export Credit Agency.
    Likewise, if the Ex-Im Bank provides financing based on the 
``additionality'' standard, then the Bank should be required to 
document the alleged market failure at issue. Specifically, the Ex-Im 
Bank should establish guidelines for determining whether its financing 
is truly necessary. Among other things, they should request 
documentation from the foreign applicant detailing their record of 
raising capital from the private sector during the 3-year period prior 
to the date of any Ex-Im Bank financing application. This should 
include all loans, equity issuances, and vendor financing. 
Documentation should also be provided to demonstrate recent, failed 
attempts to access financing from the public sector.
    I believe that these changes would have been helpful in assessing 
the SMIC case and will be useful in future instances that may affect 
Micron. However, I am not in a position to say that the recommendations 
I have outlined should be applied in all cases. I would leave that to 
the discretion of the Committee and the Ex-Im Bank.
    I applaud the Ex-Im Bank for its efforts supporting and promoting 
U.S. exports--a laudable goal. Without question, the Ex-Im Bank should 
strive to help small exporters that really need assistance. As I 
described, the problems that we encountered in our dealings with the 
Ex-Im Bank could be improved significantly if additional procedures 
were implemented to ensure a more balanced and transparent process. 
Micron would be happy to work with you, Mr. Chairman, other Members of 
the Committee and appropriate officials at the Ex-Im Bank.
    Again, thank you for the opportunity to testify and I would be 
happy to answer any questions.
                               ----------
               PREPARED STATEMENT OF THOMAS M. SNEERINGER
                 Director, Federal Governmental Affairs
                    United States Steel Corporation
                              on Behalf of
                 The American Iron and Steel Institute
                             March 29, 2006
    I appreciate the opportunity to testify here today on behalf of the 
American Iron and Steel Institute (AISI) and its U.S. member companies 
who together account for approximately three-fourths of the raw steel 
produced annually in the United States.
    American steel producers strongly support U.S. Government policies 
to open foreign markets and more specifically the goals of the Export-
Import Bank (Ex-Im Bank) to foster export of U.S.-produced goods and 
services. The financial well-being of our industry and of our domestic 
suppliers and customers is vital to our economy. At the same time, the 
domestic steel industry remains concerned about U.S. Government-
subsidized financings of manufacturing facilities which lead to the 
expansion of production capacity of a major commodity already in 
oversupply--a problem that has been especially prevalent in the global 
steel industry.
    Our concerns regarding overcapacity are deepened by the fact that 
world steel supply is likely to expand dramatically in the near future. 
Past experience clearly demonstrates that overcapacity is the root 
cause of the economic conditions that have regularly subjected American 
steel producers and workers to substantial injury caused by often 
unfairly traded imports. As the Department of Commerce confirmed in its 
2000 study entitled ``Global Steel Trade: Structural Problems and 
Future Solutions,'' government-enabled distortions and government-
tolerated anticompetitive practices are pervasive in the world steel 
market. The outcome is that market forces are not able to bring world 
capacity and supply in line with demand. Much of the resulting 
oversupply in steel ends up, directly or through displacement, in the 
open U.S. market. As a result, the American steel industry is 
repeatedly injured by import surges.
    This is why the President has made reducing global steel oversupply 
a priority and in June 2001 launched a multilateral initiative designed 
to restore market forces to world steel markets and eliminate the 
unfair trade practices that harm the industry and its workers. In 
announcing his multilateral initiative on steel, President Bush 
confirmed the extent of foreign government interventions and the 
severity of the subsidy-induced global steel excess capacity problem 
and their direct impact on domestic steel producers and workers:

        The U.S. steel industry has been affected by a 50-year legacy 
        of foreign government intervention in the market and direct 
        financial support of their steel industries. The result has 
        been significant excess capacity, inefficient production, and a 
        glut of steel on world markets. . . . Absent strict disciplines 
        barring government support, direct or indirect, for inefficient 
        steel-making capacity, the problems confronting the U.S. steel 
        industry--and the steel industry worldwide--will only recur.

