International Trade: Competitors' Tied Aid Practices Affect U.S. Exports
(Letter Report, 05/25/94, GAO/GGD-94-81).

Tied aid refers to foreign assistance that is linked to the purchase of
exports from the country extending the assistance. Tied aid can consist
of foreign aid grants alone, grants mixed with commercial financing or
official export credits, or low-interest loans.  Competitors' tied aid
practices can put U.S. exporters at a competitive disadvantage in
bidding on overseas projects. GAO estimates the potential loss of U.S.
capital goods exports due to these tied aid practices to be as high as
$1.8 billion annually. Although most countries provide tied aid,
significant differences exist between U.S. tied aid programs and those
of its competitors: most U.S. tied aid is linked to programs meeting
basic human needs, such as education, health, and food aid, while other
countries' tied aid programs focus on capital projects.  Donor countries
obtain greater economic benefits from tying aid to capital projects
because they usually involve importing large quantities of
high-value-added goods.  Capital projects also involve follow-on sales
in later years.  This report discusses (1) the amounts of tied aid
provided by the United States and six of its competitors, (2) the types
of tied aid programs of each country, (3) the potential impact on U.S.
exports of U.S. competitors' tied aid practices, (4) the Organization
for Economic Cooperation and Development's 1992 agreement on tied aid,
and (5) the Trade Promotion Coordinating Committee's new Tied Aid
Capital Projects Fund.  GAO summarized this report in testimony before
Congress; see: International Trade: Combating U.S. Competitors' Tied Aid
Practices, by Allan I. Mendelowitz, Director of International Trade,
Finance, and Competitiveness Issues, before the Subcommittee on Economic
Policy, Trade, and the Environment, House Committee on Foreign Affairs.
GAO/T-GGD-94-156, May 25, 1994 (16 pages).

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-94-81
     TITLE:  International Trade: Competitors' Tied Aid Practices Affect 
             U.S. Exports
      DATE:  05/25/94
   SUBJECT:  International trade
             International economic relations
             Foreign governments
             Foreign trade policies
             Interagency relations
             Foreign economic assistance
             Comparative analysis
             Exporting
             Economic development
             Developing countries
IDENTIFIER:  Canada
             France
             Germany
             Italy
             Japan
             United Kingdom
             Tied Aid Capital Projects Fund
             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Economic Policy, Trade and
Environment, Committee on Foreign Affairs, House of Representatives

May 1994

INTERNATIONAL TRADE - COMPETITORS'
TIED AID PRACTICES AFFECT U.S. 
EXPORTS

GAO/GGD-94-81

International Trade


Abbreviations
=============================================================== ABBREV

  AID - Agency for International Development
  Eximbank - The U.S.  Export-Import Bank
  OECD - Organization for Economic Cooperation and Development
  SDR - special drawing rights
  TDA - Trade and Development Agency
  TPCC - Trade Promotion Coordinating Committee
  U.N.  - United Nations

Letter
=============================================================== LETTER


B-256439

May 25, 1994

The Honorable Sam Gejdenson
Chairman, Subcommittee on Economic Policy,
 Trade and Environment
Committee on Foreign Affairs
House of Representatives

Dear Mr.  Gejdenson: 

As you requested, we reviewed the tied aid practices of the United
States and its major competitors.  "Tied aid" refers to foreign
assistance that is linked to the purchase of exports from the country
extending the assistance.  Specifically, we examined (1) the amounts
of tied aid provided by the United States and six of its competitors,
given the most recent data;\1 (2) the types of tied aid programs of
each country; (3) the potential impact on U.S.  exports of U.S. 
competitors' tied aid practices; (4) the Organization for Economic
Cooperation and Development's (OECD)\2 1992 agreement on tied aid;
and (5) the Trade Promotion Coordinating Committee's (TPCC)\3 new
Tied Aid Capital Projects Fund. 


--------------------
\1 The six are Canada, France, Germany, Italy, Japan, and the United
Kingdom.  We reviewed data on tied aid commitments from 1987-90.  The
first year that tied aid commitment data were reported in the current
format was 1987, and 1990 is the most recent year for which total
commitment data were available. 

\2 OECD is a forum for monitoring economic trends and coordinating
economic policy among its 24 member countries, which include the
economically developed, free-market democracies of North America,
Western Europe, and the Pacific. 

\3 The Trade Promotion Coordinating Committee is an interagency
committee created by the President in 1990 to address the
government's decentralized approach to export promotion. 


   BACKGROUND
------------------------------------------------------------ Letter :1

Our competitors' tied aid practices are of concern to U.S. 
policymakers because U.S.  exporters can be put at a competitive
disadvantage in bidding on overseas projects when competitor
countries make tied aid available.  Tied aid can consist of (1)
foreign aid grants alone, (2) grants mixed with commercial financing
or official export credits ("mixed credits"), or (3) concessional
(low interest rate) loans.  (See fig.  I for the countries that
received the largest nominal dollar amount of tied aid offers in
1993.)

   Figure 1:  Countries That
   Received the Seven Largest
   Current Dollar Amounts of Tied
   Aid Offers From All
   Participants in the OECD's 1992
   Tied Aid Agreement, 1993

   (See figure in printed
   edition.)

   Source:  U.S.  Export-Import
   Bank.

   (See figure in printed
   edition.)

U.S.  policy has generally been to discourage--primarily through
international negotiations within OECD--the use of trade-distorting
tied aid by the United States or its competitors.  When tied aid is
offered, trade distortions may occur when contract awards are based
on the availability of such subsidies, instead of on the price and
quality of the goods or services being exported.  A 1992 OECD
agreement\4 strengthens previously established guidelines intended to
minimize the trade distortions that can result from the use of tied
aid.  The agreement directs such aid toward projects that are not
inherently "commercially viable" (i.e., able to support financing on
market-related terms).  Under the terms of the OECD's tied aid
agreement, a participating member country planning to use tied aid
must first notify OECD and other agreement participants.  Other
member countries may challenge the notifying country's tied aid offer
if they believe it does not meet OECD guidelines. 

The agreement also requires that participating members notify OECD of
"untied" and "partially untied" aid offers, which member countries
may also challenge if they believe such offers are actually tied. 
Untied aid consists of loans or grants that are freely and fully
available to finance procurement from substantially all developing
countries and from OECD countries.  Partially untied aid consists of
loans or grants that are, in effect, tied to procurement of goods and
services from the donor country and from a restricted number of other
countries, including substantially all developing countries. 

Before 1973, a large proportion of U.S.  bilateral\5 aid was aimed at
capital (such as transportation, communications, and energy)
projects.  In 1973 however, the Foreign Assistance Act of 1961 (P.L. 
87-194) was revised, and became the Foreign Assistance Act of 1973
(P.L.  93-189), reflecting a new U.S.  policy on foreign assistance. 
The 1973 act directed that bilateral development aid should focus on
the critical problems affecting the majority of the people in the
developing countries:  food production; rural development and
nutrition; population planning and health; and education, public
administration, and human resource development.  One of the reasons
for this policy change was that, unlike the U.S.' successful
experience with the European-oriented Marshall Plan, 1948-51, capital
projects in developing countries were observed to be wasteful unless
skilled human resources existed to operate and maintain them. 

The U.S.  economic and political environment in which the foreign
assistance policy of 1973 was made differed significantly from
current conditions.  For example, in the early 1970s, the United
States did not face the trade deficits that now exist.  Also, the end
of the Cold War has raised questions for U.S.  foreign aid policy in
terms of its importance as an element of U.S.  national security
policy. 


--------------------
\4 The 1992 OECD tied aid agreement is sometimes referred to as "the
Helsinki package" and builds on previously established guidelines
contained in the 1987 and 1990 versions of the "Arrangement on
Guidelines for Officially Supported Export Credits."

