[Senate Hearing 109-1058]
[From the U.S. Government Publishing Office]



                                                       S. Hrg. 109-1058
 
       THE REAUTHORIZATION OF THE EXPORT-IMPORT BANK

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



                                HEARING

                               before the

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

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                                   ON

  EXAMINATION OF THE EXPORT-IMPORT BANK'S CHARTER, TO REAUTHORIZE THE 
BANK TO CONTINUE ITS WORK AS THE UNITED STATE'S OFFICIAL EXPORT CREDIT 
                                 AGENCY

                               __________

                             JUNE 20, 2006

                               __________

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


Available at: http://www.access.gpo.gov/congress/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                    THOMAS R. CARPER, Delaware
JOHN E. SUNUNU, New Hampshire        DEBBIE STABENOW, Michigan
ELIZABETH DOLE, North Carolina       ROBERT MENENDEZ, New Jersey
MEL MARTINEZ, Florida

             Kathleen L. Casey, Staff Director and Counsel

     Steven B. Harris, Democratic Staff Director and Chief Counsel

             Skip Fischer, Senior Professional Staff Member

                         Andrew Olmem, Counsel

                 Joe Cwiklinski, Legislative Assistant

                Steve Kroll, Democratic Special Counsel

              Dean V. Shahinian, Democratic Senior Counsel

       Catherine Cruz Wojtasik, Democratic Legislative Assistant

   Joseph R. Kolinski, Chief Clerk and Computer Systems Administrator

                       George E. Whittle, Editor

                                  (ii)


                            C O N T E N T S

                              ----------                              

                         TUESDAY, JUNE 20, 2006

                                                                   Page

Opening statement of Senator Hagel...............................     1

Opening statements, comments, or prepared statements of:
    Senator Sarbanes.............................................     2
    Senator Crapo................................................    12

                               WITNESSES

Clay Lowery, Assistant Secretary for International Affairs, U.S. 
  Department of the Treasury.....................................     4
    Prepared statement...........................................    40
    Response to written questions of Senator Sarbanes............    73
James H. Lambright, Acting Chairman and President, Export-Import 
  Bank...........................................................     6
    Prepared statement...........................................    43
James D. McClaskey, President and CEO, Midrex Technologies, Inc..    21
    Prepared statement...........................................    49
    Response to a written question of Senator Bayh...............    75
Harry G. Hayman, III, Senior Vice President and Head of Wholesale 
  Banking, Commerce Bank.........................................    25
    Prepared statement...........................................    59
David Ickert, Vice President and CFO, Air Tractor, Inc...........    27
    Prepared statement...........................................    62
Robert E. Scott, Ph.D., Director of International Programs, 
  Economic Policy Institute......................................    29
    Prepared statement...........................................    70

                                 (iii)


             THE REAUTHORIZATION OF THE EXPORT-IMPORT BANK

                              ----------                              


                         TUESDAY, JUNE 20, 2006

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                   Washington, D.C.
    The Committee met, pursuant to notice, at 10:08 a.m., in 
room 538, Dirksen Senate Office Building, Hon. Chuck Hagel, 
presiding.

            OPENING STATEMENT OF SENATOR CHUCK HAGEL

    Senator Hagel. The Committee will come to order. Good 
morning.
    This morning the Committee will hear testimony on the 
reauthorization of the Export-Import Bank of the United States 
(Ex-Im Bank). Ex-Im Bank is the official export credit agency 
of the United States. Since its creation in 1934, Ex-Im Bank 
has played a vital role in promoting U.S. exports. It provides 
financial supports to U.S. exporters when the private sector is 
unable or unwilling to do so.
    Last year, Ex-Im Bank authorized more than $13 billion in 
loan and capital guarantees and insurance to support nearly $18 
billion in U.S. exports.
    The Bank is governed by a renewable charter and was last 
reauthorized in 2002 for a 4-year term that expires on 
September 30, 2006.
    As the former Chairman of International Trade and Finance 
Subcommittee, I helped draft parts of the 2002 Reauthorization 
Bill authored by Senator Sarbanes.
    Ex-Im Bank serves a valuable role in this Nation's trade 
policy. It gives American businesses a tool with which to 
compete with foreign competitors. It helps lower our trade 
deficit and it promotes growth and jobs in every sector of our 
economy. Ex-Im Bank has been an efficient and cost-effective 
way of supporting U.S. exports.
    Earlier this year, Senator Crapo's Subcommittee on 
International Trade and Finance held two Subcommittee hearings 
on reauthorization of the Bank.
    Today's full Committee hearing will consider whether Ex-Im 
Bank is using its resources and legislative authority to assist 
U.S. companies efficiently with taxpayer dollars.
    Our hearing will examine issues surrounding tied aid, which 
generally requires the recipient country to use all or part of 
the aid to purchase goods from the donor country.
    We will look at how Ex-Im Bank uses its tied aid credit 
program to counteract tied aid from other countries, and how 
the procedures for administering the program have worked.
    In addition, we will discuss small business initiatives, 
such as extending underwriting authority to Ex-Im Bank's Small 
Business Division.
    And finally, we will examine the process by which Ex-Im 
Bank implements its economic impact procedures.
    The Committee will first hear testimony from Mr. James 
Lambright, Acting Chairman and President of Ex-Im Bank, and 
Assistant Secretary of Treasury for International Affairs, Clay 
Lowery. We welcome back to the Committee both Mr. Lambright and 
Assistant Secretary Lowery.
    The second panel will consist of Mr. James D. McClaskey, 
President and Chief Executive Officer of Midrex Technologies, 
Inc., on behalf of the Coalition for Employment Through 
Exports; Mr. Harry G. Hayman, Senior Vice President, Commerce 
Bank on behalf of the Bankers Association for Finance and 
Trade; Mr. David Ickert, Vice President, Air Tractor, Inc., on 
behalf of the Small Business Exporters Association; and Dr. 
Robert E. Scott, Director of International Programs, Economic 
Policy Institute.
    We thank the witnesses for appearing before the Committee 
today. Before we begin with our first panel, let me ask the 
distinguished ranking member of the Senate Banking Committee, 
Senator Sarbanes, for any statement he would wish to make. 
Senator Sarbanes.

         OPENING STATEMENT OF SENATOR PAUL S. SARBANES

    Senator Sarbanes. Mr. Chairman, thank you very much.
    The charter of Ex-Im Bank expires on September 30 of this 
year, so this hearing is certainly timely.
    The fundamental purpose of Ex-Im Bank is to finance U.S. 
exports in order to create U.S. jobs, and I want to stress 
that. There is a linkage, since the time we established Ex-Im 
Bank. There has never likely been a time when boosting exports 
and the jobs they create was more critical for a strong U.S. 
economy.
    In my perception, and I have held this view consistently, 
Ex-Im Bank has a critical role to play in leveling the playing 
field for U.S. exporters. Our rate of export growth shows that 
U.S. exporters can compete very effectively in world markets on 
the basis of price and quality if they can get a level playing 
field.
    However, when foreign governments provide subsidies to 
their exports, it seems to me the United States has to respond 
or U.S. exporters will be placed at a competitive disadvantage, 
particularly when small variations in pricing or in credit 
terms can mean the difference between a sale and a lost bid.
    The work of Ex-Im Bank also provides leverage to U.S. 
negotiators attempting to extend international agreements that 
limit the use of Government export subsidies altogether.
    There is another important reason to support the Bank. Some 
developing economies can pose credit risks from which 
commercial banks shy away, even when the transaction may 
represent significant opportunities for U.S. exporters. By 
evaluating the country risk involved the Bank can guarantee a 
commercial export loan, opening the way for an export 
transaction that would otherwise not take place.
    Our approach to Ex-Im Bank should, of course, reflect in 
part the progress being made in controlling the growth of 
export credits offered by other governments. Regrettably, it 
appears that overall funding for other national export credit 
agencies has not declined and may in fact be growing, although 
it is difficult to make the comparisons because of different 
accounting and funding methods. This is a very opaque area, I 
must say.
    Regrettably, the Committee now faces what appear to be the 
same issues we faced, and I thought we had dealt with, in the 
reauthorization in 2002. Those issues include the adequacy of 
the Bank's procedures to measure whether a particular section 
creates a net gain in American jobs, the constant refrain that 
the Bank is not adequately servicing the needs of smaller 
exports, although the Bank has undertaken some steps in that 
regard, and the continued failure to make use of the Tied Aid 
War Chest, perhaps because of the apparent determined 
opposition to the use of tied aid by the Treasury Department.
    I hope today's hearings will shed light on why these issues 
persist. We established the Tied Aid War Chest to, on occasion, 
use it in order to send a very clear signal to other countries 
that if they were going to be underwriting their exports, they 
were going to face pretty intense reaction on the part of the 
United States. If we never use it, it simply becomes a paper 
tiger.
    I also want to note my continued concern that Ex-Im Bank 
still does not have a full complement of directors. No nominees 
have yet been even designated for two open Board positions. The 
risk of the Board's work being frozen by its inability to 
muster a quorum of three Board members is not one that the 
Administration should permit to continue.
    This issue has been raised before in this Committee and we 
need a response from the Administration to get this matter 
taken care of.
    I want to welcome Mr. Lambright, the Bank's acting chairman 
and president, whose nomination to lead the Bank is pending. We 
are disappointed that Treasury Undersecretary Adams was unable 
to be with us this morning, but we welcome Assistant Secretary 
Lowery in his place.
    I also want to welcome the second panel of distinguished 
witnesses which the Chairman has already mentioned to the 
hearing.
    Mr. Chairman, before I conclude my statement, I do want to 
note the tragic death of Philip Merrill, who served as Ex-Im 
Bank's chairman and president from 2002 to 2005. Mr. Merrill 
was born in Baltimore and remained all of his life a proud, 
distinguished, and generous citizen of our State. He was indeed 
a leading philanthropist. He was a successful publisher whose 
influence was first felt in the city of Annapolis. He was also 
the guiding force behind Washingtonian Magazine since 1979.
    He was also a dedicated public servant at the Department of 
Defense, at NATO, and the Bank.
    Many Maryland institutions have been the beneficiaries of 
his philanthropy, including the Chesapeake Bay Foundation, the 
University of Maryland School of Journalism, which is named in 
his honor, and the Johns Hopkins University.
    I think it is fair to say his life was an American dream 
come true and his intensity, his intelligence and his civic 
spirit will be very much missed.
    Thank you very much, Mr. Chairman.
    Senator Hagel. Senator Sarbanes, thank you. And I would 
like to associate myself with your last words regarding the 
late Mr. Merrill.
    For the record, Chairman Shelby is not here this morning 
because he is attending a funeral, and has asked if I would 
substitute. And that is why I am here in this capacity. 
Chairman Shelby will be returning this afternoon.
    With that, let us begin. Mr. Lowery, welcome. We will begin 
with you. Thank you.

STATEMENT OF CLAY LOWERY, ASSISTANT SECRETARY FOR INTERNATIONAL 
            AFFAIRS, U.S. DEPARTMENT OF THE TREASURY

    Mr. Lowery. Mr. Chairman, ranking member Sarbanes, thank 
you for the opportunity to discuss the reauthorization of Ex-Im 
Bank.
    At the Department of Treasury, our responsibility is to 
formulate and implement international economic and financial 
policy on behalf of the executive branch, which includes 
working with Ex-Im Bank to support its export promotion mission 
and working in the OECD to reduce export financing subsidies.
    My written testimony highlights some of the successes we 
have achieved in bringing more transparency on the practice of 
untied aid and working with other donors on limiting market 
windows practices.
    This morning, however, I would like to focus on tied aid 
disciplines and the concerns that some members of this 
Committee have raised regarding the use of the so-called War 
Chest.
    As a bit of context, tied aid is a financing subsidy that a 
donor conditions of the purchase of goods or services from the 
donor country. However, prior to the OECD tied aid rules agreed 
to in 1992, many donor governments, instead of using tied aid 
for development purposes, pursued a strategy of subsidizing 
their credits in an attempt to gain market share from our 
exporters.
    The United States faced a choice: go to war with other 
export credit agencies by using taxpayer resources to subsidize 
credits or negotiate rules in which American exporters could 
compete on the price and quality of their goods and services 
rather than the financial terms that they could get from their 
government. We chose the latter approach, an approach that 
highlights agreed eligibility criteria, transparency standards, 
international dialog, challenge and enforcement mechanisms. 
Over the last 15 years, we have achieved fairly dramatic 
results.
    Before 1992, tied aid was roughly $10 billion to $12 
billion a year. Since Ex-Im Bank's previous authorization in 
2002, tied aid has averaged about $4 billion a year. That is a 
60 percent cut, which would be much greater if it was 
calculated in inflation-adjusted terms.
    In addition to the scale of tied aid changing, the scope 
has also shifted from large-scale capital projects such as 
power, telecommunications and energy projects that are viable 
in commercial terms to what most Americans actually think of as 
aid, development projects in the areas of agriculture, small 
infrastructure and social areas such as education and clean 
water projects.
    The change in scale and scope of foreign tied aid use has 
helped level the playing field for American exporters. We 
estimate that U.S. exports are roughly $1 billion per year 
greater than they would have been without those rules. The 
change in scale and scope has helped American taxpayers. We 
estimate that in the absence of the tied aid rules, we would 
have needed to request an additional budget appropriation of 
roughly $300 million a year.
    The success of the OECD rules-based approach has been the 
result of a bipartisan effort over a number of years in which 
Treasury negotiators have listened to exporters about the 
inequities in the playing field, worked with Ex-Im Bank to 
design strategies and communicated forcefully with our 
competitors to create disciplines on each other.
    One vital piece of leverage in these negotiations was the 
Tied Aid War Chest created by Congress. Over time the War Chest 
has been used by Ex-Im Bank and Treasury as an enforcement 
stick, to match export competitors that wanted to avoid 
competing with our exporters on price and quality grounds. It 
has been used as a deterrent to maintain the disciplines 
negotiated in the OECD.
    Despite the success of these negotiations, concerns have 
been expressed about the War Chest. The three that we have 
discerned are the selective and disciplined approach to using 
the War Chest, whether the War Chest is really a deterrent, and 
finally the role that Treasury plays in the process. Let me try 
to address each issue briefly.
    Given the voluntary nature of the OECD arrangement, the 
United States must be careful in how it decides to implement 
its matching policy. A change in policy away from selective and 
criteria-based matching, resulting in an increase in the use of 
commercially motivated tied aid would be seen as an abandonment 
of the agreement. It would give our partners an incentive to 
expand the scope of their tied aid programs, hurting our 
position in arguing for adherence to a rules-based approach 
that benefits all U.S. exporters.
    Using the War Chest as a credible threat, or in some cases 
to match a competitor, however, is a vital tool to ensure that 
tied aid is not used to tilt longer-term competitive conditions 
against U.S. exporters. When the U.S. challenges the practices 
of another OECD member, our negotiator's hand is strengthened 
by demonstrating the resolve to use the power of the purse.
    Treasury has lead responsibility for negotiating in the 
OECD and, as such, works very closely with Ex-Im Bank to pursue 
a rules-based approach to export financing that is beneficial 
to exporters and taxpayers. Ex-Im Bank has lead responsibility 
for working with exporters and when it should use the War Chest 
for matching purposes, it is natural that it consults with the 
lead negotiators on the rules that the War Chest could effect.
    In other words, Treasury and Ex-Im Bank work cooperatively, 
consult frequently and are vital to each other in helping 
exporters compete on the most level playing field possible.
    Mr. Chairman, OECD tied aid disciplines have been good for 
exporters, good for the international finance system by 
reducing trade distorting subsidies, good for international 
development policy, and most importantly, good for the American 
taxpayer.
    Thank you, and I will try to answer any of your questions.
    Senator Hagel. Secretary Lowery, thank you.
    Mr. Lambright.

STATEMENT OF JAMES H. LAMBRIGHT, ACTING CHAIRMAN AND PRESIDENT, 
                       EXPORT-IMPORT BANK

    Mr. Lambright. Mr. Chairman, Senator Sarbanes, I would 
first like to echo the sentiments of Senator Sarbanes and 
acknowledge that the past week-and-a-half has been a time of 
sorrow at the Bank due to the tragic loss of our immediate past 
chairman, Phil Merrill. Phil's contributions to national 
service were so diverse that his tenure at Ex-Im Bank would be 
but a chapter in the biography of his public life. Yet we at 
the Bank could write volumes on the positive impact that he had 
at the Bank.
    Phil was proud of the Bank, of its mission and its people, 
and we were fortunate to have had him as our leader and friend.
    Turning to the Bank's reauthorization, the mandate of the 
Bank, as expressed in our charter, is to create and sustain 
U.S. jobs by providing loans, guarantees, and insurance to U.S. 
exports that otherwise would not go forward, either because of 
government-supported competition or because the private sector 
is unable or unwilling to assume the risk. That mandate remains 
at the core of why the Bank exists and why it should be 
reauthorized.
    We are requesting an extension of the charter for 5 years, 
to September 30, 2011. We at Ex-Im Bank feel the current 
charter language provides the institution with sufficient 
powers and flexibilities to meet the evolving challenges of the 
next 5 years.
    Our charter provides guidance as to how to meet our 
mandate. We then must set our course by these guideposts, one 
representing the aggressive support we provide U.S. workers and 
exporters, and the other representing responsible stewardship 
of taxpayer dollars.
    Since our 2002 reauthorization, Ex-Im Bank has authorized 
roughly $48 billion of financing in 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.
    For fiscal year 2005, every taxpayer dollar used by the 
Bank yielded financing and support of over $50 in U.S. exports.
    Since being appointed acting president and chairman nearly 
a year ago, no topic has received more attention than small 
business. We have made a number of changes to our business 
operations in order to inculcate a culture that strives to meet 
our small business customers' needs. These changes include 
improving the claims process, establishing a new division for 
small business outreach, assigning small business specialists 
in each of our product divisions and expanding our online 
capabilities.
    We have already laid a strong foundation for growing our 
small business program. In the last fiscal year, Ex-Im Bank 
authorized 47 percent more in dollar volume than in the year of 
our last reauthorization for small businesses and 21 percent 
more in terms of transactions.
    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.
    Decisions on transactions that raise economic impact 
considerations, however, are among the most difficult the Bank 
must make because we must weigh the interests of one set of 
American workers with those of another. While the Bank must 
ensure that potential transactions are properly vetted and all 
interested parties have an opportunity to be heard, exporters 
have indicated that delay and uncertainty has, in some 
instances, frustrated their commercial relationships and caused 
them to lose export sales to foreign competitors.
    So we look forward to working with the Committee to enhance 
the transparency and predictability of our economic impact 
procedures.
    Looking to the future, certain countries which are not OECD 
members such as Brazil, India, and China, are emerging as 
significant exporters of capital goods. We are working with 
both our inter agency and G-7 counterparts to better define the 
rising challenge of government support for these exports and 
determine the best array of measures to successfully address 
it.
    There is no clearer or more fundamental mandate for Ex-Im 
Bank than leveling the playing field for our exporters and 
keeping jobs here in the United States. And I have every 
confidence that Ex-Im Bank will well serve the American 
workforce for years to come.
    I look forward to working with you in this reauthorization 
process and I would be happy to answer your questions.
    Thank you.
    Senator Hagel. Mr. Lambright, thank you.
    Mr. Lowery, let me begin with you. We will pursue the tied 
aid issue. It is my understanding that Ex-Im Bank has not 
awarded any tied aid projects since the 2002 reauthorization; 
is that correct?
    Mr. Lowery. That is, sir.
    Senator Hagel. What is your perspective on why that has 
been the case?
    Mr. Lowery. I think there are a couple of reasons. The 
first one is the impact of the negotiations over this period of 
time in which basically tied aid levels were dramatically 
lowered around the world and, more importantly maybe, is that 
scope of tied aid changed. We do not challenge development 
projects that are for development purposes. What we challenge 
is when tied aid is being used to provide subsidized financing 
for commercially motivated reason.
    And so, because of the fact that we have international 
disciplines and are able to challenge countries, countries are 
using their tied aid for commercially motivated reasons on a 
much less frequent basis. As I said in my testimony, it is down 
least 60 percent, probably more.
    From a scope basis, it has basically been shifting all 
toward development projects.
    In the last 4 years, to my understanding, we have had about 
12 requests of matching tied aid. Some of those requests have 
gone away because the exporter was not interested, we 
successfully challenged the actual competitor that they were 
competing with on the grounds that they were breaking the tied 
aid rules and the offer was withdrawn, or Ex-Im Bank was off 
cover. The project did not meet the environmental standards.
    Of the ones that I have personally looked at, there has 
only been one case since I assumed this job, and the Treasury 
Department supported using the War Chest. That case is pending 
right now.
    Senator Hagel. Mr. Lambright, would you care to respond to 
that question and what Secretary Lowery just said in his 
explanation?
    Mr. Lambright. I think that he is correct in noting a 
number of changes in trends in the field of export credits, 
particularly with respect to tied aid, and that Treasury and 
Ex-Im Bank have worked closely in assessing the merits of an 
application for tied aid. Both Assistant Secretary Lowery and I 
were quite supportive of a recent application for tied aid that 
we felt met both Ex-Im Bank criteria that tend to focus more at 
a transaction level and the policy criteria that Treasury tends 
to be more concerned about. Given the meeting of the minds 
there, both agencies were fully supportive of pursuing this 
case.
    And I would hope that that would indicate a similar 
willingness in the future to work together to support exporters 
where tied aid is warranted.
    Senator Hagel. Since you have been at Ex-Im Bank, I believe 
4 years?
    Mr. Lambright. Coming up on 5, yes.
    Senator Hagel. You have been there during the time frame 
that we are addressing the issue, since 2002. What is your 
recollection of disagreements between Treasury and Ex-Im Bank 
on the use of tied aid, if there have been any?
    Mr. Lambright. Since I have come to the Bank, there have 
been roughly a dozen cases that we have consulted with Treasury 
on. And while I would say that, in some cases there is a 
healthy exchange of viewpoints at the staff level, ultimately, 
as we have worked through all of the transactional concerns and 
policy concerns, that there has not been a case that has 
exhausted the full procedures laid out for us. And so we have 
not ended up with a formal disagreement.
    Senator Hagel. During that period?
    Mr. Lambright. Right.
    Senator Hagel. Thank you.
    For each of you, in light of the fact that we have seen no 
awarding of any tied aid since the 2002 reauthorization, do you 
believe that this sends a signal to our exporters that there is 
little purpose in applying because it may not happen, or it is 
just not worth going through the process? Or do you think in 
any way, because of the awards, it has discouraged interested 
exporters from using tied aid?
    Mr. Lambright. I think that our recent willingness to use 
the Tied Aid War Chest for a recent application is a positive 
signal. In the course of my time at the Bank, there was one 
other instance where the agencies agreed to issue a willingness 
to match letter supporting an exporter. In that case, the 
exporter ended up not winning the contract and so the funds 
from the War Chest were never deployed.
    I think we have a strong panel coming up behind us that can 
speak to the exporters' views on this, but I do think that both 
Treasury and Ex-Im Bank can work collaboratively to make the 
procedure more expeditious for applicants so that they can get 
faster answers and that there is not a chilling effect in the 
market from applying.
    I would like all exporters who feel disadvantaged in the 
marketplace to feel like there is an open door at Ex-Im Bank 
and that we will work quickly to address their financing needs.
    Senator Hagel. Secretary Lowery.
    Mr. Lowery. I would agree with everything that Acting 
Chairman Lambright has said. I would just go one step further 
which is to say that what we try to do is work to support 
exporters through the tied aid negotiations by fighting where 
we see subsidized financing that is against the tied aid rules. 
And if we can keep the playing field level, we do not have to 
use the War Chest. But the War Chest provides us the stick or 
the weapon we need to fight if we cannot solve the problem 
through negotiation.
    So I would say that that is the only thing that I would add 
to what Chairman Lambright said.
    Senator Hagel. Thank you, Secretary.
    Senator Sarbanes.
    Senator Sarbanes. What kind of stick or weapon is the War 
Chest if you do not ever use it?
    Mr. Lowery. It is a stick or weapon for a couple of 
reasons. First, a demonstrated record over a period of years of 
being able to use it, in which we have----
    Senator Sarbanes. Well, you have not used it in what, more 
than 4 years now?
    Mr. Lowery. We have already said that we currently have a 
case right now pending basically where we said we were going to 
use it. We actually had a case, I understand about 2 years ago, 
I was not around, where we made a matching offer.
    Senator Sarbanes. Are you the responsible person in 
Treasury for this issue?
    Mr. Lowery. Yes, sir, delegated authority, but obviously I 
consult with the Treasury Secretary and the Deputy Secretary 
and Undersecretary when need be.
    Senator Sarbanes. But on a day-to-day basis, it is on your 
desk; is that correct?
    Mr. Lowery. No, sir. We have a staff that works on it on a 
day-to-day basis.
    Senator Sarbanes. You are the immediate supervisor of that 
staff?
    Mr. Lowery. The structure basically is that the staff would 
be working for me, yes, sir.
    Senator Sarbanes. You have not used it in 4 years, except 
now you are saying you have got a case right now; is that 
correct?
    Mr. Lowery. I have been in this job for 7 months. I have 
had one case come to me and I approved it.
    Senator Sarbanes. Come from Ex-Im Bank?
    Mr. Lowery. Up from Ex-Im Bank, yes, sir.
    Senator Sarbanes. Where they wanted to use the War Chest?
    Mr. Lowery. Yes, sir.
    Senator Sarbanes. How many times has Ex-Im Bank told 
Treasury over the last 4 years they want to use the War Chest?
    Mr. Lambright. Senator, there have been roughly a dozen 
cases that we have assessed in conjunction with Treasury, but I 
would not characterize that necessarily as an Ex-Im Bank 
position saying we wanted to use the War Chest.
    The way the process works is that when we get an 
application that we deem legitimate, we will consult with 
Treasury and evaluate the file together. And so we ultimately 
will work together to reach a conclusion.
    Senator Sarbanes. The statute says, this is the law:

        Once the principles, process and standards referred to in 
        subparagraph (a) are followed, the final case-by-case decisions 
        on the use of the Tied Aid Credit Fund shall be made by the 
        Bank.