    The initiative included: (1) negotiations with America's trading 
partners seeking the near-term elimination of inefficient excess 
capacity in the steel industry worldwide; and (2) negotiations to 
eliminate the underlying market-distorting subsidies. Thus, when the 
Ex-Im Bank subsidizes loans which result in increased steel production 
capacity abroad, it directly contradicts the policies and goals 
established by the President.
    Steel companies around the world have recently announced plans to 
expand steel capacity by close to 600 million metric tons from 2005-
2012. While capacity expansion must of course be viewed in the context 
of demand growth, this capacity growth far exceeds any reasonable 
expectation for global consumption growth. The capacity expansion 
continues to occur in Asia and South America, with spurts of growth 
also occurring in Russia and other areas. These capacity expansion 
facts are sourced from a memorandum which AISI and five other major 
steel associations in the NAFTA region submitted recently to the OECD. 
This submission is attached hereto for inclusion in the record.
    Much of the unprecedented building binge occurring in multiple 
regions of the world is taking place in countries which are producing 
more steel than they consume domestically, and as a result of decisions 
by governments to support the expansion of domestic steelmaking 
capability. For instance, India's Government has announced that it aims 
to increase steel production to 110 million tons by the 2019/20 
financial year--tripling its current output.
    The large, open, and therefore vulnerable U.S. market is the 
natural choice for export by countries who produce more flat-rolled 
steel products than they consume and are heavily reliant on exports, as 
many other major steel markets are either effectively closed to 
imports, or net steel exporters, or both. A renewed import wave of 
surplus product flooding the U.S. market would be both harmful and 
unfair. It would threaten to undermine the significant progress that 
domestic steel producers have made in recent years in historic and 
ongoing restructuring efforts, which in turn would be put into serious 
jeopardy.
    The U.S. steel industry does not oppose financings by the Bank so 
long as they are not undermining U.S. Government policies to reduce 
global steel overcapacity. The industry wants to work constructively 
with the Bank in its consideration of requests for financing of global 
projects involving the steel industry to make certain that future Ex-Im 
Bank investments are not made that would increase production of a 
commodity product for which there already is overcapacity.
    In 2002 Congress, responding to the Ex-Im Bank providing financing 
for foreign steel production over the objections of the Congressional 
Steel Caucus and Cabinet level officials, and other similar concerns, 
enacted legislation to prevent the Ex-Im Bank from financing production 
of foreign goods that have been found to injure U.S. producers. AISI 
and its U.S. members supported Congress' inclusion of provisions 
strengthening the Bank's economic impact analysis provisions in the 
2002 Ex-Im Bank Reauthorization Act. While the statutory and procedural 
modifications to these rules were a great step forward, improvements 
can be made to make the rules more effective and more transparent. AISI 
therefore urges Congress to consider proposals--both substantive and 
procedural, relating to increased transparency--for inclusion in the 
Bank's reauthorization legislation:

 Define the term ``substantially the same product'' to include 
    products that are one or two steps upstream or downstream from the 
    product subject to an order or determination. This clarification 
    would apply to the rules relating to both final trade measures and 
    preliminary affirmative determinations under Title VII of the 
    Tariff Act of 1930. This clarification would make the statute 
    consistent with the legislative intent as expressed by Senator Bayh 
    and Congressmen Oxley and Toomey in 2002. Similarly, and 
    thematically consistent with the intent of the economic analysis 
    requirement, the analysis of whether the product is or will be in 
    oversupply or is in competition with U.S. production of a same, 
    similar, or competing product should include also products that are 
    one or two steps upstream or downstream from the product subject to 
    the analysis.
 Specify that the Bank shall not provide financing to a firm 
    for the production of substantially the same product that is the 
    subject of a trade law order, regardless of the country of origin 
    of the order against that firm. In other words, if there is a trade 
    law order against a company producing hot-rolled steel in Country 
    X, the Bank should not support a loan to that same company for 
    improving existing plants or building new facilities for producing 
    hot-rolled steel in Country Y.
 Specify that the Bank's $10 million and $5 million financing 
    thresholds are to be aggregated for all financings and financing 
    applications involving the same firm and substantially the same 
    product within a 24-month period. Applicants for Ex-Im Bank 
    financing should not be allowed to circumvent the rules by disag-
    gregating financing applications into several smaller applications 
    to avoid the economic impact analysis and Board consideration. This 
    aggregation proposal would apply to the Bank's general $10 million 
    threshold for an economic impact analysis; the $5 million and $10 
    million thresholds under the preliminary determination rules; and, 
    the $10 million threshold under the Section 201 investigation 
    rules.
 Require the Bank to expand the public comment periods from 14 
    days to 30 days. The statute requires that the Bank seek comments 
    from interested parties to ensure that it refrain from financing 
    activities which adversely affect American 
    interests and that it has established procedures to notify 
    interested parties and provide a comment period with regard to 
    loans or guarantees it is reviewing. The current comment periods, 
    however, are too short to allow full and meaningful private sector 
    comment. In addition to the formal mechanism for comment and 
    consultation, AISI encourages the Bank to consult closely with 
    domestic industries to discuss proposed financings and their impact 
    on excess foreign production capacity.
 Require that the Bank notify the Senate Committee on Banking, 
    Housing, and Urban Affairs and the House Committee on Financial 
    Services of proposed transactions subject to an economic impact 
    analysis. Currently, the Bank's procedures provide that it will 
    notify the relevant U.S. Government agencies but there is no 
    required notification of the Congressional oversight committees.

    In conclusion, the 2002 Ex-Im Reauthorization Act made significant 
changes to the economic impact procedures, but the additional 
amendments outlined above would help to ensure that the Bank undertakes 
a balanced, full, and fair procedure with regard to its economic impact 
analysis.

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