oversight

International Trade: Export Enhancement Program's Recent Changes and Future Role

Published by the Government Accountability Office on 1990-06-14.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                   United   States   General   Accounting   Office

GAO                Report to Congressional Requesters
                    .
                                                      f
                                                                     f




June 1990
                   INTERNATIONAL
                   TRiADE
                   Export Enhancement
                   Program’s Recent
                   Changes and Future
                   Role




                                          --
GAO/NSLAD-90-204
National Security and
International Affairs Division

B-226083

June 14, 1990

The Honorable E (Kika) de la Garza
Chairman, Committee on Agriculture
House of Representatives

The Honorable Silvio 0. Conte
House of Representatives

The Honorable Charles E. Schumer
House of Representatives

In response to your requests, we have reviewed the Export Enhancement Program. This
report, the third in a series, focuses on recent program changes and the program’s continued
role in fostering the liberalization of agricultural trade. On February 7, 1990, we issued a
report that discussed bonus overpayments, and on February 12,1990, we issued a fact sheet
that provided general information on how the program operates and the nature and extent of
program activity. We have also testified on the results of our work before various Senate and
House Agriculture committees and subcommittees.

The Department of Agriculture’s Foreign Agricultural Service has been working to improve
program operations. This report identifies several areas where further improvements are
needed. It also contains a matter for congressional consideration.

We are sending a copy of this report to the Secretary of Agriculture,   and will make copies
available to other interested parties upon request.

The report was prepared under the direction of Allan I. Mendelowitz, Director, Trade,
Energy, and Finance Issues. He can be reached on (202) 2754812, if you or your staff have
any questions. Other major contributors are listed in appendix II.




Frank C. Conahan
Assistant Comptroller General
-.
                         EkecutiveS-ary




GAO’s Analysis

Program Operations and   While relevant commodity divisions maintain files on each proposed
                         program initiative under review, the Foreign Agricultural Service does
Recent Changes           not centrally track a proposal until the division forwards it for higher
                         level review. As a result, top management cannot be readily aware of all
                         proposals under consideration at any time nor can it systematically
                         monitor the progress of proposals under review in the commodity divi-
                         sions Thus it cannot ensure that all proposals get equal treatment.

                         Exporters are required to certify their program eligibility by submitting
                         documents related to their business activities. Eligible exporters must
                         then provide details of a sales contract to participate in the bidding pro-
                         cess. GAO found that FAS files contained the required information, but
                         that agency officials did not verify all categories of information pro-
                         vided, even on a random basis. Better internal control is needed to
                         ensure that only eligible exporters with valid sales contracts are partici-
                         pating in the program.

                         During this review, GAO found agency officials were receiving the infor-
                         mation necessary to make informed decisions but were still not docu-
                         menting adjustments made when calculating price and bonus amounts.
                         As a result, it was difficult to determine whether bonus calculations
                         were higher than needed to make a sale -of particular concern when
                         bonuses exceeded sales prices. For example, in February 1990 we
                         reported that for dairy cattle, the average bonus value was as high as
                         146 percent of the average sales price in 1986; for semolina, as high as
                         140 percent in 1987; and for frozen poultry, as high as 111 percent in
                         1986. The Foreign Agricultural Service has recently developed written
                         guidelines for determining price and bonus levels and now requires that
                         all relevant price and bonus calculations be fully documented.

                         The Foreign Agricultural Service is also improving its bonus payment
                         process. Early in its review, GAO found that inadequate internal controls
                         had allowed bonus overpayments to occur and recommended that suffi-
                         cient internal controls be developed to guard against future overpay-
                         ments. The Foreign Agricultural Service agreed and is in the process of
                         recouping the overpayments and developing and implementing a new
                         computer program to administer the bonus payment process.




                          page.3
                  The Congress, in reauthorizing the program, should condition the level
Matter for        of appropriations on the outcome of the current negotiating round-
Congressional     scheduled to end in December 1990. At that time, Congress should
                  reevaluate the need for the program in light of any agreement reached
Consideration     on liberalizing agricultural trade.


                  As requested, GAO did not obtain formal agency comments on a draft of
Agency Comments   this report. However, its contents were discussed with agency officials,
                  and their views have been incorporated where appropriate.




                  Page 5                                     GAO/l’JSIMWO-2@4   Intematiod   Trade
contents




Abbreviations

EC         European Community
FAS        Foreign Agricultural Service
GAO        General Accounting Office
GA’lT      General Agreement on Tariffs and Trade
OIG        Office of Inspector General
OMB        Office of Management and Budget
TPRG       Trade Policy Review Group


pm7                                      GAO/‘NI3IAD4O.~   Intematiod   lhde
                  Chapter I
                  prO@an~ Activity and Focus




                  1989.’ At that time, 71 exporters had received over $2.3 billion worth of
                  surplus U.S. agricultural commodities as bonuses. (One year later,
                  bonuses had risen to over $2.7 billion.) Four exporters-Cargill,  Conti-
                  nental, Louis Dreyfus, and Artfer-had     each received over $100 million
                  in bonuses (nearly 60 percent of all bonus awards); Cargili and Conti-
                  nental alone had received over $400 million in bonuses each.

                  Of the $2.3 billion in bonuses, about $1.6 billion facilitated wheat sales.
                  About $1.7 billion of the total bonuses, or 74 percent, supported sales to
                  7 countries-the    Soviet Union, China, Egypt, Algeria, Saudi Arabia,
                  Morocco, and Iraq.