\5 Foreign aid is generally categorized as either "bilateral" or
"multilateral." Bilateral aid is provided directly from donors to
recipient countries.  Multilateral aid is funneled to recipient
countries through international institutions such as the United
Nations and the World Bank. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :2

The total tied aid commitments\6 of the seven countries we reviewed
generally increased between 1987 and 1990, according to the most
recently available data.  However, tied aid averaged 45 percent of
the seven countries' bilateral aid in both 1987 and 1990.  As a
percentage of bilateral aid averaged over 4 years (1987-90), Italy
provided the highest share of tied aid (approximately 86 percent),
Japan provided the lowest (approximately 15 percent), and the United
States provided the second lowest (approximately 36 percent). 

The U.S.  Export-Import Bank (Eximbank) reports that the amounts of
notifications\7 to OECD of tied aid have decreased in 1993, while the
amounts of notifications of untied aid have increased significantly. 
In 1993, France provided the highest amount of tied aid offers ($1.2
billion), Italy provided the lowest ($42 million), and the United
States provided the third highest ($900 million).  Despite these
trends, there is still a concern because some sources indicate that
some so-called untied aid may be implicitly or actually tied. 

A major difference between U.S.  tied aid programs and those of the
six other countries we reviewed is program focus.  While most U.S. 
tied aid is devoted to programs geared toward "basic human needs"
(education, health, and food aid), other countries' tied aid programs
focus on capital projects.  There are generally thought to be greater
economic benefits to the donor country from tying aid to capital
projects than to basic human needs programs because capital projects
usually involve importation of large amounts of high-value-added
goods.  These projects may also form the basis for follow-on sales in
later years.  On average, for 1988-91, the U.S.  competitors in our
review provided between 45 percent and 91 percent of their tied aid
for capital projects, while the United States provided approximately
17 percent of its tied aid for capital projects.  Compared with many
of its competitors, the United States does not have the type of
interagency integration or business-government cooperation that
facilitates identifying capital projects for U.S.  firms to bid on in
the early stages of such projects. 

To assess potential U.S.  export losses due to competitors' tied aid
practices, the Eximbank used a market share analysis that showed
potential annual export losses to be about $500 million to $1.5
billion, based on 1984-87 data.  Updating the Eximbank's market share
analysis by using more current data, we estimated that potential U.S. 
export losses could be as high as $1.8 billion a year, assuming the
projects in question would be undertaken without tied aid.  However,
some studies agree that the most important losses to the United
States are in difficult-to-measure missed opportunities--that is, the
failure of U.S.  businesses to establish themselves in high-growth
developing country markets. 

The U.S.' policy has been to use the Eximbank's "war chest" (a fund
for responding to other countries' tied aid practices) primarily to
police the 1992 OECD tied aid agreement.  The agreement does not
attempt to eliminate tied aid, but to minimize the trade distortions
that can arise from the use of tied aid.  However, some business and
U.S.  government representatives have pointed out that there are
limitations in the OECD's tied aid agreement, such as the presence of
an "escape clause" that allows countries to proceed with a tied aid
offer, despite objections by other participants, if that country
claims that the project is in its national interest.  In addition,
there are no explicit enforcement mechanisms in the agreement, and
data are not verified or confirmed.  Further, even if a competitor's
tied aid offer conforms to the agreement, the offer may still hurt
U.S.  economic interests.  Future commitment data will be necessary
to determine whether the Eximbank's use of the war chest and the 1992
OECD agreement have resulted in lower levels of tied aid. 

Based on our review of U.S.  and competitors' tied aid practices, we
believe a credible U.S.  policy to combat competitors'
trade-distorting tied aid should include (1) sufficient funds to
counter competitors' tied aid offers and (2) an active policy to
assure U.S.  firms that the U.S.  government is willing to counter
competitors' tied aid offers.  The administration has made efforts
toward meeting these criteria.  In conjunction with the release of
TPCC's September 1993 plan to guide federal export promotion
programs, the administration proposed funding a new $150-million Tied
Aid Capital Projects Fund to finance major capital projects overseas. 
Further, in February 1994, the Eximbank introduced a set of draft
policies and procedures for using the new fund, signaling a more
proactive approach toward countering competitors' tied aid offers. 


--------------------
\6 "Commitments" represent actual tied aid funds committed by a donor
country to a particular project in a recipient country. 

\7 "Notifications" represent tied aid offers reported to OECD, some
of which never become commitments.  Although notifications of offers
are less precise than commitment data because they are reported in
ranges, U.S.  officials monitor notifications of offers primarily to
determine if any offers constitute potential trade distortions. 
Notification data are available through 1993, but actual commitment
data are available only through 1990. 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

To determine the amounts of tied aid provided by the United States
and six of its competitors, we reviewed OECD-published statistics on
tied aid commitments (as well as data on partially untied and untied
aid commitments) from 1987 to 1990.  The most recent year for which
OECD had complete tied aid commitment data was 1990.  In addition, we
reviewed OECD data on notifications of tied, partially untied, and
untied aid offers for 1989-93, which we obtained from the Eximbank. 
Eximbank officials believed that we should focus more on notification
data.  Although notification data are more current, they are less
precise because notification data are reported in ranges (instead of
according to the specific value of the projects, as with commitment
data).  They also only represent tied aid offers and may never
develop into actual commitments.  We also reviewed studies and talked
to U.S.  agency officials about untied aid and informal aid-tying
practices. 

In reviewing the data, we looked specifically at trends over time,
differences between countries, and the mix of tied versus untied aid. 
We conferred with OECD and Eximbank officials to ensure that we
interpreted commitment and notification data correctly.  Although
problems exist with the consistency, timeliness, and accuracy of OECD
data, they are the only available data on tied aid and are widely
used for comparisons among countries and for looking at trends. 

To understand the tied aid programs of the seven countries we looked
at, we reviewed numerous studies and reports on the subject.  In
addition, we interviewed OECD officials, pertinent officials of
foreign governments, officials of a large association representing
U.S.  exporters, and officials at the U.S.  Department of Commerce
and the three U.S.  agencies involved with tied aid programs or
policy--the Agency for International Development (AID), the Eximbank,
and the U.S.  Treasury Department. 

To estimate the potential benefits of reduced tied aid activity by
donor countries, we updated a market share analysis that the Eximbank
performed for its 1989 report to Congress on tied aid.\8 The Eximbank
study was based on 1984-87 data.  For our estimate, we used OECD tied
aid commitment data for 1989-91\9 and United Nations (U.N.) trade
data for regional/market shares.  We replicated the Eximbank's
methodology, based on interviews with Eximbank officials involved in
the study (see app.  I). 

We reviewed the OECD tied aid agreement to determine its strengths
and weaknesses.  Further, we spoke to Eximbank and Treasury officials
about the agreement and the U.S.  response to the agreement.  We also
reviewed reports and journal articles on the agreement and spoke to
U.S.  exporters and representatives of U.S.  trade groups to learn of
their views on the agreement and the U.S.  response to the agreement. 
In addition, we examined the Eximbank's use of the war chest. 

To learn about the administration's plans for a new approach to tied
aid, we reviewed TPCC and agency reports, including an Eximbank
discussion draft on implementing the new Tied Aid Capital Projects
Fund.  We also discussed the new procedures for using the new fund
with Eximbank officials. 

We did not attempt to verify the conclusions contained in the reports
and studies we examined.  We discussed a draft of this report in an
exit meeting with the Eximbank's Special Assistant to the Senior Vice
President on February 24, 1994, and had follow-up discussions on
March 2, and March 4, 1994.  We also discussed the relevant contents
of this report with program officials from the Eximbank and Treasury
and made some technical changes based upon their review of a draft of
this report. 

We did our work between February 1993 and February 1994 in accordance
with generally accepted government auditing standards. 


