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Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
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Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986

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Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986 …

Implementation of he Export Trading Company Act of 1982 Export Promotion Report to the Chairman Subcommittee on Commerce, Consumer and Monetary Affairs GAO 1986
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  • 1. ?l3isdz i 1 United States Gen@ralAmmunting Office-- ?2lCl GAO Report to the Chairman, Subcommitteeon * b Commerce,Consumerand Monetary Affairs, Committeeon Government Operations Houseof Representatives EXPORTPROMOTION “zmplementationof the Export Trading CompanyAct of 1982 . llllllllllllllll129210
  • 2. .GAO Uuited States General Accounting Office Wa&ington, D.C. 20548 COKl and Natioual Security and Iuteruaitonal Affairs Division B220969 February 27, 1986 The Honorable‘DougBarnard, Jr, Chairman, Subcommitteeon Commerce, Consumerand Monetary Affairs Committee on GovernmentOperations Houseof Representatives DearMr. Chairman: At your request,we reviewed the implementation of the/Export Trading CompanyAct of 1982,jhe Act was passedon October8,1982, after severalyears of debateand was intended to reduceor eliminate some perceivedbarriers to U.S.exports, including concernover violation of U.S.antitrust laws and the level of expertise and financing available to support small and medium-sizedexporters. Congressconcludedthat export trading companies(mcs), similar to thosein foreign countries, were the mechanismsto overcometheseexport barriers and setout to encouragetheir formation with this legislation. traints to Growth Thus far, the exports facilitated through ETCShave not beensignificant. mpact of ETCs According to the banks and ETCSwe visited, the economicconditions of the past few years,particularly the high value of the dollar againstthe currenciesof foreign countries, hashamperedthe exporting of those ETCSwhich have beenestablished.Yet, in our opinion, bankers and exporters have an increasedawarenessof export trading and are in a position to take greater advantageof it when the economicconditions becomemore favorable. The increasedawarenesstoward exporting could result in the formation of many moreETCS and, eventually, in increasedexport trade. With respectto the Export Trade Certificates of Reviewtitle of the Act, asof October1, 1986,67 trading companies(including 29 newly organ- ized ones)had receivedcertificates from the Department of Commerce extending antitrust protection to their export trade activities and the 230 firms and individuals participating in the certificates. Our discus- sionswith 23 ETCSindicated that many had not doneaswell asthey had hoped.Many companiesdid saythat their exports had increasedmea- surably, and they believedthat having a certificate of review (which grants the antitrust protection) helpsto attract businessand provides them with legitimacy. But, economicfactors, particularly the high value Page 1 GAO/NSIAD&642 Export Trading Companh
  • 3. B-229999 of the dollar, have hurt the performance of the ETCSand forced shifts in their planned activities. With respectto the Bank Export Servicestitle of the Act, asof October 1,1986,40 ETCs had beenformed by 40 bank holding companies(bank EYD~S),with atotal authorized investment of about $84million, ranging from a high of $18million to a low of $10,000.Most of the ETCS are still in the formative stages- organizing, looking for personnel,and identi- fying markets andpotential customers.Mostexpectto incur losses during their start-up phase;only a few have engagedin trade transac- tions, which have generally beensmall. The 8 bank ETCSwe contacted report only limited exports. From our discussionswith them snd our attendanceat a conferenceon ETC operational experiences,we noted a wide variance in the approachesbeingfollowed. In our opinion, it would beunrealistic to expectthat removal of export barriers in and of themselveswould yield a major increasein exports, sinceU.S.export performance is determined by many variables, including the level and growth of grossnational product in foreign coun- tries; the value of the dollar; the availability of international lending and the current developingcountry debt problems;US. technologicalleader- ship; foreign tastes,preferences,and barriers to US, products; U.S.busi- nessattitudes; and impedimentato U.S.exports createdby US. laws and regulations. The most important determinants are fundamental eco- nomic factors, suchasforeign economicgrowth and relative exchange rates. According to Commerceand FederalReserveBoard representatives,it is too early to evaluate the successof the legislation or to judge U.S.firms’ efforts to penetrate new markets. Commercerepresentativesadvisedus that the Act is not a panacea.They stated that it is oneof many pro- gramsto help U.S.firms increaseexports andthat its effect on exports is difficult to quantify becauseits effect cannotbeseparatedfrom the effects of other programs or measuresdesignedto assistexporting. Fur- ther, the economyin generaland economicevents,suchasthird world debt, the value of the US. dollar, andthe worldwide recession,cansig- nificantly affect achievementof the Act’s objectives.
  • 4. ConcernsThat A major concernis the degreeto which bank ETCS are regulated. Bank Regulations will Affect R ETCS believethat certain provisions of the Act and certain Federal eserveBoard regulations and policies have affected or will affect their ETC Performance export performance, potential to competewith foreign-owned trading companies,and ability to survive. Of particular concernarethe provi- sionsthat bank ETCS(1) must engageexclusively in international trade, (2) must meetthe requirement that 60 percent of their total revenues from all sourcesbederived from exporting, (3) cannot invest in firms that export services,(4) must observethe samecollateral requirements asnon-bank affiliates when borrowing from parent banks, and (6) must have a leveraging,or asset-to-capital,ratio not greater than 10to 1, thereby limiting the amount that canbeborrowed. The Board’s collat- eral requirements and the leveraging ratio areintended to protect the solvencyand soundnessof banks. The Export Trading CompanyAct itself requires that bank ETCSengage exclusively in activities related to international trade. The Federal ReserveBoard views its definition of exports and the SO-percent requirement imposedby its regulations asnecessaryto carry out the intent of the legislation, which is to promote exports. Regardingthe export of services,the Board reasonsthat its restriction that bank ETCS serveonly asexport facilitators is sufficiently supported by the Act’s purposeand the legislative history. The Department of Commercedis- agreeswith the Board regarding the restriction on the export of ser- vices.Commercecontendsthat both the statute and the legislative history clearly indicate that Congressintended that a bank could invest in an ETC which exports goodsor servicesor which facilitates the export of goodsor servicesof others by providing export trade services. Two of theseissuesseemparticularly important to us,and since receiving agencycommentswe have given additional consideration to them. With regard to the required extent of export revenues,we believe the Board clearly is authorized to establishthe requirement that more than 60 percent of revenuebefrom exports. The term “principally” in the context of the statutory provision contemplatesthat the preponder- anceof an ETC’Sactivity will not beimports, and the legislative history onthe Housesideanticipates the Board’smeasuring an%rc’sactivities in terms of revenueshares.The Board actedwithin its authority by defining “principally” only in terms of export revenuesand in setting the requirement that exports bemore than 60 percent of all revenues.