                  Total sales under the program through February 1989 were valued at
                  $6.8 billion, of which wheat represented over 80 percent. (One year
                  later, sales had risen to over $10 billion.) Five countries-the  Soviet
                  Union, China, Algeria, Egypt, and Morocco-had bought approximately
                   1.4 billion bushels of wheat under the program, about 74 percent of the
                   1.9 billion bushels sold. Other commodities sold have been wheat flour,
                  barley, barley malt, semolina, rice, vegetable oil, sorghum, frozen
                  poultry, table eggs, mixed poultry feed, and dairy cattle.


                  FAS receives and reviews recommendations, both oral and written, for
How the Program   countries and commodities to target under the program from many
Works             sources, including importing countries, U.S. exporters, Agriculture’s pro-
                  gram experts, U.S. and foreign government officials, and other members
                  of the U.S. agricultural community. The appropriate FAS commodity divi-
                  sion3 reviews each recommendation to determine whether it meets the
                  program criteria. If the program criteria are met, the recommendation
                  becomes an official proposal and is forwarded with comments and rec-
                  ommendations to Agriculture’s Under Secretary for International
                  Affairs and Commodity Programs.

                  If the Under Secretary approves the proposal, an interagency review
                  process begins. The proposal is sent to the Office of the U.S. Trade Rep-
                  resentative, which coordinates the final review and approval process



                  ‘International Trade: Activity Under the Export Enhancement Program, (GAO/N&W-90-59FS,
                  Feb. 12, 1990).

                  “Currently three commodity divisions analyze recommendations for new program initiatives4rain
                  and Feed; Oilseeds and Products; and Dairy, Livestock, and Poultry.



                  Page 9                                                   GAO/NSIAD90-204 International      Trade
                          Chapter1
                          PmgramActivityandFocm




                          these certificates or redeem them for commodities that Agriculture
                          offers.


The Bidding Process       After FAS announces an initiative, U.S. exporters compete for sales
                          through an FM-administered bidding process. U.S. exporters negotiate a
                          sales price with an importer, determine the necessary bonus, and submit
                          this information to FAS as a bid. For FAS to accept the bid, it must fall
                          within established minimum price and maximum bonus levels. The min-
                          imum price and maximum bonus levels are not publicly announced, pri-
                          marily to maintain the integrity of the bidding process and to promote
                          competition.

                          Upon receiving a U.S. exporter’s bid, FAS first compares the price to its
                          minimum acceptable price. If the exporter’s price is lower, the bid is
                          rejected. If the exporter’s price is higher, FAS then compares the
                          requested bonus amount to its maximum acceptable bonus. If the
                          exporter’s bonus is higher, the bid is rejected. If the exporter’s bonus is
                          lower, the bid is acceptable. FAS compares the requested bonus amounts
                          of all acceptable bids received and awards the contracts in ascending
                          order of bonus bids until the approved quantity is filled.


                          The Export Enhancement Program was established to meet three objec-
Recent Changes to         tives: to increase U.S. agricultural exports; to challenge unfair trade
Program Criteria          practices of competitor nations, especially the European Community;
                          and to encourage U.S. trading partners to begin serious negotiations on
                          the liberalization of agricultural trade under the Uruguay Round of the
                          multilateral trade negotiations. According to guidelines established by
                          the Economic Policy Council, each program initiative (targeted country/
                          commodity) was to meet four criteria.

                      l Additionality: Sales were to increase U.S. agricultural exports above
                        those that would have occurred in the absence of the program.
                      . Targeting: Sales were to be targeted at specific market opportunities,
                        especially those challenging competitors that were subsidizing their
                        exports.
                      l Cost effectiveness: Sales were to result in a net plus to the overall
                        economy.
                      l Budget neutrality: Sales were not to increase budget outlays above those
                        that would have occurred in the absence of the program.




                           Page11                                      GAO/NSIAD9&204   Jntematiotml   Trade
                                 Chapter 1
                                 Fro@un Activity   and Focus




                         l       Trade policy effect: What is the expected contribution of a proposed ini-
                                 tiative in furthering the Uruguay Round and other trade policy negotia-
                                 tions? Sales should displace competitors’ subsidized exports in targeted
                                 countries, thereby furthering the U.S. negotiating strategy of countering
                                 competitors’ subsidies and other unfair trade practices. Targeted coun-
                                 tries are those where U.S. sales have been nonexistent, displaced, or lost
                                 because of competition from subsidized exports.
                             l   Export effect: How will the proposed initiative contribute to realizing
                                 U.S. agricultural export goals? All initiatives must demonstrate the
                                 potential to develop, expand, or maintain markets for U.S. agricultural
                                 commodities. The program should concentrate on commodities that
                                 would be competitive if competitor subsidies were eliminated.
                             l   Effects on nonsubsidizers: What effect will the proposed initiative have
                                 on nonsubsidizing exporters of agricultural products? Agriculture will
                                  consult with representatives of targeted countries, where practical and
                                  appropriate, to determine if program sales would have more than a min-
                                  imum effect on nonsubsidizing exporters.
                             l    Subsidy requirements: How do the subsidy requirements (costs) com-
                                  pare to expected benefits? The overall program level and individual
                                  bonus decisions will be the minimum necessary to achieve the expected
                                  benefits of export expansion and trade policy reform.

                                 The subsidy requirement guideline is meant to replace the budget neu-
                                 trality criterion. Agriculture recognized the difficulty in measuring
                                 budget effects in a changing global market. Additionality was dropped
                                 as a criterion and, instead, incorporated into the export effect guideline
                                 as a “consideration” when determining the initiative’s overall contribu-
                                 tion to export expansion. Targeting was also dropped as a criterion, but
                                 is identified as one of three principles that should guide both day-to-day
                                 and strategic program operations. According to Agriculture, the pro-
                                 gram will be targeted to challenge subsidizing competitors in markets
                                 where U.S. export benefits are greatest, while minimizing bonus outlays
                                 and effects on nonsubsidizing competitors. Other operational considera-
                                 tions are designed to minimize market disruption and to ensure timely
                                 interagency review.