--------------------
\8 Report to the U.S.  Congress on Tied Aid Credit Practices, the
Export-Import Bank of the United States (Washington, D.C.:  Apr. 
1989). 

\9 Although OECD had not yet published commitment data for 1991, we
were able to obtain from OECD 1991 commitment data for specific
countries and sectors. 


   THE AMOUNTS OF TIED AID
   PROVIDED BY THE UNITED STATES
   AND ITS MAJOR COMPETITORS
------------------------------------------------------------ Letter :4

The aggregate tied aid commitments of the seven countries we reviewed
increased approximately 71 percent between 1987 and 1990.  The
aggregate amount of tied aid provided by the countries we reviewed
grew from $8.9 billion to $15.5 billion between 1987 and 1988, but
remained fairly level in 1989 ($15.2 billion) and 1990 ($15.2
billion). 

Table 1 shows the seven countries' reported tied, partially untied,
and untied bilateral aid as a percent of their total bilateral aid
for the years 1987 through 1990.  Although the OECD data contain some
inaccuracies, they are useful for making comparisons among countries
and over time. 



                              Table 1
              
                The Tying Status of Seven Countries'
                       Bilateral Aid, 1987-90


                                                   Total bilateral
                           Partially                         aid\d
Countries         Tied\a    untied\b    Untied\c   ($ in millions)
------------  ----------  ----------  ----------  ----------------
==================================================================
1987
Canada                NA          NA          NA                NA
France               45%          4%         51%            $5,311
Germany               42           0          58             3,701
Italy                 81           0          19             1,855
Japan                 15          24          61             7,129
United                76           0          24             1,078
 Kingdom
United                21          46          33             7,413
 States
==================================================================
Average\e             34          20          46                --
==================================================================
1988
Canada                56           6          38             1,768
France                45           4          51             6,177
Germany               45           0          55             4,775
Italy                 88           0          12             2,959
Japan                 13          14          73            12,057
United                83           0          17             1,610
 Kingdom
United                54          20          26             7,423
 States
==================================================================
Average\e             42          10          48                --
==================================================================
1989
Canada                54           4          41             1,691
France                48           4          48             6,968
Germany               66           0          34             4,469
Italy                 91           0           9             2,222
Japan                 18           4          78             7,602
United                76           0          24             1,659
 Kingdom
United                45          20          35             7,310
 States
==================================================================
Average\e             47           7          46                --
1990
Canada                43          18          39            $1,628
France\f              49           4          47             8,061
Germany               66           0          34             4,469
Italy                 83           0          17             1,976
Japan\f               15           3          82            10,024
United                NA          NA          NA                NA
 Kingdom\f
United                23           8          69            19,872
 States\f
==================================================================
Average\e             33           5          61                --
------------------------------------------------------------------
Legend

NA = Not available
0 = Nil or negligible

Note:  Bilateral aid commitments exclude administrative costs. 

\a Tied aid is defined as loans or grants that are either in effect
tied to procurement of goods and services from the donor country or
that are subject to procurement modalities implying limited
geographic procurement eligibility. 

\b Partially untied aid is defined as loans or grants that are in
effect tied to procurement of goods and services from the donor
country or from a restricted number of countries that must include
substantially all developing countries. 

\c Untied aid is defined as loans or grants that are freely and fully
available to finance procurement from substantially all developing
countries and OECD countries.  Funds provided to finance the
recipient's local costs are also defined as untied. 

\d All the total amounts are reported by OECD in current U.S. 
dollars.  However, OECD converted the statistics for other nations to
U.S.  dollars using only 1990 exchange rates.  This conversion makes
exact cross-country and cross-year comparisons problematic. 

\e Average is weighted by countries' shares of total bilateral aid. 

\f For 1990, untied aid data include forgiveness of nonaid debt. 

Source:  OECD. 


      TOTAL TIED AID COMMITMENTS
      PROVIDED BY THE UNITED
      STATES AND ITS COMPETITORS
      INCREASED, 1987-90
---------------------------------------------------------- Letter :4.1

Total commitments of bilateral tied aid funding from the seven
countries we reviewed increased from approximately $8.9 billion in
1987 to approximately $15.2 billion in 1990.\10 Tied aid as an
average percentage of the seven countries' bilateral aid ranged from
33 percent to 47 percent over the 4-year period.  On average over the
4-year period, Italy provided the highest share of tied aid as a
percentage of its bilateral aid--approximately 86 percent--and Japan
provided the smallest share of tied aid as a percentage of its
bilateral aid--approximately 15 percent.  The United States tied
about 32 percent of its bilateral aid on average for the period, the
second lowest of the seven countries we reviewed.\11


--------------------
\10 Although there are some instances of multilateral tied aid, most
tied aid is bilateral.  Therefore, we deal only with bilateral tied
aid in this report. 

\11 Averages are weighted by countries' shares of total bilateral
aid. 


      TOTAL TIED AID OFFERS
      PROVIDED BY THE UNITED
      STATES AND ITS COMPETITORS
      DECREASED IN 1993
---------------------------------------------------------- Letter :4.2

According to the Eximbank, 1993 notifications to OECD of tied aid
offers decreased significantly, signaling a potential reduction in
tied aid activity.  In 1993, France provided the highest amount of
tied aid offers ($1.2 billion), and Italy provided the lowest amount
of tied aid offers ($42 million) of the seven countries we reviewed. 
The United States provided the third highest amount of such offers
($900 million).  However, the overall decline in tied aid offers was
accompanied by an increase in untied aid offers in 1993, and a number
of sources are concerned that some so-called untied aid may be
implicitly or actually tied. 


      PARTIALLY UNTIED AID GIVEN
      BY FEW COUNTRIES
---------------------------------------------------------- Letter :4.3

For the period 1987 to 1990, the average percentage of partially
untied aid for the seven countries we reviewed was relatively small
(11 percent or less).  Canada, France, Japan, and the United States
were the only countries in our review that provided any partially
untied aid.  (See table 1.) Although the United States reports
partially untied aid separately, as required by OECD, U.S.  trade
officials generally consider partially untied aid to be implicitly
tied in most cases because developing countries cannot compete with
large OECD countries in winning contracts. 


      UNTIED AID HAS INCREASED
---------------------------------------------------------- Letter :4.4

Total untied bilateral aid commitments from the seven countries we
reviewed increased sharply, from $12.3 billion in 1987 to $28.3
billion in 1990.  For 1990, however, the majority of the untied aid
reported by the United States, and some of the untied aid reported by
other countries, was debt forgiveness. 

A number of U.S.  trade officials, exporters, and experts in the
field have expressed concern that some of the untied aid being
reported, particularly by the Japanese, could be implicitly or
actually tied.  These concerns are important because the decline in
notifications of tied aid offers is accompanied by a substantial
increase in notifications of untied aid offers, based on the
Eximbank's review of notifications for 1993.  OECD is currently
studying how member countries report untied aid. 

Studies indicate that there are ways that donor countries can
implicitly tie their aid and still meet OECD criteria for untied aid. 
One way is through funding feasibility studies, which determine the
technical, economic, and financial viability of a project.  For
example, the United States might fund a feasibility study on the
premise that if a U.S.  firm performs the feasibility study, other
U.S.  firms will be in a more competitive position to win
design/engineering, and procurement and/or construction contracts,
and thus generate U.S.  exports. 

However, while the United States performs feasibility studies through
the Trade and Development Agency (TDA), the TDA's budget is limited
to $40 million, compared with the Japanese budget of $200 million for
feasibility studies.\12 Various reports allege that the close
relationship between Japanese consulting and construction firms, and
the Japanese consulting firms' natural familiarity with Japanese
standards and products, lead the consulting firms performing
feasibility studies to favor the selection of Japanese products and
construction firms.  One such study indicates that bidding for
feasibility studies funded by Japanese bilateral aid is virtually
"closed" to non-Japanese firms.\13 According to the study, only one
non-Japanese firm, a U.S.  consulting firm, was allowed to
subcontract with a Japanese consulting firm in 1991 to prepare a
feasibility study.  The study suggests that even though Japan may
report its aid as untied because the construction part of the project
is untied, the feasibility study, or design phase, is often tied. 
Thus, the entire project may be implicitly tied. 