  • 5. B-220999 The statute, however, doesnot itself addresshow suchrevenuesshould becalculated or whether revenueshould bethe solebasisfor deter- mining if an EW is organizedand operatedprincipally for the purposeof exports. In fact, it doesnot eveninclude the term “revenue.” Therefore, for calculations to meetthe SO-percentrequirement we believethe Board could redefine its own term “revenues” to include only proceeds from imports to and exports from the United States.This changewould exclude,for purposesof establishing whether an ETC meetsthe SO-per- cent requirement, the proceedsfrom foreign products soldin overseas markets that do not enter US. commerce.The Board could alsodevise indices additional to “revenue” to determine whether a company is “organized and operated” principally for exporting or facilitating exports and it could extend beyond 2 years the period during which qualifying revenuesarecomputed.Webelievesuchmodifications could have the effect of reducing the extent to which companiesview the cur- rent regulation asa potential impediment to operations and still assure that importing doesnot constitute the preponderanceof ETC activity. With regard to the agencies’interpretations of the Export Trading Com- pany Act asit relatesto export of services,we believethat Commerce’s position is the better interpretation of the statute and its legislative his- tory. In our view, the definition of export trading company in Title II of the Act permits bank holding company investment in an ETC which exports services. Legislation currently before the SenatejS. 1934,khe“Export Trading CompanyAmendmentsAct of 1986,” would make changesto address theseand other matters. The bill addressescomputation of the Board’s SO-percentrequirement by proposingto amendthe Act to provide that a company qualifies asan ETC when its export revenuesexceedits import revenues.The intended effect is to excludefrom the calculation of reve- Y nuesthosethird-party transactions involving neither exports to nor imports from the United States.Also, the bill would clarify that abank holding company may invest in an ETC which exports servicesand that revenuefrom the export of servicesproducedby an ETC itself or an affil- iate countsasexport income. Page 4 GAO/NS- 2 Export Trading Compades
  • 6. B220969 Agency Comments and Our Evaluation Board of Governors of the Weagreewith the FederalReserveBoard commentsthat fundamental Federal ReserveSystem economicfactors have createdthe unfavorable export markets in which many ETCS have had to operate.However,irrespective of the conditions of the variables that make up the primary trade determinants, if the Export Trading CompanyAct in fact reducedbarriers to exports, we would expectto find exports higher than they would have beenwithout the Act. Werecognize,however, that sucha direct causeand effect rela- tionship may, in fact, beimpossibleto quantify or demonstrate I statistically. The Board alsocommentedthat our report givesundue emphasisto the questionsthat somebank holding companieshave raised about new Board regulations on bank participations in ETCS. The Board emphasized that it promulgated its regulations to reflect a congressionalconcernfor the balancebetweenbank participation in ETCS and fundamental con- cernsabout assuringthe safety and soundnessof banksthat engagein commercial activities. The regulations that we found of concernto the bank ETCS aremore fully discussedon pages24to 28 of appendix I. Our purposesin coveringconcernsof bank ETCS was to report on actual or perceivedeffects of the Act on export performance. Sinceour presenta- tion includesthe Federal ReserveBoard’sposition, we believethe report to befair and balanced. Depkrtment of Commerce The Department of Commercecommentedthat it appreciatedthe thor- ough review we conductedand agreedwith our overall conclusions. Commercehad a few minor clarifications and additions and we made revisions to the report in responseto thesesuggestions. Appendix I discussesmore fully the results of our work on the imple- mentation of the Act. Page 6 GAO/NSIAD49-42 Jhpert Trading Compadw 8.; “, ~ ‘,‘, ,‘I:,, ” I,,,,”
  • 7. -- B220969 As arrangedwith your office, unlessyou publicly announceits contents earlier, no further distribution of this report will bemadeuntil 30 days from its issuedate.At that time, we will sendcopiesof the report to interested parties and make copiesavailable to others upon request. Sincerelyyours, Frank C.Conahan Director Page 0 GAO/NSW2 Export Trading Compnies
  • 8. Page 7 GlAO/NSLhD8642 Export Trading Companies
  • 9. Contents Letter Report 1 Appendixes Appendix I: Implementation of the Export Trading CompanyAct of 1982 10 Appendix II: CompaniesThat ReceivedCertificates of Review From the Department of Commerce(As of October1,1986) 30 Appendix III: Export Trading CompaniesOwnedby Bank Holding Companies(As of Oct. 1, 1986) Appendix IV: CommentsFrom Board of Governorsof the FederalReserveSystem 38 40 Appendix V: CommentsFrom the Department of Commerce 43 ables Table 1.1:Sizeof Bank Holding Companiesand Their 20 I Investments in ETCs Abbreviations ETC export trading company.A bank ETCis an export trading companyowned in whole or in part by a bank holding company GAO GeneralAccounting Office OETCA Office of Export Trading CompanyAffairs Page 8 GAO/NSIADM-4 2 Export Trading Companies
  • 10. Page 9
  • 11. Appendix I -- hplementation of the l!!kport Trading CompanyAct of 1982 , - The Export Trading CompanyAct of 1982was passedon October8, 1982,to reduceor eliminate someof the perceivedimpediments to U.S. exports, including concernover violation of U.S.antitrust laws and over the level of expertise and financing available to support small and medium-sizedexporters. Congressconcludedthat export trading compa- nies(ETCS) similar to thosein other countries were the mechanismto overcometheseexport barriers. In Japan and Europe,ETCShandle a large shareof the export market and play an important role in foreign trade. In the United States,mul- tinational and other large corporations generally handle their own exports; small and medium-sizedfirms useexport managementcompa- nies,which act asthe export departments for oneor more manufac- turers and provide export servicessimilar to thoseof the ETCS. Objective, Scope,and The Chairman of the Subcommitteeon Commerce,Consumerand Mone- Methodology tary Affairs, HouseCommittee on GovernmentOperations,askedusto determine the progressmadein implementing the Export Trading Com- I pany Act of 1982.Wewere specifically askedto analyze - 1.the expectationsheld out for ETCSby Congressand the executive branch, 2.the number of ETCS formed andtheir activities, 3. the number of antitrust exemptionsgranted by the Department of Commerceand how effectively theseexemptionshave beenused, 4. whether the ETCShave helpedto lessenthe trade deficit, and 6. reasonsadvancedfor establishing suchcompanies. Weinterviewed representativesfrom the FederalReserveBoard and Department of Commerce,8 ETCSowned by bank hol#ng companies,l3 bankswhich have not formed ETCS, and 23ETCSwhich had obtained antitrust protection from Commerce.The sizeof our sampleand the ‘A companythat ownsat least26percentof anybanksubsidiaryandis registeredby TheFederal ReserveBoard.TheAct a&oallowsbankera’banks(bankswhoseonly cliqntzareotherbanks)and EklgeAct Corporationaownedby bankholdingOrJmpanies(which arec&teed by the Federal Reserveandengagedin international andforeignbanking)to investin ET’&+but sofar only bank holdingcompanieahavedone80. Page 10 GAO/NSIAD-MM 2ExportTradingC~mpadea ,,,8’,i ,!’., “,’