Now I understand, from previous testimony, from what I hear and 
what both of you are saying this morning, that that is not 
being followed. These case-by-case decisions are not being made 
solely by the Bank. Is that right?
    Mr. Lowery. Sir, my understanding is case-by-case decisions 
are made in a broader policy framework. It says here that:

        The Bank shall not approve the extension of a proposed tied aid 
        credit if the President of the United States determines, after 
        consulting with the President of the Bank and the Secretary of 
        Treasury, that the extension of the tied aid credit would 
        materially impede achieving the purposes described in 
        subsection (a)(6).

Subsection (a)(6) regards leveraging negotiations on tied and 
untied aid rules.
    In order for the Treasury Department to have a chance of 
understanding and consulting with the President, we obviously 
have to work with Ex-Im Bank on the transactions as they might 
apply to the actual policy guidance in the negotiations. So we 
work together through these issues.
    Ex-Im Bank receives the cases on a transaction basis and we 
try to look at them from a policy standpoint on an OECD 
negotiations basis.
    Senator Sarbanes. I know, but who makes the decision in a 
particular case?
    Mr. Lowery. I think that we work together, sir.
    Senator Sarbanes. That is not what the statute----
    Mr. Lowery. In fact, since the reauthorization, as Chairman 
Lambright just noted, there has not been one case where the 
Treasury Department and Ex-Im Bank saw differently on a Tied 
Aid War Chest case.
    Senator Sarbanes. I know, because the Treasury says you 
cannot do it.
    Mr. Lowery. Sir, I do not think that that is correct. I 
think that--you are suggesting that we have some sort of a veto 
power, and that is not actually what is happening. We are 
consulting with Ex-Im Bank on these cases, and there has not 
been one case where there has been a disagreement.
    Senator Sarbanes. You are intruding into the case-by-case 
decisionmaking, which by the statute was placed in the hands of 
Ex-Im Bank.
    Mr. Lowery. I think the word intruding would be too strong. 
I think that the word consulting is the word I would choose.
    Senator Sarbanes. Let me ask you this question. You said in 
your testimony that tied aid credit had generally been reduced 
by about 60 percent?
    Mr. Lowery. Probably more than that, yes, sir.
    Senator Sarbanes. So that means the other 40 percent of 
these OECD countries are continuing to provide an unfair 
advantage to their exporters; is that correct?
    Mr. Lowery. No, that is not correct, sir. The 40 percent, 
as I also said, represents the change in the scale of the 
financing. There has also been a change in the scope of the 
financing.
    If they are providing credits that are going for legitimate 
development purposes, for instance if you were doing a rural 
electrification program on a small-project basis and it is tied 
aid, that would be allowed under the rules and we would not try 
to challenge that.
    However, if you were trying to provide financing for a 
project that addresses a power grid or something that is 
commercially viable over a longer time period, that is 
something that we would challenge and potentially use the War 
Chest to match, if need be.
    Senator Sarbanes. We understand that a number of countries 
have worked out all sorts of arrangements to provide support or 
underwrite for their exports. Is that your perception?
    Mr. Lowery. If you could provide a little more detail, I am 
sorry?
    Senator Sarbanes. That a number of countries with whom our 
exporters compete with their exporters are engaged, in one way 
or another, in providing favorable opportunities for their 
exporters.
    Mr. Lowery. I think that Ex-Im Bank obviously worries very 
much, as does Treasury, about the competitiveness of our 
exporters versus other exporters based on export credit 
financing. If a country is subsidizing in a way that is against 
the disciplines that we have set up, then we will challenge 
that.
    In fact, we have been primarily successful in around 90 or 
95 percent of our tied aid challenges.
    Senator Sarbanes. What study do you undertake to ascertain 
what other countries are doing in underwriting their exporters?
    Mr. Lowery. The first thing we do is we look at the country 
and the eligibility. Basically, we are trying to go toward the 
least developed countries, so basically below around $3,000 per 
capita income.
    Second, we look at the terms that they are giving. If there 
is a grant element of----
    Senator Sarbanes. No, I am trying to get at a broader 
question.
    Mr. Lowery. Sorry.
    Senator Sarbanes. Do you do continuous studies that say 
countries X, Y, and Z are engaged in the following practices, 
which underwrite their exporters? Can you tell me what these 
OECD countries are actually doing? And does the survey 
encompass all forms of export credit?
    Mr. Lambright. Speaking for Ex-Im Bank, Senator, we conduct 
an annual competitiveness report that we send up to this 
Committee annually that addresses how Ex-Im Bank is positioned 
vis-a-vis our export credit agency competitors. Historically, 
this has been looking at the behavior of OECD or, more 
narrowly, G-7 export credit agencies.
    Within the past 2 years, we have introduced chapters on 
non-OECD export credit agencies, most prominently China, to try 
to track the behavior of other government's support for their 
exporters.
    Senator Sarbanes. What is Treasury's position on the non-
OECD countries? In terms of us using tied aid credit in cases 
involving competition with exports financed by export credit 
agencies of non-OECD countries?
    Mr. Lowery. We think that we should be able to use the War 
Chest in circumstances that fit the criteria that we have 
talked about in cases of non-OECD matching----
    Senator Sarbanes. But you do not think any such 
circumstances have yet come to your attention; is that the 
idea?
    Mr. Lowery. I cannot say that any have come to my attention 
but I know that there is growing competition out there from 
India, China, Brazil, other countries that are not in the OECD 
and it is something that we have to watch very carefully. We 
are starting to work more with those countries to try to get 
them more involved in the disciplines.
    But we do need to be prepared to use the War Chest if we 
need to in a matching case.
    Senator Sarbanes. It might help if you showed them right at 
the outside that this stick meant something.
    Mr. Chairman, I have imposed on Senator Crapo. I apologize 
to him for going over my time.
    Senator Hagel. Senator Sarbanes, thank you.
    The Chairman of the International Trade and Finance 
Subcommittee, Senator Crapo, welcome.

         OPENING STATEMENT OF SENATOR MICHAEL D. CRAPO

    Senator Crapo. Thank you very much.
    First of all, Mr. Chairman, and to our witnesses, I 
apologize for being late. This is one of those mornings where I 
literally had four very important things, all of which were 
unavoidable, to be at the same time. So I apologize for being 
late.
    One of those items is a very significant markup in the 
Budget Committee that is going on right now as we speak on what 
I consider to be one of the most important budget reform 
measures that we have before Congress this year. So I am 
probably going to have to depart early to get down there and 
participate in that battle and that vote.
    I go into that only to make it clear that my reason for 
being late and my reason for my early departure should not give 
any indication of a lack of interest in the matters before this 
Committee today.
    As the Chairman has indicated, I Chair the International 
Trade and Finance Subcommittee. We have already held two 
hearings on this issue and I am very pleased that the Chairman 
has chosen to hold this full Committee hearing on the issue, 
and I look forward to being very involved as we work on the 
reauthorization.
    Mr. Lambright, I just have a couple of questions before I 
am going to have to dash off to the budget battle.
    First, at our last two Subcommittee hearings, as you know, 
we discussed the economic impact procedures and specific 
suggestions on how to improve the efficiency and really to get 
greater clarity, fairness and transparency in the economic 
impact process. I just want to state at the outset that I 
appreciate your willingness to work with me and other Members 
of Congress on these issues. I think we are making progress.
    I am aware that these economic impact cases can make it 
difficult to provide exporters and other transaction parties a 
sense early on in the transaction as to where the Bank's 
analysis is likely to lead. And while the Bank can continue 
with its case-by-case approach, it strikes me that the Bank 
might consider establishing or publishing some kind of list of 
sectors in which provision of Ex-Im Bank financing is less 
likely.
    I am interested in what your thoughts are in this approach?
    Mr. Lambright. Senator, since we last talked at our 
Subcommittee hearing, I have heard, as I am sure you have 
heard, a lot of ideas regarding transparency. Many of them are 
very good ideas. But some other ideas raise a concern about 
adding too much process for the non-contentious transactions to 
endure.
    And so, in the context of that broader concern, I think a 
list seems to be an idea worth pursuing.
    Of course, the details would be important, but I would 
welcome the chance to work with you on seeing if this is 
something that could work.
    Senator Crapo. How would the Bank go about creating such a 
mechanism?
    Mr. Lambright. Well, I could envision a number of ways to 
go about it. And again, I would be happy to work with you and 
your staff on pursuing that.
    I suppose I would want to be careful that whatever list or 
mechanism we came up with would give an early warning sign to 
applicants where their cases should not go forward, but allow 
cases that should go forward to come forth before the Bank.
    Senator Crapo. Just one other question in this area, and if 
you would, could you give me just an idea of what this list 
might look like?
    Mr. Lambright. Well, even though we are making decisions on 
a transaction-by-transaction basis, these procedures tend to 
encompass entire industries at any given time. And so there are 
cases where our Board has had to decline an application 
because, for example, an indication that that particular sector 
would be in a state of oversupply at the time the project would 
come on stream.
    So, if we were looking for something to add to the 
transparency and predictability and provide that early warning, 
I would imagine some kind of mechanism whereby if we have 
turned down a case that we could have a list where that 
industry would be put on the list since we would have made a 
determination really on the industry at the time that we 
assessed a particular transaction.
    But I would also want to make sure that this mechanism or 
list would have an opportunity for industries to come off the 
list at the time that the supply and demand dynamics were to 
change.
    But I think that this early warning sign, this transparency 
that you mentioned, is important and something that I would be 
happy to continue working with you on.
    Senator Crapo. Thank you.
    I think we are talking the same thing here. We do not want 
to have an absolute bar, but a guidance would be very helpful 
at the early stages of the process.
    Mr. Chairman, if I could just do one more question, I would 
appreciate the opportunity.
    I want to shift to the small business issue, Mr. Lambright. 
Also, I want to commend you for making some needed reforms at 
the Bank that advance the needs of small businesses. I also 
appreciated your statement that although the Bank of making 
progress on these small business issues, there is room for 
improvement on that front.
    Could you elaborate on some of the reforms that are still 
needed?
    Mr. Lambright. Well, since coming into my current position, 
we have addressed a number of areas in the small business 
experience with the Bank. We have developed a group to focus on 
outreach to small businesses, to help educate them and help 
them apply to the Bank. We have focused on the claims process 
to make sure that that is easier to navigate for small 
businesses.
    And now we are turning our attention to the processing and 
approvals of applications. We have recently implemented a 
number of managerial and structural changes that we will need 
to monitor on an ongoing basis and judge their effectiveness 
and make any further necessary adjustments that we may need to 
make.
    Likewise, we intend to monitor and continue making 
refinements to our online capabilities that will be of large 
benefit to small business applicants.
    But of course, we have a limited discretionary budget and 
you mentioned budget issues, Senator. So these plans that we 
have could be jeopardized by budget cuts, such as the 8 percent 
cut to our administrative budget proposed by the House.
    And so, given our very limited discretionary budget, we 
intend to devote a large amount of that to working with small 
businesses on the whole range of experience that small 
businesses have in the Bank.
    Senator Crapo. Thank you.
    Is legislation needed to institute any of these changes 
that you are talking about?
    Mr. Lambright. We have already begun to make these changes, 
and I believe that the current charter makes it quite clear the 
focus the Bank should have on small business exporters. And so 
I do not see the need to legislate changes.
    But we will continue to monitor the changes we are making 
and make further refinements as needed and, of course, continue 
to work with the small business community and the Members of 
this Committee to see where further refinements may be 
necessary.
    Senator Crapo. I assume you just expect these changes to 
assist the Bank in meeting the 20 percent target?
    Mr. Lambright. I do, although in a demand-driven agency it 
is always difficult to promise that a particular goal or ratio 
will be met. But I think that these are the changes that we 
should be making to help maximize our support for small 
businesses.
    Senator Crapo. Thank you very much.
    Mr. Chairman, thank you for letting me go over. As I 
indicated, I am going to have to leave but that should not be 
any indication of my lack of interest in this manner.
    I would encourage everybody to pay attention to what we are 
doing in the Budget Committee today, too, because it is, I 
think, one of the best things we have got going in this 
Congress right now in terms of some major enforcement with some 
teeth in it to help get some control over our budget.
    So pay attention to what is happening on the sixth floor, 
was well, today.
    Thank you very much.
    Senator Hagel. Chairman Crapo, thank you, and thank you for 
your continued leadership on this issue.
    Let me pursue what Chairman Crapo was referencing.
    Why then, as you have just noted in response to Mr. Crapo's 
question, you have not been able to do more in terms of dollars 
on that set aside, trying to hit that 20 percent mandate? Is 
that, as you have noted, to some extent is it a procedural 
issue? Is it? Obviously demand drives a certain amount of this.
    Where are the biggest issues that you find in being unable 
to fulfill that minimum 20 percent?
    And then, if you could give the Committee some sense of 
when you believe that we may see that target fulfilled?
    Mr. Lambright. Mr. Chairman, I do want to start by saying 
that I think a great deal of progress has been made since the 
last rechartering on behalf of small businesses.
    By dollar terms, our support in the last fiscal year for 
small businesses was 47 percent greater than in the year of our 
last reauthorization. And though we have never reached the 20 
percent goal in the term of this charter, we have never turned 
down a small business application for budgetary reasons. We 
have always made the resources available to support small 
business exporters.
    The key, I feel, to deriving that small business number has 
been outreach. When I travel and meet with small businesses, 
quite frequently they are not even aware that there is a 
Federal Government program that is available for them. And so, 
educating them and helping them work through the application 
process is a key. Which is why we have put together a division 
with significant resources targeted on outreach.
    Current changes and future refinements are focusing on the 
experience that the small business applicant has once they 
apply to the Bank. So that is the processing and the 
underwriting process that we have turned our attention to most 
recently. I am hoping that those will bear fruit shortly in a 
way that I can come back to you soon and say that we have 
exceeded the 20 percent threshold.
    Senator Hagel. Thank you.
    Let me ask Mr. Lambright a question about procedures. There 
has been, as you have noted, and since you have been at Ex-Im 
Bank for almost 5 years, you know that there are some 
criticisms about the Bank taking too long to complete 
procedures. This obviously injects uncertainty about what 
transactions can be supported and when.
    Is this a continuing problem? What is Ex-Im Bank doing to 
deal with it? Should we be concerned? How much of an impediment 
is it, if it is?
    Mr. Lambright. I think it is a very fair concern. And I 
have heard from a number of exporters in my time at the Bank of 
this very concern. It is one that we have to take very 
seriously.
    Some of our larger transactions, the larger projects, the 
turnaround time tends not to be an issue or a source of 
complaint because these are large undertakings with large lead 
times. So really, where the most frustration is created is 
where you are dealing with the smaller applicant or the smaller 
transaction where they are trying to get a deal done quickly 
and dealing with a Government agency may inject more time than 
they would be comfortable with.
    One step that we have taken to address this concern is the 
rolling out of something we call ``Ex-Im Online,'' which is an 
online application system that will be of particular benefit to 
small businesses that apply for some of our shorter-term 
products, so that the automation will reduce some of that 
turnaround time.
    And in other products, we are monitoring much more closely 
than we used to the cycle time that it takes for applications 
to move through the various divisions of the Bank. And it is 
something that I am hopeful we will continue to improve.
    Senator Hagel. In that same general area, we talked earlier 
specifically in regard to some of the questions that Senator 
Sarbanes had asked Mr. Lowery, how does Ex-Im Bank measure up 
against the export credit agencies that we compete with in the 
way of new products, procedures, processes? Where do we lag 
behind other ECAs? Where are we significantly better? Is it an 
issue that we need to address? Should we be addressing it in a 
reauthorization process?
    I did not attend the two hearings that Chairman Crapo had, 
so you may well have covered this ground in those hearings.
    But if there are areas where we are, in fact, lagging in a 
competitive world that is becoming more competitive, and we 
talked a little bit earlier about some of the specific 
countries, we should obviously address those in this 
reauthorization process.
    Can you answer those general questions for me? And Mr. 
Lowery, I would welcome your thoughts on this, as well.
    Mr. Lambright. Mr. Chairman, the Administration is 
requesting a clean bill, so at the fundamental level there is 
no request to change the charter to address the competition 
with other governments and their export credit agencies.
    But that said, broadly speaking, where Ex-Im Bank fares 
well against our counterparts is at the product and program 
level, at the acting-as-a-bank side of the house. We tend to 
offer competitive terms and products and expertise to help our 
exporters get good financial support for their exports.
    Where the criticism tends to come, or where our weakness is 
with respect to counterpart export credit agencies, is at the 
level of flexibilities in implementing and putting to use those 
financial skills.
    And so these flexibilities are constrained along a number 
of lines that are found in our charter. But I am not here to 
say that we should eliminate any of them, but other export 
credit agencies do not have the same concern for the 
environment, let us say, or for economic impact that Ex-Im Bank 
has.
    We are a very traditional export credit agency, focused on 
the jobs in our country. And other export credit agencies have 
started to move beyond that narrow focus, looking toward any 
benefit to their country, not just to the workforce. And that 
is not territory that Ex-Im Bank has ventured into yet. And the 
guidance from Congress has been clear to us that that is not 
territory that we will soon be venturing into. But in comparing 
U.S. Ex-Im Bank to our overseas competitors, that tends to be 
how it breaks down.
    We have strength in the financial aspects, but we are more 
limited in flexibility.
    Senator Hagel. Thank you. Secretary Lowery?
    Mr. Lowery. I think the only thing that I would add, sir, 
is from the Treasury's perspective, we try to help Ex-Im Bank 
and the exporters level the competitive playing field through 
these OECD negotiations.
    I would say that a couple things that we have been 
successful in is taking the environmental guidelines that Ex-Im 
Bank has and internationalizing them in the OECD process. That 
was something that was done in very close coordination between 
Treasury, Ex-Im Bank, and the State Department. I think that we 
actually achieved a lot back in the 2003-2004 time frame.
    Second, and this goes to Senator Sarbanes' concerns, I 
think we need to continue to focus on squeezing out the export 
subsidies that are a problem for the system through discipline, 
challenges, and transparency. And where we need to use it, we 
should be prepared to use the War Chest.
    In that respect, I completely agree with Senator Sarbanes. 
And the Treasury Department is ready to work with Ex-Im Bank on 
how we can use it when we receive matches that make good 
economic sense.
    Senator Hagel. Thank you.
    Senator Sarbanes.
    Senator Sarbanes. I know we have another panel, Mr. 
Chairman. I will be very quick.
    Mr. Lambright, how do you respond to criticism of the 
Bank's economic impact analysis? You have a mandate that your 
financing must generate U.S. jobs. You have been subject to 
some pretty strong--actually there are members of this 
Committee who have had some direct experiences in their States 
on this very issue.
    Mr. Lambright. Senator, you have touched on an area that 
involves the most difficult decisions we at the Bank have to 
make. You correctly note that our mission is to support U.S. 
jobs associated with exports. But when that export will be used 
to produce a commodity that will then enter the global 
marketplace and pose a competitive threat to U.S. producers of 
the same commodity, we are charged to be very careful in how we 
proceed. We need to balance the interests of the benefits 
associated with the export against the potential harm posed by 
the future threat of increased commodity production.
    We have made changes since the last rechartering to try to 
handle these questions more transparently and efficiently. We 
have introduced a public comment and notice period so that all 
interested parties can be heard. And we have formalized the 
involvement of the other trade policy agencies to get their 
expertise on various industries and various transactions.
    We have taken up this topic at the Subcommittee level, as 
you know, to explore these challenges and find out how we can 
balance the interest of both the exporters and the affected 
industries, so that we can have a transparent and predictable 
process that comes to the right outcome.
    Senator Sarbanes. Well Mr. Scott, who is going to be on the 
panel subsequent to this one, let me just read you a paragraph 
from his statement:

        In fiscal year 2005, the Bank provided financing for 3,128 
        projects. The Bank issued only six economic analysis notices, 
        covering only 0.2 percent of the transactions financed in 
        fiscal year 2005. Furthermore, there is not a single reference 
        to or discussion of any of the Bank's economic impact analysis 
        in its 2005 annual report. Given the unprecedented size of the 
        U.S. trade deficit

and I would underscore that


        which reached $717 billion in 2005, and Congressional concern 
        with the economic impact issue

I would underscore that, as well

        it is surprising that the Bank has provided so little public 
        information on its economic impact analysis or the results of 
        those investigations.

What do you say to that?
    Mr. Lambright. We have been trying to boost the 
transparency of this issue, both by having a public notice and 
comment period for the relevant cases and by posting the 
procedures on our Ex-Im Bank web site so that applicants can 
familiarize themselves with the procedures before they 
undertake an application with us.
    But because of the nature of the guidance that we have in 
the economic impact realm, it is not surprising that it is a 
small number of cases that trigger this analysis because it 
really is limited to those cases where the export of some piece 
of capital equipment will be used to produce a commodity that 
may then come and displace U.S. production of the same 
commodity.
    So, if you export agricultural commodities or spare parts 
or most machinery that is not itself producing a commodity, 
those cases are going to go through without implicating these 
procedures. But when they are implicated, it is a long and 
rigorous process that does involve public notification.
    Senator Sarbanes. Is the only time you think you should do 
an economic impact assessment is cases involving the export of 
capital goods that would be used to expand production capacity?
    Mr. Lambright. The guidance in the charter addresses when 
productive capacity will be increased. It does not necessarily 
have to be capital equipment. That could be through licenses or 
blueprints or other mechanisms that would allow for a foreign 
entity to increase production. But yes, that tends to be the 
area that triggers these procedures.
    Senator Sarbanes. As I understand it, it is pretty much the 
guiding criteria for Ex-Im Bank; is that right?
    Mr. Lambright. What is the guiding criteria?
    Senator Sarbanes. Expanding production through the export 
of capital goods. That is the thing you look for, and then you 
do an economic impact statement; is that right?
    Mr. Lambright. Right, yes.
    Senator Sarbanes. Mr. Scott suggests:

        The Bank should also do economic impact assessments for other 
        goods' export contracts

this is besides the export of capital goods

        that include agreements to transfer production technology or 
        formal or informal offset agreements to transfer production of 
        related or unrelated products abroad or to serve as a marketing 
        agent for foreign suppliers in the United States in exchange 
        for export sales of goods of any type.