                                  In response to requests from Congressman E (Kika) de la Garza,
Objectives, Scope, and            Chairman of the House Committee on Agriculture, and Congressmen
Methodology                       Silvio 0. Conte and Charles E. Schumer, we reviewed the Export
                                  Enhancement Program. This report is the third in a series of products
                                  resulting from our review.



                                  Page 13                                    GAO/NSIALMO-204 International   Trade
Chapter 1
Program Activity   and Focus




We also visited 12 countries representing competitors and importers of
commodities under the program-Canada,          Australia, New Zealand,
Hong Kong, Indonesia, Algeria, Egypt, Belgium, the Netherlands, France,
West Germany, and the United Kingdom. We interviewed FAS agricul-
tural attaches, foreign government officials, importers, farmers and
farm managers, foreign grain trading companies, trade representatives,
and FAS contractors who report trade information. We also reviewed FAS
files, cables, statistical reports, and other supporting documentation
provided by U.S. and foreign government officials.

Our initial fieldwork was conducted between August 1988 and August
1989. As a result of concerns that GAO and Agriculture’s Office of
Inspector General (OIG) raised at a series of hearings on the Export
Enhancement Program and in a number of internal agency studies, FAS
made changes to its program operations and management. We conducted
additional fieldwork between December 1989 and March 1990 to update
our information based on these changes.

We performed our review in accordance with generally accepted govern-
ment auditing standards.

As requested, we did not obtain formal agency comments on this report;
however, we did discuss it with responsible agency officials and have
incorporated their comments where appropriate.




Page 16                                  GAO/NSlADgO204   International   Trade
                        chapter2
                        Program   operaliom   can Be
                        FlutIler Improved




                        In addition, as part of a recently approved reorganization, additional
                        staff will be assigned to the Regulations, Procedures, and Reports
                        Branch of the Commodity Credit Corporation’s Operations Division.
                        Their function will be to enhance the branch’s operations, including
                        Export Enhancement Program activities such as bid receipt and pro-
                        gram activity reporting. Furthermore, a new Planning and Evaluation
                        staff will be established to evaluate FAS market development programs,
                        including the Export Enhancement Program.

                        The Federal Managers’ Financial Integrity Act of 1982 (31 U.S.C.
                        35 12 (b)) requires executive agencies to establish and maintain systems
                        of internal control that are to be consistent with the Comptroller Gen-
                        eral’s Standards for Internal Controls in the Federal Government. These
                        standards call for internal controls to provide reasonable assurance that
                        the use of resources is consistent with applicable laws, regulations, and
                        policies and that reliable data are maintained. We believe that FAS can
                        further improve its internal controls in several areas.


                        In 1989 and 1990 hearings before Senate and House agriculture commit-
Not all Proposals Are   tees, we testified that while each commodity division individually
Centrally Tracked       tracked relevant proposals for new program initiatives, FAS did not cen-
                        trally track a proposal until a commodity division forwarded it for fur-
                        ther review. We stated that a centralized tracking system would allow
                        FAS to monitor the progress of proposals from initial receipt through
                        final acceptance and would limit FAS vulnerability to claims of inconsis-
                        tent or unfair treatment. FAS responded in hearings that its current
                        system is adequate and, if needed, can provide information on the his-
                        tory and status of any proposal.

                        A proposal for a new program initiative is developed in two distinct
                        stages. The first stage involves the recommendation of a new program
                        initiative and its analysis by the appropriate commodity division. If the
                        commodity division finds that the recommendation meets the program’s
                        minimum criteria, the recommendation enters the second stage and is
                        forwarded to FAS management, the Under Secretary for International
                        Affairs and Commodity Programs and, eventually, the Trade Policy
                        Review Group for review and approval.

                        According to FAs officials, each commodity division maintains files on all
                        recommendations being analyzed and on those proposals submitted for
                        further management review and approval. If the commodity division
                        determines that a recommendation for a new program initiative meets


                        page 17                                    GAO/NSlAB9@204   International   Trade
chapter 2
FNDgram OpemtloIla can Be
Further improved




audited fiiancial statement showing a positive net worth or a certified
statement describing participation in a U.S. government program during
the preceding 3 years.

We found that FAS routinely verified experience in trading in the com-
modity offered and the exporter’s financial responsibility, including its
participation in other U.S. government programs, if applicable. For
example, when exporters certified that they had participated in a U.S.
government program during the preceding 3 years, FAS officials made
calls to verify the information, and notes were added to the file. How-
ever, FAS did not routinely verify the form of doing business or the name
and address of the exporter’s U.S. agent, even on a random basis.

To participate in the bidding process, an eligible exporter is required to
have a sales contract with a buyer in the targeted market. Although the
exporter is generally not required to furnish a copy of the sales contract
or other proof of its existence, a certified statement outlining the details
of the sales contract must accompany the bid. FAS reserves the right to
request a copy of the sales contract at any time and routinely does so in
cases of nonperformance or other instances where problems have
occurred. However, sales contract information generally was not veri-
fied, even on a random basis.

In 1989 and 1990 we testified on the need for better documentation and
verification of exporter eligibility. In particular, we recommended that
FAS randomly verify the sales contract information submitted with the
bids. Moreover, the OIG has recommended that FAS require exporters to
submit proof of the existence of the sales contract with each bid.

FAS has opposed the OIG’S recommendation, stating that it would seri-
ously delay the review and award of bonuses and would greatly tax
existing staff resources. Even so, since July 1988, FAS has required that
exporters provide proof of the existence of a sales contract prior to bid-
ding on dairy cattle sales. This requirement has not yet been extended to
the other 11 commodities sold under the program. In addition, in
December 1989, FAS amended all commodity announcements to include a
more complete definition of minimum requirements for a properly exe-
cuted sales contract and for exporter records of sales. We believe that
clarifying the definition of a sales contract will not ensure compliance,
and that random verification is still needed.