  • 12. Appendix I Implementatian of the Export ‘Ihding Company Act of 1982 selectionof companieswas basedon resourcelimitations and profes- sionaljudgement. Wealsotalked with officials of the U.S.Export Import Bank about their loan activity under the Act. Weexaminedthe notifications submitted by banks concerningtheir intentions to invest in IZTCSand certificates of review issuedby Com- merceto ETCSto provide antitrust protection. Wealsoreviewed the cor- respondenceand files of both agencies.Wemadeour review in accordancewith generally acceptedgovernment audit standards. Baclfground During deliberations on how to increaseexports, Congressconcluded that potential exports were not being realized dueto a number of fac- tors, including a lack of businessexpertise in exporting, limited financing, and governmentregulations. Congressbelievedthat, to reach a significant number of potential exporters, well-developedETCSwere neededto provide a full rangeof trade servicesand to achieveecono- miesof scalein order to lower unit costs.Congressexpectedthat ETCS could bemore successfulif they were allowed to draw upon the finan- cial resourcesand expertise of the banking system.Congressalso believedthat reducing the antitrust issueasan impediment to export trade would behelpful. Title I of the Act setsforth the purpose,which is to increaseexports of products and servicesby (1) forming an office of Export Trade in the Department of Commerceto promote and encouragethe formation of ETCS, (2) allowing bank holding companiesto invest in ETCS, (3) reducing restrictions on trade financing, and (4) modifying the application of antitrust laws to export trade. Title I of the Act defines an ETC as including a person,partnership, or associationwhich operatesprinci- pally to export goodsand servicesproducedin the United Statesor facilitates the export of suchgoodsor servicesby an unaffiliated person by providing export trade services.An ETC may buy and sell goodsand servicesor act asa broker on a commissionbasiswithout taking title to the goods.ETCSmay offer a wide rangeof exporting services,suchas market research;finding foreign distributors; preparing documentsfor export sales;taking title to goods;and arranging for transportation, insurance,financing, and other ancillary services. Title II permits bank holding companies,under the review and supervi- sion of the Federal ReserveBoard,to invest in ETCSthat are exclusively engagedin activities related to international trade and principally Page 11 GA0PMAD4M-42 Export ~radhg Companies
  • 13. Appamdix I Implementation of the Export !lhding Company Act of 1982 engagedin exporting (bank ETCS). Title II alsoestablishesa loan guar- anteeprogram in the US. Export Import Bank for exporters. Title III authorizesCommerce,with Department of Justice concurrence,to issue certificates of review to exporters that provide antitrust protection for their export activities. Title IV further clarifies the application of the antitrust laws to export trade. The Act doesnot setspecificseither in terms of increasedexports that were expectedto result or in the number and sizeof ET.CSthat were expectedto beformed. Expectations regarding the number of small and medium-sizedfirms that would usethe servicesof an ETC and the number of businessesthat would seekantitrust protection were not quantified. The Senatecommittee which reported out the bill indicated that both the banks andthe bank regulatory agenciescould beexpected to proceedcautiously. The Senatereport stated that, at most, $1 billion in total bank investments and loansto ETCSmight beanticipated within 6 years after enactment(Oct. 1987). According to Commerceand The FederalReserveBoard, it is too early to evaluate the successof the legislation or to judge U.S.firms’ efforts to penetrate new markets. Commercerepresentativesadvisedusthat the Act is not a panacea,asit is oneof many programs to help U.S.busi- nessesincreaseexports; they said it is difficult to quantify the Act’s effect on exports becauseits effect cannotbeseparatedfrom the effects of other programs or measuresdesignedto assistexporting. Further, the rate of economicgrowth in foreign countries, the debt problemsof developing countries, andthe value of the U.S.dollar relative to other currenciescansignificantly affect achievementof the Act’s objectives. Commercerepresentativeswill have onemeasureof the Act’s perform- ancein the annual reports submitted by companiesthat obtained anti- trust protection under Title III. However,evenexports listed in such * reports cannot necessarilybeattributed to the Act. Sucha direct cause and effect relationship may in fact beimpossibleto quantify or demon- strate statistically. 1 Export Promotion Pursuant to the Act, Commerceestablishedthe Office of Export Trading CompanyAffairs (OETCA) to promote and encouragethe formation of ETCSand to facilitate contact betweenproducersof exportable goods and servicesand firms offering export services,For fiscal year 1986, OETCAhasabudget of $746,000and 17staff members.To inform the public about the Act, OETCAinitially participated in 49 ETC conferences Page 12 GAO/NSIAD-!XM 2 Export Trading Companies
  • 14. APW* 1 Imph3mentatlon of the Export Trading Company Act of 1992 nationwide. It then held a secondround of conferencesto provide guid- anceto thoseseriously interested in forming or using ETCS. Theseconfer- encescoveredlegal issues,businessplanning, financing, and government assistance,Commercealsoheld ETC conferencesfor the banking industry. OEIU distributed information kits containing copiesof the Act, Com- merceand FederalReserveBoard regulations and guidelines,and mate- rials explaining other related governmentprograms. In March 1984, OETCApublished The Export Trading CompanyGuidebook,which explains the provisions of the Act, the advantagesof establishing or using an ETC, the organizational variables in designingan ETC, financial considerations,and other information. To increaseexporting awareness, OETCAconductedindividual counselingsessions,mostly with small and medium-sizedfirms interested in forming ETCS. It alsopublished a Con- taceq in June 1984,which lists by statr both export serviceproviders and U.S.producersof goodsand services that wish to beregistered.This will beupdated periodically and is intended to serveasa clearinghousefor producersto contact ETCS and for ETCSto identify possibleclients for their services. In commentingon our draft report, Commercenoted that OETCAhas also offered counselingto about 460 firms on Title III antitrust matters, other government assistanceand financing programs, and exporting in general,OETC4 produced and distributed the Handbook for Professionals to assistthe FederalBar Association in counselingon the Export Trading CompanyAct. OETCAhasorganizedindustry-specific outreach activities not only to the banking industry but alsoto the U.S.agricul- tural export community and to small and medium-sizedmanufacturing firms. Commercehasno data available on its successin bringing producers and ETCStogether or on the number of ETCSformed asa result of the promo- tion efforts. / Antitrust Protection The Act provided two meansof clarifying the antitrust laws andtheir Under Titles III and IV application to export trade. The first, Title III, establishesa pre-clear- ante processthat enablesany personor companyto determine in advancewhether its export conductis exempt from federal and state antitrust laws. Page 18 GAO/NS- 2ExpartlbdinjgCompantee