What do you say to that?
    Mr. Lambright. Well, Senator, I have not read the testimony 
and I am not familiar with the argument. But I do think that 
Ex-Im Bank tries to be inclusive when approaching the question 
of whether economic impact procedures should be relevant. And 
as I said to an earlier question of yours, this could be taken 
as broadly as licensing rights or blueprints. It does not 
necessarily need to be limited to capital equipment.
    But for the other items the gentleman suggests, I would 
need time to think about those before taking a position.
    Senator Sarbanes. Well, I commend this statement to you. I 
think it raises a number of interesting questions. I think many 
of them go to the concerns that many Members of the Congress 
have with respect to the economic impact analysis which Ex-Im 
Bank is supposed to conduct.
    The essential thrust of this paper is that your parameters 
are too narrow, in terms of when you undertake to do an 
economic impact analysis, and also that it is not sufficiently 
open and transparent, although you mentioned you are trying to 
start addressing that problem. So I commend that statement to 
you.
    Second, I want to ask you about small business. Do you have 
a small business division now, within the Bank?
    Mr. Lambright. We do have a small business division that 
focuses on outreach to the small business community.
    Senator Sarbanes. And does that small business division 
report directly to the CEO of the Bank?
    Mr. Lambright. Yes, it does.
    Senator Sarbanes. Are the credit decisions allocated to the 
small business division?
    Mr. Lambright. No, they are not. Those are made in--
depending on the product, most of them are made in a credit 
underwriting division that services all of the divisions of the 
Bank.
    Senator Sarbanes. Does the credit underwriting division 
have a small business division within it?
    Mr. Lambright. It does not have a small business division 
that is titled as such. It does have specialists in the 
division identified to be the credit underwriting officers 
focused exclusively on small business applicants, so that those 
looking at small business applications are sensitive to the 
unique needs of small businesses and expert in those concerns.
    Senator Sarbanes. We set a goal for small business, did we 
not? What was that goal?
    Mr. Lambright. To make available 20 percent of our 
resources for small business.
    Senator Sarbanes. And has that happened?
    Mr. Lambright. We have not hit the 20 percent since the 
last rechartering, though we have never turned down a deal from 
a small business applicant for lack of resources. We have 
always made the resources available.
    But we continue to strive, Senator, to meet the 20 percent 
goal. And that is why we continue to make these adjustments to 
our management structure.
    Senator Sarbanes. And what percentage figure are you at?
    Mr. Lambright. In the last fiscal year we were at 19.1 
percent.
    Senator Sarbanes. Is that the highest you have reached?
    Mr. Lambright. No. Three fiscal years ago, we were at 19.8 
percent.
    It tends to knock around, Senator, as a function between 
the amount of small business and non-small business that we do. 
So in any given year it depends on the pace of growth of all of 
our business. But we continue to strive to do as much small 
business as possible. Regardless of the percentage, we want to 
do as much as we can for small businesses.
    Senator Sarbanes. One would think there must be things you 
can do in terms of outreach and marketing, that if you are that 
close to the 20 percent that you could reach it.
    Mr. Lambright. I agree with you.
    Senator Sarbanes. Then you would be able to sit at the 
witness table and say we have met the goal.
    Mr. Lambright. I would like to come before you having well 
exceeded the goal, so that this is not an issue anymore. I do 
not look at it as a ceiling or a floor. I want to move well 
past it and do as much as we can for small business.
    Senator Sarbanes. You are not there yet, so let us get 
there.
    Thank you, Mr. Chairman.
    Senator Hagel. Senator Sarbanes, thank you.
    I understand there is to be a vote at 11:15, so I think 
this is a good opportunity to break as we exchange panels.
    We will keep the record open for a few days in the event 
other members of the Committee wish to submit questions in 
writing.
    Again, thank you each for coming this morning.
    I am going to go vote and come back. If you would like to 
start, are you planning on staying for a while?
    Senator Sarbanes. I was going to hear the testimony.
    Senator Hagel. Then what we will do is we will not recess 
since Senator Sarbanes is going to stay. We would ask the 
second panel to come forward and get started. I will go vote.
    Gentleman, welcome. Since you each have been introduced, I 
will dispense with that activity and again welcome you and tell 
you we appreciate your testimony.
    Mr. McClaskey, we will begin with you.

  STATEMENT OF JAMES D. McCLASKEY, PRESIDENT AND CEO, MIDREX 
                       TECHNOLOGIES, INC.

    Mr. McClaskey. Thank you, Mr. Chairman, Senator Sarbanes.
    My name is Jim McClaskey. I am President and CEO of Midrex 
Technology, Inc., headquartered in Charlotte, North Carolina.
    Senator Sarbanes. [Presiding.] Mr. McClaskey, if you could 
pull that microphone closer, it would be helpful.
    Mr. McClaskey. Is that better?
    Senator Sarbanes. Yes.
    Mr. McClaskey. I have worked at Midrex for the past 32 
years. With me today is my colleague, Rob Klawonn, who is the 
Vice President of Commercial for our company.
    We sincerely appreciate this opportunity to speak to you 
today regarding an issue which is critical to the success of 
our company and the hundreds of small businesses we support in 
the United States. Specifically, I am directing my remarks to 
the pending reauthorization of Ex-Im Bank of the United States.
    Midrex needs the support of an active and aggressive export 
credit agency to allow us to compete on a level playing field 
with our competitors. These competitors in Europe benefit 
greatly from the aggressive support of export credit agencies 
such as Hermes and Sache.
    Midrex is a small technology company with less than 100 
full-time employees. We are 100 percent dedicated to the global 
iron and steel industry, and nearly all of our clients are 
foreign.
    This year our revenues will be the highest in our company's 
history, more than $200 million. How did we achieve revenues of 
more than $2 million per employee? We rely heavily on the 
support of hundreds of U.S. and, yes, foreign suppliers and 
manufacturers of industrial, electrical and mechanical 
equipment, specialty fabrications, refractory, and much more.
    We typically sell a technology package of engineering 
equipment materials and services for export. The pieces come 
together at our customers' plant sites in their home countries. 
Although we do not manufacture anything ourselves, the bulk of 
our revenues and profits are derived from the supply of goods 
manufactured right here in the United States.
    Key supply relationships have developed over the past 30 
years in States such as Alabama, Florida, Georgia, Illinois, 
Indiana, Kentucky, Massachusetts, Missouri, New York, North 
Carolina, Ohio, Pennsylvania, South Carolina, Texas, Utah, West 
Virginia, Wisconsin, and others.
    Many of these companies are small businesses. Furthermore, 
we are the market leader in our segment of the industry, with 
two-thirds market share. And the Midrex direct reduction 
technology has over 90 percent market share in the Middle East-
North Africa region.
    In the past, Midrex had received support from Ex-Im Bank, 
although there were numerous complaints about its lack of speed 
and efficiency. We have developed support for projects in 
Mexico, Venezuela, and the Middle East.
    We had not been in contact with Ex-Im Bank for 
approximately 5 years from 1998 to 2002, due to very poor 
global market conditions in the iron and steel business. Upon 
returning to Ex-Im Bank in 2003 asking for support, we were 
verbally instructed by one business development officer at Ex-
Im Bank, do not waste your time simply because we are 
associated with the steel industry.
    Unfortunately, we had to spend thousands of dollars over 
the past few years educating--and maybe that is not the right 
word. Let us say making people more informed, people in 
Washington, D.C., more informed about our business and the fit 
we have in the global steel industry.
    I would like to make one thing very clear at this point--
Midrex technology does not produce steel. Our process is used 
to make a metallic iron raw material that is then used to make 
steel, much the same way that scrap metal is used.
    In December, 2004 Midrex signed a contract with a client in 
Saudi Arabia to supply $81 million worth of engineering 
equipment and field services. The majority of this revenue is 
dedicated to U.S. goods and services. The contract is a minor 
but critical part of a $1 billion investment being undertaken 
by our client to increase iron and steel-making capacity in 
Saudi Arabia.
    The metallic iron produced by our technology will be used 
in adjacent steel-making operations to produce steel for the 
Arab Gulf region's fast growth and also for export to the 
global steel consuming customers.
    In 2005, the Saudi client made its application to Ex-Im 
Bank for loan guarantees as part of an overall financing 
effort, using combinations of commercial financing and European 
export credit agency support.
    It is interesting to note that the lead bank, who was very 
much aware of the sensitivities associated with Ex-Im Bank in 
support of foreign steel producers, recommended that his Saudi 
client not submit an application to Ex-Im Bank due to the high 
probability that the application would be denied.
    The Saudi client nevertheless expressed an interest in 
establishing a relationship with Ex-Im Bank and instructed the 
financial arranger to complete the application process.
    Ex-Im Bank, based upon the negative findings of the 
economic impact analysis, denied the application a few months 
ago because the project as a whole will result in the addition 
of nearly 1.3 million tons per year of hot-rolled coil 
capacity.
    On the surface, the system of checks and balances on Ex-Im 
Bank worked. The procedures and guidelines which were put in 
place as a consequence of the last Ex-Im Bank reauthorization 
and fall-out of the Bush 201 trade sanctions imposed in early 
2003, worked as intended.
    However, I would like to ask you a question. Did the denial 
of this application when all other European ECAs approved 
respective portions protect the U.S. economy? The answer is a 
big ``no.'' Did it make some people feel good because we did 
not use U.S. taxpayer dollars to support the project? The 
answer is ``yes.'' But let us look at the real outcome.
    This project is still moving ahead as planned and will 
become operational in April 2007. So ask yourselves, what did 
we really accomplish here?
    We must admit that hot-rolled coil was being dumped on the 
global market in the earlier part of this decade. Anti-dumping 
duties and tariffs were imposed on some foreign producers. Many 
of these producers were selling at or below their cash cost of 
production. You have heard for years from various sources that 
there is a glut of steel capacity. However, as we all know, 
China has entered the picture now and on its own has raised 
total global crude steel-making supply and demand by more than 
30 percent.
    Furthermore, tremendous efforts have been made by the likes 
of Mittal, Nucor, US Steel, Severstal and other major players 
to absorb under performing assets through acquisition and 
merger. Some inefficient and poorly located assets were simply 
taken out of operation altogether, like Gulf States Steel and 
Geneva Steel.
    The threat of state-owned steel companies dumping steel and 
causing prices to plummet has ben diminished, with the 
exception of China, of course. As for China, the story is a 
young one. We have been told by many analysts and industry 
leaders that China is not a near-term threat due to high iron 
ore prices. They are expected to import approximately 300 
million metric tons of this raw material in 2006 at market 
prices.
    Iron ore costs are a major factor in determining production 
costs. They have other issues facing them, as well, such as the 
high cost of energy, high prices for metal iron, rising labor 
costs and labor inefficiencies, infrastructure issues, 
environmental concerns, currency uncertainties, and so on.
    U.S. steel producers face some of these same issues. 
Despite this recent explosive growth, China is still a 
developing nation when considering its low per capita 
consumption of steel and its huge demand for infrastructure 
development.
    Please do not misunderstand me. I do not mean to imply that 
the domestic U.S. steel industry is now well-protected. This is 
still, and will always be a commodity business subject to the 
ups and downs of the global economic cycles and there will be 
some producers willing to sell it any price.
    However, I do offer that the future will look much 
different than the past because of the huge privatizations 
which have taken place, putting capacity in the control of 
market-driven companies.
    Just look at the recent industry gatherings and you will 
find many statements by current U.S. steel executives which are 
positive about the future. An American Metal Market article 
published last month quoted the CEO of Nucor when he said: ``No 
one predicted that 2004 would do what 2004 did. I think we are 
going to be in a bull market for the next 10 to 15 years. There 
is something much bigger going on here. We are in a place where 
things will be very positive.''
    An article titled Raw Materials: The Sourcing Game, 
published in American Metal Market, dated May 15, 2006, was 
making the argument that ``Raw materials remain a key area of 
concern'' and cited a few steel leaders here in the United 
States on issues of raw material and logistics issues. The Head 
of Mittal Steel USA was discussing raw materials and North 
America infrastructure when he was quoted. Here is a key 
excerpt from the article.
    ``They, raw materials, are still very tight,'' said Louis 
L. Schorsch, chairman of the AISI and President and Chief 
Executive Officer of Mittal Steel USA, Inc., Chicago. ``I do 
not think there is any bad behavior out there or anything like 
that, but I think it is clear that the level of investment in 
raw materials or logistics infrastructure needs to improve. 
Investment in raw material capabilities is critical for steel 
producers. It is the market at work,'' he said. ``Supplies are 
tight and demand is high.''
    Later in the same article the writer goes on to conclude by 
saying: most observers predict that steel consumption will 
continue to grow globally for the foreseeable future, putting 
further strain on raw material supplies, not only in North 
America but worldwide.
    So back to the question at hand. How does the denial of the 
Saudi application and others like it protect the U.S. economy? 
As I said before, the project is still proceeding, the European 
export credit agencies have no problem supporting it, and now 
Midrex has a free hand to buy its equipment from global sources 
rather than right here at home, from American companies.
    The denial of the Saudi application by Ex-Im Bank does 
absolutely nothing to protect U.S. companies and its employees. 
To the contrary, I would like to put forward that it will have 
far-reaching negative effects. The Saudi client is now 100 
percent sure that their lead bank was correct. They never 
should have wasted their time pursuing support from Ex-Im Bank.
    I must also mention that its predisposition to avoid Ex-Im 
Bank is very common among many of our foreign clients. I would 
like to read for you a direct quote from our client's banker, 
taken from an e-mail of November 2004, before the application 
was submitted to Ex-Im Bank: ``I think the way I would describe 
our position with regard to potential Ex-Im Bank support is 
that we would much prefer not have a separate Ex-Im Bank 
facility and therefore wish to explore all other alternatives 
first. Hence, our desire to understand all possible sourcing 
options.''
    Now let us look at the future for a moment. This same 
client has intentions to further expand his business. He will 
give Midrex the opportunity to supply its technology. If export 
credit is wanted or needed, then our European competitors will 
have a distinct advantage over us.
    What can we do? Who do we turn to for support? Remember, if 
we get the job, many other U.S. companies, especially small 
business, get business, especially if Ex-Im Bank would 
participate. However, if it does not, then we will have to look 
at other alternatives.
    Perception is reality, and this view, unfortunately, is 
shared by many of our prospective clients. Since 2002, and with 
numerous visits to Washington, D.C., we have learned that it is 
a widespread opinion shared by many foreign buyers, not only 
Midrex clients, who believe that approaching Ex-Im Bank is a 
fruitless endeavor. To be truthful, we are also beginning to 
feel this way.
    Speaking for the thousands of small companies without a 
voice here today, the assumption that denial of applications 
actually protects the U.S. economy could not be more wrong. 
Such decisions deliver a terrible message to foreign buyers 
considering U.S. offerings. These buyers will proceed with or 
without the support of the U.S. export credit agency, which 
means that U.S. offerings are at a competitive disadvantage to 
foreign companies using their own export credit agencies to 
support clients.
    Furthermore, American exporters like Midrex, with the 
flexibility to buy goods competitively across the globe will 
quickly find ways to regain their competitiveness. European 
ECAs, JBIC, Japanese ECA and EDC in Canada are very eager for 
Midrex to source more equipment from their respective countries 
and are willing to offer promotional support as well as 
tremendous flexibility.
    Given the restrictive nature of the current economic impact 
analysis guidelines, Midrex, and who knows how many other 
companies like us, have no other option but to source equipment 
needs abroad in order to compete when ECA support is desired by 
our clients. Many, however, have their manufacturing here in 
the United States and cannot take advantage of foreign supplies 
and foreign ECAs.
    Thankfully for us, we can change our sourcing patterns. And 
we do have some clients who can arrange financing without the 
need for ECA support. But there are many prospective Midrex 
clients who need and will receive ECA support for their 
projects.
    Picture this as a headline: A Ukrainian export deal goes to 
Japan----
    Senator Sarbanes. Mr. McClaskey, I am going to have to, 
regrettably and with apologies, recess the Committee hearing. 
There is a vote on. And if I do not leave here pretty quickly, 
I am not going to make that vote.
    Senator Hagel is going to return and he will resume the 
hearing when he comes back in. We tried to keep going in order 
to get as much in as we could, out of respect for the time of 
the members that are on the panel. But all those lights that 
are lit on that clock up there behind you mean if you do not 
get moving quickly you might miss a vote.
    So I recess the hearing and when Senator Hagel returns, he 
will pick it up again.
    Thank you all very much. We have no control over this.
    [Recess.]
    Senator Hagel. [Presiding.] Good morning again. I apologize 
for the break but, as you know, we had a vote.
    I understand that our first witness, Mr. McClaskey, has 
completed his statement. Let me remind the witnesses, if you 
were not reminded before, first, your entire statement will be 
included in the record. And if you could keep your opening 
remarks to within 5 minutes, we would very much appreciate it.
    Mr. Hayman, thank you.

 STATEMENT OF HARRY G. HAYMAN, III, SENIOR VICE PRESIDENT AND 
            HEAD OF WHOLESALE BANKING, COMMERCE BANK

    Mr. Hayman. Thank you, Mr. Chairman.
    I am pleased to be with you today to discuss the 
reauthorization of Ex-Im Bank of the United States.
    I am testifying on behalf of the Bankers Association for 
Finance and Trade, of which I am the President. Most of BAFT's 
U.S. members are active in trade finance and they account for a 
significant portion of the dollar volume of Ex-Im Bank 
transactions each year on behalf of our exporting customers.
    As you consider reauthorization of the Bank, it is 
important to recognize that American businesses are engaged in 
fierce competition with foreign companies in the global 
marketplace. In the midst of this competition, we cannot afford 
to abandon one of the most important weapons in our national 
economic arsenal, Ex-Im Bank. Nor can we afford to impose any 
new or greater restrictions on its ability to support American 
exports.
    If we did, the inevitable result for our country would be 
fewer export sales, loss of jobs, and an even larger trade 
deficit.
    Something that other trade bankers and I have observed in 
recent years is that the export credit agencies from other 
countries are getting to be more strategic and flexible in 
their approaches to export finance. I believe that U.S. 
companies' efforts to compete in international markets will be 
impaired if our Ex-Im Bank does not take a similar approach.
    I hope that in reauthorizing the Bank, Congress will 
clearly express its support for an aggressive effort by Ex-Im 
Bank to meet the needs of American businesses large and small 
competing in global markets.
    I would like to comment on several issues related to Ex-Im 
Bank that concern U.S. banks active in the trade finance 
business. The first is economic impact assessment. Ex-Im Bank 
is required by law to consider the extent to which the 
transaction brought to it are likely to have an adverse effect 
on industries and employment in the United States. The 
rationale for this requirement is understandable: taxpayer 
money should not be used to support a transaction if its 
benefits for the U.S. economy are outweighed by adverse 
consequences.
    You should be aware, however, that the economic impact 
requirement itself has an adverse effect on U.S. exports. 
Whenever the Bank turns down a transaction on the basis of 
economic impact, it means the financing support that a 
purchaser expected will not be made available and the 
transaction likely will not occur. This adds to a perception in 
the market that U.S. exporters are not reliable suppliers.
    For that reason, we believe that economic impact 
assessments should be required only in the most compelling 
cases and we would strongly oppose any steps to expand the 
application of economic impact assessments to a broader range 
of transactions or to make those assessments more rigorous.
    Another issue that affects the competitiveness of U.S. 
exports in world markets is the availability of cofinancing 
arrangements that facilitate credit support from two or more 
export credit agencies for exports that are sourced from more 
than one country. Typically, the ECA in that country that is 
the principal source of the products takes the lead and is the 
sole agency with which the purchaser must interact.
    Bankers that finance foreign trade prefer cofinancing 
arrangement because they are a straightforward, efficient, and 
convenient way of providing credit support for what otherwise 
could be a much more complicated transaction.
    As Ex-Im Bank noted in its June 2005 report to Congress, 
the availability and ease of ECA cofinancing has become an 
important and measurable competitive issue. According to the 
Ex-Im's web site, it currently has completed cofinancing 
agreements with only five countries. We are disappointed that 
there are not more.
    We would believe that it would be appropriate for this 
Committee or the appropriate committee of the Senate to monitor 
the Bank's progress in establishing cofinancing arrangements 
and we suggest that the Bank be required to report to you 
annually on the cofinancing agreements it has in place.
    With respect to small business, we would like to commend 
Chairman Lambright and John McAdams on recent initiatives to 
increase Ex-Im Bank support of small business.
    We also would like to congratulate the Bank on the expanded 
environmental program that they have developed.
    Additional initiatives to coordinate all of the public and 
private export development resources would also be critical in 
addressing the generally weak export performance of our 
country. By that, I mean public and private export initiatives 
that are widely in place but are not coordinated.
    In conclusion, we believe Ex-Im Bank plays an important 
role in our Nation's economic prosperity by helping American 
exporters sell their goods and services to purchasers in other 
countries. We hope that Congress will act promptly to 
reauthorize the Bank and, in so doing, take steps that will 
enhance and not detract from its operation and effectiveness.
    Thank you.
    Senator Hagel. Mr. Hayman, thank you.
    Mr. Ickert.

STATEMENT OF DAVID ICKERT, VICE PRESIDENT AND CFO, AIR TRACTOR, 
                              INC.

    Mr. Ickert. Chairman Hagel, Senator Sarbanes and the 
Committee, thank you for inviting me here today.
    I am David Ickert, Vice President and CFO of Air Tractor, 
Inc.
    Air Tractor is a small business that manufacturers 
agricultural airplanes and forestry firefighting airplanes. We 
are located in Olney, Texas, a rural town with a population of 
about 3,500. We employ 175 folks.
    We have manufactured and delivered over 2,100 aircraft to 
buyers in more than 20 countries. Over the past 10 years, we 
have used Ex-Im Bank financing on about 35 occasions.
    I am here also on behalf of the Small Business Exporters 
Association (SBEA) of the United States. SBEA is the Nation's 
oldest and largest trade association, representing small- to 
medium-sized enterprises (SMEs), that export. I am a Board 
member and former chair of SBEA.
    SBEA, Air Tractor, and I strongly support the 
reauthorization of Ex-Im Bank. With our country's trade deficit 
now about $700 billion a year and rising rapidly, Federal 
agencies like Ex-Im Bank must do all they can to encourage 
exports.
    Exporting, however, is not easy. Export financing is often 
central to it and that can be a daunting task. You have to 
balance the customer, who is probably new to the process, 
against the uncertainties of the deal and often difficult 
underwriting process. Underwriting is a key. A time-consuming 
and cumbersome underwriting process ending with a ``no'' can be 
demoralizing for the exporter and the buyer, even to the extent 
of discouraging future international efforts on the part of 
both of them.
    As the official export agency of the U.S. Government, Ex-Im 
Bank can make or break exports. Commercial banks and brokers 
will not take on foreign risk that these transactions entail 
without Government guarantees. So for smaller companies, Ex-Im 
Bank is not the bank of last resort, it is probably the bank of 
only resort.
    And yet, the most promising upside potential for exports 
come from SMEs in this country, only about 10 percent who now 
export.
    Ex-Im Bank has a mixed record in handling small business 
transactions. Under its new Chairman, Jim Lambright, Ex-Im Bank 
has undertaken several initiatives to help small exporters, 
such as the appointment of a new Senior VP for Small Business. 
Mr. Lambright's openness and willingness to listen are 
refreshing and encouraging. We applaud these moves and we have 
told the Bank so.
    But can these moves be sustained without further 
Congressional action? On past experience, it seems unlikely. 
Many small business initiatives have come and gone at the Bank 
over the past 10 years.
    In short, Congress needs to give the Bank some guidance. If 
sustainability of small business initiatives is an important 
problem, sufficiency is even more critical. Ex-Im Bank's recent 
initiatives have come about because of problems. The Bank has 
repeatedly failed to meet its Congressional mandate to allocate 
20 percent of its financing dollars to small business. In fact, 
it has not met that mandate since its reauthorization in 2002.
    In recent years, many exporters have complained that the 
Bank is not transparent enough, that it is too bureaucratic, 
and that its decision cycles are slow and exasperating.
    To be frank, we doubt whether the Bank's recent initiatives 
are sufficient to solve these problems. The Bank's new Senior 
VP for Small Business, for example, still has no authority over 
the Bank's products, processes and transactions. His sole 
operational function is outreach.
    Outreach is useful. But what matters most to small 
companies is what happens once they get in the door. Outcomes 
are the important issue.
    In fact, outreach efforts that over promise and under 
deliver risk driving companies away from exporting and hurting 
Ex-Im Bank's reputation in the small exporters' community.
    Establishing someone as the visible small business leader 
within the Agency but giving that person no authority to match 
the implied responsibility is a recipe for disappointments. It 
will also frustrate Congress' effort to gain accountability, 
since real authority for small business transactions will 
continue to be scattered across multiple operating units of the 
Bank.
    Therefore, we strongly recommend that Congress create a 
permanent small and medium-sized enterprise finance division at 
the Bank, headed by a senior VP who answers directly to the 
chairman and authorize that division to direct Ex-Im Bank's 
core small business products, processes, and transactions.
    This does not have to occur overnight. It can be phased in 
one product at a time, one underwriter at a time.
    We also ask Congress to help exporters to access the Bank's 
medium-term financing, which is to say financial for capital 
equipment, by authorizing Ex-Im Bank to delegate more medium-
term underwriting authority to commercial banks, as the Bank 
has done with other types of financing.
    In our written testimony, we have cited some best practices 
of organizations, EDC in Canada, OPIC in the United States, 
that have outstanding results in their small business 
portfolios.
    As small business exporters, our honest advice to you is 
without rigorous SME structure and focus, Ex-Im Bank risks 
falling behind the export credit agencies of other nations. 
That means the Bank will not be able to do its full share of 
helping exporters reduce the U.S. trade deficit. A rigorous and 
focused small business structure at Ex-Im Bank will address the 
outcomes and results of our country's export promotion needs.
    Thank you.
    Senator Hagel. Mr. Ickert, thank you.
    Dr. Scott.