Another way that aid can be implicitly tied--and of greater concern
to some U.S.  officials than feasibility studies--is through joint
ventures between contractors from a developing country and a donor
country.  For example, while a donor country may report a project as
officially untied because a developing country's contractor was
awarded the contract, the developing country's contractor could have
a joint venture with a contractor in the donor country.  Often the
contractor from the donor country is the controlling partner of the
joint venture and will subsequently benefit through increased
exports. 

Some studies point out that geographical proximity or historical ties
between a donor country and a recipient country may also lead to
informal tying.  Japan provides most of its aid to Asian countries,
while some European donors direct much of their aid to their former
colonies in Africa.\14 For example, approximately half of Japan's
untied aid in 1993 was offered to four Asian countries:  China,
India,Indonesia, and Vietnam.  In turn, the recipient countries may
be more likely to choose contractors from donor countries with which
they have some type of historical or geographical relationship. 

It is difficult to determine the degree to which implicit tying
occurs and to measure the actual extent of its effects.  Some studies
examining Japan's tied aid practices suggest a high degree of
implicitly tied aid.  However, a recent U.S.  State Department study
of Japanese foreign aid concluded that evidence of Japan implicitly
tying its aid is "incomplete and often purely anecdotal."\15 We have
not attempted to verify the results of any of the studies we
reviewed.  U.S.  officials told us that several U.S.  firms have made
significant progress in obtaining early information on projects
funded by the government of Japan and that these same firms have
lobbied U.S.  officials to "press the aid-recipient governments to
award procurement to U.S.  firms."


--------------------
\12 Although the amounts spent on feasibility studies are relatively
small, such studies can lead to contracts for follow-on work, such as
architectural and engineering design, project management during the
construction phase, or work on unrelated projects. 

\13 Margee Ensign, Doing Good or Doing Well?, (New York:  Columbia
University Press, 1992). 

\14 There is relatively little trade-distorting European aid for
capital projects in subsaharan Africa. 

\15 Japan's Foreign Aid:  Program Trends and U.S.  Business
Opportunities, U.S.  Department of State (Washington, D.C.:  1993). 


   TIED AID PROGRAMS DIFFER AMONG
   DONOR COUNTRIES
------------------------------------------------------------ Letter :5

There are some major differences among the tied aid programs of the
countries we reviewed, including differences in program focus and
structure--the degree of trade and aid financing integration and the
amount of cooperation between business and government.  Often, these
differences in countries' tied aid programs stem from philosophical
differences in their approaches to development assistance. 

Compared with many of its competitors, the United States does not
have very strong integration of agency functions or
business-government cooperation.  Such integration and cooperation
help many competitor countries identify opportunities for its
businesses to bid on capital projects in the early stages.  Our
October 1993 report on TDA stated that most of the U.S.' competitors
use a more integrated organizational approach to enhance the
commercial benefits derived from their projects.\16


--------------------
\16 See U.S.  Trade and Development Agency:  Limitations Exist in its
Ability to Help Generate U.S.  Exports (GAO/GGD-94-9, Oct.  20,
1993). 


      PROGRAM FOCUS:  CAPITAL
      PROJECTS VERSUS BASIC HUMAN
      NEEDS
---------------------------------------------------------- Letter :5.1

Many of the U.S.' major competitors focus their tied aid programs on
capital-intensive infrastructure projects, particularly in such
sectors as transportation, communications, and energy.  In fact, the
U.S.' competitors in our review provided between 45 percent and 91
percent of their tied aid for capital projects, on average, for
1988-91, whereas the United States provided about 17 percent of its
tied aid for capital projects (see table 2).  Studies suggest that
there are greater economic benefits to the donor country from tying
aid to capital projects than to "basic human needs programs" because
capital projects typically require importation of large amounts of
high-value-added goods such as energy generation and
telecommunications equipment.  Further, these projects can result in
additional sales of maintenance and replacement parts, and market
entry opportunities, in the recipient country.  Some countries view a
focus on capital projects as a legitimate form of development
assistance. 



                           Table 2
           
           Seven Countries' Percentages of Tied Aid
           Commitments for Capital Project Sectors,
                           1988-91

                                                    Tied aid
                                             commitments (4-
Donor country                                  year average)
----------------------------------------  ------------------
Canada                                                   45%
France                                                    73
Germany                                                   91
Italy                                                     60
Japan                                                     76
United Kingdom                                            78
United States                                             17
------------------------------------------------------------
Note:  Unspecified tied aid commitments for commodities and capital
goods are included in this percentage. 

Source:  OECD. 

U.S.  tied aid is primarily focused on non-project-oriented programs
geared toward "basic human needs" such as education, health, and food
aid.  This type of tied aid is funded primarily by AID.  From 1961 to
the early 1970s, AID devoted a significant portion of its resources
to capital projects.  In the early 1970s, however, AID's focus was
shifted from "capital-goods-intensive infrastructure" projects to
basic human needs programs.  The 1973 revision of the 1961 Foreign
Assistance Act required AID to focus its resources on smaller-scale
projects such as agriculture production and improved health/education
programs.  However, the U.S.' major competitors continued to fund
telecommunications, energy, and transportation projects in the
developing world, a practice that many foreign governments consider a
reasonable method by which to support economic development. 

Increasingly, AID is also funding various technical assistance
programs (consulting services), with the funds "tied" to U.S. 
services.  U.S.  officials pointed out that while capital project aid
would support a broad base of U.S.  manufacturing industries, basic
human needs aid and technical assistance aid primarily support
private voluntary organizations and consultants. 


      PROGRAM STRUCTURE: 
      INTEGRATION OF AID AND
      EXPORT FINANCING
---------------------------------------------------------- Letter :5.2

Most U.S.  competitors integrate their aid and export financing
programs to a greater extent than does the United States.  For
example, France--widely recognized as the originator of mixed
credits--lacks a clear demarcation between the domains of aid and
export finance.  Of the seven countries we reviewed, only Japan and
the United States did not greatly involve the export financing arms
of their governments with the tied aid provided by their respective
development ministries or agencies. 


      SOME U.S.  COMPETITORS HAVE
      STRONGER BUSINESS-GOVERNMENT
      COOPERATION IN INITIATING
      CAPITAL PROJECTS
---------------------------------------------------------- Letter :5.3

In some of the countries we reviewed, stronger business-government
cooperation exists than in the United States, particularly when it
comes to setting up capital projects for economic development. 
Japan's administrative practices relating to launching capital
projects serve as an example.  All Japanese aid in the form of
capital projects must be requested by the recipient country.  Japan
has a relatively limited field presence in developing countries. 
However, it has had a steadily growing budget for development
assistance.  This circumstance encourages the Japanese government to
rely on the Japanese private sector to identify potential capital aid
projects.  The private sector knows what type of projects will be
acceptable to the aid bureaucracy in Japan and may influence a
recipient's request for Japanese development assistance.  Japanese
consulting companies have strong ties and networks in the developing
countries, and studies suggest they are often dependent on
aid-related projects for much of their business.  For example, one of
Japan's largest consulting companies depends on Japanese government
aid for about 30 percent of its business, according to one study on
Japan's aid practices.\17 Similarly, French capital projects are
mainly identified by private French firms that go into a country,
target a potential project, and then lobby the recipient's government
to formally request funding from the French government. 