  • 15. Appendix I Implement8tion of the Export Trading Company Act of 1982 The Department of Commerce,in concurrencewith the Department of Justice, determineswhether or not the applicant’s proposedconduct would 1.substantially lessencompetition or restrain trade in the United States or substantially restrain the trade of any competitor of the applicant, 2.unreasonably affect prices of particular goodsor serviceswithin the United States, 3. constitute unfair methodsof competition, or 4. include any act that may reasonablybeexpectedto result in the sale or resalein the United Statesof the goodsor servicesexported by the applicant. When a favorable determination is made,a certificate of review is issuedgranting antitrust protection for the proposedexport activities. A certificate holder is still subjectto private party lawsuits for, among other things, injunctive relief and actual damagesif any of the four standards are violated and the lawsuit is brought within 2 years.The certificate, however, doescreateapresumption of validity for the export conduct specified andthe certificate holder canbeawarded the costsof defending the action, including attorney fees,if it prevails in any action brought against it. The secondmeans,Title IV, amendsthe,ShermanAct/and section5(a) of the FederaljTrade CommissionActTitle IV clarifies that theseantitrust dstatutes do not apply to export tra eunlessit hasan adverse,anti-com- petitive effect on commercein the United Statesor on the export com- b merceof a US. resident. Under Title IV, the antitrust laws would apply to export activity only if the activity hasa “direct, substantial, and rea- sonably foreseeableeffect” on the U.S.economyor U.S.competitors. Commercebelievesthat affirmative exporting decisionsmay have sub- stantially increasedasa result of the jurisdictional limitation provided by Title IV. However, sinceTitle IV requires no administrative action, it is not possibleto estimatethe impact with precision. mocessfor Obtaining @rtificates of Review A company seekinga certificate files with OETC4 an application which describesthe company,its goodsand services,and the export conduct for which the certificate is beingsought.The company alsoprovides Page 14 GAO/TVSIADW42 Export Trading Companiee
  • 16. Appendix I hnplem6mtation of the Export Trading Company Act of lSS2 organizational and financial information. The application is forwarded to the Justice Department with published data on the industry to facili- tate independent analysis of the application. OETCA prepares(1) a fact report describingthe industry, the applicant, andthe company’sshare of the market, (2) an economicanalysis of how the proposedexport con- duct falls within the four standardsof certification, and (3) a legal opinion on the proposedconduct.After Justice reviews and concurs with the issuanceof the proposedcertificate, the Secretaryof Commerce issuesa certificate basedon the recommendationof the Director of OliTC!A. ificates of Review The first certificates were issuedon October25, 1983,about oneyear after the Act waspassed,and asof October1, 1985,certificates had beenissuedto 67 companies.As of September1986,no applications had beendenied,although modifications had beenmadeand many had been withdrawn or returned to the applicants becausethey were incomplete. Of the 57 certificate holders, 28provide export servicesto facilitate the saleof goodsand servicesof non-affiliated firms in export markets and 29 holders or their membersproduce at least someof the goodsor ser- vicesthat are exported. The type of export conductcertified canbeclassified ashorizontal or vertical. Horizontal arrangementsare thosein which domesticcompeti- tors havejoined together to fix prices and allocate markets, customers, or quotas.According to Commerce,24 certificates have beengranted for which the antitrust issueswere principally horizontal. Included in the horizontal classification are membersof four Webb-PomereneAssocia- tions (organizations engagedin exporting that combinesimilar products of different producersfor overseassales)which export cherries,wood chips, sodaash,and textile machinery, respectively. Also included are * three other associationswhich were in existencebefore the Act was passed-one exports catfish, oneexports rice, and onehasmembers which operate duty free alcohol and tobaccoshopsalongthe Mexican border. Onehorizontal arrangement,for example,is Chlor/Alkali Producers International, ajoint venture of four companiesthat are competitors in the caustic sodaand chlorine business.Under the certificate, each membermay independently decidethe quantity of causticsodaand chlorine it will make available for worldwide export and may enter into an exclusive agreementwith Chlor/Alkali to act asexport salesrepre- sentative. Chlor/Alkali, on behalf of itself or its members,may establish Page 16 GAO/NSIAD-M-42 Export Trading Companies
  • 17. AppmiMx I Implementatlon of the Export Trading Company Act of 1982 prices and the quantities it will sell in the export market and allocate the markets or customersamongthe members.Chlor/Alkali and its mem- bersmay alsodiscussinformation about export salesand marketing efforts, quality and quantities, terms of contracts, expensesof exporting, and other export-related matters2 Vertical arrangementsarerestrictive agreementswith U.S.suppliers of export products or distributors in export markets. They canbenon- exclusiveor exclusive agreementswhere the ETC canrefuse to deal with other U.S.suppliers or other distributors in export markets. According to Commerce,31 certificates have beengranted for which the antitrust concernswere principally vertical. For example, a certificate was awarded to GateGroup U.S.A.,Inc., anETC which representsmanufac- turers of graphic art equipment and supplies and provides export trade services(consulting, advertising, market research,insurance,product research,freight forwarding, foreign exchange,taking title to goods,and other services).Under the certificate, GateGroup may enter into agree- mentswith a supplier to sell its products in designatedmarkets and the supplier may agreenot to sell directly or through any intermediary other than GateGroup.Gatemay alsoenter into agreementswith for- eign salesrepresentativesand establishprices and quotasfor the prod- ucts to besold by its foreign representatives. Appendix II is an analysis of the 67 ETCSthat had receivedcertificates asof October1,1986. meReasonsWhy More f! According to Commerce,more businessesmay not have soughtcertifi- sinessesHave Not Sought catesof review becauseTitle III is a new process.A companymust pro- rtificates of Review vide proprietary businessdata to the CommerceandJustice Departments and may want to know that the benefits are worth doing 4 so.Wewere advisedthat oncea few major companieshave sought cer- tificates and it appearsworthwhile to do so,many others will likely follow. A secondreasonwhy morebusinesseshave not soughtcertifi- I I catesmay involve the lack of antitrust issues;most of the applications / I for certificates returned by Commercebecausethey were incomplete were withdrawn becausethe firms did not have antitrust issues-they did not handle competingproducts, had no needto fix export markets or prices,or did not want to combinewith others for this purpose. 2Accordingto OETCAofficials, asuit hasbeenbroughtagainstthe Departmentsof Commerceand Justiceby aprivate party for the improperissuanceof acertificateto Chlor/Alkali; the casewas pendingbeforethe Federalcourt aaof Oct.1,1986. Page 16 (zAO/NSIAD-Sf3-42 Export Trading Companies