 Page 19
                      chapter 2
                      IJmgmm opemtlom      can Be
                      Further Improved




                      During the initial stages of our review, we found that internal controls
Improvements to the   over the bonus payment process were not adequate to ensure that bonus
Bonus Payment         payments were properly made.5 We identified eight cases of apparent
Process ”             bonus overpayments, totaling about $635,000.

                      Our February 1990 report to the FAS Administrator outlined the internal
                      control weaknesses and provided the details of the apparent overpay-
                      ments. We recommended that FAS complete its review of the eight cases
                      and recover any actual overpayments from the exporters. Furthermore,
                      we recommended that FAS develop sufficient internal controls over the
                      bonus payment process to safeguard against future overpayments.

                      FAS investigated the eight cases and found six of the eight cases, totaling
                      about $306,000, were in fact overpayments; FAS is in the process of
                      recouping these overpayments. FAS determined that the remaining two
                      cases, totaling about $329,000, were not overpayments, but instead were
                      bonus calculation errors that were discovered before the commodities
                      were released. FAS has updated the computer database and relevant
                      hard copy files kept on each contract which, at the time of our review,
                      erroneously reflected payment figures above the tolerance level.

                       FAS agreed that internal controls over the bonus payment process should
                       be improved to safeguard against future overpayments. According to
                       FAS officials, they are proceeding with the development and implementa-
                       tion of a new computer database program to administer program agree-
                       ments. An intermediate phase of this system will not allow the
                       processing of bonus payments when the export quantities are over the
                       maximum shipping tolerance, or when the delivery is outside of the
                       agreed period, made from the wrong U.S. coast, or not in accordance
                       with correct commodity specifications. It will also allow FAS to generate
                       a variety of reports, which is currently not possible. According to FA!3,
                       this aspect of the system was installed in March 1990 and became fully
                       operational in April 1990 after staff were trained on its use.




                       “Under the program, FAS approves a commodity sales agreement between an exporter and a partici-
                       pating country for a specified quantity of agricultural goods. Thii agreement can be exceeded by up
                       to 6 percent. If the quantity shipped exceeds 106 percent of the approved sales quantity, the excess is
                       not eligible for a bonus. Any bonus awarded for these excess quantities  shippedisconsidered an
                       overpayment.



                       Page 21                                                     GA0,‘NSL4B99.204 lntematiod         Trade
                            chapter 2
                            Fvogtam opemtio~     can Be
                            Fkther Improved




Adopt the Commercial        Four exporters told us that FAS policy on “dockage”” does not conform to
                            commercial trade norms. For commercial sales, both importers and
Definition of Contract      exporters judge a contract to be fulfilled if the gross amount has been
Fulfillment                 shipped. Then, payment is made only on the net amount, which is the
                            gross amount less dockage. Under the Export Enhancement Program,
                            FAS also awards bonuses based on the net amount shipped. However, FAS
                            judges contract fulfillment based on the net amount shipped rather than
                            on the gross amount.

                            The exporters took exception to FAS using the net amount shipped when
                            determining whether the contract was fulfilled. Exporters often cannot
                            add to the shipment to allow for dockage. In these cases, FAS has
                            assessed the exporter damages for failing to ship the contracted amount.
                            Despite appeals to FAS, it has penalized exporters for not delivering the
                            contract amount, even when the buying country has determined that the
                            contract has been fulfilled. The exporters suggested that FAS adopt com-
                            mercial standards for judging contract performance.

                            According to FAS, program announcements clearly state its policy on con-
                            tract fulfillment (i.e., net, rather than gross, quantity delivered). There-
                            fore, exporters know in advance that they should submit a bid based on
                            the expected net quantity to be delivered to avoid the possibility of
                            having liquidated damages assessed for failure to export the required
                            quantity. Any exporter who bases a bid on the gross quantity shipped,
                            rather than the expected net quantity, is knowingly taking a risk.


Accept Alternate Forms of   For FAS to release a performance bond, an exporter must submit landing
                            certificates and other documentation as proof of delivery. According to
Documentation               three exporters surveyed, landing certificates are often hard to obtain,
                            and FAS will not accept any alternate form of delivery confirmation.
                            Moreover, the exporters said that FAS will only accept a landing certifi-
                            cate from the buying agency that negotiated the sale, yet often the
                            importing company provides the certificate instead.

                             These exporters told us that as a result of FAS inflexibility, performance
                             bonds and bonus awards are held up unnecessarily while the exporter
                             tries to obtain an acceptable landing certificate. They suggested that FAS
                             reevaluate its definitions of acceptable documents that can be used as

                             “The Department of Agriculture’s Dictionary of Intemational Agrkmltural Trade defines dockage as a
                             factor in the grading of grab and oilseeds. Dwkage includes waste and foreign material readily
                             removed by the use of screens, sieves, and other cleaning devices The tern is also wed to describe
                             the amount of money deducted due to a deficiency in quality.



                             Page 23                                                  GA0,WSL4D96.206 h~ternatiolul      Trade
                        chspter2
                        Plugmm opelmion.9 can Be
                        Further Improved




Reactivate the Export   On July 22, 1985, Agriculture published a notice in the Federal Register
                        proposing the establishment of an Agricultural Export Enhancement
Enhancement Advisory    Advisory Group to provide advice on the establishment and administra-
Group                   tion of the program. The group, consisting of eight members repre-
                        senting farmers and the export trade, has met only twice since its
                        establishment.