STATEMENT OF ROBERT E. SCOTT, Ph.D., DIRECTOR OF INTERNATIONAL 
              PROGRAMS, ECONOMIC POLICY INSTITUTE

    Mr. Scott. Senator Hagel, thank you very much.
    My name is Robert Scott. I am a senior international 
economist with the Economic Policy Institute. Thanks again for 
inviting me here to testify on the Bank's economic impact 
procedures.
    I am going to summarize my remarks for the record.
    As I say in the statement, I have two primary areas of 
concern. First, whether the Bank is living up to its 
obligations under existing law to use the economic impact 
analysis techniques for certain transactions where the 
provisions of Ex-Im Bank financing could cause substantial 
injuries to domestic producers. My conclusion is that the Bank 
is not fully utilizing this procedure to analyze potential 
transactions.
    Second, I am going to examine criteria for conducting these 
analyses and ways in which they could be expanded and the 
procedures could be improved. I note three areas for 
improvement here.
    First, I think the Bank should expand its definition of 
industries covered within the scope of substantially the same 
industry in its economic impact methodology.
    Second, the bank's policy of only conducting these 
assessments for capital goods, that is goods that can be used 
to produce exports, should be expanded. In particular, I think 
we should also, or the Bank should also, be at least examining 
information, collecting information, about contracts that 
include offset agreements. These are formal or informal 
agreements to transfer production or technology to other 
countries. They are extremely common in some industries, 
especially in aerospace, a sector that receives a large amount 
of financial support from the Bank.
    And finally, as noted earlier, I think the Bank should 
improve its openness and transparency with the economic impact 
process. As Senator Sarbanes noted earlier, the Bank only 
carried out about six or issued six economic impact notices in 
all of fiscal year 2005.
    As he further noted, this is not widely discussed on the 
Bank's web site or in its annual report. in fact, I can find 
nothing other than the guidelines and the notices of 
assessments in my study of that.
    Turning to the definition of industries that could be 
affected, the Subcommittee heard testimony from Mr. Steven 
Appleton of Micron Technology about an application to finance a 
semiconductor pure play foundry that was made for the SMIC 
Semiconducting Manufacturing Company from China. This foundry 
can be used to make two kinds of products, DRAM chips and NAND 
flash memory chips. The application listed the purpose as to 
make these NAND chips, which are rather specialized. However, 
the DRAM market is subject to vast amounts of overcapacity and 
boom and bust cycles. And there are U.S. producers in that 
industry and I think the Bank should have been concerned from 
the outset with the potential for this export to worsen this 
cycle of boom and bust in the DRAM market.
    Micron was able to intervene in this case and after a 
prolonged series of interventions, Ex-Im Bank finally never 
voted on this contract. But it is the kind of transaction, I 
think, that should be highlighted and the Bank should be 
concerned with because it can lead to expansion of production 
capacity abroad.
    In terms of expanding the Bank's scope, I think that there 
is concern in particular with exports in the steel industry, 
that was noted earlier. I have been an expert witness in a 
large number of steel anti-dumping cases in the last 15 years. 
In my experience that industry has suffered again, periodic 
crises and capacity gluts that lead to massive dumping, 
particularly in the United States, which has the most open 
steel market in the world. I think our Government has been 
attempting to negotiate an agreement to reduce excess capacity 
in the steel industry for many years. And yet China and India, 
and many other countries have announced plans to dramatically 
expand steel production capacity.
    So investments abroad that augment this effort by foreign 
governments to build up excess steel production capacity are 
simply going to stabilize the market and hurt U.S. steel 
producers, which have lost tens of thousands of jobs in the 
past decade alone.
    With that, I think I will stop and thank you for the 
opportunity to testify and I will be happy to answer any 
questions.
    Senator Hagel. Dr. Scott, thank you. And again, thanks to 
each of you for your testimony and your assistance today.
    Let me ask each of you about the general points and some 
specific points that were covered in each of your testimonies.
    You all have focused to some extent on product offerings 
and the competitive nature of other ECAs. In Mr. Ickert's 
testimony, he spent a good deal of time talking about the small 
business facilities, how those should be increased, widened, 
deepened, specifically by giving small business individuals at 
Ex-Im Bank more authority.
    If I could start with you, Mr. McClaskey, now that you have 
listened to the other's testimony in light of your own, do you 
generally agree with what you have heard from your colleagues 
here on some of the general areas that were covered in the four 
of your testimonies on small business? Dr. Scott talks about 
expanding product bases and coverage areas.
    Take any pieces of those that you like but I would be 
interested in getting each of your reactions to the testimony 
that you heard from your colleagues, specifically during this 
time that we are spending to take a look at reauthorization. 
And one of the questions that you might recall I asked to the 
first panel, specifically Mr. Lambright, are there areas that 
we should be focusing on as we go through this reauthorization 
process to expand the powers or to broaden authorities, to do 
something new, give Ex-Im Bank more options and flexibility?
    So with that general context, let me begin with you, Mr. 
McClaskey.
    Mr. McClaskey. First of all, based on what you were told, I 
actually was not finished with my speech, but that is OK.
    Senator Hagel. It is because you did not have enough time, 
I understand. We will include your entire testimony in the 
record.
    So if you felt that there was something at the end of your 
testimony that you did not have a chance to cover, if you would 
like to restate that now within the limits of time here, please 
proceed.
    Mr. McClaskey. That is OK. We support Ex-Im Bank. I know 
there are some times they are between a rock and a hard place, 
trying to choose between helping this group of workers over 
here and harming this group of workers over there.
    But I think that my personal opinion is that they do not do 
enough of looking in both directions. They look in one 
direction only and they really do not investigate thoroughly 
what they need to do, to do a real economic analysis of who 
does it really hurt.
    For example, the project that we indicated, the project 
went ahead anyway. It is going ahead anyway, so who is hurt 
here?
    The reason why we brought that particular project up was 
the fact that this client is going to do another project. We 
have competition in Europe. If our European competitors get the 
job because they can offer ECA financing, we do not get the 
job. If we do not get the job, then the list of these States in 
the back, on the attachment here, that we give business to, 
which the majority are small businesses, millions of dollars. I 
think the total was $147 million since January of 2005, we have 
given to small businesses in this country. We have another 
approximately $40 million to purchase this year from small 
businesses in this country.
    If we do not get that opportunity in the future, then they 
lose and we lose. That was my point that I did not get to make.
    Senator Hagel. Let me ask you specifically, you heard what 
Mr. Ickert said in his testimony. He came forward with specific 
ideas and thoughts, expanding this general area. Do you agree 
with what you heard from Mr. Ickert?
    Mr. McClaskey. Yes, I do. I do agree. I would like to see 
Ex-Im Bank expand. I would like to see them become more 
flexible. I certainly would like them to be more thorough in 
their investigation of the economic impact analysis, which 
really bothers me, so that we can move on and make some 
positive business here in the States. That is what I would 
really like to see.
    Senator Hagel. Thank you.
    Mr. Hayman.
    Mr. Hayman. The point that is being discussed now is, I 
think everyone understands what that point is, that if the 
transaction is going to happen anyway, why should we let the 
Germans get the order? And that is probably really at a 
Congressional level because Ex-Im Bank is certainly acting 
within the rules that are set by Congress.
    So that might be an issue that would be discussed with Jim 
Lambright.
    Senator Hagel. Do you believe that that answers part of the 
question that was put to Mr. Lambright by essentially the three 
senators that have been here this morning, about why you have 
not reached the 20 percent goal? And what have been the 
impairments and the difficulties in making that happen?
    Mr. Hayman. I think that is part of it. The other one is 
the point that was made by Air Tractor on the ability of the 
sort of newly created small business division to be able to 
accomplish their mission.
    And on that point I would say we would support Air 
Tractor's views, that over probably a fairly extended period of 
time if the small business effort that Jim Lambright talked 
about were given more authority and ability, for example, to 
approve transactions, that gets them back to 2002 when they 
were much more effective.
    So we would support that not as something that has to be 
done in a short order, because that would just slow down things 
again. But we would support that point, yes.
    Senator Hagel. Thank you.
    Mr. Ickert.
    Mr. Ickert. As far as the products of the Bank, from a 
small business perspective, I feel like the Bank offers very 
good products.
    As far as transaction authority, such things as I 
mentioned, like giving more delegated authority to Banks to 
actually underwrite and to help move transactions along, would 
be most helpful.
    I guess the one point I would like to come back to, and I 
do not mean to go over this over and over, but again we feel 
very good about the willingness of Mr. Lambright to listen and 
initiate new projects.
    The problem is the need for institutionalizing the small 
business division. Mr. Lambright could be gone 1 day. And we 
have seen in the past, as chairmen change, as policies change, 
then you see the ebb and flow of small business on the radar 
screen of the Bank.
    In fact, we have counted that in the last 10 years there 
have been about 15 major changes in the small business area, 
from being somewhat high in the organization chart to being in 
the middle to not even being on the radar screen.
    So again, I am very comfortable with what Jim Lambright is 
doing, but we would like to see these things institutionalized 
to prevent the ebb and flow that happens with administration 
changes from sapping the efforts.
    Senator Hagel. Thank you.
    Dr. Scott.
    Mr. Scott. Thank you.
    Two brief comments. In my prepared remarks I noted that 
there is a need, I think, for ex poste assessments, after the 
Bank has done a number of transactions to look at their impact 
on different industries.
    I think in this regard also, it is important for the Bank 
to develop a strategic outlook on the kinds of industries that 
it should or should not be financing export transactions. I 
learned of another case yesterday where the Bank was 
considering a proposal to finance an export of equipment to 
produce soda ash in Turkey. This is an industry that supplies 
the global glass-making production. This industry is another 
one where there is a chronic global excess capacity glut.
    So if we are going to think strategically, I think, at a 
minimum, we can ask the Bank to begin to assess what kinds of 
exports are actually going to hurt U.S. producers of final 
products. I think that is a key area.
    Second, I mentioned the onset agreements, a very tough 
issue to analyze. I think, at a minimum, it would be useful if 
the Bank would simply be able to ask applicant companies to 
list or describe formal or informal offset agreements. It could 
then use that information. Simply collecting the data would be 
useful.
    Last, just a point on small business exports. I would just 
like to add that I have looked at small business exports, and 
between 85 and 90 percent of all of U.S. exports come from 
medium and large enterprises. It is very hard for small firms 
to penetrate foreign markets to have sufficient scale or 
marketing channels.
    So encouraging small business exports is a Sisyphean 
struggle. It is something that will have to be pursued on a 
continuing basis because the structure of international markets 
is such that it is just inherently difficult for small 
businesses to export.
    So I think that it is important to keep that economic 
background in mind. Think you.
    Senator Hagel. Thank you.
    Let me ask each of you this question: what was your 
reaction to Mr. Lambright's response to my question when I 
specifically asked him were there new authorities required, any 
new framing, any new language, anything that should be included 
as we move toward reauthorizing Ex-Im Bank for another 4 years? 
If you recall, he said we are asking for a clean bill.
    Now I was not at Chairman Crapo's two hearings, but the 
Acting Chairman and President of Export-Import, at least when I 
asked the question do you see any need for more flexibility, 
more range, more authority for a SBA division, he said ``no.''
    Were you surprised by that, especially in light of what the 
four of you have just said? Mr. McClaskey.
    Mr. McClaskey. Yes, I was surprised by that. I think they 
do need to have more flexibility and to certainly take a look 
at exactly how they do support--what they can do to support 
small businesses in the country.
    Yes, I was surprised by his remarks.
    Senator Hagel. Mr. Hayman.
    Mr. Hayman. I think the reason for his comment was that 
most of the things on the small business side, they already 
have the power to do. It is a matter of organization and will 
and structure.
    On the area of economic impact, I think, their concern 
would be that any legislation would make it more difficult for 
them to support U.S. exports, so they are probably not looking 
for any change.
    Senator Hagel. So you essentially would not agree with what 
Mr. Ickert said in his testimony on the SBA authority? Mr. 
Ickert says they need more authority.
    Mr. Hayman. No, I would agree with him. I would agree with 
him. In other words, that is not authority. Within Ex-Im Bank, 
they can say the small business division has ability to 
approve----
    Senator Hagel. But you are saying they already have the 
authority?
    Mr. Hayman. They have already got that.
    Senator Hagel. For what reason would they not be exercising 
that authority in this specific case?
    Mr. Hayman. It used to be that way. They had an insurance 
division which would do transactions up to $10 million. They 
reorganized 4 years ago and put it all in one kind of neat 
block, so big and small transactions were being approved by the 
same people.
    That has made it much more difficult to get the smaller 
transactions done, and I think that is what we have all noted.
    What Jim Lambright is trying to do is reverse the field a 
little bit, but keeping the same infrastructure but having some 
authority or some focus within the larger group to support 
small business. He is trying to work his way back to where they 
were before, without another massive reorganization, which 
nobody probably wants. So the point of doing it over a period 
of time, I think, is a good one.
    Senator Hagel. Thank you.
    Mr. Ickert.
    Mr. Ickert. First of all, you asked does it surprise me 
that Mr. Lambright answered that way? I would say ``yes'' and 
``no.'' It does not surprise me because I think Jim Lambright 
has an honest desire to move forward in a lot of these areas, 
and I believe he will. And I would like to see more authority, 
delegated authority, things of those sorts, to answer your 
question specifically.
    However, as Mr. Hayman just pointed out, there are changes 
that happen, administration changes that happen, 
reauthorizations that happen. And without a dedicated, 
institutionalized system or division, these things can cause 
small business initiatives to disappear. And so, 
institutionalization is what I would like to see in order to 
foster more small business activity at the Bank and to foster 
more small business exporting.
    I would disagree to some extent with what Dr. Scott said. 
Yes, it is difficult for small companies to export. But it is 
not impossible. Small business can do a good job of exporting. 
They can do a better job with help, and that comes back to the 
processes and the transactions and the procedures at Ex-Im, 
which we would like to see become more of an institutionalized 
effort. This would also give more accountability for the 20 
percent mandate that Congress has put out there that has not 
been met since the last reauthorization.
    Senator Hagel. Thank you.
    Dr. Scott.
    Mr. Scott. I have already talked about the need for reform 
of the economic impact procedures, and I think that would 
require some charter amendments, although I have not looked in 
detail at the charter myself. I am an economist, not a lawyer.
    I guess the other point that I would make is if we are 
going to ask the Bank to expend additional efforts on 
conducting economic impact assessments, that will probably 
require additional resources, as well. And I think there is 
some attention that will have to be paid to that.
    Senator Hagel. Thank you.
    Again a question for each of you. As you all are aware, and 
was noted in the previous testimony, on June 1 Ex-Im Bank 
launched Ex-Im Online, which Mr. Lambright noted in his 
testimony, a new interactive web-based service which enables 
exporters and financial institutions to go online to apply for 
insurance, monitor the status of applications, receive and 
accept quotes and receive a variety of other services.
    My question is this, have any of you had the opportunity to 
use this service? If so, what is your initial evaluation of its 
effectiveness? Mr. McClaskey?
    Mr. McClaskey. I have not had an opportunity to use the 
service. I was unaware until today that it existed.
    Senator Hagel. You were unaware until today?
    Mr. McClaskey. Yes.
    Senator Hagel. Thank you.
    Mr. Hayman.
    Mr. Hayman. We have used it. It is a good effort. I think 
it only went into effect June 1 or so.
    But as they improve it, it will have some small benefit. 
But a technology solution is, you are addressing 5 percent of 
the overall--it is nice to have but it does not solve any core 
problems.
    Senator Hagel. Mr. Ickert.
    Mr. Ickert. No, sir, we have not used it. We are aware of 
it.
    However, from the standpoint of tracking and helping the 
process, I applaud that. We do medium-term deals. Our 
applications run between 70 to 200 pages long. So I am not for 
sure how much this particular effort will benefit our 
situation.
    Senator Hagel. Thank you.
    Dr. Scott.
    Mr. Scott. I am not familiar with the new procedure.
    Senator Hagel. Mr. Hayman, you noted in your testimony that 
other ECAs are becoming more strategic and flexible than Ex-Im 
Bank and that was a significant concern you had, that 
essentially we are being overrun and will continue to be.
    I want you to dwell on that and develop that a little more. 
And then I would like very much the other three panelists to 
respond to that observation.
    Mr. Hayman. I think the other ECAs, the United States has 
always had a problem not really being a trading nation. 
Obviously, all of our competitors grew up as trading nations. 
If they can figure out a way to get a big export order, they 
are going to work on it and they are going to get it done.
    Specifically, on the cofinancing, we see much more action 
from the other ECAs. If their company is producing 30 or 40 
percent of its product in Taiwan, which is, as we all know, 
getting more and more common, then they are going to support 
the transaction. So they are going to support that as if it 
were 100 percent French manufacture because it is 60 percent 
French, they get exports, they get profits. They pay taxes. 
They boost the will of their company. That is probably the 
largest one right now.
    Senator Sarbanes' questions on the tied aid. We all know 
that they are using charitable donations to support 
transactions. It was a nice agreement. It has probably helped 
some. But they are going to figure out a way to get that big 
export order to make it happen.
    I would say, as Jim Lambright said, that they tend to be 
more--they are quicker in responses, in terms of getting 
approvals done. And Jim is trying to address that. But again, 
that is another area where we are behind the curve.
    Senator Hagel. What do we need to do to pull ourselves back 
up into a more competitive position, especially for the long 
run?
    Mr. Hayman. Clearly, there are some things that have been 
suggested on Ex-Im Bank. But one of the others is that we have 
so many resources in this country, both public and private, 
that are working to promote exports. And they are not 
coordinated at all. So you have U.S. Chamber of Commerce, SBA, 
Ex-Im Bank, Department of Commerce, Bucks County Economic 
Development, the banks. Everybody is working to promote 
exports. Banks spend huge amounts of time working with 
exporting customers. But there is no coordination.
    So as a national policy or a national will, say wow, if we 
have all of these resources and they were coordinated, then 
would that help us? And being $700 billion in the hole, 
strategy would probably be a good thing to have.
    Senator Hagel. Do you believe our overall trade policy, 
starting with trade promotion authority, is adequate? We have 
seen here on the Hill the last few years a trickle of trade 
legislation. And I, for one, am very concerned about that 
because I see a very dangerous protectionist streak developing 
up here, in both political parties by the way. Comment on that.
    Mr. Hayman. No, I would 100 percent agree with that. If we 
were doing better on the export side, if we were out there 
winning orders and getting jobs, I think the protectionist 
sentiment would be less. But right now it seems like it is 
almost a, well we cannot really compete so we might as well 
throw up the barriers, which has some short-term benefit and 
some appeal. But I think history shows that long term it does 
not work.
    So the aggressive export effort, getting behind exports, 
using the tools of Ex-Im Bank, SBA, everyone puts us in a 
position where we do not have to be protectionist.
    Senator Hagel. Thank you.
    Mr. McClaskey.
    Mr. McClaskey. I agree with Mr. Hayman. It is really, night 
and day between our ECA, Ex-Im Bank, and the other ECAs. We do 
work with some German companies and they get tremendous support 
from Hermes over there. It is unbelievable.
    As a matter of fact, I was there last week and one of them 
told me they went to meet with one of their clients and Hermes 
sent three of their people with the company to meet with the 
client to show their support.
    I am not exactly sure if I asked Ex-Im Bank to go with me 
to visit somebody over in the Ukraine if they would send 
anybody with me to do that. So I think it is actually night and 
day.
    We are actually being courted by JBIC right now because 
they want our business because we are doing so good. We are 
owned by a Japanese company, Kobe Steel Limited in Japan. They 
have opened up the door with JBIC and they are very interested 
in financing a project in the Ukraine for us so that we can--
but that means that we will have to go and supply a certain 
amount of Japanese-supplied equipment if we do that.
    Senator Hagel. All of this, of course, you mentioned tied 
aid is why there has been so much interest, particularly in 
Senator Sarbanes' line of questioning, as some of mine this 
morning as well. It all does connect. Thank you.
    Mr. Ickert.
    Mr. Ickert. Our experience with other ECAs, is from the 
standpoint of Canada, where we do some cofinance work. They 
seem to be much faster and much quicker in decisions than Ex-
Im. And I think that is a big issue in this whole discussion, 
the process. There are 225,000 small business companies in the 
United States that are actually exporting. But there are far 
more export-capable companies than that in the United States. 
We should encourage more of them to export. The process 
sometimes can be discouraging
    I am going to be part of a group speaking in Grand Island, 
Nebraska, on Thursday to small business exporters. And I would 
hope that new people coming out of that would find the process 
quick and efficient. Unfortunately, I do not think that has 
been the case all the time.
    EDC seems more focused, more willing to move and faster to 
move.
    We have had an example recently, and unfortunately there is 
really no answer for it. In Brazil, the government is making 
concessionary financing for airplanes to compete with us there. 
Those are winning airplane sales from us, using concessionary 
financing.
    When we talked to Ex-Im Bank about that, they said that 
Brazil is not a member of the OECD, so there is nothing really 
that we can do. So there are areas like that, I think, that I 
would like to see addressed more.
    Senator Hagel. Mr. Ickert, if you are going to be in Grand 
Island, Nebraska you shall receive special status. Thank you 
for your efforts there, as well.
    My State, the small State of Nebraska, is very, very 
involved, as you know, not just in agriculture but across a 
range of products in exports and trade. So thank you.
    Dr. Scott.
    Mr. Scott. Just a couple of points. I think it is generally 
true that many of the other advanced industrial countries that 
we compete with are much, much more strategic in terms of their 
efforts to buildup industrial capacity and sustain exports. I 
think that kind of strategic outlook requires an assessment of 
what is going on in other countries. I think that Senator 
Sarbanes and others mentioned the need to conduct those kinds 
of assessments to understand what other countries are doing on 
an industry-by-industry basis and use that information in 
planning.
    So we need to develop that kind of capacity. Japan has a 
Ministry of Industry and Trade. The Chinese have industrial 
planning agencies. We shy away from those kinds of activities 
and I think that hurts our competitiveness as a nation.
    I would just go back in regard to your earlier question 
about the broader trends in trade legislation and say I have 
studied the broad problems of our trade and current account 
deficits and have written extensively on this for a number of 
years.
    Again, we face a problem with other countries intervening, 
particularly in currency markets, in ways to make it very 
difficult for the United States to export. I think until we 
address those problems, it is going to be tough to bring down 
this massive trade deficit that we are confronting.
    Senator Hagel. Thank you.
    Paperwork. How big a problem is paperwork in the processing 
of projects and all that Ex-Im Bank does? Does it impede? Is it 
directly attributable to people staying away or shying away or 
being reluctant to deal with Ex-Im Bank? Or is it not a 
problem?
    Mr. McClaskey.
    Mr. McClaskey. I do not think that is a big issue, the 
paperwork. I think what is required is what is required in 
order to do a proper due diligence on the application. So I do 
not see that as a hindrance.
    Senator Hagel. Mr. Hayman.
    Mr. Hayman. It is a problem, yes.
    Senator Hagel. Problem?
    Mr. Hayman. Yes, problem.
    Senator Hagel. Give me an example.
    Mr. Hayman. In 2003, our Institution was the largest user 
of Ex-Im Bank, among all banks. Our cycle time, from approval, 
from acceptance of the transaction to shipment, was 182 days. 
Two-and-a-half years later, it was 282 days.
    There are a number of factors in that, and I think Chairman 
Lambright is working to address them. It is not quite as simple 
an issue as I say it is, because there are some other things 
that happened at Ex-Im Bank that we would support them being 
more careful.
    I mean, clearly the ability to evaluate transactions 
quickly would be a significant help for U.S. exporters.
    And I think they are working on that. But as Jim Lambright 
said, they are not there and it is a problem.
    Senator Hagel. These are issues that can be resolved within 
the current authorities of management?
    Mr. Hayman. Absolutely.
    Senator Hagel. Thank you.
    Mr. Ickert?
    Mr. Ickert. First of all, Ex-Im Bank published its the 
medium-term credit standards several years ago and that move 
significantly helped in the transparency and the understanding 
of what was required.
    However, as I mentioned earlier, our particular 
applications will run 70 to close to 200 pages. So, yes, the 
process is difficult. It is also difficult for our buyers on 
the other side, as many of them are small buyers and we are 
trying to help them gather the information they need to submit.
    And that, in itself, makes the process complex.
    That being said, I think Ex-Im Bank has a better 
sensitivity to that complexity and especially to small 
exporters that may be the first or second time through the 
process. Unfortunately, the underwriting complexity that exists 
without a lack of sensitivity, and the process time that Mr. 
Hayman just mentioned, I think discourages more than it 
encourages people to export in this country.
    Senator Hagel. Thank you.
    Dr. Scott.
    Mr. Scott. Following up on my earlier comments, my personal 
belief is an understanding based on the study of the trade 
trends that we need to go beyond Ex-Im Bank to address this 
issue. We need to have capacity to plan for competition with 
foreign suppliers and to help U.S. industries export, perhaps 
to have preapproved forms, to have Government help in filling 
out the forms.
    This is going to require, I think, other kinds of 
institutional support in the Government that go beyond what Ex-
Im Bank can hope to accomplish.
    Senator Hagel. Gentleman, thank you. You have been very 
generous with your time.
    Let me ask, before we adjourn, if there is any one last 
comment that any of you would like to make? We will keep the 
record open, as I noted with the first panel, because we may 
have members of the Committee who would like to send a 
question.
    So if there is anything else you would like to say, you 
have an opportunity to do it. Mr. McClaskey.
    Mr. McClaskey. No, I would just like to thank the Chairman 
and the Committee for inviting me to be here today to give my 
testimony. I really appreciate that. Thank you.
    Senator Hagel. Thank you. Mr. Hayman.
    Mr. Hayman. Thank you, Senator Hagel.
    I think the other thing that we would take away from the 
last several comments is that a coordinated approach to U.S. 
export performance would be a very valuable thing for our 
country.
    Senator Hagel. Thank you.
    Mr. Ickert.
    Mr. Ickert. No, sir. Thank you for the opportunity to be 
here.
    Senator Hagel. Spend a lot of money in Grand Island.
    Mr. Scott.
    Mr. Scott. No comments. Thank you, Senator.
    Senator Hagel. Thank you all. The hearing is now adjourned.
    [Whereupon, at 12:24 p.m., the hearing was adjourned.]
    [Prepared statements and response to written questions 
follow:]
                                ------                                