In contrast, the U.S.  government maintains a large field presence
(primarily AID staff) to manage various basic human needs and
technical assistance projects.  However, according to U.S. 
officials, the function of the staff does not include the initiation
of development projects involving the commercial participation of
U.S.  capital goods exporters. 


--------------------
\17 Doing Good or Doing Well? 


   IMPACT ON U.S.  EXPORTS OF
   COMPETITORS' TIED AID PRACTICES
   HARD TO ISOLATE
------------------------------------------------------------ Letter :6

It is difficult to isolate the effect of other countries' tied aid
practices on U.S.  exports, partially because of the difficulty of
determining whether exports associated with tied aid would have
occurred even without the presence of tied aid.  Nonetheless, there
have been attempts to estimate the impact of other countries' tied
aid practices on U.S.  exports. 

The most frequently cited estimate of the effects of competitors'
tied aid practices on U.S.  exports comes from a 1989 Eximbank report
to Congress on tied aid.\18

The Eximbank report (based on 1984-87 data) stated that "the U.S. 
may be experiencing perhaps $400 million to $800 million a year in
lost sales because of tied aid credits." The estimate was calculated
on the basis of an Eximbank survey of exporters in five industry
sectors.\19

However, in the same study, the Eximbank also performed a market
share analysis, using historical market share ratios to calculate
what the level of U.S.  exports might have been in the absence of
competitors' tied aid practices.  The Eximbank then compared that
figure with the actual level of U.S.  exports supported by U.S.  tied
aid.  Based on its market share analysis, the Eximbank reported that
"potentially lost U.S.  exports" are between $500 million and $1.5
billion a year (based on averages of 1984 to 1987 data on total tied
aid activity, U.S.  tied aid, and regional/market share information). 

We updated the Eximbank market share analysis, using the Eximbank's
methodology and 1989-91 OECD data on tied aid activity and current
market share ratios.  We made two major assumptions in conducting
this analysis.  First, we assumed that recipient nations would have
bought the same amount of capital goods with or without tied aid. 
This assumption means that some other source of financing would have
replaced the tied aid; such sources could include untied aid or
commercial financing.  We also assumed that U.S.  companies would
have maintained their traditional market share in supplying capital
goods to these nations.  (See app.  I for more information on the
market share analysis.) We found that "potentially lost U.S. 
exports" could be as high as $1.8 billion per year. 

However, some studies have pointed out that the greatest impact on
the United States of competitors' tied aid practices involves losses
in potential long-term opportunities that result from inaccessibility
of U.S.  businesses to certain overseas markets.  Tied aid capital
projects tend to be in technology-intensive, competitive industries. 
By not participating in these capital projects (especially
telecommunications and energy projects), the United States may be
missing opportunities to establish itself in high-growth, developing
country markets where it would not only gain experience in doing
business in these environments but also would introduce U.S.-drawn
engineering specifications and U.S.  technology standards to the
recipient countries.  Also, there are potential losses in related
exports such as maintenance equipment and replacement parts required
for upkeep after the project has been completed. 


--------------------
\18 Report to the U.S.  Congress on Tied Aid Credit Practices, the
Export-Import Bank of the United States (Washington, D.C.:  Apr. 
1989). 

\19 These sectors were telecommunications, computers, electric power
generating, rail transportation, and earthmoving equipment. 


   THE OECD AGREEMENT AND THE U.S. 
   RESPONSE
------------------------------------------------------------ Letter :7

U.S.  trade policy has generally been opposed to trade-distorting
tied aid.  Through international negotiations, the United States has
sought to dissuade its competitors from using such aid.  The 1992
tied aid agreement among 22 of the 24 members of the OECD\20
strengthened previous guidelines that established minimum
concessionality levels (the percentage of financing that is a grant
or grant equivalent) of 50 percent for least-developed countries and
35 percent for other countries eligible for tied aid.  The new OECD
tied aid rules generally

  prohibit the use of tied aid for projects in countries whose per
     capita income would make them ineligible for 17- or 20-year
     loans from the World Bank;\21

  restrict the use of tied aid for commercially viable projects--such
     aid may only be extended to projects that are either unable to
     generate cash flow sufficient to cover the project's operating
     and capital costs or cannot be financed by the private market or
     official export credits; and

  do not apply the above limitations for projects in least-developed
     countries.\22

The agreement does not attempt to eliminate tied aid, but to minimize
the trade distortions that can arise from the use of tied aid.  The
rules apply to all tied aid with a concessionality level below 80
percent and a value of special drawing rights (SDR)\23 of 2 million
or larger. 

The new OECD tied aid rules are also meant to increase transparency
about tied aid use by strengthening notification and consultation
procedures.  Under the agreement, a participating member country
planning to use tied aid must notify OECD and other agreement
participants.  Other member countries may challenge the notifying
country's tied aid offer if they believe it does not meet the new
OECD guidelines.\24 Once challenged, the initiating country must
justify to the member countries opposing the offer the use of tied
aid on developmental grounds and show how the project does not meet
the "commercial viability" test.  A project is considered
commercially viable if it is able to generate cash flow sufficient to
cover the project's operating and capital costs or if it can be
financed by the private market or official export credits.  If other
member countries are not satisfied with the justification, the offer
may fail to win the substantial support of the member countries
opposing the offer, in which case the donor country may withdraw the
offer.  The donor country can, however, still decide to go forward
with its offer, if it provides a "derogation letter" to the OECD
Secretary-General, citing non-trade-related national interest reasons
for opting not to follow the OECD tied aid rules.\25 At any point in
the consultation process, other countries may make a matching tied
aid offer. 

In 1992, there were 824 notifications to OECD of tied aid credit
offers, totaling approximately $15.4 billion, although most were
either "excludable"\26 or exempt from the consultation process
because of grandfathering.\27

The United States or other countries requested formal consultations
on 41 of the 137 offers that were subject to the consultation
process, primarily on the grounds of "commercial viability." Of 16
cases deemed commercially viable, the donor governments decided not
to go forward with 9, and there were 7 derogations (i.e., the donor
governments have proceeded with their offers).  During 1993, there
were two additional derogations. 

According to Eximbank officials, the United States has successfully
challenged tied aid offers for equipment for manufacturing plants,
electric power generation, urban and interurban telecommunications
systems, freight rail systems, and air traffic control systems.  On
the other hand, the United States has not been successful in
challenging tied aid offers for projects involving urban subway
systems, interurban passenger rail systems, and telecommunications
equipment for low-density areas. 

Although previous OECD agreements did little to reduce the use of
tied aid, some U.S.  officials believe that the new agreement has
been more effective.  As evidence, the Eximbank cites the fact that
notifications to OECD of tied aid offers decreased significantly in
1993.  Total tied aid notifications for 1993 were $7 billion,
compared with $15.4 billion in 1992.  According to the Eximbank, the
decrease in tied aid offers is due to (1) the impact of the 1992 OECD
tied aid rules, (2) the presence of budgetary constraints in the
donor countries, and (3) the shift from tied to untied aid.\28

Notifications to OECD of untied aid offers have increased
dramatically since the new tied aid rules went into effect, and there
are concerns that one or two countries are simply reporting tied aid
as untied aid to circumvent the rules.  U.S.  officials said they are
closely monitoring untied aid notifications, and OECD is reviewing
how member countries report their untied aid. 

In 1986, Congress authorized the Eximbank to create a "war chest"
fund to counter the use of tied aid by other countries.  (See table 3
for appropriated and actual Eximbank war chest expenditures, fiscal
years 1987-93, and table 4 for information on individual war chest
transactions, fiscal years 1987-93.) Since the new tied aid rules
went into effect in February 1992, Eximbank policy has been to use
its war chest only to police the agreement by reacting selectively
against other countries' offers in cases where tied aid should not be
used--particularly where consultations have not resulted in the
withdrawal of a tied aid offer that has been considered inconsistent
with the OECD agreement. 