                        The majority of exporters we spoke with thought an advisory group
                        made up of representatives of the agricultural trade community and
                        Agriculture would serve a useful and important purpose. Meetings could
                        be held 2 or 3 times a year, when problems encountered by Agriculture
                        and exporters could be voiced and discussed. These exporters stated
                        that they could make useful recommendations and help eliminate many
                        of the problems the program has encountered to date or might encounter
                        in a changing world agriculture market. However, the exporters stated
                        that such an advisory group would be a waste of time for all partici-
                        pants if it had no real influence on agency actions.

                        According to FAS, the advisory group was originally organized to provide
                        FAS with advice on the establishment and administration of the program.
                        However, as FM gained experience with the program, daily contact with
                        numerous members of the agricultural trade community provided FAS
                        and exporters ample opportunity to discuss and resolve any concerns.


                        In response to concerns voiced by GAO and Agriculture’s OIG, FAS has
Conclusions             taken some action to improve program operations. FAS has recently
                        developed written guidelines detailing the procedures to be used when
                        determining price and bonus levels and instructed commodity divisions
                        to document price and bonus determinations. FAS is also improving its
                        internal controls over the bonus payment process to preclude future
                        bonus overpayments. While we believe that these changes will improve
                        program operations, more can be done.

                        Currently the General Sales Manager receives a status report on pro-
                        posals forwarded by the commodity divisions for review and approval,
                        but not on proposals that the commodity divisions are analyzing. There-
                        fore, the General Sales Manager cannot monitor the progress of all pro-
                        posals to ensure their timely analysis and equitable treatment. In
                        addition, the Under Secretary for International Affairs and Commodity
                        Programs does not provide written justification for decisions to reject
                        official proposals that the commodity divisions forward. This lack of



                         Prge25                                    GAO/NS-204      lntematIonaI   Trade
Chapter 3

The Export Enhancement Program’s Effect on
World Agricultural Trade

                       The Export Enhancement Program has helped increase US. agricultural
                       exports, particularly wheat, in many countries, including the Soviet
                       Union, China, and those in the Middle East. The extent of the program’s
                       effect, however, is difficult, if not impossible, to quantify due to the
                       many policy and economic variables that influence exports. Recent
                       studies estimate that the program was responsible for between 2 and 30
                       percent of the increase in U.S. agricultural exports.

                       The fact that the program is targeted further complicates the determina-
                       tion of its effect. While exports may increase in the targeted markets,
                       the overall effect on U.S. exports worldwide is uncertain. Originally the
                       program’s primary targets were countries that made significant
                       purchases of commodities subsidized by the European Community. Over
                       time the program has expanded to include countries that had a small EC
                       market and then to countries where the ECwas only contemplating a
                       presence. As U.S. sales displaced EC sales in one market, the EC moved
                       into another country’s market, making that country eligible for program
                       benefits as well.

                       The program was also designed to challenge unfair trade practices and
                       encourage trading partners to negotiate agricultural trade reforms.
                       Although in its early years the program increased the cost of EC subsi-
                       dies, it has neither deterred the EC from using subsidies nor hurt its
                       share of the world market. Other U.S. competitors, including Australia
                       and Canada, have been adversely affected both in terms of receiving
                       lower prices for their commodities and in having reduced market shares.
                       Nevertheless, the program was instrumental in bringing the EC to the
                       negotiating table on agricultural trade liberalization.


                       According to original Export Enhancement Program additionality cri-
Impact on U.S.         teria, program sales were supposed to increase U.S. agricultural exports
Agricultural Exports   above those that would have occurred in the absence of the program. In
                       the last several years, U.S. agricultural exports have increased in certain
                       markets. However, the program’s effect cannot be easily isolated from
                       that of other policy and economic variables that have contributed to
                       increased agricultural exports--lower loan rates, availability of export
                       financing and other U.S. government assistance, depreciation of the U.S.
                       dollar against major competitor currencies, production shortfalls, and
                       other changes in global economic conditions.

                       Additionality is also dependent on the buying and selling decisions of
                       competing exporters and importers. For example, competing suppliers
Chapter3
The Export Enhancement Ro@am’s Effect
on World A@icuhral Trade




The price differential was fundamentally resolved in April 1987 when
Agriculture again targeted wheat sales to the Soviet Union under the
Export Enhancement Program and increased bonuses to enable U.S.
exporters to sell wheat at competitive prices. As of May 1990, the Soviet
Union had bought over 21 million metric tons of wheat (29 percent of
the total wheat sold under the program), making the Soviet Union the
largest wheat importer under the program.

China is another country in which the program has been effective in
increasing U.S. agricultural exports. The U.S. market share of Chinese
wheat imports was less than 10 percent during 1985 and 1986, prima-
rily because of the relatively high U.S. price. In January 1987, China
was offered wheat for the first time under the Export Enhancement
Program. Sales increased from less than 1 million metric tons in 1985 to
about 7.2 million metric tons in 1988. As of May 1990, China had bought
over 15 million metric tons of wheat (21 percent of the total wheat sold),
making China the second largest wheat importer under the program.

In two countries visited during this review-Algeria      and Egypt-US.
and foreign officials told us that the Export Enhancement Program was
essential in enabling U.S. exporters to make sales because these coun-
tries are price buyers (i.e., they buy at the best price available, regard-
less of the source). They also noted that many sales depended on the
availability of US. export credit guarantees.~

Some Algerian officials singled out the GSM-102 program as the primary
reason that U.S. agricultural exports expanded in North Africa. An eco-
nomic officer in the U.S. Embassy in Algiers told us that the availability
of GSM-102 was a very important factor in Algeria’s and other Third
World countries’ exporting decisions. For example, due to falling oil
prices, Algeria began to experience budget problems in 1986 and became
very interested in the availability of favorable credit terms.

