Cargo Preference: Effects of U.S. Export-Import Cargo Preference Laws on
Exporters (Briefing Report, 10/31/94, GAO/GGD-95-2BR).

This report examines the frequency with which exemptions from cargo
preference requirements for U.S. Export-Import Bank (Eximbank) financed
exports were granted between 1990 and 1992.  GAO found that in 1990 and
1991, the number of general waivers that the Maritime Administration
granted held steady at seven; however, in 1992 they more than doubled to
15.  From 1990 to 1992, the number of statutory waivers, granted when
U.S.-flag vessels were unavailable, more than tripled from 28 in 1990 to
102 in 1992. GAO did not find any situations in which Eximbank cargo
preference requirements were causing U.S. exporters to lose sales;
however, exporters did raise other concerns resulting from their
compliance with the cargo preference requirements.  GAO did not find any
evidence that midwestern exporters were uniquely affected by the cargo
preference requirements.

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

 REPORTNUM:  GGD-95-2BR
     TITLE:  Cargo Preference: Effects of U.S. Export-Import Cargo 
             Preference Laws on Exporters
      DATE:  10/31/94
   SUBJECT:  Exporting
             Cargo preference laws
             Export regulation
             Waivers
             International trade
             Shipping industry
             Business assistance
             Freight transportation operations
             Marine transportation operations
             Trade policies

             
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Cover
================================================================ COVER


Briefing Report to Congressional Requesters

October 1994

CARGO PREFERENCE - EFFECTS OF U.S. 
EXPORT-IMPORT CARGO PREFERENCE
LAWS ON EXPORTERS

GAO/GGD-95-2BR

Eximbank Cargo Preference Laws


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

  FAS - Free alongside ship
  FMC - Federal Maritime Commission
  MARAD - U.S.  Maritime Administration
  P.L.  - Public Law
  RORO - roll-on, roll-off vessels
  SLSDC - St.  Lawrence Seaway Development Corporation

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


B-257255

October 31, 1994

The Honorable Henry B.  Gonzalez
Chairman, Committee on Banking,
 Finance and Urban Affairs
House of Representatives

The Honorable Gerald D.  Kleczka
House of Representatives

As you requested, we examined the frequency with which exemptions, or
waivers, from cargo preference requirements\1

for U.S.  Export-Import Bank (Eximbank) financed exports were granted
between 1990 and 1992.  We also attempted to determine whether
Eximbank cargo preference requirements were having an adverse effect,
in terms of lost sales, particularly on exporters located in the
Midwest. 

On September 20, 1994, we briefed your staff on the results of our
analysis on the effects of cargo preference requirements of the
Eximbank's efforts to assist U.S.  exporters.  This letter summarizes
the information presented, and Appendix I contains the materials used
in that briefing. 


--------------------
\1 The United States has a variety of cargo preference laws that
require significant portions of U.S.  government cargo be shipped on
U.S.-flag vessels. 


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

Section 1241-1 of title 46, U.S.  Code, requires that exports
financed by an instrumentality of the U.S.  government, such as the
Eximbank, be carried on U.S.-flag vessels, unless a waiver, or
exemption, is granted that allows the use of foreign-flag vessels.\2
Eximbank regulations require that these provisions be applied to all
loans and long-term loan guarantees.\3

The Maritime Administration (MARAD) administers cargo preference
requirements and grants exemptions from the requirements.  MARAD
grants two types of waivers--general and statutory--for Eximbank
preference cargo.  General waivers are granted on a
country-by-country basis and allow vessels flagged under the
recipient foreign nation to transport up to 50 percent of the cargo
generated under an individual loan or guarantee agreement if that
nation has not discriminated against U.S.-flag vessels in its trade. 
According to a MARAD official, general waivers are designed to assist
in the growth of the merchant marine of developing nations.  MARAD's
statutory waivers permit goods to be shipped on foreign-flag vessels
when U.S.-flag vessels are unavailable.  As long as a waiver is
granted, the cost of shipping cargo on a foreign flag vessel may be
eligible for Eximbank financing if the items shipped meet the
Eximbank's foreign content rules.\4


--------------------
\2 Section 1241-1 is based upon a Joint Resolution of Congress, Mar. 
26, 1934 (ch.  90, 48 stat.  500). 