  • 18. Appendix I Implementation of the &port Trading Cornpuny Act of 1982 The executive director of the National Federation of Export Associa- tions, which represents800 to 850 small and independentcompanies, told us that more companieshave not applied for certificates of review becausemost companiesare specializedand have suchsmall sharesof the market that they are not concernedabout antitrust. In view of the fact that only 57 businesseshave receivedcertificates of review which grant antitrust protection in advance,the concernover antitrust may not have beenasmuch of abarrier to exporting asper- ceived.Businesses,however, may berelying on the protection under Title IV of the Act which is intended to clarify the antitrust laws in regard to export trade. In commentingon our draft report, Commerce emphasizedthe role that Title IV may have in reducing antitrust uncer- tainty. It noted that sinceTitle IV is self-effecting and available to all U.S.exporters, the extent of its impact on increasedexports cannotbe determined. Have the Certificates Been Wecontacted23of the 67 certificate holders to learn how useful the Useful? certificates have beento them. The 23 companieswere small; somepro- ducedor assembledproducts, others provided export trade services, someactedascommissionedagents,while others took title to goods. The reasonsgiven by companiesfor obtaining certificates were to obtain the antitrust protection andto enhancetheir stature with clients and the public; 19companiessaid they had antitrust concerns.Over half of the companiesrespondingsaid they had receivedother benefits from being certified, including the publicity, credibility, and imageasapproved ETCS. As onecompanyofficial put it, the intangible benefits associated with the certificate include a little publicity and a Commerce“seal of approval” that provides legitimacy to the ETC. Severalcompany officials * alsosaid that the certificate madeit easierto deal with suppliers and others. Many of the 23 companiesthat we contactedclearly had not doneas well asthey had hoped.Many companiesdid say they had a measurable increasein exports and believedthat having certificates helpedto attract business,but only 2 of 13respondingconclusively about their trade volume indicated they had doneaswell asanticipated. The other 10companiessaid it was too early to tell becausethey hadjust recently receivedtheir certificates or they had no opinion. Page 17 GAO/NSIAD-S64 2 Export Trading C43mpaniee ,:
  • 19. Appendix I Implementation of the Export Trading Company Act of 1982 / Bpk Holding ampany Investment iri ETCs Economicfactors, particularly the current high value of the dollar, have hurt the performance of the ETCSconsiderably and forced shifts in their planned activities. Three companiesattributed their lack of export busi- nessto the value of the dollar and five said it severelyaffected their businesses.To offset negativeeconomicfactors, many companieshave turned to or are consideringincreasedimporting and countertrade. Only onecompany saidthat economicfactors have not affected its perform- ance-the value of the dollar was already high when the company started and the company sellsa unique product. Yet, 19companies, someof which are new to exporting, said they could eventually compete with foreign firms, particularly if the value of the dollar declines. The intent of Title II is to developETCSin which bank holding companies will participate effectively in financing and development.Congress expectedthat bankswould createETCSwhich . have powers sufficiently broad to competewith similar foreign-owned institutions; l afford U.S.commerce,industry, and agriculture, especially small and medium-sizedfirms, a meansof exporting at all times; l have regional and smaller bank participation; and . facilitate joint ventures betweenbank holding companiesand non-bank firms that canhandle all the needsof an exporting company. Becausebank holding companyownership of ETCSis a departure from the policy of separating banking from other types of business,the Act imposedcertain restrictions. Bank holding companieswere allowed to invest up to 6 percent of their consolidatedcapital and surplus in the ownership of ETCS andto loan the ETCSup to 10percent of their consoli- dated capital and surplus. The Board of Governorsof the Federal b ReserveSystemmay disapprove an investment (1) to prevent unsafeor unsoundbanking practices,undue concentration of resources,decreased or unfair competition, or conflicts of interests or (2) if it materially adversely affects the safety or soundnessof a subsidiary bank of a bank holding company. Proponentsof bank involvement maintain that U.S.banks canprovide important trade services,suchasresearch,foreign market knowledge and experience,expertise in documentation, and,most importantly, 3Countertradeinvolvestransactionswherethe U.S.selleris requiredto acceptpaymentin goodsor otherinstrumentsof tradefromthird countries. Page 18 GAO/NSIAD-8642 Export Trading Companies
  • 20. Appendix I Implementation of the Export lhding Company Act of 1982 financing. The banking provision was controversial becauseit breaks the traditional separation betweenbanking and commerce.According to representativesof the Board, the separation was basedon (1) the safety and soundnessof banks and of the banking systemin general,which might beimpaired if banks were closely affiliated with ownership and managementof a potentially high risk, non-bankbusiness,and (2) the premisethat the lending decisionsof banksbeimpartial and basedon soundeconomicand financial grounds. Federal ReserveBoard I The Board published its proposedrule implementing Title II in the I%& ;7:3Register in January 1983and the final rule becameeffective in July Bank holding companiesthat wish to invest in anETC notify the Board in writing about the nature of the investment andthe activities of the proposedETC. The notification is reviewed for financial and legal issues and a staff recommendationis madeto the Board. The proceduresallow bank holding companiesto invest if they are soadvisedby the Board or if the Board doesnot disapprove the investment within 60 days. In December1983,the Board delegatedauthority to review notifications of investment to the FederalReserveBanks when certain criteria set forth in the regulations aremet. Failure to meetthe criteria meansonly that the Board must review the proposedinvestment. As of October1986,no investments had beendisapproved by the Board andthe Federal ReserveBanks andthe bank ETCSwe visited had no problemswith the Board procedures.They did, however, disagreewith someof the rules and regulations imposedby the Board. Bank Holding Company Invqstment As of October1, 1986,40 ETCS had beenformed by 40 bank holding com- panies;30 of them arewholly-owned subsidiariesof the bank holding companiesand 2 of these30 were outright purchasesof an ongoingETC. b Two of the 40 are subsidiariesof bank holding companiesbut will allow other investors to purchasean equity interest, and 8 arejoint ven- tures-one betweenthree bank holding companiesand private inves- tors, onebetweenthe samethree bank holding companiesand an ongoingETC, onebetweenabank holding company and a manufacturer, and 6 betweenbank holding companiesand ongoingETCS. In several joint ventures, bank holding companiesdid not retain controlling interest. Page 19 GAO/NSIAD46-42ExportTrading Companies