Since the implementation of the new tied aid rules in February 1992,
there have been nine derogations from the tied aid rules.  Of the
nine derogations, the Eximbank made only one matching offer because
it was the only one where a U.S.  firm was bidding on the project. 
According to one U.S.  official, the reason there were no U.S.  firms
competing for the other eight contracts was that most of the projects
were developed by donor governments' aid agencies working with the
recipient government, so there usually was no international bidding
for the projects.  Eximbank officials said that most of the projects
for which there were derogations were projects that the recipient
country would not have undertaken if the donor country had not
provided concessionary financing. 



                                     Table 3
                     
                      The Eximbank's War Chest Appropriated
                      and Actual Expenditures, Fiscal Years
                                     1987-93

                              (Dollars in millions)


War chest funding           1987    1988    1989    1990    1991    1992    1993
------------------------  ------  ------  ------  ------  ------  ------  ------
Appropriated              $100.0  $110.0  $110.0  $110.0  $150.0  $197.0  \$200.
                                                                             0\a
Committed                   78.1     7.6     0.0    53.4   145.5     5.1    26.7
--------------------------------------------------------------------------------
\a A Congressional Continuing Resolution reduced initial
appropriation of $200 million by 1.5 percent. 

Source:  Eximbank. 



                           Table 4
           
            The Eximbank's War Chest Transactions,
                     Fiscal Years 1987-93

                    (Dollars in millions)

                                                   War chest
                                          Export       grant
Country               Project              value      amount
--------------------  --------------  ----------  ----------
Fiscal year 1987
Gabon                 Earth                $21.2        $5.3
                       satellite
                       station
Gabon                 Cellular phone         8.5         2.1
                       system
Brazil                Hospital              35.0         8.7
                       equipment
Brazil                Airport               52.6        13.2
                       navigation
                       equipment
India                 Gas turbines          27.0         8.8
Thailand              Capital              100.0        40.0
                       equipment
============================================================
Subtotal fiscal year                      $244.3       $78.1
 1987
Fiscal year 1988
Jordan                Power                $18.3        $5.5
                       equipment
Algeria               Telecommunicat        16.0         2.1
                       ions
============================================================
Subtotal fiscal year                       $34.3        $7.6
 1988
Fiscal year 1989
                      No                      NA          NA
                       transactions
                       authorized
Fiscal year 1990
China                 Shanghai Metro       $23.3       $10.4
                       project
Uruguay               Power project         55.2        19.3
Morocco               Air traffic           24.7         9.9
                       control
Philippines           Tied aid line        125.0      13.8\a
============================================================
Subtotal fiscal year                      $228.2       $53.4
 1990
Fiscal year 1991
Indonesia             Tied aid line       $127.7       $56.2
Thailand              Tied aid line        127.7        43.7
Pakistan              Tied aid line        135.0          \b
Papua New Guinea      Satellite              3.1         1.1
                       earth station
Papua New Guinea      Satellite             13.5         4.7
                       system
Indonesia             Telecommunicat        60.0      17.0\c
                       ions
                       equipment
Mauritius             Construction           5.0         1.8
                       equipment
Pakistan              Digital               45.0        15.8
                       switches
Pakistan              Satellite             15.0         5.2
                       system
============================================================
Subtotal fiscal                           $532.0      $145.5
 year 1991
Fiscal year 1992
Tunisia               Air traffic          $12.3        $5.1
                       control
Fiscal year 1993
India                 Air traffic          $60.6       $26.7
                       control
============================================================
Total                                   $1,111.7      $316.4
------------------------------------------------------------
Legend

NA = Not Available

Note:  A "tied aid line" is a line of credit extended to a country to
be used for several related projects. 

\a AID is providing $30 million in grants. 

\b AID is providing $46 million in grants. 

\c AID is providing $12 million in grants. 

Source:  Eximbank. 


--------------------
\20 Although members of OECD, Iceland and Turkey have not signed the
OECD's tied aid agreement. 

\21 Examples of countries in this category are Argentina and Kuwait. 

\22 Examples of least-developed countries are Afghanistan and
Bangladesh. 

\23 An SDR is an official international monetary reserve asset
created by the International Monetary Fund.  One SDR currently is
equal to about $1.39. 

\24 All participants in the OECD's tied aid agreement have access to
the notification data.  Treasury and Eximbank officials monitor tied
aid notifications to determine whether other OECD members are abiding
by the agreement. 

\25 "Derogations" are cases in which the countries making the tied
aid offers have proceeded with their offers, despite a decision by
OECD agreement participants that the offers do not conform to the
rules of the agreement.  Derogations are permissible under the OECD
tied aid rules, but a derogating country must first submit to OECD a
letter indicating a non-trade-related national interest reason for
the derogation. 

\26 Offers are excludable if they have a concessionality level of 80
percent or more or are under SDR 2 million, constitute matches of
other tied aid offers, are directed toward least developed countries,
or are for ships. 

\27 "Grandfathering" refers to a provision included in a new rule
that exempts from the rule a person or business already engaged in
the activity coming under regulation. 

\28 See the Eximbank's Report to the Congress Under Section 15(g) of
the Export-Import Bank Act of 1945, as Amended (Washington, D.C.: 
Dec.  9, 1993). 


      LIMITATIONS IN THE OECD
      AGREEMENT
---------------------------------------------------------- Letter :7.1

U.S.  exporters, Members of Congress, and others have expressed
doubts about the effectiveness of the U.S.  policy of using the war
chest only to "police" the OECD agreement.  They note that the OECD
tied aid agreement has some built-in limitations.  These limitations
include (1) the difficulty of defining "commercially viable"; and (2)
the presence of an "escape clause" that allows countries to proceed
with a tied aid offer, despite objections by other participants, if
that country claims that the project is in its national interest. 
(As previously stated, there have been nine derogations since the
agreement went into effect.) Also, as with many international
agreements, the OECD's tied aid agreement contains no explicit
enforcement mechanism.  Enforcement depends on the willingness of
individual governments to counter violating tied aid offers.  In
addition, the effectiveness of the agreement depends on the accuracy
and openness of tied aid offers reported to OECD, and OECD does not
confirm or verify the data provided by member countries.  However,
offers may be reviewed during the consultation process by those
countries that have participated in the agreement. 

As we noted in our testimony on November 3, 1993,\29 even if a
competitor's tied aid offer conforms to the rules of the agreement,
the offer may still limit opportunities for U.S.  exporters.  For
example, the agreement allows very long-term financing for a wide
variety of capital goods, such as for large, capital-intensive
projects (railways or subway systems) with long-lived capital
justifying longer-than-OECD arrangement terms.\30

Depending on the ruling of the member countries opposing the offer,
the agreement may also allow tied aid for parts of larger projects
(such as power transformers or telephone switching equipment) for
which capital costs are easy to calculate but revenue allocation is
often difficult to estimate.  U.S.  officials told us that the U.S. 
government challenges all power and telecommunications projects. 

Another weakness in the agreement is that aid programs administered
by the European Union (formerly referred to as the Economic
Community) are not subject to the agreement's tied aid rules. 
Although individual members of the European Union are required to
report bilateral tied aid to OECD and are subject to its tied aid
rules, the agreement specifically excludes "aid programs of
multilateral or regional institutions." Thus, tied aid offered by the
European Union itself is considered by the European Union to be--and
reported to OECD as--multilateral aid and cannot officially be
challenged within the consultation process.  Some U.S.  officials
have suggested that European Union members might be using their
multilateral European Union tied aid instead of bilateral tied aid to
circumvent the rules of the agreement.  The Eximbank has recently
provided tied aid funds to match a European Union tied aid offer that
is permissible under the rules of the agreement.  Further, OECD
members are considering whether European Union tied aid should be
subject to tied aid rules. 