\3 The Eximbank considers an agreement to be long-term if the
repayment period exceeds 7 years or if the amount of the transactions
exceeds $10 million irrespective of the length of the payment period. 

\4 MARAD considers foreign shipping costs for an item to be a foreign
component if the costs are included in the total contract price of
the item. 


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

We found that in 1990 and 1991 the number of general waivers that
MARAD granted held steady at 7; however, in 1992 they more than
doubled to 15.  From 1990 to 1992, the number of statutory waivers,
granted when U.S.-flag vessels were unavailable, more than tripled
from 28 in 1990 to 102 in 1992. 

We also did not find any situations where Eximbank cargo preference
requirements were causing the five U.S.  exporters that we spoke with
to lose sales; however, exporters did raise other concerns that
resulted from their complying with the cargo preference requirements. 
Moreover, we did not find any evidence suggesting that midwestern
exporters were uniquely affected by the cargo preference
requirements. 


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

We interviewed officials at the Eximbank, MARAD, the St.  Lawrence
Seaway Development Corporation (SLSDC), and the Federal Maritime
Commission to get information and their perspectives on the effects
and administration of the cargo preference requirements.  We
collected and analyzed data on the composition of the U.S.-flag
fleet, cargo preference programs, and the number of waivers granted
by MARAD.  We did not independently verify the accuracy of the data
we obtained from any of these agencies. 

To determine if the Eximbank's cargo preference requirements had an
adverse effect on Eximbank efforts to assist U.S.  exporters and
whether cargo diversion was extensive, we interviewed officials of
five firms that we judged most likely to show lost exports because of
cargo preference requirements.  Most of these firms are Fortune 500
firms located in the Midwest that have received export financing
assistance from the Eximbank and have had to comply with cargo
preference requirements.  We sought firms whose exports were heavily
dependent on ocean vessels for transport to overseas markets and that
could potentially lose export sales because of cargo preference
requirements.  These five firms were recommended to us by a
midwestern banker who had assisted these companies in arranging
financing for foreign sales through the Eximbank and by Eximbank
officials who had also participated in these types of deals. 

To determine if midwestern exporters were harmed to a greater extent
than other U.S.  exporters, we examined (1) the various options to
export products that are available to companies in the region, in
particular intermodal networks and (2) the use of the Saint Lawrence
Seaway for ocean shipping originating in the Great Lakes region. 


   AGENCY COMMENTS
------------------------------------------------------------ Letter :4

On May 20, 1994, we discussed a draft of this report with the Chief
of the Civilian Agencies Division for MARAD.  On May 23, 1994, we
discussed a draft of this report with a vice president of Eximbank
who is responsible for contract administration.  On June 8, 1994, the
Director of the Office of Development and Logistics at SLSDC provided
written comments on the sections of our report that pertained to the
St.  Lawrence Seaway.  Overall, these officials said that our
presentation of their policies and procedures was accurate; however,
in several instances they provided technical clarifications and
corrections, which we have included where appropriate. 

We did our review from May 1993 through January 1994 in accordance
with generally accepted government auditing standards. 


---------------------------------------------------------- Letter :4.1

As agreed with the Committee, unless you publicly release its
contents earlier, we plan no further distribution of this briefing
report until 30 days from the date of this letter.  At that time, we
will send copies of this briefing report to various congressional
committees and other interested parties.  We will also make copies
available to others upon request. 

The major contributors to this briefing report are listed in appendix
II.  Please contact me at (202) 512-4812 if you or your staff have
any questions about this briefing report. 

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


DATA ON EXIMBANK'S ADMINISTRATION
OF CARGO PREFERENCE REQUIREMENTS
AND THE U.S.-FLAG FLEET
=========================================================== Appendix I















 


   EXPORTERS HAVE A VARIETY OF
   CHOICES TO TRANSPORT CARGO
--------------------------------------------------------- Appendix I:1

Several types of oceangoing vessels transport cargo.  Bulk carriers
generally carry commodities such as corn and wheat; container ships
are designed to accommodate 20-foot to 40-foot containers.  These
containers can be transported by ships, trucks, rail cars, or
aircraft.  Break-bulk ships usually transport commodities such as
bound lumber or goods stacked on wooden pallets.  These pallets, or
other holders, can be separated or broken apart.  Break-bulk ships
also transport cargo that is so heavy or large that it cannot be
accommodated in standardized containers.  There are also other
specialized general cargo ships, such as roll-on/roll-off (RORO)
vessels.  RORO vessels are designed to accommodate cargo such as
tractors and trucks by allowing them to be driven on and off the
vessel.  According to a 1989 study, transatlantic trade has been
dominated by the use of container ships and RORO vessels since
1973.\1 However, it is important to note that most Eximbank ocean
freight subject to cargo preference laws is shipped to Asia; very
little is shipped to Africa and almost none to Europe. 