  • 21. - Appmdix I Implementation of the Export Trading Company Act of 1982 The 40 ETCS are geographically disbursed-13 in the U.S.northeast, 11 in the U.S.west, 6 in the U.S.midwest, 9 in the U.S.south, and 1over- seas.The sizeof the bank holding companieswhich investedin the ETCS varies considerably; the total authorized investment in the 40 companies is about $84 million, ranging from a high of $18million to a low of $10,000. Table 1.1comparesthe sizeof the bank holding companieswith the amount of authorized investments and showsthat 9 multinational money centerbanks,accountingfor 10EWS, have madethe bulk of the investments. Table 1.1:Sire of Bank Holding panlor and Their Investments In Dollars in thousands111” ------~...-~ Number of Tot@ approved investment Size of bank holding company ETCs Amount Percent.--- Money center banksa 10 $71,103 04-~ Assets over $5 billion 13 6,573 8- Assets between $1 billion and $5 billion 5 3,250 -2-- Assets below $1 billion 8 1,275 2 Joint venture of three banks 2 702 1-~ Dissolved ETCs 2 1,150 1 Total 40 $84,053 100 ‘The Federal Reserve Board has classified 17 U.S. bank holding companies as multinational or money center bank holding companies-large organizations located in major financial centers in the United States 0 erating Experience and Agpreach of bank ETCs The ETCS have little operating experience.The first onewas authorized in May 1983,sohashad almost 3 years experience.Overone-third of the proposals,however, date from the beginningof 1984,sothe oper- * ating experienceof thesecompaniesis much shorter. The Federal ReserveBoard stated that most were still in the formative stages- organizing, looking for personnel,identifying markets and potential cus- tomers, etc.Most expectto incur lossesduring their start-up phaseand only a few have engagedin trade transactions, and thesehave generally beensmall. Our survey confirms this; the eight bank JCNSwe contacted reported only limited exports. From our discussionswith the eight bank ETCX and our attendanceat a conferenceon ETC operational experiences,export trends, and federal policy matters, we noted a wide variance in the approachesbeing fol- lowed and the scopeof operations.Bank ETCSwere formed for various Page20 GAO/NS LAD-8642 Export Trdlng Chmpdes
  • 22. Implementation of the Export Trnding CompanyActof1982 reasons;most of the oneswe contactedwere formed generally asa new sourceof profits, but banks alsowanted to provide additional services to their clients. According to onebank ETC representative, the banking industry hasbecomevery competitive, sobanksmust scrambleto find new ways to servecustomersand make profits. The differences in approachesfollowed in forming ETCSand the scope and focus of operations are shown in the examplesbelow. A-An ETC was establishedin May 1984with a generalmanagerand a bank attorney asthe only employees.It provides trade developmentser- vicesin suchareasasexport licensing andmarket researchand con- tracts out for much of theseservices.The bank holding company is taking a cautious approach in trying to purchasethe right export man- agementcompany or to form the right joint venture. The company finds it difficult to find an export managementcompanyto purchase,asthere are few with the right managementand characteristics. B-The bank holding companypurchasedan ETC in 1984which has beenin businesssince1971and hasabout 76 employees.The company specializesin exporting computer graphics products, and little has changedsincethe acquisition. The affiliated bank hasbrought a few cli- entsto the company,and the company president has assistedthese potential clients by examining whether products canbesold abroador whether a client’s approachis viable. C-The bank holding company acquired a consumerfinance and leasing corporation in 1984which had its own inactive trading ‘companysubsid- iary. The subsidiary was reactivated with a staff of six experienced traders who had salescontactsin different parts of the world. The com- pany operatessimilar to a trading houseand prefers to take title to goods.Although the company was very active during 1984,there have beenfew exports and most of its businesshasinvolved third-country trades. The company handlesmostly textiles and chemicalsbut will trade any products. It “works with” the bank’s in-housetrade group that provides bank clients with export-related services. D-This trading corporation was establishedin 1983and represents small to medium-sizedU.S.companiesin overseasmarkets, principally China. Its primary expertise is in the metal processingindustries, such ascanmanufacturing equipment. China is viewed asa difficult market for most manufacturers, andthe trading corporation believesit knows . Page21
  • 23. --- Appendix I Imphmentath of the Export Trading Company Act of 1982 how to sell in China. It alsoattempts to sell Chinesegoodsin the United States. E-The ETC beganoperations in February 1984and is a full service trading company with over 40 employeesengagedin export, import, third-country trade, and counter-trade.It focuseson specific product areasin advancedtechnology, forest and agricultural products, and machinery and other generalproducts, including chemicals,construction materials, fertilizer, coal,and machinery. In addition to buying and selling products, it alsoprovides trade related services,suchastrans- portation, insurance,and financing. The bank ETCSthat we contactedsaid the value of the U.S.dollar makes it difficult to sell new products. Ona recent Europeanvisit, representa- tives of oneETC found that U.S.goodsof high quality were about 36 percent (and on occasion70 percent) abovethe market price; foreigners will pay a premium of about 6 percent,but not the high prices required becauseof the value of the U.S.dollar. Another representative saidthat saleshave beendisappointing, the ETC lost five potential dealsto foreign competitors in a S-dayperiod in December,and “the value of the U.S. dollar hasbeena killer”. Aside from the value of the dollar, oneETC representative said another concernis that many U.S.companiesare not gearedto export and do not look beyondthe U.S.market. U.S.companiesdo not view the world as the marketplace eventhough they may not beoperating at full capacity. Another said U.S.companiesdo not believethey needa “middle-man” or ETC. Eventhough they arenot experiencedin international trade, U.S. companiesoften believethey canhandle suchtrade without the assis- tanceof an ETC. Onerepresentative of an ETC seemedvery optimistic about its future. The ETC could not gointo all areasof business,soit carved out some niches-medical products, food systems,technology, andtelecommuni- cations.It incurred a lossduring 1984but expecteda profit in 1986.The ETC employs 40,to 46 peopleand hasoffices in Europe, EastAsia, and Latin America. In the representative’sopinion, opportunities do exist but successcomeswith hard work and beingcreative. Hestated that to have a successfulETC, the bank holding company must becommitted to the business,be “diversified-minded” and not let the ETC becomean extension of bank services,realizethe businessis complicated and will take time to beprofitable, and make a$6 million to $10 million invest- ment andthe ETC must (1) beflexible and have a businessstrategy, (2) Page 22 GAO/NS IAD- Export Trading Cvmpaniee