--------------------
\29 See Export Finance:  Challenges Facing the U.S.  Export-Import
Bank (GAO/T-GGD-94-46, Nov.  3, 1993). 

\30 The OECD agreement includes guidelines for maximum repayment
terms based on the category ("relatively rich," "intermediate," or
"relatively poor") of the recipient country. 


   THE NEW TIED AID CAPITAL
   PROJECTS FUND
------------------------------------------------------------ Letter :8

Generally, the Eximbank has not been very active in using its war
chest.  According to one official, the mechanism for war chest use
has been "demand driven"--the Eximbank generally only responded to
requests from U.S.  exporters and has not routinely sought out U.S. 
exporters with whom to match tied aid offers from other countries
that did not comply with the agreement.  However, under a newly
proposed Tied Aid Capital Projects Fund, the Eximbank is planning to
take a much more proactive stance in providing tied aid funds. 
Further, Eximbank officials stated that they are more actively
tracking U.S.  exporters' requests for the use of tied aid funds and
checking exporters' reports of suspected tied aid use by competitors. 

In the Export Enhancement Act of 1992 (P.L.102-429), Congress charged
the interagency TPCC with developing a governmentwide strategy to
guide federal export promotion programs that were fragmented among at
least 10 agencies.  The act intended to set into motion a process,
including an annual reporting requirement, through which the
administration, working with Congress, can establish priorities for
guiding export promotion efforts, reshape its programs to reflect
those priorities, and marshal federal resources to fund them.  In
September 1993, TPCC issued its first annual plan, "Toward a National
Export Strategy." The Eximbank and its Chairman were actively
involved in developing the TPCC plan. 

In response to concerns about competitors' tied aid use, and in
conjunction with the TPCC plan, in September 1993, the administration
proposed funding a new $150-million Tied Aid Capital Projects Fund
(available in fiscal year 1995) to finance capital projects overseas. 
The $150 million represents the subsidy component of the fund, which
is estimated to potentially support (under credit reform)\31 $600
million in U.S.  exports.  The stated purpose of the Tied Aid Capital
Projects Fund is to combat other countries' use of tied aid.  The
Eximbank has been given the task of administering the fund, $50
million of which will come from the Eximbank's war chest, with the
remaining $100 million coming from "proportional contributions" from
the export promotion budgets of other agencies that are members of
TPCC.  In addition, the Eximbank has $121 million in "carryover" from
prior years' war chest budgets that can be used in any year. 

The new fund constitutes a significant increase over funds available
for tied aid in previous years.  However, the total amount is still
relatively small compared with funds devoted to counter foreign
countries' agricultural export subsidies ($532 million proposed for
fiscal year 1995).  As we pointed out in previous reports, including
a December 1992 report on export finance,\32 in fiscal year 1991, the
Department of Agriculture issued approximately 45 percent of total
government export loans and loan guarantees, even though agricultural
products only constituted about 10 percent of total U.S.  exports. 
Further, the amount of the new fund ($150 million, which is estimated
to potentially support $600 million in U.S.  exports) is not
sufficient to counter our estimate of up to $1.8 billion in potential
U.S.  export losses per year, resulting from competitors' tied aid
practices.  In order to counter other countries' tied aid of $1.8
billion, the United States would have to provide a subsidy equaling
$450 million. 

On February 4, 1994, the Eximbank began distributing a "discussion
draft" of policies and procedures for the new Tied Aid Capital
Projects Fund.  The draft contains the four principles--or
criteria--governing use of the new fund, procedures for making
conditional offers (using a "letter of interest"),\33 and information
on loan structure and pricing.  The draft resulted from interagency
consultation among members of TPCC and will be distributed to U.S. 
exporters to obtain their comments. 

The draft signals the beginning of a change in U.S.  policy on the
use of tied aid--assuring U.S.  firms that the U.S.  government is
willing to take a much more proactive approach to combat tied aid use
by competitors.  Generally, the procedures that the Eximbank is
planning to implement would permit the new fund to be used to counter
competitors' tied aid offers that are permissible under the OECD
agreement, instead of only matching tied aid offers that are
violations of the agreement.  Further, the new fund could also be
used to counter competitors' offers that are not reported as part of
the OECD's notification process, as long as certain criteria are met. 

According to the draft, each Eximbank use of the Tied Aid Capital
Projects Fund should satisfy the following criteria:\34

(1) It should counter a foreign aid donor's use of trade-distorting
tied aid credits, when such financing is confronted by a U.S. 
exporter;

(2) It should uphold OECD rules on trade-related aid and contribute
to a climate supportive of reducing trade-distorting tied aid;

(3) It should support sales that combine substantial follow-on market
penetration with strong international competitive advantages; and

(4) It should refrain from supporting projects that are
developmentally or environmentally unsound. 

In addition, the Eximbank's new letter of interest will permit a U.S. 
exporter to compete for projects as soon as a competitor is strongly
suspected of offering trade-distorting tied aid.  The letter of
interest should provide U.S.  exporters with greater assurance that
the Eximbank is willing to aggressively match competitors' use of
trade-distorting tied aid.  Previously, exporters had to wait until
the notification and consultation processes had been completed and a
derogation occurred, which was often too late for a U.S.  firm to bid
on a project. 

The Eximbank plans to charge a fee for accessing the fund that would
range from 5.25 percent to 11.81 percent of the loan value, depending
on the market.  According to the Eximbank, the fee will serve to
"self-regulate" applications to the fund.  Eximbank officials believe
that by charging fees, they are encouraging exporters, whose export
sales promise substantial follow-on market penetration and offer
international competitive advantages, to apply to the fund. 


--------------------
\31 Under the Federal Credit Reform Act of 1990, the estimated total
future costs of the Eximbank's annual transactions must be accounted
for when the transactions are made, and these costs are limited by
the total amount appropriated for that activity. 

\32 See Export Finance:  The Role of the U.S.  Export-Import Bank
(GAO/GGD-93-39, Dec.  23, 1992). 

\33 The Eximbank's tied aid letter of interest would indicate that
the availability and timing of the Eximbank's preliminary commitment
is conditioned on the foreign tied aid credit's formal notification
to OECD and its clearance through the OECD's challenge and
consultations process. 

\34 The Eximbank will not require that all criteria be met in
matching derogations from the OECD's agreement. 


   CONCLUSIONS
------------------------------------------------------------ Letter :9

The U.S.' tied aid strategy has had some success--U.S.  officials
have negotiated to establish successively stronger international
agreements to restrict trade-distorting tied aid.  However, it
remains difficult to identify tied aid capital projects early enough
for U.S.  firms to bid on them.  In addition, the Eximbank's past
policy of using the war chest primarily to police the most recent
OECD agreement meant that many U.S.  firms could not access tied aid
funds to combat competitors' use of tied aid. 

Based on the results of our review, we believe that a credible U.S. 
policy to combat competitors' trade-distorting tied aid practices
should include (1) assurances by U.S.  government agencies that the
U.S.  government has an active policy to counter competitors' tied
aid offers and (2) sufficient funds to counter competitors' tied aid
offers.  Once these two factors are in place, U.S.  firms may be more
likely to compete for capital projects early on. 

We recognize that TPCC has made progress toward making the U.S.  tied
aid policy more credible.  The TPCC's new policy suggests that U.S. 
exporters will be able to access tied aid funds for matching
competitors' tied aid offers much more readily, and for a broader
range of situations than before.  Also, with the introduction of the
new Tied Aid Capital Projects Fund, TPCC has increased the amount of
tied aid funds available to support U.S.  exporters.  However, it is
still not sufficient to counter the amount of potential U.S.  export
losses (as high as $1.8 billion) that we estimated in the market
share analysis.  The amount earmarked for the new fund is also
relatively small compared with the amount of funds provided to combat
foreign agricultural export subsidies. 