The French agricultural attache in Algiers told us France was only able
to compete in the Algerian market by offering export credits. This offi-
cial added that other countries unable to offer export credit, such as
Argentina, could not break into the Algerian market.




LFAS has made its short-tern export credit guarantee program, lolown as GSM-102. awlable for
some Export Enhancement F~@am initiatives. The credit guarantee program     allowscountries to
purchase U.S. commodities when credit guarantees are necessary to secure pnvate financing.



Page 29                                                  GAO/NSIADSO-204      International   Trade
                                        Chapter 3
                                        The Fixpors Enhancement Program’s Effect
                                        on World Agrkultural Trade




Shares of Hong Kong Table Egg lmportr   Figures m percent
(Calendar Years 1984-1989)
                                        Studier
                                           ..                            1984       1985      1986’       1987      ISW           198Sc
                                        United States                      6.8        76         61        109        149           127
                                        The Netherlands                     .4        29         6.3        3.4       168          24 5
                                        China                             76.6       75.6       750        74 6       59 3         46.3
                                        Others                            16.2       139        12.6       11.1        9.0         165
                                        Total                           100.0      100.0       100.0      100.0      log.0        100.0
                                        dThe Export Enhancement Program began to target table egg sales to Hong Kong in November 1986
                                        ‘European Community subsIdles increased dung 1988
                                        “Through March 1989
                                        Source, Compllatlon of data from Hong Kong government sources

                                        According to FAS officials in Hong Kong, the Export Enhancement Pro-
                                        gram was responsible for much of the increase in US. table egg sales.
                                        Cheaper prices allowed U.S. table eggs to regain some of the market
                                        share that had been lost to subsidized Dutch table eggs during 1986. The
                                        Dutch agricultural attache also attributed the increased sales to the pro-
                                        gram, but added that after 1987 much of the increase in sales occurred
                                        at the expense of the Chinese. According to several egg traders, U.S.
                                        table eggs sold because they were competitively priced.

                                        FM  officials and egg traders in Hong Kong agreed that the program
                                        would be needed so that U.S. table eggs could continue to compete with
                                        cheaper Dutch and Chinese table eggs. ECsubsidies were increased in
                                        1988 in response to the program, but U.S. bonus awards apparently did
                                        not keep pace. FAS officials acknowledged that the U.S. market share
                                        decreased in 1989 because prices were no longer as competitive.


Dairy Cattle Exports to                 According to Indonesian government officials, dairy cattle have been
                                        imported over the last 10 years in a government-backed effort to
Indonesia                               increase domestic dairy production. Australia and New Zealand had
                                        been the primary sources of cattle during the last decade. Prior to 1987,
                                        U.S. dairy cattle imports to Indonesia were nonexistent. While U.S.
                                        cattle were desirable because of their superior milk-producing potential,
                                        they cost at least twice as much as the competition’s cattle. The availa-
                                        bility of bonuses under the program lowered U.S. prices to within a com-
                                        petitive range. While U.S. cattle were still more expensive, the importers
                                        believed that the superior genetics warranted the higher price. By 1988,
                                        about half of Indonesia’s imports of dairy cattle were from the United
                                        States.


                                         Page 31                                                GAO/NSlAIHO-204     lntematioti   Trade
                           chapter3
                           The Export Enhancement Program’s Effect
                           on World Agricuhral Trade




Economic Analyses Differ   While U.S. agricultural exports have increased since the Export
on the Program’s           Enhancement Program’s inception, there is debate over how much of the
                           increase can be attributed to the program. Three recent economic studies
Additionality              have attempted to measure the program’s additionality. While they
                           agree that the program has contributed to the increase in U.S. agricul-
                           tural exports since 1985, they differ on the magnitude of its effect.
                           Additionahty estimates range from 2 to 30 percent and are greatly influ-
                           enced by the assumptions made about the international export market,
                           the tune period covered, and prevailing market conditions.

                           Agriculture’s Economic Research Service released a study3 in May 1989
                           that used a world wheat trade simulation model to identify factors that
                           expanded U.S. wheat exports since the passage of the Food Security Act
                           of 1985. According to the study, U.S. wheat exports grew from 0.9 bil-
                           lion bushels in 1985/1986 to 1.6 billion in 1987/1988, due to the pro-
                           gram, lower wheat loan rates, lower competitor yields, and expanded
                           Soviet-Chinese demand. The study estimated that the program was
                           responsible for about 30 percent of the 1986/1987 wheat export expan-
                           sion and about 20 percent of the expansion through 1988/1989.

                           Another Economic Research Service study’ published in April 1989 eval-
                           uated the effect of the program, U.S. dollar depreciation, and lower loan
                           rates on U.S. wheat exports for the 1986/1987 crop year. The study esti-
                           mated U.S. wheat exports under various assumptions about how aggres-
                           sively the European Community would have subsidized wheat sales in
                           the absence of the Export Enhancement Program. Depending on one’s
                           interpretation of the ECmotivation for its own targeted subsidy pro-
                           gram, the study credited the Export Enhancement Program with
                           increasing U.S. wheat export volume by between 10 and 30 percent.

                           A 1988 university-based study’ used a game-theory trade model that
                           simulated actions taken by targeted importers and U.S. exporters partic-
                           ipating in the program. The study assigned arbitrary weights to the
                           various objectives of the U.S. government, importers in targeted mar-
                           kets, and foreign competitors in order to predict potential displacements

                           “Kenneth W. Bailey, “Why Did U.S. Wheat Exports Expand?” (U.S. Department of Agnculture Infor-
                           mation Bull. No. 564, May 1989).