  • 24. Appendix I Implementation of the Export Trading Company Act of 1982 identify U.S.products that are competitive, (3) hire peopleexperienced in international trade, and (4) “focus, focus,focus”, meaningthat it must sort out the right products and locations. SomeReasonsWhy Bank Holding CompaniesHave Not Tnvestedin ETCs The Bank Administration Institute and the ConferenceBoardjointly researchedwhether the banking community respondedfavorably to the Export Trading CompanyAct. In a questionnaire sentto 1,000of the largest U.S.banks in August 1983,126of 160respondingbanks reported they had no plans to createbank ETCS and 34 were considering it. Although the data arenot current andthe responserate was low, the following reasonsgiven for lack of interest may berepresentative of the banking community in general. 1.The geographicalareaservicedby the banks had a relatively small number of firms engagedin exporting, and somebanks did not evenfind it necessaryto have an international department. 2. Many banks are conservative and believethat ETCSshould beunder- taken only by the large international banks. 3. There were no bank ETCSin the country which could serveasmodels to beemulated. 4. The profitability of an ETC is too uncertain or other areasof banking are more profitable. The low responserate (16 percent) may alsobeindicative of the lack of knowledge or interest in establishing ETCSin 1983.In 1984,we contacted three money centerbanksthat had not establishedETCS, and they gave us the following reasonsfor not doing so. Bank A, when the Export Trading CompanyAct was passed,considered severaloptions and almost acquired a high-tech ETC. A bank representa- tive said that the banking environment is changing-deregulation allows banksto operateinterstate and more capital is neededfor lending activities. Export trading is a new areawhere margins are small. The bank will consideran ETC while viewing other priorities for its capital, and an ETc will beformed only if it appearsmore attractive than other businessareas.The bank did purchasea small companythat assistsin marketing U.S.products overseasand specializesin the market needs and trade opportunities of certain countries. Page 22 GAO/NSLAD-8&4 2 Export Trading Companies
  • 25. Appendix I Implementation of the Export Trading Company Act of 1982 Bank B decidedthat an ETC is not part of its businessstrategy at this time, but it hasnot closedout the possibility for the future. The bank canencouragetrade and meetthe needsof its clients without estab- lishing an ETC. Most bank clients are large multinational companies experiencedin exporting and importing and do not needthe services envisionedin the Act. Bank Cstated that its expertise on how to export is what is important to bank customers;a bank doesnot needto form an ETC to provide its cli- ents with the knowledge to export. Bank representativesalsopointed out that the environment for En: formation hasnot beengood;for sev- eral reasons,potential constraints on the bank’s capital and the strength of the U.S.dollar madeapoor climate for exporting. Sincethe ETC was a non-traditional useof bank management’stime and there was no history of bank ET%, they decidedit was not the right businessfor the bank at this time. b&k ETC Commentson F4deral ReserveBoard Rqgulationsand Policies Bank ETCSbelievethat certain provisions of the Export Trading Com- pany Act and of the FederalReserveBoard’sregulations and policies have affected or will affect their export performance, potential to com- pete with foreign-owned trading companies,and ability to survive. According to theseETCS, the regulations and policies appearinconsistent with the congressionalintent of facilitating financing for exports and drawing on the resourcesof the banking systemto createsuccessful bank ETCS. Onerepresentative said that if the Board maintains its regu- lations and policies,the bank holding companywill sell its ETC because it’s a vast problem to run a businesswithin suchnarrow confines,par- ticularly when the policies have no relation to world trade. In general, the banks believethat it is discriminatory to subjectbank ETCSto regula- tions and policies that do not encompassnon-bankETCS. Five concerns h cited are asfollows. 1.The definition of expm - The Act requires the bank E'IC to beoper- ated principally for the purposeof exporting; the Board hasdefined this asmaking 60 percent of total revenue-including exports, imports, and the saleof foreign products in overseasmarkets-from exporting over a 2-yearperiod. The proceedsof countertrade and trade.that the ETCS arrange betweentwo foreign countries are countedasnon-export rev- enue.The bank ETCSarguethat if half of the businessmust consistof exports, they may not beableto meetthe Board’srequirement. They assertthat, asa minimum, the 50-percentrequirement should encom- passmore than aperiod of 2 years and that atransaction necessaryto Page 24 GA0/N8L4D-96-42 &port Trading companies ,j&; ,. ,/,:, ;” .rw:, ’ .’ _’ : ’ ;’ ;::, ““::
  • 26. Appendix I Implementation of the Export Trading Company Act of 1992 make an export saleshould not becountedasnon-export revenue.For example, the elementof a counter-tradetransaction involving athird country or an import into the United Statesshould not becountedas non-export revenue.Onerepresentative said that the purposeof Title II is to provide for meaningful and effective participation by bank holding companiesand that it givesbank ETCs powers sufficiently broad to enablethem to competewith similar foreign-owned institutions in the United Statesand abroad;thus, hebelievesthat the SO-percentrequire- ment conflicts with Title II. The FederalReserveBoard views its SO-percentrequirement and its def- inition of exports asnecessaryto carry out the intent of the legislation, which is to promote exports. Importing is lessdifficult, and the Board feelsthat without the 50-percentexport requirement, bank ETCSwould have lessincentive to find markets for U.S.goods.The Board is reluc- tant to take what it feelswould bea stanceagainstthe export intent of the legislation. Board representativesadvisedusthat ETCSwhich have commentedon the regulation stated that the problem is anticipatory; they havenot had any difficulty meetingthe test to date. With regard to the required extent of export revenues,we believethe Board clearly is authorized to establishthe requirement that more than 60 percent of revenuesbefrom exports. The term “principally” in the context of the statutory provision contemplatesthat the preponderance of an ETC’S activity will not beimports, andthe legislative history on the Housesideanticipates the Board’s measuringan ETC'S activities in terms of revenueshares,The Board actedwithin its authority by defining “principally” only in terms of export revenuesand in setting this requirement that exports bemore than 60 percent of all revenues. The statute, however, doesnot itself addresshow suchrevenuesshould becalculated or whether revenueshould bethe solebasisfor deter- mining if anETC is organizedand operatedprincipally for the purposeof exports. In fact, it doesnot eveninclude the term “revenue”. Therefore, for calculations to meetthe 60-percentrequirement, we believethe Board could redefine its own term “revenues” to include only proceeds from imports to and exports from the United States.This changewould exclude,for purposesof establishing whether an ETC meetsthe SO-per- cent requirement, the proceedsfrom foreign products sold in overseas markets that do not enter US. commerce.The Board could alsodevise indices additional to “revenue” to determine whether a company is “organized and operated” principally for exporting or facilitating exports and it could extend beyond 2 yearsthe period during which Page 25 GAO/NSW 2 Export Trading Companies