Further, some U.S.  government officials and U.S.  exporters are
concerned about whether export promotion agencies are identifying
capital projects early enough for U.S.  exporters to have an
opportunity to bid successfully on them, particularly since AID
(unlike many competitors' aid agencies) has little involvement in
capital projects.  Also, compared with most of its competitors, the
United States does not have very strong integration of agency
functions or business-government cooperation.  Such integration and
cooperation help many competitor countries identify opportunities for
their businesses to bid on capital projects in the early stages. 


   RECOMMENDATION
----------------------------------------------------------- Letter :10

In order to provide greater assurance to U.S.  exporters that the
U.S.  government is serious about combating foreign competitors' tied
aid practices, we recommend that the Secretary of Commerce, as Chair
of TPCC, work with other member agencies to ensure that the budget
for the Tied Aid Capital Projects Fund is sufficient to counter
competitors' trade-distorting tied aid offers when U.S.  economic
interests are adversely affected. 


   AGENCY COMMENTS
----------------------------------------------------------- Letter :11

On February 24, 1994, and on March 2 and 4, 1994, we discussed the
contents of this report with the Eximbank's Special Assistant to the
Senior Vice President.  Although he believed that the report should
focus more on the Eximbank's plans for implementing the new Tied Aid
Capital Projects Fund, he agreed with the report's recommendation. 
The Eximbank and the Treasury made some technical comments that we
incorporated into the report where appropriate. 


--------------------------------------------------------- Letter :11.1

We are sending copies of this report to the Chairman of the
Subcommittee on International Economic Policy, Trade, Oceans and
Environment, Senate Committee on Foreign Relations; the Chairman of
the Subcommittee on International Development, Finance, Trade and
Monetary Policy, House Committee on Banking, Finance and Urban
Affairs; and the Chairman of the Subcommittee on International
Finance and Monetary Policy, Senate Committee on Banking, Housing,
and Urban Affairs.  We will also make copies available to other
interested parties upon request. 

Please contact me on (202) 512-4812 if you have any questions
concerning this report.  The major contributors to this report are
listed in appendix II. 

Sincerely yours,

Allan I.  Mendelowitz, Managing Director
International Trade, Finance,
 and Competitiveness


ESTIMATING U.S.  EXPORTS LOST TO
FOREIGN COMPETITORS' TIED AID
PRACTICES
=========================================================== Appendix I

This appendix provides an estimate of the potential loss of U.S. 
exports because of the tied aid practices of U.S.  competitors in the
Organization for Economic Cooperation and Development (OECD).  In
1989, the U.S.  Export-Import Bank (Eximbank) conducted a market
share analysis using historical market share ratios based on 1984-87
data to estimate potentially lost exports.  We updated this study
using 1989-91 data.  This appendix contains the assumptions we made,
a description of the approach including the data sources, and the
results of the estimation with the accompanying qualifications. 

ASSUMPTIONS

We made two major assumptions in conducting this analysis.  First, we
assumed that recipient nations would have bought the same amount of
capital goods with or without tied aid.  This assumption means that
some other source of financing would have replaced the tied aid; such
sources could include untied aid or commercial financing.  We also
assumed that U.S.  companies would have maintained their traditional
market share in supplying capital goods to these nations. 

APPROACH

To estimate the potential loss of U.S.  exports, we conducted a
market share analysis in four steps.  We first determined how the
amount of tied aid was divided among four different regions of the
world.  We then calculated the U.S.' share (in both percent and
dollars) of capital goods exports to each of these regions.  Next, we
multiplied the level of tied aid to each region by the U.S.' share of
all capital goods exported to the region.  Summed over all the
regions, this number represents the share of tied exports that
reflects the relative competitive strength of the U.S.' capital goods
industries.  Finally, we subtracted the amount of U.S.  capital goods
exports supported by U.S.  tied aid to obtain our estimate.  Our
detailed estimation is presented in table I.1. 

According to the most recent data on OECD tied aid commitments, the
tied aid market size for capital goods averaged $8.9 billion per year
in the period 1989-91.  We calculated the tied aid market share by
region, using OECD notification data, which contain information on
tied aid recipients.  We estimated the U.S.' regional market share by
calculating U.S.  exports of capital goods into a region as a percent
of all countries' exports of capital goods to that region.  For this
calculation, we used United Nations (U.N.) trade data, as well as
U.N.  definitions of capital goods and regions.\1 Finally, the level
of U.S.  capital goods exports supported by U.S.  tied aid averaged
$467 million per year for 1989-91, according to OECD tied aid
commitment data. 



                          Table I.1
           
           Estimation of Annual U.S. Capital Goods
             Exports Potentially Lost to Tied Aid
           Practices of Foreign Competitors, 1989-
                              91

                (Dollars in millions per year)


                                           Percent
Regions                           Dollars       \a   Dollars
--------------------------------  -------  -------  --------
Asia                               $4,454      23%    $1,024
Africa/Middle East                  2,405       16       385
Latin America                       1,514       51       772
Other\c                               535       15        80
Total                              $8,908   n.a.\d    $2,261
Potential impact of tied aid on
 U.S. capital goods exports
Share of tied aid exports which                       $2,261
 reflects the competitive
 position of U.S. capital goods
 industries
Annual level of U.S. exports                           (467)
 supported by tied aid
Potential annual U.S. exports                         $1,794
 lost due to foreign tied aid
------------------------------------------------------------
Note 1:  Shaded area represents hypothetical amount of U.S.  capital
goods exports supported by tied aid. 

\a Actual U.S.  market share of capital goods exports from 1989 to
1991. 

\b Represents U.S.  exporters' share of tied aid supported exports if
they captured the same market share as that for all capital goods
exported to the regions. 

\c "Other" includes tied aid recipients in Eastern Europe, as well as
island nations in the Pacific. 

\d n.a.  means not applicable. 

Sources:  OECD commitment data, OECD notification data, and U.N. 
trade data. 

RESULTS

Under the stated assumptions, the estimate of U.S.  capital goods
exports potentially lost to the tied aid practices of OECD
competitors could be as high as $1.8 billion per year in 1989-91. 
There are two factors working in opposite directions on the size of
the estimate whose impact we could not quantify.  The factor that
could lead to an overestimate is the likelihood that some capital
projects throughout the world would not have been undertaken in the
absence of tied aid.  We were not able to estimate the extent of this
possible overestimate.  On the other hand, a factor tending to lead
to an underestimate of the level of potential lost exports is the
fact that the U.S.  market in each region is lower than would
otherwise be the case because it includes the effect of other
countries' tied aid exports. 


--------------------
\1 This calculation yields a conservative estimate of U.S.  regional
market share because the data include all reported interregional
exports, as well as exports from outside the region. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

Virginia C.  Hughes, Assistant Director
Susanne E.  Wood, Evaluator-in-Charge
L.  Kyle Lindland, Evaluator
Ken Miyamoto, Evaluator
Susan S.  Westin, Senior Economist
Martin de Alteriis, Social Science Analyst
Rona Mendelsohn, Reports Analyst

RELATED GAO PRODUCTS

Export Finance:  Challenges Facing the U.S.  Export-Import Bank
(GAO/T-GGD-94-46, Nov.  3, 1993). 

U.S.  Trade and Development Agency:  Limitations Exist in Its Ability
to Help Generate U.S.  Exports (GAO/GGD-94-9, Oct.  20, 1993). 

Export Finance:  The Role of the U.S.  Export-Import Bank
(GAO/GGD-93-39, Dec.  23, 1992). 

The U.S.  Export-Import Bank:  Reauthorization Issues
(GAO/T-NSIAD-91-17, Apr.  11, 1991). 

Economic Assistance:  Integration of Japanese Aid and Trade Policies
(GAO/NSIAD-90-149, May 24, 1990). 

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