                   PREPARED STATEMENT OF CLAY LOWERY
             Assistant Secretary for International Affairs,
                    U.S. Department of the Treasury
                             June 20, 2006
    Chairman Shelby, Ranking Member Sarbanes, and members of the 
committee, thank you for the opportunity to discuss the reauthorization 
of the Export-Import Bank of the United States (Ex-Im Bank). I am 
pleased to be here with Acting Ex-Im Bank Chairman James Lambright 
because we are in total agreement on the importance of a strong Ex-Im 
Bank.
    This Administration believes that, given a level playing field, 
U.S. exporters can compete with anyone in the world. As the lead U.S. 
Government agency on international economic and financial policy, 
Treasury leads the U.S. delegation to the OECD export credit 
negotiations, which are intended to establish that level playing field. 
Working closely with Ex-Im Bank and other U.S. Government financing 
agencies, we have successfully developed multilateral rules to reduce 
or eliminate the use of foreign export financing subsidies. These rules 
help to protect all U.S. exporters by ensuring that the competition for 
export sales is driven by price, quality, and service--and not by 
unfair government financing. Equally important, these OECD rules 
protect U.S. taxpayers from having to pay for a subsidy program that 
would be necessary to counter foreign subsidy programs in the absence 
of these rules.
Export Financing and the Role of the OECD Arrangement
    The OECD members that negotiate these multilateral financing rules 
are referred to as the Participants to the Arrangement for Officially 
Supported Export Credits (the Participants; the Arrangement). The 
Participants are those governments which provide the vast bulk of 
export financing for capital goods to developing countries. The 
Arrangement rules are critical to ensuring that the export financing 
provided by governments promotes market principles, a level playing 
field, and transparency. As these rules apply to all sources of 
official export financing, policy agencies such as finance and 
economics ministries represent their governments among the 
Participants. In addition to Treasury and Ex-Im Bank, the U.S. 
delegation includes the Departments of Commerce and State, USTR, USAID, 
the Trade and Development Agency, and any other agency whose programs 
or policy role might be affected by negotiations.
    Export subsidies are bad economic policy and very costly to 
taxpayers. They close markets to competition and reduce global economic 
growth. By distorting trade flows, subsidies also distort the global 
allocation of resources and reduce international economic efficiency. 
Exporters who become dependent on tied aid subsidies become less 
efficient and unable to compete on market terms.
    Moreover, using subsidies for export promotion is ultimately self-
defeating because when one nation uses subsidy programs to gain a 
competitive advantage, others naturally follow suit to protect their 
interests. This inevitably leads to an export-subsidy race which harms 
the international economic system and severely undermines or reverses 
the gains from trade. This is why successive Administrations have 
worked in the OECD to negotiate a trade finance environment driven by 
market forces in which all U.S. exporters can compete.
    The Arrangement complements the WTO anti-subsidy rules. The WTO 
does not restrict the use of aid subsidies--tied or untied--because 
resource transfers from rich to poor countries are important for the 
latter's development. The United States uses the Arrangement to ensure 
that aid-financed subsidies are really development aid and not export 
promotion in disguise.
    Aid--tied or untied--is normally in the form of official 
development assistance (ODA) offered by a donor's development ministry 
and can be in the form of grants or credits. However, tied aid also is 
a form of export subsidy in which financing is formally linked to the 
purchase of goods and services from donor-country firms.
    The U.S. offers tied aid through USAID, as part of the ``Buy 
America'' mandate. However, U.S. tied aid is usually in the form of 
grants which, dollar-for-dollar, distort trade far less than credits 
and provide greater assistance to developing country recipients.
    Many other OECD donors use tied and untied aid credits in order to 
leverage more exports while reducing the budgetary cost of aid and 
thereby increase domestic political support for their aid programs. 
Before the Arrangement, competitive economic and political pressures 
resulted in many foreign tied aid credits being de facto export 
promotion. Since tied aid credit terms are more favorable to the 
borrower than standard export credit terms, tied aid distorts trade 
flows in favor of the tied aid provider's firm when the two forms of 
financing compete.
    Under the rules, tied aid is now focused on the poorer countries--
those with per capita incomes below $3,255 annually. Wealthier 
countries like Mexico, Korea and Malaysia are no longer eligible for 
tied aid. Tied aid is now virtually non-existent in major projects for 
power (thermal and hydro), oil and gas pipelines, telecommunications, 
air traffic control equipment, industry, and manufacturing. This has 
enabled U.S. exporters to compete for contracts in these commercial 
sectors without the concern of confronting tied aid. Instead, tied aid 
now is used primarily for what are generally regarded as bona fide 
development projects in sectors such as health, education, water, 
sanitation, and roads.
Recent Negotiating Successes
    During Ex-Im Bank's 2002 reauthorization, Treasury reported on the 
success of disciplining tied aid use and the remaining challenges 
associated with two other foreign financing practices that distort 
trade and threaten the level playing field that we seek--untied aid and 
market windows. Since that testimony, Treasury has continued its work 
to address these issues in the OECD. (Efforts were highlighted in two 
reports to Congress in June 2004.) I am pleased to report that 
significant progress has been made on all fronts, and, as Ex-Im Bank's 
latest Competitiveness Report shows, neither untied aid nor market 
windows pose the same challenge that they did in 2002.
    Untied aid is aid that may not be formally linked to donor country 
procurement. Untied aid typically is used for non-commercial projects 
with a development impact. However, without formal OECD rules on what 
procedures, practices, and procurement results constitute untied aid 
for the purposes of exempting it from the tied aid disciplines, donor 
governments can use untied aid to circumvent the tied aid rules agreed 
to by the OECD members in 1992 and distort trade in favor of the donor. 
Examples include requiring aid recipients to use donor-country firms 
for design and engineering work or requiring a donor-country firm to 
run the bidding process, thereby creating a de facto bias toward the 
firms of that country.
    Over the last few years, Treasury negotiated an agreement in the 
OECD that members would stop offering tied aid for design and 
engineering studies for projects that will then be financed with untied 
aid. We firmly believe that this practice provided an unfair technical 
advantage to donor country firms when bidding for untied aid projects.
    In addition, in January 2005, following intensive bilateral 
discussions with the EC and Japan (the two largest untied aid donors) 
and a Treasury-led initiative in the G-7, a ground-breaking OECD 
agreement was reached. This agreement requires that untied aid donors 
notify the OECD of projects and bidding information 30 days in advance 
of the start of the bidding process. We believe that this will provide 
valuable information to U.S. exporters to help them compete effectively 
for untied aid projects that have averaged $8 billion a year since 1993 
and are currently rising. Moreover, donor governments agreed to 
maintain a minimum bidding period of 45 days to further facilitate 
participation by U.S. and other exporters. The United States makes this 
project and bidding information available on the Commerce Department's 
web site at http://web.ita.doc.gov/sif/untied.nsf/.
    Furthermore, to ensure that donor governments treat foreign bidders 
fairly, donors will report the outcome of untied aid bids to the OECD 
on an annual basis. We will review carefully the results of the 
transparency agreement later this year to confirm whether U.S. 
exporters are winning a fair share of these projects. If not, and this 
new transparency shows that untied aid continues to distort trade, the 
data will provide a credible foundation for the United States to 
request OECD negotiations for comprehensive rules for untied aid.
    We also have seen some progress on disciplining market windows 
since Ex-Im Bank's 2002 reauthorization. Market windows are quasi-
official institutions that support national exports, but because they 
purport to operate as private sector actors, they are not subject to 
any transparency or discipline concerning the terms and conditions of 
their financing. Market windows have the ability to offer financing on 
better terms than either the private markets or export credit agencies. 
The two largest market windows are KfW of Germany and EDC of Canada.
    Following extensive but inconclusive OECD and bilateral discussions 
on the issue, EDC seems to be voluntarily shifting its activities 
toward non-export credit support. KfW has been subjected to an EC-
mandated separation of its official and commercial business. We expect 
this action to result in far greater transparency and market-like 
discipline on its export financing function. While the potential 
certainly remains that either institution could offer terms that 
undercut the OECD rules and the private market, current trends show 
that significant progress is being made. Nevertheless, Treasury and Ex-
Im Bank will continue to monitor the situation closely.
    Finally, our success in disciplining tied aid continues since our 
last testimony. The benefits to the United States of negotiating and 
implementing international rules on the use of tied aid continue to be 
dramatic. Prior to 1992--before the OECD tied aid rules came into 
effect--donors offered $10-$12 billion of tied aid annually and the 
resulting U.S. export losses were estimated to be $2 billion or more 
per year. Since 1992, tied aid credits have averaged only $4 billion 
annually--a minimum reduction of 60 percent--and therefore have been 
cumulatively reduced by about $80 billion.
    Treasury estimates that U.S. exports of capital goods are higher by 
at least $1 billion a year as the result of tied aid rules that reduce 
trade distortions. Furthermore if the United States had competed for 
these additional exports by using tied aid, the War Chest would have 
required roughly $300 million annually in additional appropriations--a 
cumulative savings of $4 billion for U.S. taxpayers since 1993.
The War Chest
    Continued success in the OECD rules-based approach to tied aid as 
well as untied aid and market windows is dependent in large part on 
Treasury's ability to use the War Chest as a policy tool. Removing that 
role would undermine U.S. credibility and deter cooperation from our 
OECD partners. More importantly, this would seriously weaken the U.S. 
position in any effort to negotiate new rules, such as those for untied 
aid, and to enforce the existing rules. A weakened U.S. position in the 
export financing disciplines arena will almost certainly raise the cost 
to the U.S. taxpayer of protecting U.S. exporters against unfair 
foreign subsidies.
    Congress created the tied aid War Chest in 1986 in order to provide 
the Administration with leverage to negotiate economically and 
developmentally sound tied aid rules in the OECD. The War Chest was 
also intended as a means to enforce these rules and leverage additional 
market-opening negotiations, as necessary. As a result of Treasury-led 
negotiations, the comprehensive set of tied aid rules outlined earlier 
took effect in 1992, providing a better balance between the development 
and commercial objectives of the OECD donor governments.
    The selective use of War Chest funds to enforce tied aid rules has 
worked exceedingly well in reducing trade distortions and leveling the 
playing field for U.S. exporters at virtually no cost to the U.S. 
taxpayer. As a result of this success, foreign tied aid programs have 
been pushed out of most areas of commercial competition, and the demand 
by U.S. exporters for tied aid matching has declined dramatically. 
Despite this decline in demand, the War Chest remains an important tool 
in the U.S. policy arsenal. Treasury uses the War Chest as leverage not 
only to enforce existing rules on tied aid and other trade-distorting 
activities but also to negotiate new rules as needed--as may be the 
case for untied aid.
    While we refer to tied aid ``rules,'' they are not legally binding. 
They are voluntary, as are all the export credit rules under the 
Arrangement. Other donors have voluntarily addressed U.S. concerns and 
agreed to stop or limit their financing for the types of capital 
projects that the United States has argued should be ineligible for 
tied aid credits. The tied aid projects that our OECD partners are now 
financing are specifically permitted under the rules and are less 
distorting to trade.
    Given the voluntary nature of the Arrangement, the United States 
must be careful how it decides to implement its matching policy. An 
insufficiently judicious policy on use of our tied aid would give our 
OECD partners an incentive to abandon the Arrangement and expand the 
scope of their tied aid programs to include larger, more commercial 
projects.
    This would create a vicious cycle of increasing tied aid from all 
parties and generating a larger demand for the War Chest. The gains 
that the successive Administrations have worked to achieve over the 
last fifteen years would quickly unwind. This is not to suggest that 
the United States should never match any tied aid offers. Some tied aid 
projects pass the OECD eligibility test but can still create longer-
term advantages for foreign exporters by setting technical standards, 
providing brand name recognition, allowing maintenance and repair 
capabilities to become established, etc. Any of these elements can tilt 
the playing field for future commercial sales. War Chest matching is a 
vital tool to ensure that tied aid is not used, intentionally or 
unintentionally, to tilt longer-term competitive conditions against 
U.S. exporters. Treasury fully supports using the War Chest in such 
instances.
    In addition, the tied aid rules have two systemic shortcomings. The 
first relates to small projects below $3 million and the second relates 
to projects in the railway and mass transit sectors. Small projects are 
exempt from the tied aid rules in order to minimize the administrative 
burden of the rules. However, some OECD members used this exemption 
aggressively to finance small commercial projects in violation of the 
spirit of the rules. In response to this, Treasury has been clear that 
it automatically supports using the War Chest to match small commercial 
projects.
    Passenger railway and mass transit projects also meet the 
eligibility rules because they are highly capital intensive, meaning 
their costs are normally not recouped from their own earnings over the 
term of an export credit agency (ECA) loan. In addition, their revenues 
are limited because they are often unable to charge the full economic 
value of their services. Therefore, Treasury has been clear that such 
projects are frequently good candidates for War Chest matching, and 
just such a matching offer was approved earlier this year.
    In conclusion, this policy-based approach to matching foreign tied 
aid offers allows us to protect U.S. exporters from unfair use of tied 
aid, while recognizing the legitimate development objectives of foreign 
aid programs. It is in the interest of U.S. exporters and taxpayers 
that the War Chest remain a tool to leverage the broader, rules-based 
approach. The current Treasury/Ex-Im Bank tied aid principles and 
procedures were put in place in close cooperation with Congress in 
2002, are working well, and have not produced a single disagreement 
between the two agencies.
    I appreciate the opportunity to appear before you today and look 
forward to your questions. Thank you.
                                 ______
                                 
                PREPARED STATEMENT OF JAMES H. LAMBRIGHT
                     Acting Chairman and President,
                           Export-Import Bank
                             June 20, 2006
    Mr. Chairman, Senator Sarbanes, Members of the Committee:
    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 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. The specific role of the Bank is to 
help provide export financing in instances where creditworthy 
transactions would not otherwise go forward. That can occur when a 
market or a buyer is too risky to obtain 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 provide 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 driving between two guideposts. 
One guidepost represents the benefits we offer to U.S. workers and 
exporters when we assist in the financing of exports that otherwise 
would not occur. Over the years, those exports have helped to sustain 
U.S. jobs, jobs that on the average offer higher wages than non-export 
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 guidepost--the one that 
represents assuming reasonable risk and responsible stewardship of the 
resources provided by taxpayers necessary to bear those risks. The 
guidepost of risk is ``reasonable assurance of repayment,'' a term 
Congress has explicitly put in our charter as our standard for making 
credit judgments.
    The results have been tremendous. 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.
    The conclusion is that Ex-Im Bank is a great deal for the 
taxpayers. When we manage to drive between the guideposts 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. In 2002, Congress 
increased from 10 to 20 percent the amount of financing authority that 
must be available for small business transactions, and though the Bank 
has not yet authorized the full 20 percent of authorizations for the 
direct support of small business, we have never turned down a small 
business transaction due to lack of resources. We are still seeking the 
best course to drive 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 continue our efforts to increase financing commitments for 
exports to sub-Saharan Africa. In fiscal year 2005, Ex-Im Bank 
supported 115 transactions in 20 countries in the region, totaling 
$461.8 million, a $78.6 million increase over fiscal year 2004. 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 drive the Bank between those guideposts, 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.
    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 is 
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 non-lethal 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. 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 almost a year 
ago, I have devoted more attention to small business than any other 
issue. We have been working with Congress on its concerns. We have 
conferred with small business representatives on changes we have been 
implementing which I am about to discuss. And we are institutionalizing 
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 Bank 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 authority 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 that one of the primary ways 
to increase support for small business is to improve our outreach 
programs in order to increase demand. I have created the new position 
of Senior Vice President for Small Business to manage an independent 
business development unit with a dedicated staff focused solely on 
small business outreach. He reports directly to the President and 
Chairman of the Bank. The Senior Vice President for Small Business 
serves as the primary small business advocate on the staff level, and 
of course works 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.
    Although the Senior Vice President for Small Business is 
responsible directly to the President and Chairman and he and his staff 
comprise an independent business development unit, they still work 
closely with the Bank personnel who are responsible for actually 
processing the transactions--that is, those in what we call the 
``business units.'' This is consistent with what we do for all business 
development, large and small, within the Bank. It is part of our credit 
culture, and reflective of best practices in the private sector, that 
those who must objectively evaluate credit not be the same people as 
those responsible for business outreach.
    Furthermore, small business transactions are now processed only by 
specified 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 small businesses come into the Bank to discuss their 
transactions, they will interact with personnel who are familiar to 
them and knowledgeable about their needs.
Ex-Im Bank's Small Business Committee
    To facilitate seamless interaction between the dedicated small 
business outreach division and the small business specialists in the 
business units, we have established an Ex-Im Bank Small Business 
Committee (SBC) to coordinate, evaluate, and make recommendations 
regarding the many Bank functions necessary to successfully execute our 
small business plan. The SBC is co-chaired by the Senior Vice President 
for Small Business and Senior Vice President for Export Finance, and 
reports directly to the President and Chairman of the Bank. And we have 
institutionalized this structure by having the Board formally approve 
it. The SBC is composed of representatives from a number of Bank 
divisions. Other divisions within the Bank, including Congressional 
Affairs, also participate at meetings.
    The goals of 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.