  • 27. -- Appendix I Imp1ementdion of the Export Trading Company Act of 1982 qualifying revenuesare computed.Webelievesuchmodifications could have the effect of reducing the extent to which companiesview the cur- rent regulation asa potential impediment to operations and still assure that importing doesnot constitute the preponderanceof ETC activity. 2.Section23A collateral reauirements - Section23A of the Federal ReserveAct Istatesthat extensionsof credit from abank to its non-bank affiliates shall besecuredby collateral with a market value of 100to 130percent of the credit, dependingon the nature of the collateral. Although the Export Trading CompanyAct exemptedtransactions betweena bank and its ETC from the collateral requirements of any fed- eral law in effect on October1, 1982,this exemption, accordingto the Board, was nullified a week later upon passageof the/Gain-St Germain Depository Institutions Act of 1982/Beard regulations have permitted a bank to advancefunds to its ETC to purchasegoodsif its ETC hasa con- tract to sell the goodsand the bank hasa security interest in the goods or in the proceedsfrom the saleof the goodsequal in value to the funds advanced.The Board hasalsoindicated that it will considerwaivers in certain cases,and it hasgranted at least onewaiver. For affiliate lending, bank ETCSstate that they are already subjectto the lo-percent limit of capital and surplus for extensionsof credit andto the provision that the bank may not extend credit to the ETC or customers on more favorable terms than it affords similar borrowers; they believe theseprovisions provide adequateprotection for the solvencyand soundnessof banks and therefore section23A is unnecessary.According to the Board, however, theserestrictions are intended to protect the resourcesof the bank from abuseby related companies.Wewere advisedthat section23A restrictions arethe linchpin of current efforts to deregulatethe banking industry, reflecting the view that banks are subjectto unsafeor unsoundpractices if free to lend to affiliates on an * unrestricted basis. 3. Exclusive international trade - The Act requires that a bank ETC be exclusively engagedin activities related to international trade. Oneof the largest bank ETCSviews this ascounterproductive and contendsit is difficult to restrict one’sservicessolely to international activities; in working with a customer,it sometimesis necessaryto take a position in or to finance the saleof a commodity when only a portion of that com- modity will beexported. Although this kind of transaction helpsthe export market and is typical of foreign banking firms in Europe,the bank ETC believesit is prohibited from doing this. Page 26 GAO/NSliiDM-4 2 FIxport Trading Companies
  • 28. Appendix I Implementation of the Export Trading Company Act of 1982 4. Exporting of services- The Act defines a bank ETC as“a company which doesbusinessunder the laws of the United Statesor any State, which is exclusively engagedin activities related to international trade, and which is organizedand operatedprincipally for purposesof exporting goodsor servicesproduced in the United Statesor for pur- posesof facilitating the exportation of goodsor servicesproduced in the United Statesby unaffiliated personsby providing oneor more export trade services.” Under the Board’sdefinition, an ETc canonly provide servicesto facili- tate the export trade of others. Thus, under the Board’s definition, a bank ETC may not invest in a companythat only provides servicesto foreign customers(suchasa construction company or an insurance firm). The Department of Commercedisagreeswith the Board’s position on this and there hasbeenan exchangeof correspondenceabout the matter betweenthe Secretaryof Commerceand the Chairman of the Board of Governorsof the FederalReserveSystem.The Board reasoned that its position that bank ETCSserveonly astrade facilitators and not asinvestors in serviceindustries is sufficiently supported by the Act’s purpose and the legislative history. The Board believesthat Congress would not regard banking investment in construction companies,general insuranceunderwriters, or mining companies,for example, aswithin the scopeof activities authorized by the Act. The Board’s interpretation of legislative intent was alsoexplained in a letter to the Chairman of the HouseCommitteeon Banking, Financeand Urban Affairs andto other legislators at the time the final regulations were adopted. Commercecontendsthat the regulatory definition of an ETC adoptedby the Board is not supported either by the languageof Title II or its legis- lative history. Instead Commercecontendsthat a straightforward reading of the statutory definition clearly indicates that Congress intended an ETC to export goodsand servicesitself or to facilitate the exports of goodsand servicesof others by providing export trade ser- vices.Commerceconcludesthat the Board, by finding in the statutory languagean “ambiguity” on which to baseits interpretation, hasmerely establisheda vehicle to permit the Board to substitute its own view of the proper role for bank ETCS for the role Congressexpressedin the statute and the legislative history. Wereviewed the positions of both the Board and Commerceconcerning the interpretation of the statutory definition of a bank ETC. Basedon our review of the statute, its legislative history, and the respectivepositions of the two agencies,we believethat Commerce’sposition is the better Page 27 GAO/NSIAD-S6-42 Export Trading Companies
  • 29. Appendix1 ImplemeniationoftheExportTruding CompnnyActof1982 interpretation of the statute and its legislative history. In our view, the Export Trading CompanyAct’s definition of “export trading company” permits bank holding companyinvestment in an ETC which exports services. 6. Leveragingratio - In consideringproposedinvestments and in dele- gating authority to FederalReserveBanks,the Board’spolicy is that the bank ETC asset-to-capitalratio will not exceed1O:l. This limits the amountsthat canbeborrowed. Bank ETCS believethat the ratio should not beimposedon them and that becauseof the barriers to and risks inherent in the export business,a low leveraging ratio doesnot give them an adequatechancefor success.Onthe other hand, the Board intends to protect the banks againstunsoundpractices and the 10:1 ratio protects the solvencyand soundnessof banks.The Board might considergranting awaiver for individual casesif it concludesthat no potential harm exists to the bank. U!S.Export Import Bank Section206of the Act directed the U.S.Export Import Bank (Eximbank) to establish a loan guaranteeprogram for exporters andETCS. In response,Eximbank approved the Working Capital GuaranteeProgram in January 1983to assistcompanies,especially small and new-to-export companies,to obtain working capital for export-related projects, suchas purchasing inventory or developingexport marketing programs. Eximbank is not supposedto competewith private sourcesof funding, sothe program should cover loansthat otherwise would not bemadeby commerciallenders. Under the program, a lender must indicate that it will not approve the loan without the Eximbank loan guarantee.The loan guaranteecovers both principal and interest. As much as90 percent of the principal and b interest (up to the US. Treasury borrowing rate for comparablematuri- ties plus onepercent) canbeguaranteed.The lender is at risk for the balanceof the unguaranteedprincipal and interest. For the guarantee, Eximbank receivesa fee of onepercent of the loan amount for loans maturing in 180days or less;for longer maturity periods,the fee increases. This is the only Eximbank program that guaranteesloansfor U.S. exporters rather than foreign purchasersof U.S.exports. To publicize the program, Eximbank sentbrochuresto about 14,000commercial banks and 16,000small businessesandparticipated in about 40 semi- nars on export financing with the Department of Commerceandthe Page28 GAO/NSIAD&U 2ExportTradingCompanienies

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