The type of vessel used to ship Eximbank cargo is determined by the
type of product being financed.  Eximbank assists in the export of a
variety of products requiring a mix of different types of cargo
ships.  However, bulk vessels are not normally used for Eximbank-
financed cargo because Eximbank does not ordinarily finance the types
of cargo shipped in bulk vessels. 



 


--------------------
\1 Muller, Intermodal Freight Transportation. 


   SOME U.S.-FLAG CARRIERS ARE
   MEMBERS OF OCEAN SHIPPING
   CONFERENCES
--------------------------------------------------------- Appendix I:2

U.S.-flag carriers that are members of shipping "conferences" may
charge rates that are the same as foreign-flag carriers.  Such
conferences are "agreements among ocean-carriers to restrict
competition, regulate and rationalize sailing schedules and ports of
call, and sometimes to arrange for the pooling of cargo revenues."\2

Conferences that participate in U.S.  trade are required to file
tariffs with the Federal Maritime Commission (FMC).  These tariffs
include the shipping rates, terms, and conditions of transport
covering all of the commodities that their ocean going vessels carry. 
For liner vessels, freight rates are generally set by shipping
conferences on behalf of all their members.  According to a MARAD
official, shippers that utilize liner services pay the same rate for
the movement of a particular cargo between two points regardless of
the flag of the vessel because the rates are set uniformly for
members of the conference. 

In the bulk shipping market, freight rates are established through
open market competition.  There, the combination of low cost and
services offered is the driving force when choosing a carrier, unless
cargo preference requirements are in effect.  It is important to
point out that most shipping conferences allow members to form
service contracts with their customers where the shipping rates may
be below tariff rates.  This process allows for some element of
competition in the conference system.  Carriers are not required to
file service contracts with FMC, but this information must be made
public. 





\a General waivers may not be granted to countries that discriminate
in their trade against U.S.-flag carriers. 










--------------------
\2 Maritime Policy and Agricultural Interests:  Impacts of the
Conference System, U.S.  Department of Agriculture (Washington, D.C.: 
Oct.  1993). 


   MOST PREFERENCE CARGO WAS
   GENERATED BY THREE GOVERNMENT
   AGENCIES
--------------------------------------------------------- Appendix I:3

Between 1990 and 1992, three U.S.  government agencies generated most
of the nation's preference cargo:  the Department of Defense--
through foreign military sales, the Military Sealift Command, and
various other programs; the Department of Agriculture--through P.L. 
480 title I and title III programs; and the Agency for International
Development--through P.L.  480 title II and section 416 food
assistance programs.  During this period, Eximbank-financed
preference cargo constituted less than 1 percent of the nation's
total preference cargo. 









One exporter said that cargo preference requirements sometimes
increased the time it takes to deliver cargo, since exporters are
limited to using U.S.-flag carriers.  He said that exporters do not
have the flexibility and additional choices that would exist if they
were allowed to use foreign-flag carriers.  He also said that in most
cases customers want their goods as quickly as possible and are
sometimes inconvenienced because they must wait longer to receive
those goods.  However, he said he knew of no circumstances where
deals were actually lost due to these requirements. 



A manufacturer of heavy machinery said that by adhering to cargo
preference requirements on some occasions his company was not able to
obtain the type of vessel--RORO vessels--that it preferred to
transport its products and had to use other types of U.S-flag
vessels.\3 When other than RORO type of vessels are used, the company
must disassemble its equipment and then reassemble it when the goods
reach their destination.  The company official said that not only
does this situation create more work, but disassembly may lead to
theft of parts and can expose them to damage from environmental
elements such as salt water. 


--------------------
\3 RORO vessels are designed to accommodate cargo such as tractors
and trucks by allowing them to be driven on and off the vessel. 


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

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

James McDermott, Assistant Director
Jean-Paul Reveyoso, Evaluator-in-Charge
Rona Mendelsohn, Communications Analyst