    The SBC has already had impact. For example, as a result of SBC-
initiated action, Ex-Im Bank is encouraging brokers to more proactively 
market our short-term insurance policies to small businesses through 
increased broker commissions. The SBC approved a 25 percent premium 
discount for Ex-Im Bank short-term multibuyer insurance policies 
offered to small business exporters that are using the Small Business 
Administration's international loan programs. Furthermore, in order to 
make short-term insurance policies more user-friendly for small 
businesses, the SBC approved several endorsements to short-term 
insurance policies relative to shipments and delegated authority.
Claims Committee
    In addition, we have established a new claims reconsideration 
procedure and ``Claims Committee'' consisting of five senior Bank 
officials. The Claims Committee is responsible for evaluating and 
reconsidering claims originally denied by the Asset Management 
Division. I believe these changes are helping all of our customers, but 
are particularly useful to small businesses, by improving transparency 
in the claims 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. To strengthen customer 
education about the reconsideration process, a small-business portal 
with information pages has been created on Ex-Im Bank's web site.
Technology Upgrades
    We are making significant progress 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.'' Since the Bank's last reauthorization, the Bank has been 
implementing its online capabilities in stages.
Ex-Im Online
    Ex-Im Online, our major business reengineering and automation 
project, is the latest step. On June 1, small business customers began 
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 Bank's annual 
transaction volume. Customers apply online, get quick decisions and 
receive online status information.
    Ex-Im Online is reengineering, automating and modernizing 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 provides exporters, particularly small businesses, the benefits 
of electronic application submission, processing and insurance policy 
management.
    Ex-Im Online reduces customers' paperwork, improves the Bank's 
response time, increases productivity and improves risk management. Ex-
Im Online allows 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 reduces 
        review and decision time for short-term transactions.
    Receive online information on application status. 
        Applicants receive email notification of the status of their 
        application.
    Reduce paperwork burden. Automatic data entry and reuse of 
        existing data permits ``enter once--use many times'' management 
        of customer information.
    Manage export accounts receivable online. 
    Utilize enhanced products. Ex-Im Bank 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 are also benefits to Ex-Im Bank:

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

    When considering Ex-Im Bank support for small business, it is 
important to note that we are a demand-driven enterprise. We 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. Moreover, I am going to 
continue to inculcate a culture that strives to meet all of our small 
business customers' needs through improved processing of small business 
applications by our small business specialists, the development and 
implementation of forward-leaning initiatives by the Small Business 
Committee, the careful consideration of the Claims Committee and 
further expansion of Ex-Im Online. Ex-Im Bank is going to continue to 
seek out and listen to small business input concerning our programs, we 
will communicate with Congress and take your concerns seriously, and 
our renewed efforts in small business are going to be sustained and 
further institutionalized.
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. This is the foundation of our economic impact procedures. 
Decisions on transactions that raise economic impact considerations, 
however, are the most difficult the Bank must make because it must 
weigh the interests of one set 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 
the new economic impact 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.
    Since the new procedures took effect, economic impact issues have 
arisen in a number of 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, 
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 properly vetted and all 
interested parties have an opportunity to be heard.
    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 analysis and expanded participation by other 
U.S. Government agencies and stakeholders in the process. Yet, 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 industry, and other interested parties.
KEEPING THE COMPETITIVE EDGE IN NEW PRODUCTS AND SPECIAL MARKETS
Women- and Minority-Owned Exporters
    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 $363 million, compared to $296 million in fiscal year 2004. In 
fiscal year 2005, transactions involving women- and minority-owned 
businesses accounted for over 13 percent of our total small business 
authorizations and over 20 percent of our working capital guarantee 
authorizations in dollar terms. Ex-Im Bank staff participated in 57 
speaking engagements and attended thirteen conferences expressly aimed 
at these targeted audiences in fiscal year 2005. We have increased our 
outreach with the goal of doing even more this year. We are committed 
to continuing and expanding these efforts.
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. 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 $1.1 billion in environmentally beneficial exports. The Bank's 
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 fifteen 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.
FUTURE CHALLENGES
    Any testimony about Ex-Im Bank must include a discussion of the 
challenges the 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 with 
over the next 5 years.
    Developing countries on the upper part of the industrialization 
scale (e.g. 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 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 are working with both our interagency 
and G-7 counterparts to better define this rising challenge and 
determine the best array of measures to successfully address it. 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. 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 JAMES D. McCLASKEY
              President and CEO, Midrex Technologies, Inc.
                             June 20, 2006
    I am Jim McClaskey, President and CEO of Midrex Technologies, Inc., 
headquartered in Charlotte, North Carolina. I have worked at Midrex for 
the past 32 years and with me today is Rob Klawonn, Vice President, 
Commercial, for our company. We sincerely appreciate this opportunity 
to speak to you today regarding an issue which is critical to the 
success of our company and the hundreds of small businesses we support 
in the United States. Specifically, I am directing my remarks to the 
pending reauthorization of the Export-Import Bank of the United States 
(Ex-Im Bank). Midrex needs the support of an active and aggressive 
export credit agency to allow us to compete on a level playing field 
with our competitors. These competitors in Europe benefit greatly from 
the aggressive support of export credit agencies such as Hermes and 
Sache.
    Midrex is a small technology company with less than 100 full-time 
employees. We are 100 percent dedicated to the Global Iron & Steel 
Industry and nearly all of our clients are foreign. This year our 
revenues will be the highest in our company's history, more than $200 
million. How did we achieve revenues of more than $2 million per 
employee? We rely heavily on the support of hundreds of U.S., and yes, 
foreign suppliers and manufacturers of industrial electrical and 
mechanical equipment, specialty fabrications, refractory and much more. 
We typically sell a technology package of engineering, equipment, 
materials and services for export, and the pieces come together at our 
customer's plant site in their home country. Although we do not 
manufacture anything ourselves, the bulk of our revenues and profits 
are derived from the supply of goods manufactured right here in the 
United States. Key supplier relationships have developed over the past 
30-plus years in states such as Alabama, Florida, Georgia, Illinois, 
Indiana, Kentucky, Massachusetts, Missouri, New York, North Carolina, 
Ohio, Pennsylvania, South Carolina, Texas, Utah, West Virginia, 
Wisconsin, and others. Many of these companies are small businesses. 
Furthermore, we are the market leader in our segment of the industry 
with two-thirds market share, and the Midrex Direct Reduction 
Technology has over 90 percent market share in the Middle-East North 
Africa region.
    In the past, Midrex had received support from Ex-Im Bank, although 
there were numerous complaints about its lack of speed and efficiency. 
We had developed support for projects in Mexico, Venezuela, and the 
Middle East. We had not been in contact with Ex-Im Bank for 
approximately 5 years, from 1998-2002 due to very poor global market 
conditions in the iron and steel business. Upon returning to Ex-Im in 
2003 asking for support, we were verbally instructed by one business 
development officer at Ex-Im ``don't waste your time'' simply because 
we are associated with the ``steel'' industry. Unfortunately, we have 
had to spend thousands of dollars over the past few years educating 
many in Washington, D.C., about our business and the fit we have in the 
global steel industry. I'd like to make one thing very clear at this 
point; the Midrex technology does not produce steel. Our process is 
used to make a metallic iron raw material that is then used to make 
steel, much the same way that scrap metal is used.
    Saudi Ex-Im Bank Denial: In December 2004, Midrex signed a contract 
with a client in Saudi Arabia to supply $81 million worth of 
engineering, equipment and field services. The majority of this revenue 
is dedicated to U.S. goods and services. The contract is a minor, but 
critical part of a $1 billion investment being undertaken by our client 
to increase iron and steelmaking capacity in Saudi Arabia. The metallic 
iron produced by our technology will be used in adjacent steelmaking 
operations to produce steel for the Arab Gulf region's fast growth and 
also for export to their global steel-consuming customers.
    In 2005, the Saudi client made its application to Ex-Im Bank for 
loan guarantees as part of an overall financing effort using 
combinations of commercial financing and European export credit agency 
support. It is interesting to note that the lead bank, who was very 
much aware of the sensitivities associated with Ex-Im Bank and support 
of foreign Steel producers, recommended that his Saudi client not 
submit an application to Ex-Im Bank due to the high probability that 
the application would be denied. The Saudi client, nevertheless, 
expressed an interest in establishing a relationship with Ex-Im Bank 
and instructed the financial arranger to complete the application 
process.
    Ex-Im Bank, based upon the negative findings of the economic impact 
analysis, denied the application a few months ago because the project 
as a whole will result in the addition of nearly 1.3 million tons/year 
of hot-rolled coil capacity. On the surface, the system of checks-and-
balances on Ex-Im Bank worked. The procedures and guidelines which were 
put in place as a consequence of the last Ex-Im Bank reauthorization 
and fall-out of the Bush 201 Trade Sanctions imposed in early 2003 
worked as intended.
    However, I would like to ask a question: Did the denial of this 
application, when all other European ECA's approved their respective 
portions, protect the U.S. economy? The answer is a big NO! Did it make 
some people feel good because we didn't use U.S. Taxpayer dollars to 
support the project? . . . The answer is YES. But, let's look at the 
real outcome.
    This project is still moving ahead as planned and will become 
operational in April 2007. So ask yourselves, what did we really 
accomplish here?
    We must admit that hot-rolled coil was being dumped on the global 
market in the earlier part of this decade--anti-dumping duties and 
tariffs were imposed on some foreign producers. Many of these producers 
were selling at or below their cash costs of production. You have heard 
for years from various sources that there is a glut of steel capacity. 
However, as we all know, China has entered the picture now and on its 
own has raised total global crude steelmaking supply and demand by more 
than 30 percent. Furthermore, tremendous efforts have been made by the 
likes of Mittal, Nucor, US Steel, Severstal, and other major players to 
absorb under-performing assets through acquisition and merger. Some 
inefficient and poorly located assets were simply taken out of 
operation altogether like Gulf States Steel and Geneva Steel. The 
threat of state-owned steel companies dumping steel and causing prices 
to plummet has been diminished, with the exception of China, of course. 
As for China, the story is a young one. We have been told by many 
analysts and industry leaders, that China is not a near-term threat due 
to high iron ore prices (they are expected to import approximately 300 
million metric tons of this raw material in 2006 at market prices). 
Iron ore costs are a major factor in determining production costs. They 
have other issues facing them as well, such as the high cost for 
energy, high prices for metallic iron, rising labor costs and labor 
inefficiencies, infrastructure issues, environmental concerns, currency 
uncertainties, etc. U.S. steel producers face some of these same 
issues. Despite this recent explosive growth, China is still a 
developing nation when considering its low per-capita consumption of 
steel, and its huge demand for infrastructure development.
    Please don't misunderstand me, I don't mean to imply that the 
domestic U.S. steel industry is now well-protected. This is still, and 
will always be, a commodity business subject to the ups-and-downs of 
the global economic cycles and there will be some producers willing to 
sell at any price. However, I do offer that the future will look much 
different than the past, because of the huge privatizations which have 
taken place, putting capacity in the control of market-driven 
companies. Just look at recent industry gatherings and you'll find many 
statements by current U.S. steel executives that are positive about the 
future. An American Metal Market article published last month quoted 
the CEO of Nucor when he said:

        No one predicted that 2004 would do what 2004 did . . . I think 
        we are going to be in a bull market for the next 10 to 15 
        years. There is something much bigger going on here . . . We 
        are in a place where things will be very positive.

    An article titled ``Raw Materials: The Sourcing Game'' published in 
American Metal Market dated May 15, 2006 was making the argument that 
``raw materials remain a key area of concern'' and cited a few steel 
leaders here in the United States on issues of raw material and 
logistics issues. The head of Mittal Steel USA was discussing raw 
materials and North American infrastructure when he was quoted. Here is 
a key excerpt from the article:

        ``They (raw materials) are still very tight,'' said Louis L. 
        Schorsch, chairman of the AISI and president and chief 
        executive officer of Mittal Steel USA Inc., Chicago. ``I don't 
        think there is any bad behavior out there or anything like 
        that, but I think it is clear that the level of investment in 
        raw materials or logistics infrastructure needs to improve . . 
        . investment in raw material capabilities is critical for steel 
        producers. ``It is the market at work,'' he said. ``Supplies 
        are tight and demand is high.''

Later in the same article the writer goes on to conclude by saying:

        Most observers predict that steel consumption will continue to 
        grow globally for the foreseeable future--putting further 
        strain on raw material supplies not only in North America, but 
        worldwide.

    So, back to the question at-hand . . . How does the denial of the 
Saudi application and others like it protect the U.S. economy? As I 
said before, the project is still proceeding, the European export 
credit agencies have no problem supporting it, and now Midrex has a 
freehand to buy its equipment from global sources, rather than right 
here at home from American companies. The denial of the Saudi 
application by Ex-Im Bank does absolutely nothing to protect U.S. 
companies and its employees! To the contrary, I would like to put 
forward that it will have far-reaching negative effects. The Saudi 
client is now 100 percent sure that their lead bank was correct: They 
never should have wasted time pursuing support from Ex-Im Bank. I must 
also mention that its predisposition to avoid Ex-Im Bank is very common 
among many of our foreign clients. I would like to read for you a 
direct quote from our client's banker taken from an email of November, 
2004 (i.e., before the application was submitted to Ex-Im Bank).

        I think the way I would describe our position with regard to 
        potential Ex-Im Bank support is that we would much prefer not 
        to have a separate Ex-Im Bank facility and therefore wish to 
        explore all other alternatives first. Hence our desire to 
        understand all possible sourcing options.

Now, let's look at the future for a moment. This same client has 
intentions to further expand his business. He will give Midrex the 
opportunity to supply its technology. If export credit is wanted or 
needed, then our European competitors will have a distinct advantage 
over us. What do we do? Who do we turn to for support? Remember, if we 
get the job, many other U.S. companies get business especially if Ex-Im 
Bank would participate. However, if it does not, then we will look at 
other alternatives.
    Perception is reality, and this view, unfortunately, is shared by 
many of our prospective clients. Since 2002 and with numerous visits to 
Washington, D.C., we have learned that it is a widespread opinion 
shared by many foreign buyers (not only Midrex clients) who believe 
that approaching Ex-Im Bank is a fruitless endeavor. To be truthful, we 
are also beginning to feel this way.
    Speaking for the thousands of small companies without a voice here 
today, the assumption that denial of applications actually protects the 
U.S. economy could not be more wrong. Such decisions deliver a terrible 
message to foreign buyers considering U.S. offerings. These buyers will 
proceed with or without the support of a U.S. export credit agency, 
which means that U.S. offerings are at a competitive disadvantage to 
foreign companies using their export credit agencies to support 
clients. Furthermore, American exporters, like Midrex, with the 
flexibility to buy goods competitively across the globe will quickly 
find ways to regain that competitiveness. European ECAs, JBIC (the 
Japanese ECA), and EDC in Canada are all very eager for Midrex to 
source more equipment from their respective countries and are willing 
to offer promotional support as well as tremendous flexibility. Given 
the restrictive nature of the current economic impact analysis 
guidelines, Midrex, and who knows how many other companies like us, 
have no other option but to source equipment needs abroad in order to 
compete when ECA support is desired by our clients. Many, however, have 
their manufacturing here in the United States and cannot take advantage 
of foreign supplies and foreign ECAs. Thankfully for us, we can change 
our sourcing patterns. And, we do have some clients who can arrange 
financing without the need for ECA support. But there are many 
prospective Midrex clients who need, and will receive ECA support for 
their projects.
    Picture this as a Headline: A Ukrainian Export Deal Goes to Japan!: 
Let me give you another VERY REAL example. In the Ukraine we now have a 
client in the process of developing his financing for a 3 million tons 
per year steel slab-making facility. The order value for Midrex would 
be approximately $150 million. In light of recent experience, we have 
already instructed our client to consider other ECA coverage, not Ex-Im 
Bank. In fact, we will probably be offering Japanese ECA financing. If 
successful, the result is that we would have to place tens of millions 
of dollars in orders to Japanese suppliers in order to obtain their 
financing support. That means that many of our company's loyal U.S. 
suppliers and manufacturers will not get the opportunity to bid on 
these items as a result, and Midrex will lose some profit due to the 
higher costs of Japanese equipment purchases. Is this a good thing? . . 
. Of course not.
    Specific Changes to the rules imposed on Ex-Im Bank have been 
proposed, and many of them are positive or neutral. Minor changes 
relating to notification and public comment periods, as well as methods 
of calculating the value trigger point for initiating an economic 
impact analysis are not worth debating. Also, specifying that certain 
companies with a history of dumping should not receive Ex-Im Bank 
support seems reasonable and we agree with that. However, vague but 
substantive changes which might encourage unfounded political influence 
or oversight into the application review process is likely to destroy 
any appearance of objectivity and possibly be seen by many as an effort 
designed to grant unchecked influence on specific applications. Not to 
mention the fact that people may not take the initiative to really look 
at what is the real impact to the American economy of a negative 
decision. Could other small American companies get hurt? To what 
extent? Would anyone even think to check it out? Is it worth it to make 
some people feel good while the project or projects go ahead anyway? We 
do not want to see this happen.
    Lastly, and perhaps most debatable is the introduction of the 
definition of ``substantially the same product''. While on the surface 
this request seems reasonable, it could easily be used to prohibit very 
legitimate projects intended to manufacture products which are globally 
traded and are in high demand and short supply. If you examine the 
attached flowchart of the Iron & Steel making processes, you will see 
that the Midrex ironmaking technology is far upstream from any finished 
steel products. Our technology produces a steelmaking raw material 
which is in very high demand and short supply. No one could rightfully 
claim that product made from our technology does harm to U.S. steel 
interests. To the contrary, increased supply of this metallic iron raw 
material does everything to help assure U.S. steelmakers of readily 
available and lower cost metallic iron for their steelmaking efforts.
    Numerous Electric Arc Furnace steel producers exist in many of your 
States. In fact, the States represented by this committee alone have 
existing Electric Arc Furnace steelmaking capacity which is 
approximately 25 percent of the total U.S. crude steelmaking capacity, 
or roughly half of the total U.S. electric furnace steelmaking 
capacity. Therefore, your own steel producing companies need our 
technology to flourish in the global market so that they can continue 
to rely upon plentiful supplies of raw materials at low cost. 
Unfortunately, our technology cannot be applied here in the United 
States due to exorbitant energy prices, specifically natural gas--the 
primary energy source for Midrex plants.
    Concluding Remarks: We will conclude our remarks by insisting that 
foreign companies abiding by WTO trading policies and guidelines, with 
no history of dumping, should be able to receive the support of a U.S. 
export credit agency. In fact, we should go out of our way to reward 
trading partners abiding by WTO rules, while simultaneously promoting 
the export of U.S. goods and services. This should be the ultimate 
objective of Ex-Im Bank fully demonstrated by its actions, not just 
words. The objective of Ex-Im Bank should be to support exporters, not 
to offer itself as a club to protect U.S. producers, because when used 
this way the club strikes only the U.S. exporters and not the foreign 
producer.
    Insisting to place even more stringent rules and guidelines on Ex-
Im Bank will simply render the bank useless to us and even more out of 
reach than it already is to the thousands of small businesses trying to 
compete globally. And, export-oriented, technology companies like 
Midrex will find other ways to compete and support our customers, 
unfortunately to the detriment of many U.S. manufacturers, who 
otherwise would not have access to these foreign projects.
    Lastly and more near and dear to our heart, denial of legitimate 
applications for Ex-Im Bank support will greatly impact the competitive 
position of Midrex and hurt many U.S. companies, not to mention 
undermine the United States' reputation for promoting fair trade. 
American exporters, including Midrex, will lose orders and to 
compensate we will be forced to take business purchases overseas when 
products could have been made available right here in our country. Over 
the long-term, continued protectionist actions disguised as medicine to 
relieve apparent chronic overcapacity in world markets, will 
significantly weaken the technological dominance of hundreds if not 
thousands of U.S. companies. Many will close their doors permanently, 
or already have, and those that survive will do so only by reducing 
profit levels and changing their business model to procure goods and 
services from foreign countries which are obviously more supportive of 
their exporters. All of this debate is supposedly based on the false 
assumption that denial of support for U.S. exporters actually protects 
American jobs when it is clearly obvious that the companies most likely 
to flaunt WTO rules and incur Anti-Dumping/Countervailing Duties would 
never qualify for the loan guarantee in the first place.
    Please look at the attached state-by-state breakdown of our recent 
purchases. Dozens of suppliers in these states benefit from export 
business that they otherwise would not have. There are many millions of 
dollars in purchases to be made in the coming 12 months as a result of 
new projects as well. How do we explain to these suppliers that, due to 
our government's failure to promote exports, we have to go across the 
Pacific or Atlantic Ocean to find an export-oriented government willing 
to do what is necessary to support us, our clients and its own domestic 
manufacturers? Do we tell them that our government stood on principle 
based on the best information available at the time? What kind of 
explanation would that be? Remember, the projects manage to go ahead 
anyway so who wins as a result of an Ex-Im Bank denial, and who are the 
REAL losers here?
    I submit to you that the application of economic impact analyses 
may theoretically determine the possibility of future economic harm, 
but the reality is that most investments will move forward with or 
without the support of Ex-Im Bank. Thus, restricting the Bank and its 
ability to support exporters during a time when manufacturing in this 
country is quickly moving abroad and our trade balance is 
deteriorating, will do nothing to protect U.S. jobs but will only hurt 
the U.S. economy.
    I want to thank each and every one of the distinguished committee 
members gathered here today for your attention. I am hopeful that this 
committee will recognize these challenges we face and we ask that you 
please stand behind small companies like Midrex, promoting job creation 
rather than job protection, strengthening the United States' reputation 
rather than weakening it, and understanding that global trade is a very 
dynamic and ever-changing world in which to compete. Please support us 
and give us the chance to compete fairly, on a level playing field with 
foreign competitors by allowing Ex-Im Bank to meet the goals of its 
charter and allow it to operate freely with prudent oversight and 
management under the leadership of Mr. Lambright and the many 
professional and hard-working managers at Ex-Im. Do not allow Ex-Im 
Bank to be used as a protectionist club, because its strike zone does 
not extend beyond our own borders!

    Thank you.

    /s/ JAMES D. McCLASKEY
    President & CEO, Midrex Technologies, Inc. 
    
    
    
    
    
    
    
    
    
    
                                 ______
                                 
               PREPARED STATEMENT OF HARRY G. HAYMAN, III
          Senior Vice President and Head of Wholesale Banking,
                             Commerce Bank
                             June 20, 2006
Introduction
    I am pleased to be with you today to discuss reauthorization of the 
Export-Import Bank of the United States (Ex-Im Bank). I am testifying 
on behalf of the Bankers' Association for Finance and Trade (BAFT), an 
organization founded in 1921 by a small group of American bankers from 
the Midwest. Their purpose in forming the association was to enable its 
members to exchange opinions on the conduct of foreign business, and to 
aid in the development and maintenance of foreign trade. Today, BAFT is 
an affiliate of the American Bankers Association. Most of its U.S. 
members are active in trade finance and they interact with Ex-Im Bank 
every business day. I don't have statistics on this, but I believe that 
BAFT's members account for a significant portion of the dollar volume 
of Ex-Im Bank transactions each year.
    I am a senior officer of Commerce Bank, which has its headquarters 
in Cherry Hill, New Jersey. Until recently I was a banker with PNC Bank 
in Philadelphia and I have spent much of my career in the trade finance 
area. I am the President of BAFT, and I have served as a member of Ex-
Im Bank's Advisory Board. I am pleased to be with you today and thank 
you for giving me the opportunity to speak with you about a subject 
that is very important to American financial institutions and their 
exporting clients.
Why We Need Ex-Im Bank
    Ex-Im 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. There are many examples of 
transactions in which the sale of U.S. goods abroad has been made 
possible by the participation of the Bank. These transactions represent 
incremental export sales by American companies that support the jobs of 
American workers and help to reduce our national trade deficit. Surely 
it is in our national interest to have Ex-Im Bank continue playing its 
role in promoting American exports.
    As you consider reauthorization of the Bank, it is important to 
remember that American businesses are engaged in fierce competition 
with foreign companies in the global market. Among the advantages that 
many of those foreign companies enjoy is 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 weapons in our 
competitive arsenal--Ex-Im 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 greater trade deficit.
    Something that other trade bankers and I have observed in recent 
years is that the ECAs 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 ECAs, 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 ECAs 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 100 percent locally 
produced goods. I believe that U.S. companies' efforts to compete in 
international markets will be impaired if our Ex-Im Bank doesn't take a 
similarly aggressive approach. (This is not to say that Ex-Im Bank 
hasn't been aggressive in certain respects in the past, as shown by its 
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 Ex-Im Bank 
to meet the needs of American businesses--large and small--competing in 
global markets. I also believe Congress should support additional 
initiatives to coordinate public and private export development 
resources, which would help address the generally weak export 
performance of our country.
Issues Related to Ex-Im Bank Operations
    I would like to comment on a number of issues related to Ex-Im Bank 
that concern U.S. banks active in the trade finance business.
Economic Impact
    Ex-Im Bank is required by law to consider the extent to which the 
transactions brought to it are likely to have an adverse effect on 
industries and employment in the United States. The rationale for this 
requirement is understandable: taxpayer money should not be used to 
support a transaction if its benefits for the U.S. economy are 
outweighed by other, adverse consequences. You should be aware, 
however, that the economic impact requirement, itself, has an adverse 
impact on U.S. exports.
    Whenever the Bank turns down a transaction on the basis of economic 
impact, it means the financing support that a purchaser expected won't 
be made available and the transaction likely won't occur. This adds to 
a perception in the market that U.S. exporters aren't reliable 
suppliers. Many exports are sold as a package--the goods, plus bank 
financing (with an Ex-Im Bank guarantee) to cover the purchase price. 
If a foreign purchaser has doubts about whether Ex-Im Bank support for 
the financing of their purchase actually will be made available, the 
likelihood of the U.S. exporter getting the sale is diminished. 
Conversely, the likelihood of a producer in another country getting the 
sale is increased, and so far as we are aware none of the other export 
credit agencies in other countries are required to make this kind of 
economic impact assessment.
    The magnitude of the sales that are lost due to economic impact 
assessments that are performed is known, but we don't know how many 
export sales never are initiated because potential buyers are unwilling 
to take the chance that the financing they need won't be available. 
Bankers who are active in trade finance believe the volume of U.S. 
export sales that don't occur for this reason is significant. That is 
why we believe that economic impact assessments should only be required 
in the most compelling cases and we would strongly oppose any steps to 
expand the application of economic impact assessments to a broader 
range of transactions or to make those assessments more rigorous.
Small Business
    Small business plays an important role in the American economy and 
we believe that it is appropriate for Ex-Im Bank to make special 
efforts to ensure that it is meeting the export financing needs of the 
small business community. In that regard, we would like to commend 
Chairman Lambright and John McAdams for recent Bank initiatives to 
increase its support of small business. We are concerned, however, that 
the small-business requirement imposed on the Bank (it must 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) can create the wrong 
incentives for the Bank's decisionmaking.
    Suppose, for example, 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 a strong reason to delay or not do the 
transaction in order to stay above 20 percent. That doesn't make sense 
if the real purpose of 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 reach that target. Neither incentive is a healthy one 
for the Bank and, for that reason, we would oppose any effort to make 
the Bank's small business goal more rigorous or demanding.
Tied Aid
    Ex-Im 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 on Export Credit Competition (the ``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 other, 
similar or related kinds of export support is growing. China, in 
particular, is among the countries that are mentioned. 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 re-examine 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 changes would be appropriate in order to combat 
the misuse of tied aid and other forms of export support and to better 
protect the interests of American exporters.
Cofinancing
    Cofinancing is an arrangement whereby exports that are sourced from 
more than one country can receive credit or credit support from two or 
more ECAs 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 
ECAs.
    Bankers that finance these transactions like cofinancing 
arrangements because they are a straightforward, efficient and 
convenient way of providing credit support for what otherwise could be 
much more complicated transactions. As Ex-Im Bank noted in its June 
2005 Report to the U.S. Congress, the ``availability and ease of ECA 
cofinancing has become an important and measurable competitive issue.''
    According to Ex-Im Bank's web site, it currently has bilateral 
cofinancing agreements with ECAs in five other countries: Canada, 
Italy, Japan, The Netherlands, 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 Bank 
Chairman John Robson reported that the Bank had entered into a 
bilateral agreement with ECGD of the U.K. and that discussions with EDC 
of Canada were close to completion. We are disappointed that agreements 
have been signed with only three other countries in the ensuing 4 years 
(a 1998 GAO report said there were more than 70 ECAs operating 
throughout the world; the U.K.'s ECGD has agreements with ECAs in 24 
different countries).
    Although the Bank has participated in cofinancing arrangements on a 
one-off basis with ECAs 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 ECAs.'' We believe 
that the Bank should take more of these steps and make cofinancing 
agreements with other ECAs a priority. It would be appropriate for the 
congressional committees that have jurisdiction over the Bank to 
monitor its progress in this respect and we suggest that the Bank be 
required to report to you annually on the cofinancing agreements it has 
in place and on its efforts to enter into cofinancing agreements with 
ECAs in other countries.
Dual-Use Products
    Ex-Im Bank generally is prohibited from providing credit or credit 
support in connection with the sale of military 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 non-
lethal 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, ``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.'' With this endorsement of the 
Bank's approach, we think it would be appropriate to make this a 
permanent provision that does not require periodic renewal.
Conclusion
    Ex-Im Bank plays an important role in our nation's economic 
prosperity by helping American exporters sell their goods and services 
to purchasers in other countries. The global competition they encounter 
is intense and many countries have well-funded, effective government 
agencies that advance the efforts of their exporters by providing them 
with credit, credit support, and other assistance. We believe Ex-Im 
Bank generally does a good job helping American exporters meet this 
competition and at the present time we feel that our association and 
its member banks--virtually all of which are in the business of 
financing American exports--have effective channels of communication 
and a solid working relationship with the Bank.
    As Congress acts on the Bank's reauthorization and considers 
whether it should take additional steps to improve the Bank's 
operations, it should be aware of the concerns of American banks that 
work with Ex-Im Bank, which we have addressed in this statement. They 
include the adverse consequences of economic impact assessment, the 
need to improve utilization of other provisions that should make the 
Bank more effective, such as the Tied Aid War Chest; and areas, such as 
cofinancing, where the Bank itself could do more to fulfill its mission 
of promoting American exports. We hope that Congress will act promptly 
to reauthorize the Bank and, in so doing, take steps to make the Bank 
more effective; Congress should reject proposals that will make it more 
difficult for the Bank to fulfill its mission.
                                 ______
                                 