                           %ephen L. Haley, “Evaluation of Export Enhancement, Dollar Depreciation, and Loan Rate Reduc-
                           bon for Wheat” (U.S. Department of Agriculture’s Economic Research Senwx. April 1989)

                           ‘Ann Marie Hillberg, “The Umted States’ Export Enhancement Program for Wheat: A Simulation
                           Model of the U.S. Export Enhancement Program for WheatEmploying Nash’s Bargaining Solution”
                           (Diss., Purdue University, May 1988 and updates).



                            Page 33                                               GAO/NSlAD9@204 International      Trade
                             Chapter 3
                             The Export Enhancement Program’s Effect
                             on World Agricultural Trade




                             When it was established, the program was viewed not only as a means
Use as a Trade Policy        of increasing U.S. exports but also as a means of encouraging U.S.
Tool                         trading partners, especially the EC, to begin serious negotiations on liber-
                             alizing agricultural trade. In our March 1987 report, we noted that the
                             program had exerted financial pressure on the EC and had reduced its
                             grain sales in the Mediterranean region. Combined with the decline of
                             the dollar and lower loan rates, the financial cost of the EC export resti-
                             tution payments had increased. We also stated that the program had
                             contributed to achieving agreement on including discussion of agricul-
                             tural subsidies in the Uruguay Round of multilateral trade negotiations.

                             In September 1986, the Uruguay Round of multilateral trade negotia-
                             tions was launched under the auspices of the General Agreement on Tar-
                             iffs and Trade (GATT). One of the major agricultural trade issues to be
                             discussed was government agricultural support and its effect on trade.;
                             During 1987 and early 1988, the United States, the EC, and other major
                             participants in the Uruguay Round made initial proposals addressing
                             agricultural trade issues.


Proposals for Agricultural   During the first full year of the Uruguay Round negotiations, all major
Trade Reform                 participants in the GATT’S Negotiating Group on Agriculture, one of 15
                             negotiating groups, submitted proposals for liberalizing agricultural
                             trade. In July 1987, the United States proposed the elimination over a
                             lo-year period of all government support to agriculture that distorts
                             trade. In October 1987, the ECsubmitted a proposal for a gradual reduc-
                             tion in agricultural support and for short-term emergency measures to
                             reduce surpluses in the grain, dairy, and sugar sectors. A Cairns Group”
                             proposal, also submitted in October, was seen as a compromise between
                             the U.S. and the EC proposals because it addressed both the long-term
                             concerns of the United States and the short-term concerns of the EC.
                             Other proposals were submitted by Canada, the Nordic countries, and
                             Japan.”

                             ‘Domestic farm price and income support policies in the United States, the EC, and other GATT coun-
                             tries encourage surplus agricultural production. Increased production leads to a buildup of stocks,
                             decreased commodity prices, and more aggressive subsidized competition for export markets.

                             “Established in Cairns, Australia, in August 1986, the Cairns Group is composed of countries that
                             consider themselves to be fair traders in agriculture. It includes Argentina, Australia, Brazil, Canada.
                             Chile, Colombia, Fiji, Hungary, Indonesia, Malaysia, New Zealand, the Philippines, Thailand, and
                             unlguay.

                             “For more detailed information on these and other major participants’ proposals, see our report, e
                             cultural Trade Negotiations. Initial Phsse of the Uruguay Round (GAO/NSIADSS-144BR, May 5.
                             1988).



                             Page 36                                                      GAO/NSIAD90204        International   Trade
                  Chapter3
                  The Export Enhancement Program’s Effect
                  on World Agricultwal Trade




                  had merely served as a detriment to the negotiating climate. A French
                  government official stated that the program had probably been a factor
                  early in the negotiations, but that its impact had diminished over the
                  years as world market prices had increased.

                  Foreign industry representatives provided a mixed assessment of the
                  program’s effect on the negotiations. Some noted that the program
                  serves as a constant reminder that the United States is serious about
                  competing in world agriculture markets. However, while the program
                  has gotten the EC’Sattention, foreign industry representatives do not see
                  the program forcing the ECto abandon its obligation to support small,
                  inefficient farmers.

                  To some extent, the outcome of the Uruguay Round of negotiations in
                  December 1990 will depend on changes in world agricultural markets.
                  Continued tight supplies and higher commodity prices will require less
                  subsidization (lower budget outlays) and reduce pressure on the ECnego-
                  tiators to reach an agreement. On the other hand, increased supplies and
                  resultant lower prices will increase budget outlays and encourage the EC
                  to negotiate.


                  While the program is aimed at challenging the export markets of subsi-
Impact on Other   dizing countries like the EC,it was also designed to avoid competing
Competitors       directly with other competitors not considered direct subsidizers, such
                  as Australia and Canada. The program was to be implemented so as to
                  maintain the traditional commercial trading volume of these other com-
                  petitors by obtaining assurances from importers that they would con-
                  tinue to import from them. According to the Agricultural Counselor, U.S.
                  Mission to the European Community in Brussels, Agriculture goes to
                  great lengths to avoid disrupting the markets of “nonsubsidizing” com-
                  petitors. For example, during the initial targeting of Algeria in 1985,
                  U.S. durum wheat was specifically excluded from the program in order
                  to protect Canadian trade interests in North Africa.

                  Obtaining assurances from importers that traditional trading volumes of
                  non-m exporters will be maintained does not ensure that market shares
                  will be preserved. As shown in table 3.2, since the program’s inception,
                  Argentina, Australia, and Canada have lost market shares for wheat
                  and wheat flour, while the U.S. and the EC market shares have




                  Page 37                                   GAO/NSL4DS@204 Intemational   Trade
            Chapter 3
            The Export Enhmcement l-hgmm’s        Effect
            on World A@icuhral     Trade




Australia   Australia has been most vocal in its opposition to the program because
            of its perceived effect on Australia’s wheat exports. While Australian
            government officials, farm industry representatives, and U.S. govern-
            ment officials agreed that the program contributed to the depression of
            world wheat prices between 1985 and 1988 and, consequently, to the
            reduction in Australian wheat export earnings, there was no consensus
            on the extent of the program’s effect.