                   PREPARED STATEMENT OF DAVID ICKERT
               Vice President and CFO, Air Tractor, Inc.
                             June 20, 2006
    Chairman Shelby, Senator Sarbanes, members of the Committee, thank 
you for inviting me here today. I am David Ickert; Vice President and 
CFO of Air Tractor, Inc. Air Tractor is a small business that 
manufactures agricultural and forestry firefighting aircraft. We are 
located in Olney, Texas (population 3,500) and employ 175 people. Air 
Tractor has manufactured and delivered over 2,100 aircraft to buyers in 
more than 20 countries. Over the past 10 years, we have utilized the 
Export-Import Bank (Ex-Im Bank) financing on about 35 occasions.
    I am also here on behalf of the Small Business Exporters 
Association of the United States (SBEA). SBEA is the nation's oldest 
and largest trade association representing small- to medium-sized 
enterprises (SMEs) that export.\1\ I am on the Board of SBEA and have 
served previously as the Board Chair.
---------------------------------------------------------------------------
    \1\  Here, as elsewhere in this testimony, ``small- and mid-sized 
enterprises'' (or exporters or ``SME's'') refers to U.S. businesses 
defined as ``small'' by the U.S. Small Business Administration (SBA). 
Generally these are businesses with fewer than 500 employees, with 
certain limited exceptions.
---------------------------------------------------------------------------
    SBEA, Air Tractor, and I strongly support the reauthorization of 
Ex-Im Bank, and we urge Congress to do so expeditiously.
    Exports are good for our country.

    Companies that began trading internationally between 1993 
        and 2001 had about five times the employment growth of other 
        companies, a recent study has shown. Companies that stopped 
        trading during this period actually lost jobs.\2\
---------------------------------------------------------------------------
    \2\ Importers, Exporters, and Multinationals: A Portrait of Firms 
in the United States That Trade Goods, Andrew B. Bernard, J. Bradford 
Jensen, Peter K. Schott, National Bureau of Economic Research, Working 
Paper 11404, June 2005, pp. 4-5.
---------------------------------------------------------------------------
    Export-related jobs also pay more--15-20 percent more, on 
        average, than similar jobs in non-exporting companies, 
        according to Commerce Department statistics.
    Each $1 billion in exports generates an average of over 
        14,000 of these higher-paying U.S. jobs.

But exports depend critically on financing. In many parts of the world, 
financial systems are underdeveloped or prohibitively costly. Buyers in 
these countries who need financing almost always ask sellers to provide 
them with it.
    Thus, exporters in the United States need ready access to:

    loans for their own business expansion to meet foreign 
        demand,
    insurance against foreign buyer default, and
    the ability to provide financing to foreign buyers who 
        require it.

    In the United States, as in all other industrial nations, 
commercial banks are extremely reluctant to accept these foreign risks 
without government guarantees. This problem is especially acute for 
SMEs, who typically lack the economic power to get banks and brokers to 
overcome their hesitancies about this kind of risk.
    Thus all major industrial nations have ``export credit agencies'' 
to judiciously provide this capital, offer this insurance, and extend 
these guarantees. Ex-Im Bank is ours. For SME exporters in this 
country, Ex-Im Bank is not the ``bank of last resort.'' It is the bank 
of only resort.
    And not only do smaller exporters need Ex-Im Bank. There are 
compelling economic reasons for Ex-Im Bank to actively court these 
companies.
    With our country's trade deficits now above $700 billion a year and 
rising rapidly, Federal agencies like Ex-Im Bank must do all they can 
to encourage exports. The most promising upside potential for increased 
exporting is the nation's small and medium-sized business community. 
Virtually all of the Fortune 1000 companies are active international 
traders already, but less than 10 percent of the nation's small 
companies export. With 96 percent of the world's consumers living 
outside the United States, with global communications rapidly shrinking 
the world community, and with trade deficits threatening our future 
economic stability, this disappointing overall export performance by 
smaller companies is something our nation can no longer afford.
    Abroad, it is small company buyers who often represent best upside 
potential for U.S. exports. These buyers want to purchase products like 
water wells or diagnostic equipment for small medical clinics, or the 
know-how to wire an office building for computers or to build a mile-
long road or to access alternative energy. Or perhaps they want to buy 
a forest fire-fighting plane like Air Tractor sells. As an exporter, I 
can tell you that ``Made In USA'' has never lost its tremendous drawing 
power all over the world.
    On paper many American companies sell the products and services 
that these smaller company buyers overseas want. But it is frequently 
only smaller U.S. companies that truly take an interest in these 
smaller foreign sales--and can deliver them with the pricing and terms 
that the foreign buyers want.
    If Ex-Im Bank and other parts of the government can help make 
everything go smoothly on this end, then these smaller foreign sales 
could collectively deliver tens, and perhaps hundreds, of billions of 
dollars in new exports. Look at capital equipment. SMEs play a huge 
role in domestic sales of capital equipment, and do a remarkably good 
job at capital equipment exports. These are especially valuable exports 
because they:

    typically utilize parts and sub-assemblies manufactured by 
        a whole array of U.S. companies.
    are usually bundled with service exports like training and 
        after-sale-service.
    help build U.S. product standards and specifications in the 
        buyer's country, paving the way for future export sales.
    offer the biggest and fastest ``bang for the buck'' in U.S. 
        job creation, and
    in the case of capital equipment exports like medical 
        equipment, construction machinery, road building equipment, 
        food handling equipment and the like, help demonstrate to our 
        neighbors that the United States wants to work with them in 
        improving the health and prosperity of their societies.

If SME capital equipment exports could be increased by just 10 percent 
of the domestic sales figure, it would add as much as $280 billion to 
U.S. exports. (See attached tables.)
    A national campaign to double the volume of U.S. small business 
exporting, which is not at all unrealistic, would--by itself--cut the 
U.S. trade deficit almost in half.
    Such an achievement would also spread the benefits of international 
trade to Main Streets across America, which would go a long way toward 
addressing the doubts that many people in our country have about trade.
    So one of the issues that we encourage Congress to explore fully 
during Ex-Im Bank's reauthorization is how the Bank's work with small 
businesses can be improved.
Positive Aspects of the Current Small Business Environment at the Bank
    Ex-Im Bank has a good foundation for serving SME exporters. SMEs 
accounted for over 75 percent of the companies and 89 percent of the 
dollars that Ex-Im Bank financed through its Working Capital Guarantee 
Program last year. In the Bank's Export Credit Insurance programs, SMEs 
were responsible for more than 2,100 transactions valued at about $1.7 
billion. About 90 percent of the companies accessing the Bank's short-
term insurance products are SMEs.
    Ex-Im Bank is also moving forward with its pledge to put more 
transactions online. This is an especially important innovation for 
both SME buyers and sellers, because it lowers their transaction costs, 
a critical determinant of whether smaller sales occur.
    In recent months, under the strong leadership of its Acting 
Chairman, Jim Lambright, Ex-Im Bank also has made several 
administrative changes designed to aid SMEs. The Bank has created a 
Senior Vice President for Small Business, answering directly to the 
Chairman, and named a person to occupy the position. It has set up a 
``Small Business Committee'' whose members are drawn from various 
operating units around the agency. It plans to increase its outreach to 
SMEs, notably through its Regional Offices, which have been directed to 
focus on SME business. It has designated certain underwriters to focus 
exclusively on SME transactions.
    For Medium-Term Financing (6 months to 7 years), which is crucial 
for capital equipment exporting, the Bank has indicated a willingness 
to delegate more authority to commercial banks, as it has done with 
other types of transactions. This would help unclog a major Ex-Im Bank 
bottleneck.
    Dialogue with SMEs, (including SBEA), has increased.
    All of these are welcome developments.
    The critical questions, however, are these:

    Are these changes sustainable without further legislative 
        backing?
    And, are they sufficient to meet the challenge?

Congress clearly intended for Ex-Im Bank to play an important role in 
stoking exports by U.S. small business. During the last Ex-Im Bank 
reauthorization in 2002, the Bank was given a mandate to allocate 20 
percent of its financing dollars to small businesses.
    Ex-Im Bank has yet to meet that mandate.
    Ex-Im Bank was directed by earlier Congresses to designate a member 
of its Board of Directors to keep the Board apprised of the Bank's SME 
activities and to serve as an advocate for them.\3\
---------------------------------------------------------------------------
    \3\ 12 USC 635(E)(i)(I)(iii-iv).
---------------------------------------------------------------------------
    No Board member has been named to this position since it became 
vacant in July 2003, nearly 3 years ago.
    Moreover, complaints about the Bank have increased among smaller 
exporters and the commercial banks and brokers who handle their Ex-Im 
Bank transactions. Some of these complaints have surfaced in 
Congressional hearings.\4\ Others have been expressed privately to 
Members of Congress. A recent GAO Report identified weaknesses in Ex-Im 
Bank's internal controls for accurately determining its small business 
financing,\5\ a problem that a more unified small business management 
structure would be better suited to correct.
---------------------------------------------------------------------------
    \4\ See, for example, Ex-Im Bank oversight hearings of the House 
Financial Services Committee on May 4, 2004 and November 11, 2005, and 
the House Small Business Committee on April 6, 2005.
    \5\ ``Export-Import Bank: Changes Would Improve the Reliability of 
Reporting on Small Business Financing'', GAO Report 06-351, March 2006.
---------------------------------------------------------------------------
Sustainability
    Part of the problem at Ex-Im Bank, in our view, is chronic 
instability in the Bank's management of its overall SME activities. As 
SBEA testified before the International Trade and Finance Subcommittee 
of this Committee on March 8 of this year, our analysis indicates that 
Ex-Im Bank has had at least 15 major changes in its overall SME 
management since 1997, or more than one a year, on average. 
    During the past 10 years, the point person for SMEs 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 broadly in charge of SMEs. ``Business 
Development'' has been included in and excluded from the Bank's small 
business operation. Currently it is separated into international 
business development, which is excluded, and domestic business 
development, which is included. Ex-Im Bank 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 SMEs 
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 Ex-Im Bank's small business 
transactions; sometimes the person has had no significant recent SME 
experience. And so on.
    So while we genuinely respect the SME initiatives that the Bank, 
under Jim Lambright, has undertaken during the past 6 months, the 
Bank's longer history would suggest that these initiatives probably 
cannot be sustained without further Congressional guidance.
    Moreover, even if Mr. Lambright is confirmed soon by the Senate, 
which we hope happens, his term in office will end in 2\1/2\ years, 
well before the end of the 4-6 year reauthorization that the Bank is 
likely to get from Congress. So Congress ought to spell out the SME 
structure and performance that it expects from the Bank over the longer 
haul.
Sufficiency
    If Ex-Im Bank's current SME structure were to be maintained through 
the next reauthorization, would it be sufficient to meet the challenge?
    SBEA doubts it. At present, the Bank's Senior Vice President for 
Small Business directs only the Bank's outreach to SMEs, not the actual 
handling of SME customers.
    To ramp up its SME export financing, Ex-Im Bank needs to impose a 
clear management structure over SME products, processes, and 
transactions.
    As worthy as the agency's ``outreach'' emphasis may be, the new 
customer prospects won't last long if they encounter cumbersome or 
inappropriate products and processes inside the Bank. Worse still, 
customer prospects who find their initial transactions unsatisfactory 
will probably never return--and will likely complain about the Bank to 
their peers and colleagues, hurting Ex-Im Bank's overall reputation in 
the smaller exporter community.
    A disconnect between the ``sales''/``outreach'' people who are 
promoting Ex-Im Bank to small business, and the Bank personnel actually 
handling those transactions, seems almost certain to lead to such 
outcomes--through misinformation, over-promising, and unmet 
expectations.
    Under the current Ex-Im Bank structure, the Senior Vice President 
for Small Business has the apparent responsibility for small business, 
but not the corresponding authority. If this ``Small Business'' Senior 
VP wishes to improve specific aspects of how SMEs are handled within 
the Bank, he or she must ask other operating units of the Bank to make 
those changes or ask the Chairman of the Bank to intervene. Alone, this 
Senior VP can't compel anyone who's actually handling the SME work flow 
to do anything.
    At the same time, the people who do conduct the actual small 
business work inside the Bank will continue answering to the heads of 
various other operating units--who may or may not place an emphasis on 
successful SME transactions.
    If the Bank's SME performance falls below expectations--if, for 
example, the Bank again fails to meet Congress' 20 percent mandate--all 
eyes will turn to the Senior VP. Yet the Senior VP will be essentially 
powerless to offer any remedies beyond ``more outreach'' or perhaps 
more requests for the Chairman of the Bank to intervene in assorted 
problem situations.
Accountability
    For its part, Congress will be stymied in conducting oversight by 
the current SME structure. The real authority over SMEs will continue 
to be scattered across a half dozen operating units within the Bank. 
Accountability will remain elusive.
    What should be done?
Best Practices
    One way to think about the small business question at Ex-Im Bank is 
to look at ``best practices'' elsewhere that have facilitated smaller 
companies in international trade.
    Over 70 governments around the world actively promote their exports 
through export credit agencies (ECAs) like Ex-Im Bank, and most of them 
have carefully analyzed small business exporting.
    The ECAs of many of our global competitors have targeted smaller 
companies as a source of huge and largely untapped exporting potential. 
Australia, Canada, France, Germany, Spain and Sweden are among the many 
developed nation examples. China and India are among the emerging 
nation examples.
    These ECAs are assiduously developing export finance products and 
processes to get their smaller companies into exporting, particularly 
high-value exporting like capital equipment.
    Canada's Export Credit Agency. Consider Canada, which in some ways 
represents the ``best practices'' in financing smaller exporters.
    Canada's ECA, called Export Development Canada, does differ in some 
important respects from Ex-Im Bank. It has, for example, a different 
legal structure and more employees.\6\ Still, its numbers are 
impressive. EDC did business with over 6,200 Canadian small business 
exporters in 2005. This represents 18 percent of Canada's total SME 
exporter population of about 34,000 companies. EDC supplied them with 
over C$15 billion in financing.\7\ Canadian SMEs accounted for over 24 
percent of all EDC financing dollars.
---------------------------------------------------------------------------
    \6\ Also, one of EDC's product lines competes with the Canadian 
private sector, though this is declining, and EDC underwrites more 
export sales to the United States than Ex-Im Bank does to Canada. 
Still, Canadian SMEs used EDC financing to ship to 170 countries.
    \7\ Source: Export Development Canada, Annual Report 2005, p.2, 
www.edc.ca/english/docs/2005_annualreport_e.pdf.
---------------------------------------------------------------------------
    As good as Ex-Im Bank is, and it is certainly well respected, its 
numbers pale by comparison. In 2005, the Bank had about 2,500 SME 
transactions (probably representing about 2,000 SME exporters), or less 
than 1 percent of the estimated 225,000 SME exporters in the United 
States. Ex-Im Bank supplied its SME customers with $2.6 billion in 
financing, or 19 percent of the Bank's overall total.\8\
---------------------------------------------------------------------------
    \8\ Source: Export-Import Bank of the United States, 2005 Annual 
Report, p. 18, www.exim.gov/about/reports/ar/ar2005/2005Glance.pdf.
---------------------------------------------------------------------------
    Thus, despite the fact that the U.S. economy is seven times larger 
than the Canadian economy, Canada's export credit agency managed to 
handle three times as many SME customers and underwrite five times as 
much SME business as its U.S. counterpart.
    For ``best practices'' closer to home, consider the Overseas 
Private Investment Corporation (OPIC). Again, there are obvious 
differences between OPIC and Ex-Im Bank. But OPIC, if anything, has a 
much more difficult mandate to achieve. It must foster investments that 
assist the developing nations, don't cost a single American job, make 
economic sense on their own, and would not otherwise occur.
    If the universe of small companies that want to, or can, export is 
relatively small--less than 10 percent of U.S. small businesses at 
present--then the universe of small companies that want to make 
overseas investments, with these strings attached, is a fraction even 
of that.
    Five years ago, a debate raged inside OPIC about whether to drop 
all efforts to attract SME customers. In the end, under the strong 
leadership of Dr. Peter Watson, OPIC went the other way. The agency 
created a Small Business Office and then a Small and Medium-Sized 
Enterprise Financing unit. In fiscal year 2001, OPIC handled SME 
transactions worth about $10 million. Today it is handling about $500 
million worth of SME transactions. OPIC is now one of the Federal 
Government's most striking SME international trade success stories in 
recent years.
    What EDC and OPIC have in common is a single, consolidated Small 
and Medium-Sized Business unit--with full control over their agency's 
SME products, processes and transactions--and answering directly to the 
Presidents and the Boards of their respective organizations.
    In the private sector, Ex-Im Bank's single most successful small 
business export financier--GE Capital--also utilizes a focused and 
consolidated small business financing unit. Indeed, Ex-Im Bank itself 
has had something approaching this structure at various times in its 
past. But, as noted, the Bank has had difficulty sustaining any SME 
management structure for long.
    Significantly, EDC, OPIC and GE Capital all give their dedicated 
SME units enormous praise--and credit--for expanding the scope of their 
SME successes. They all report that the focused SME structure fosters 
not only a close familiarity with the ``look'' and ``feel'' of SME 
transactions, but also an ``SME culture'' within that part of the 
agency.
    It's difficult to imagine the ``SME culture'' that EDC, OPIC and GE 
Capital find so valuable emerging under the current circumstances at 
Ex-Im Bank. SME specialists are assigned to slots in assorted operating 
units, and the Senior VP for Small Business isn't in charge of any of 
them. Therefore SBEA makes the following Ex-Im Bank reauthorization 
recommendations to Congress:

    1) Create a dedicated Small- and Medium-Sized Export Financing 
(SMEF) Division within Ex-Im Bank, headed by the Senior Vice President 
for Small Business, and reporting directly to Ex-Im Bank Chairman.
    2) Give the SMEF Division responsibility for, and authority over, 
SME products, processes, and transaction and Ex-Im Bank personnel 
handling them.
    3) Allow Ex-Im Bank to allocate such funds as are necessary to 
operate the SMEF Division successfully.
    4) To assure that the SMEF Division has a clear goal from Congress, 
maintain the current law requirement that the Bank allocate 20 percent 
of its financing dollars to small business. Should the Bank fail to 
achieve this mandate in any Fiscal Year, require the submission to 
Congress of a plan for doing so within the following 30 days, and a 
follow-up report 60 days later on the implementation of the plan. The 
plan should at minimum include the reallocation of funds from Ex-Im 
Bank's administrative budget to the Bank's SMEF Division. As part of 
any such plan, and to assure that Congress does not have to wait until 
the end of the next Fiscal Year to observe the results of the plan, the 
Bank should be required to submit quarterly, rather than annual, 
reports to Congress on the small business percentage of Ex-Im Bank 
financing.
    5) To aid Ex-Im Bank in its willingness to improve medium-term 
financing, give the Bank Congressional authorization to delegate 
medium-term financing authority to commercial banks, subject to final 
Ex-Im Bank approval on each transaction, as with the delegated 
authority that Ex-Im Bank makes available for other types of 
transactions.

SBEA is aware of Ex-Im Bank's concerns about our proposals, 
particularly the proposed SMEF Division.
    We would note that:

    The transition to the new structure need not be abrupt. To 
        minimize disruptions, the Bank could shift one product line at 
        a time, or even one underwriter at a time, into the new 
        structure. And frankly, modest disruptions within 
        underachieving units, in the interest of improved long-term 
        effectiveness, would seem to be an acceptable tradeoff.
    SBEA is fully prepared to meet with Ex-Im Bank's 
        Congressional appropriators, as we have done in the past, to 
        advocate that the Bank be given the funds it needs to carry out 
        the transition and the SME work flow.
    Concerns about any internal ``conflicts of interest'' can 
        be addressed. While EDC, OPIC, and GE Capital do not seem to 
        feel that having both underwriters and business development 
        specialists in the same unit constitutes such a ``conflict of 
        interest,'' if Ex-Im Bank feels strongly about this, the two 
        functions can be separated. The best approach would be to 
        delegate outreach to the commercial banks that utilize Ex-Im 
        Bank's products, in much the same way that SBA uses commercial 
        banks to promote SBA lending. This would at least assure that 
        institutions with a powerful interest in seeing transactions 
        completed and customers return--namely the commercial banks--
        are handling the ``sales pitches.'' Alternatively, outreach 
        could be assigned to the Bank's communications office. What's 
        vital, however, is to maintain SMEF Division's responsibility 
        over--and accountability for--the Bank's core SME products, 
        processes, and transactions.
    There is precedence at the Bank for a more unified approach 
        to customers. Not only has Ex-Im Bank done so with small 
        businesses at various times in the past, but the Bank's 
        Transportation Division--which includes underwriters--is 
        premised on just such a customer focus.

    SBEA is very grateful for the sympathetic hearing that members of 
the House and Senate, as well as their staffs, have given to our views. 
The sincerity of Congress' interest in expanding U.S. exports, 
especially exports by smaller companies, has been heartening to us.
    We believe that both the House and the Senate are off to a good 
start toward getting Ex-Im Bank's charter renewed well before the 
current one expires.
    We look forward to working with Ex-Im Bank and both chambers of 
Congress on the legislation.
    That concludes my remarks. I will be happy to accept any questions 
at this time. 




                                 ______
                                 
              PREPARED STATEMENT OF ROBERT E. SCOTT, Ph.D.
     Director of International Programs, Economic Policy Institute
                             June 20, 2006
    Mr. Chairman, Senator Sarbanes, and members of the Committee, my 
name is Robert Scott and I am a senior international economist for the 
Economic Policy Institute. Thank you for inviting me here today to 
testify on the economic impact procedures of the Export-Import Bank 
(Ex-Im Bank). I recognize the important role played by the bank in 
providing export financing in cases where such financing is unavailable 
to foreign purchasers in commercial markets, or where U.S. firms are 
competing for contracts with suppliers from other countries who have 
access to below-market financing from their home-country governments.
    My remarks today are concerned with two issues. First, whether Ex-
Im Bank is living up to its obligations under existing law to use 
economic impact analysis for certain transactions where the provision 
of Ex-Im Bank financing could cause substantial injury to domestic 
producers. My conclusion is that the bank is not fully meeting its 
obligation under existing law to carry out economic impact analyses and 
utilize that information in its decisionmaking processes.
    Second, the bank's criteria for conducting economic impact analyses 
should be expanded and its procedures improved. First, the bank should 
expand its definition of industries covered within the scope of 
``substantially the same industry.'' Second, the bank's policy of only 
conducting economic impact assessments in cases involving the export of 
capital goods that will be used to expand production capacity is 
excessively narrow. The bank should also do economic impact assessments 
for other goods export contracts that include agreements to transfer 
production technology or formal or informal ``offset agreements'' to 
transfer production of related or unrelated products abroad, or to 
serve as a marketing agent for foreign suppliers in the United States 
in exchange for export sales of goods of any type. Finally, the bank 
should improve the openness and transparency of its economic impact 
analysis process. Congress should also require the bank to conduct 
formal reviews of the aggregated impacts of its financing of exports of 
both capital equipment and contracts involving offset agreements on 
particular industries, and to adopt an adjudicatory process for such 
reviews that would be modeled on anti-dumping and subsidy case hearings 
before the U.S. International Trade Commission.
Ex-Im Bank's interpretation of existing requirements for conducting 
        economic impact analyses
    In fiscal year 2005 the bank provided financing for 3,128 
projects.\1\ The bank issued only six economic analysis notices 
covering only 0.2 percent of the transactions financed in fiscal year 
2005.\2\ Furthermore, there is not a single reference to or discussion 
of any of the bank's economic impact analyses in its 2005 annual 
report. Given the unprecedented size of the U.S. trade deficit, which 
reached $717 billion in 2005,\3\ and congressional concern with the 
economic impact issue it is surprising that the bank has provided so 
little public information on its economic impact analyses, or the 
results of those investigations.
---------------------------------------------------------------------------
    \1\ Export-Import Bank of the United States, ``Annual Report 
2005'', p. 18, http://www.census.gov/foreign-trade/Press-Release/
current_press_release/exh1.pdf. 
    \2\ Export-Import Bank of the United States, ``Economic Impact 
Notices,'' http://www.exim.gov/products/policies/noticeindex.html.
    \3\ Census Bureau, ``FT 900: U.S. Trade in Goods and Services'', 
April 2006, http://www.census.gov/foreign-trade/Press-Release/
current_press_release/exh1.pdf.
---------------------------------------------------------------------------
    The bank has also taken an excessively narrow interpretation of 
industries that could be affected by its export financing. In a case 
described at the subcommittee hearing on March 29. Testimony by, Steven 
R. Appleton of Micron Technology, Inc., about a case in which Ex-Im 
Bank entertained a proposal to provide financing for a Chinese firm, 
the Semiconductor Manufacturing International Company (SMIC) to 
purchase a ``pure-play'' foundry that could be used to manufacture DRAM 
memory chips, and also NAND flash memory chips.\4\ The DRAM market is 
subject to chronic over-capacity and boom-bust cycles. Furthermore, 
Micron was able to demonstrate that the SMIC had excellent access to 
domestic and international capital markets. Hence, there was no 
evidence that this transaction involved a purchaser with inadequate 
access to private financing, nor was there a competing offer from 
another vendor with access to below-market credit from another country. 
This case should never have been considered by the bank. Yet Micron was 
forced to go to considerable expense to intervene and testify before 
Ex-Im Bank's Board in this case. Although this particular contract 
never came to a vote before the Board, it illustrates that the bank is 
failing to use economic impact analysis in the way it was intended by 
the Congress.
---------------------------------------------------------------------------
    \4\ Statement of Steven R. Appleton before the Subcommittee on 
International Trade and Finance of the Committee on Banking, Housing, 
and Urban Affairs of the U.S. Senate, March 29, 2006, p. 3.
---------------------------------------------------------------------------
Expanding the scope of and requirements for economic impact assessments 
        by Ex-Im Bank
    Congress should expand the scope of Ex-Im Bank contracts requiring 
economic impact assessments in at least three areas.
    1. The bank should expand and much more liberally interpret the 
definition of ``substantially the same product.'' Testimony at the 
subcommittee hearing in March provided referred to two clear examples 
where this definition should be much broader. In the SMIC case, the 
applicant alleged that the primary purpose for purchasing the ``pure-
play'' foundry was to make NAND chips. However, since the same 
equipment could be used to make DRAM, the Bank should have also 
considered scenarios in which the plant could be used to make DRAM. 
Given the propensity of Chinese producers to flood the United States 
with exports of all varieties of computer and electronic products, this 
possibility should have been taken seriously by Bank staff in their 
analysis of the proposal.
    The steel industry is another sector where the bank should rarely, 
if ever, finance the expansion of production capacity for basic steel 
products. Basic steel is a highly fungible product. I have served as an 
expert witness for domestic producers of steel products, including 
steel pipe, plate, and flat-rolled products, in numerous antidumping 
and countervailing duty cases at the U.S. International Trade 
Commission over the past 15 years. The global steel industry has 
suffered from a capacity glut for decades, as noted by Thomas M. 
Sneeringer of U.S. Steel Corporation in his testimony before the 
Subcommittee on International Trade and Finance on March 29. The United 
States and other governments have been attempting to negotiate a multi-
lateral agreement to restructure the industry and limit excess capacity 
for more than a decade. Yet producers in Asia, Latin America, and other 
areas have announced plans for massive steel capacity additions over 
the next decade. In particular, the industries in India and China, 
working with government support, plan to double and triple their basic 
steel-making capacity in this period.
    There are anti-dumping orders in place covering the import of steel 
plate, reinforcing bars and hot-rolled sheet from China.\5\ Hot-rolled 
sheet made in China sells for at least $300 per ton less than in the 
United States owing to the market distortions in place there. Since 
China cannot directly export this product to the United States, Chinese 
producers have begun to produce and export massive quantities of steel 
pipe, which is not now subject to antidumping orders, to the United 
States. The vast bulk of the production cost of steel pipe is for hot-
rolled plate. Hence, exports of steel pipe to the United States simply 
embody illegally dumped and subsidized steel plate.\6\ To reiterate, 
Ex-Im Bank should simply not finance the export of any steelmaking 
equipment to China, or other countries presently subject to antidumping 
orders of any basic steel product.
---------------------------------------------------------------------------
    \5\ U.S. International Trade Commission, ``Antidumping and 
Countervailing Duty Orders in Place as of May 3, 2006, by Country'', 
http://info.usitc.gov/oinv/sunset.nsf/269dca91a05d2d878525663c006a6ac3/
96daf5a6c0c5290985256a0a004dee7d/$FILE/orders-ctry-tbl.pdf.
    \6\ The U.S. International Trade Commission recently found in a 
recent ``421 investigation'' that U.S. producers had been injured by a 
surge of imports of steel pipe from China. ``CIRCULAR WELDED NON-ALLOY 
STEEL PIPE FROM CHINA'' Investigation No. TA-421-6 (Publication 3807; 
October 2005).
---------------------------------------------------------------------------
    2. The bank should expand its economic impact assessments' scope to 
include goods other that production equipment for which exporters have 
reached formal or informal agreements with purchasers or their 
respective home-country governments to ``offset'' part or all of the 
value of the export sale with any concession that could affect 
production in the United States. Such agreements are especially common 
in the U.S. aerospace industry. They have included agreements to 
transfer production of components to foreign countries, transfer 
technology for producing like or unrelated products to producers in the 
importer's country, or to market related or unrelated exports from that 
country in the United States. Private firms and public agencies in 
China have frequently required U.S. aerospace exporters to make offset 
agreements in exchange for export sales. Such agreements are also 
extremely common in defense products industries, and many governments 
explicitly require such offset concessions and maintain public offices 
for registering and monitoring offset agreements. In aerospace alone, 
increased competition from foreign producers and offset agreements 
could displace up to 250,000 workers from jobs in aerospace and related 
industries between 1994 and 2013.\7\ Domestic firms applying for Ex-Im 
Bank financing should be required to disclose such agreements to the 
bank. Disclosure of such agreements should automatically trigger an 
economic impact analysis to assess the impact of those agreements on 
domestic firms, workers, and communities.
---------------------------------------------------------------------------
    \7\ Barber, Randy and Robert E. Scott, Jobs on the wing: Trading 
away the future of the U.S. aerospace industry, Washington, D.C.: The 
Economic Policy Institute, 1995. p. 2, http://www.epi.org/content.cfm/
studies_jobsonthewing.
---------------------------------------------------------------------------
    3. Finally, the Bank should improve the openness and transparency 
of its economic impact analysis process. The Bank should issue written 
reports summarizing the findings and decisions made in all of its 
economic impact analyses. These reports should not disclose 
confidential, business proprietary information provided by applicants. 
Their publication would better inform the Congress and affected 
communities of the Bank's actions and the factors considered in its 
decisionmaking process. In addition, the 14-day window for comments on 
economic impact notices should be expanded to 30 days.
     Congress should also require the Bank to conduct formal ex-poste 
reviews of the aggregate economic impacts of its financing of exports 
of both capital equipment and contracts involving offset agreements, 
and that it should adopt an adjudicatory process for such reviews that 
would be modeled on antidumping and subsidy case procedures at the U.S. 
International Trade Commission. This procedure should provide an 
opportunity for representatives of exporters and affected domestic 
parties to assess and comment on both the public and business propriety 
aspects of the contracts being financed by the Bank in particular 
sectors. The Bank should give all parties involved aggregated, ex-poste 
reviews of transactions in an industry due time to review available 
data, file pre-hearing briefs, testify to the Bank's Board and file 
post-hearing briefs. At the completion of this process, the Bank's 
Board should review and, as needed, revise criteria for making loans 
for exports in that sector and release a public report outlining the 
reasons for its findings and summarizing the public data from the cases 
reviewed. The Board should have the option to reject all applications 
for financing exports of products related to import-sensitive 
industries, as well as contracts that unduly damage the competitiveness 
of U.S. producers of related or unrelated products.
    In conclusion, while Ex-Im Bank plays a critical role in supporting 
U.S. export sales, it also needs to give greater attention and weight 
to the possible negative impacts on domestic producers of some of the 
contracts that it is supporting.
    Thank you for your interest. I'd be happy to answer any questions.
  RESPONSE TO WRITTEN QUESTIONS OF SENATOR SARBANES FROM CLAY 
                             LOWERY

Q.1. Please explain the process used to evaluate tied aid 
applications, under the terms of the arrangements agreed to 
between the Department of the Treasury and the Export-Import 
Bank

A.1. Treasury and Ex-Im Bank follow the Tied Aid Principles and 
Procedures that were agreed between the two agencies in 2001.
    The principles state that the United States: (1) will not 
initiate tied aid; (2) will use tied aid selectively and 
purposefully; (3) will use tied aid for negotiating objectives, 
including helping to create a level playing field for all U.S. 
exporters at minimal cost to U.S. taxpayers; (4) will use tied 
aid to counter any instances of untied aid that appear to be de 
facto tied; and (5) will use tied aid in situations that could 
create a long-run trade advantage for foreign exporters, or 
form a threat to long-run U.S. market access. The principles 
also state that credible evidence of a foreign tied aid offer 
is needed, as well as specific information on financing terms, 
before a U.S. tied aid matching offer can be made. Without 
this, the United States could inadvertently initiate tied aid.
    Factors that are weighed in deciding whether to match 
foreign tied aid include: the cost and concessionality level of 
the transaction; whether the matching is likely to displace the 
foreign offer; whether the recipient country is a market 
already spoiled with tied aid, or is a dynamic developing 
market; whether a small business exporter or environmentally 
beneficial equipment is involved in the proposed transaction; 
and any particular patterns of tied aid use by the donor.
    Similarly, the tied aid procedures establish: (1) specific 
time frames within which information will be shared between the 
two agencies; (2) how long agencies have to review information 
(including the final Board document); (3) how long agencies 
have to make both preliminary and final decisions; (4) steps to 
request additional review time, if needed; (5) how long 
agencies have to provide written comments on the transaction; 
and (6) what steps will be taken in the event of a disagreement 
between the two agencies at various levels within each agency, 
including at the most senior level.
    The final step in the procedures, which was added during 
Ex-Im Bank's 2002 reauthorization, mandates referral of the 
transaction to the President if the Secretary of the Treasury 
does not agree with the Ex-Im Bank Chairman. However, Treasury 
and Ex-Im Bank have yet to disagree on War Chest use since the 
2001 principles and procedures were put in place.

Q.2. The 2002 legislation reauthorizing the Charter of the 
Export-Import Bank attempted to end the dispute about control 
of the Tied Aid War Chest by giving the Department of the 
Treasury and the Bank a joint role in formulating principles, a 
process, and standards for the use of tied aid, but also 
stating that ``the final case-by-case decisions on the use of 
the Tied Aid Credit Fund shall be made by the Bank.'' Please 
explain, step-by-step, citing the provisions of the agreements 
between the Treasury and the Bank, how the processes used by 
Treasury and the Bank satisfy the terms of the legislation.

A.2. As described in the answer to Question 1, Ex-Im Bank and 
Treasury jointly prepared the Tied Aid Principles and 
Procedures that were agreed to in 2001. The late Chairman John 
Robson, then-Chairman of Ex-Im Bank and then-Under Secretary of 
the Treasury John Taylor jointly agreed to this document. 
Therefore, a ``joint role'' in formulating principles, a 
process, and standards for the use of tied aid has been assumed 
by each agency.
    While the specific procedures outlined in the 2001 document 
are fairly detailed (see question 1), the bulk of the step-by-
step procedures focus on how Treasury and Ex-Im Bank will 
consult with each other on tied aid cases and identify the 
steps that are required if there is a disagreement between the 
two agencies.
    Although there is consultation at all levels, prior to a 
decision on tied aid, we believe that Ex-Im Bank makes the 
final determination. As called for in the statute, it is the 
responsibility of Treasury to raise this issue to the President 
in the event that Treasury disagrees with Ex-Im Bank's final 
determination. We take the requirements of the statute 
seriously and understand that the burden of proof in such a 
circumstance is clearly on Treasury to show that Ex-Im Bank's 
determination--whether supporting or opposing tied aid use--
should be overturned. The current Ex-Im Bank/Treasury tied aid 
principles and procedures are working well, however, and have 
not produced a single disagreement between the two agencies 
with regard to any final determination on tied aid.

Q.3.  Does the Department of the Treasury oppose the use of 
tied aid in cases that involve competition with exporters 
financed by export credit agencies of countries that are not 
part of the OECD?

A.3.  No. Treasury supports the use of tied aid in cases of 
competition from export credit agencies of non-OECD member 
countries.
    Treasury uses the same underlying market-based principles 
behind the OECD Arrangement to evaluate non-OECD members' tied 
aid offers, with the goal of ensuring a level playing field for 
all U.S. exporters. Treasury fully supports matching non-OECD-
member countries if their financing violates accepted 
international financing rules. Even if a non-OECD-member's 
financing offer is consistent with these rules, Treasury 
supports matching a foreign offer that impacts a U.S. 
exporter's ability to compete effectively in that market.
    It could be more difficult to get information about a non-
OECD member's tied aid offer, such as the financing terms 
necessary to create a matching offer. The U.S. exporter may not 
have complete information, and non-OECD members have no 
obligation to provide such information when they are asked for 
it. Therefore, we would have to look at each case on its 
merits. However, if we learn of a foreign tied aid offer and 
the donor government does not cooperate when we seek 
information, we would likely recommend taking an aggressive 
matching posture as a matter of principle.

Q.4. Your testimony emphasizes that the Department of the 
Treasury must exercise control over the use of tied aid by the 
Export-Import Bank to facilitate Treasury's responsibility at 
the OECD. In what other countries do the national finance 
ministries control use of tied aid by export credit agencies in 
this fashion?

A.4. There are twenty-four * other governments that formally 
participate in the OECD Arrangement on Officially-Supported 
Export Credits. Not all of those governments provide tied aid. 
However, of the OECD countries that do, none of them allows the 
export credit agency alone to decide when to use tied aid. In 
all of these countries, the export credit agency's ``guardian'' 
authority--which is usually the finance ministry, or the aid 
ministry, or perhaps an inter-ministerial committee--has to 
approve the use of concessional financing. The reasons 
typically given for this procedure are to ensure the government 
properly appraises the feasibility, priority, and developmental 
effects of the project, as well as the recipient country's 
credit worthiness, and to ensure that the project complies with 
the OECD Arrangement.
---------------------------------------------------------------------------
     *Australia, Austria, Belgium, Canada, Czech Republic, Denmark, 
Finland, France, Germany, Greece, Ireland, Italy, Japan, Korea, 
Luxembourg, Netherlands, New Zealand, Norway, Portugal, Slovak 
Republic, Spain, Sweden, Switzerland, United Kingdom.
---------------------------------------------------------------------------
                                ------                                


 RESPONSE TO A WRITTEN QUESTION OF SENATOR BAYH FROM JAMES D. 
                           McCLASKEY

Q.1. Mr. McClaskey, in your testimony on June 20, 2006, you 
cited the failure of Ex-Im Bank to approve a recent application 
by Midrex for support of a sale of Midrex products to a Saudi 
Arabian steel facility as an example of problems your company 
had experienced with the Bank. However, earlier this Spring, it 
was represented by Midrex officials that Midrex had withdrawn 
its support for this very same application and denied that it 
was supporting the application only two days before the 
application was to be taken up by the Bank's Board. If, as the 
U.S. exporter that would have benefited from the Bank's 
approval of the application, Midrex withdrew its support, it is 
unclear to me how the company could present this as an example 
of a failure of the Bank's processes. Could you please provide 
an explanation of how the Bank process failed if the U.S. 
exporter did not support the application? If the company did 
not withdraw its support for the application, why did the 
company represent otherwise?

A.1. I appreciate the opportunity to respond to your question. 
First, it is important to clarify for the record that Midrex 
Technologies never filed an application on behalf of its client 
in Saudi Arabia (Hadeed). Rather, it was ANZ Investment Bank, 
London, which is/was the applicant of record. Second, Midrex 
Technologies, Inc. never said that the Ex-Im Bank process 
failed. To the contrary, we stated that the process worked. 
Assuming the ``process'' to which you make reference is the 
economic impact analysis (EIA), it is our position that the 
``process'' functioned as designed because it determined that 
the Hadeed project would result in additional (foreign 
produced) steel capacity which is expected to be in oversupply. 
Pursuant to current EIA guidelines, the denial of the 
application was made. I am confident a second, more thorough 
reading of my testimony will substantiate that I do not suggest 
the process failed. Rather, I challenge the presumption that 
the EIA and its attendant outcome (vis-a-vis Hadeed) actually 
protected the American economy. I say this because the project 
enjoys strong European ECA support which requires the sourcing 
of critical equipment from abroad. All the EIA process 
accomplished was to pit one American worker against another. 
Neither worker benefits from this result because (1) the Ex-Im 
Bank denial did nothing to protect the U.S. producer because 
the project is proceeding and will ultimately produce the 
product expected to be in oversupply--thus injuring that 
segment of the U.S. market which the EIA was trying to protect, 
and (2) the U.S. exporter, while successful to get the order 
without Ex-Im support, has the option to procure from global 
sources and will likely do so--thus injuring American 
manufacturers with loss of export opportunities.
    It is also very interesting to note that this is not the 
first time this question has been posed to us, and in fact, the 
same question was posed to us by a representative of US Steel 
at the committee hearing break. He raised this very same 
challenge directly to Midrex during the break at the hearing 
and unfortunately, we didn't have time to refute his remarks 
since the committee was reconvening. The fundamental basis of 
this challenge, if you refer to the written testimony, is 
incorrect and we really didn't appreciate his pointed remarks.
    1. In summary, Midrex Technologies, Inc. made no 
application to Ex-Im Bank on behalf of Hadeed. Rather as 
previously herein noted it was ANZ Investment Bank which made 
the application on behalf of our Saudi client (SABIC/Hadeed); 
Midrex Technologies Inc. never even received a copy of the 
application.
    2. You will see after a second, more thorough reading of my 
testimony in its entirety that the ANZ Bank application for the 
Saudi Project was only used as a means of leading up to our 
real point, which unfortunately, I didn't get to make. 
Specifically, what needs study by you and others is the 
Economic Impact Assessment since it is being used solely as a 
``protectionist tool'' for one segment of the U. S. economy 
while injuring other segments. The purpose of Ex-Im Bank should 
be to support all exporters. There are other government 
agencies whose mandate is to protect the U.S. Economy and U.S. 
producers when the need is legitimate.
    3. Midrex Technologies, Inc. recommended on several 
occasions to ANZ Investment Bank that they withdraw the 
application because we were told by Ex-Im officials that the 
application stood little chance of being approved, but the 
client decided to pursue it nevertheless because of the desire 
to establish a relationship with Ex-Im Bank, which would result 
in future U.S. exports. Please refer to the emails below as 
reference to clearly show our position. Note: Midrex never 
changed its position and I suggest if you or anyone else on the 
committee has any more questions concerning our position, we 
meet face-to-face to set the record straight.
    4. Just for general information, we tried on at least two 
occasions since the committee hearing to ask the Steel Lobby 
members to meet with us so we could explain ourselves and to 
this date, they have not yet responded to our offer.
    5. In closing and perhaps most important, more stringent 
economic impact requirements will only serve to injure our key 
American suppliers--companies such as Dresser Industries, Roots 
Division in Connersville, Indiana, which is one of our biggest 
suppliers. When you protect one segment of the U.S. economy at 
the expense of another--my question to you, Senator Bayh--must 
it always be to the detriment of the thousands of American 
small businesses which can't afford the high-priced lobbyist 
who seem to be so influential in today's Washington, D.C.? One 
final comment for clarity, Midrex is in communication with 
other ECAs: the result, we will (unfortunately) source millions 
of dollars outside the United States simply because our own ECA 
is of absolutely no benefit to us in cases involving neutral or 
negative EIA findings. Perhaps you should change the EIA 
concept to one of achieving the least amount of harm to the 
U.S. economy, because, in our opinion, the current EIA concept 
only seems to result in the most harm.

Reference: Email Communication:

08/Aug/05 --W. Trotter (Midrex) to J. Miller (V.P. at Ex-Im 
Bank)

    Jeffrey:

    I spoke today with Simon Lee (ANZ) regarding the Hadeed 
application. I suggested in view of the stringent opposition 
from AISI as well as US Steel, it would be better if ANZ would 
consider withdrawing the application. I told Simon it is my 
considered opinion the application stands no chance of 
obtaining Board approval (again, my opinion only). Simon would 
like to discuss this a bit more in detail with Ex-Im and I 
suggested he contact you in Barbara's absence. I believe she is 
on vacation until August 22.
    Please contact me should you need additional information.

    Regards,

    Wayne Trotter

12/Oct/05--Simon Lee (ANZ) to B. Marcum (Ex-Im Bank)

    Bob:

    As discussed earlier, Hadeed have now reverted to us and 
they have decided that they do not wish us to withdraw the 
application; instead they wish the application to proceed such 
that a formal decision is made and communicated by U.S. Ex-Im. 
Obviously they are hopeful that the application will ultimately 
be approved, but they recognise that this may be unlikely.

    I would be grateful therefore if you would now take the 
application forward. It would be helpful if you could let me 
know the likely time scale as to when it will go to the U.S. 
Ex-Im Board.

    Apologies that it has taken some while to revert on this 
issue but this was due to a combination of the end of the long 
summer break in Saudi and subsequent travel commitments.

    Please let me know if there is any further information or 
any other assistance we can provide at this stage.

    Regards,

    Simon