            Australian government officials and grain industry representatives
            stated that the decline in export prices after the program’s inception
            encouraged some producers to move out of wheat production; plantings
            fell from about 12 million hectares in 1984/1985 to about 9 million hec-
            tares in 1988/1989.

            Australian government officials acknowledged that the program is only
            one of a number of factors contributing to the decline in Australian
            wheat export earnings, including declining world import demand and
            acreage shifts from wheat plantings to wool production. However, in
            their opinion, the program has clearly had a significant adverse impact
            on Australian grain exports.

            According to an October 1989 Australian study,” the program has cost
            Australian wheat growers between $150 million and $238 million, due to
            reduced average prices on wheat exports and a consequent decline in
            wheat production. The study points out that in 1987 the estimated cost
            to the Australian wheat industry was far greater than to the ECwheat
            industry, because exports to Export Enhancement Program-targeted
            markets constituted a far larger proportion of Australia’s total
            production.

            U.S. government officials stated that the program’s effects on wheat
            prices were minimal. A more significant factor in the sharp fall in world
            grain prices during the mid-1980s was the collapse of world import
            demand. For example, in 1985/1986, the Soviet Union (the world’s
            largest wheat importer) had a bumper wheat crop. As explained by the
            U.S. Agricultural Counselor to Australia, world prices were bound to
            drop after a fifth of the world demand evaporated overnight. Moreover,
            Australian farmers were protected from the full impact of reduced
            export earnings by the Australian government’s guaranteed price mech-
            anism and the devaluation of the Australian dollar in 1985. The U.S.

             ’ ‘Australian Bureau of Agricultural and Resource Eimnomics, US. Grain Policies and the World
             Market (Policy Monograph No. 4, released in Oct. 1989).




             Page 39                                                   GAO/NSIAD90204      International     Trade
                Chapter3
                The Export Enhancement F’rograds Effect
                on World Agriculhwal Trade




                world prices have risen. There are widely divergent views on the need
                for the program today and on the way countries and commodities are
                being targeted. While accurate measurements of the program’s addition-
                ality have been elusive, the program’s importance as a trade negotiation
                tool is continuing to be emphasized.

                The U.S. government views the program as a valuable trade policy tool
                that has prodded the European Community to negotiate the liberaliza-
                tion of agricultural trade in the current Uruguay Round of the multilat-
                eral trade negotiations. The U.S. government has continually reaffirmed
                its position that any unilateral concession would weaken the U.S. negoti-
                ating position.

                We agree that the Export Enhancement Program’s continued existence is
                important as a trade negotiation tool. If market conditions change, the
                program could again be used aggressively, potentially increasing the
                cost of the EC restitution program. More significantly, abandoning the
                program now would send the wrong signal to U.S. competitors during
                the final months of the Uruguay Round. To the extent that the program
                has had an adverse impact on other competitors, including Australia
                and Canada, its continued existence has increased their resolve to nego-
                tiate an agreement on agricultural trade reform.


                The Congress, in reauthorizing the program, should condition the level
Matter for      of appropriations on the outcome of the current negotiating round-
Congressional   scheduled to end in December 1990. At that time, Congress should
                reevaluate the need for the program in light of any agreement reached
Consideration   on agricultural trade liberalization.




                 Page 41                                   GAO/NSIAD-9@204 International   Trade
                                                Appendix I
                                                Total Program Activity by Country and
                                                Commodity a8 of May 31,1990




Targeted countrya                                                        Commodityb
Srngapore                                                                Frozen poultry
Soviet Unwon                                                             Wheat
Srr Lanka                                                                Wheat and wheat flour
Swrtzerland                                                              Barlev and sorohum
Syria                                                                    Wheat
Tunrsra                                                                  Wheat, barley, vegetable 011,and dairy cattle
Turkey                                                                   Wheat, barley, race. vegetable 011,and darry cattle
Venezuela                                                                Barley malt
West Afrrca (Benin, Cameroon, Cote d’lvorre, Gabon, Ghana, Gumea,        Frozen poultry
   Lrberra, Senegal, Sierra Leone, and Togo)
West Afrrca (Benrn, Burkrna Faso, Cameroon, Congo, Cote d’lvorre,        Wheat
   Ghana, Gabon, Ltbena, Mall, Nrger, and Togo)
West and Central Afrrca (Angola, Benrn. Burundi, Cameroon, Central       Wheat flour
   Afrrcan Republic, Congo, Gabon, Ghana, Gumea, Lrberia. Mali,
   Maurrtanra, Nrger, Rwanda, Srerra Leone, Togo, Zarre, and Zambia)
Yemen                                                                    Wheat, wheat flour, and mrxed poultry feed
Yugoslavra                                                           -   Wheat
Zarre                                                                    Wheat, wheat flour, and frozen poultry
Zanzibar (Tanzanra)                                                      Wheat flour
                                                “Total number of targeted countrres IS69 Syria ISnot counted because the rnrtiatrve was subsequently
                                                cancelled
                                                ‘The Export Enhancement Program has targeted 12 commodltles under 107 lnltlatwes
                                                Source Based on U S Department af Agriculture’s Foreign Agncultural Serwce data




                                                 Page 43                                                   GAO,‘NSW90.~          Jntematlod     Trade
                                                                                                                                                            ,‘...


                                                                               -,   -.-.    -,-.-,         -    -,, _. -        .,            -_.. -.   -
                  I

                                                                      -.. -.
              ,




     -.,,-_           ._-   I.,._   ,,.,.   .   ,.   _,     ,.




                                                          Requests for copies of           GAO   reports       should     I.-

                                                          U.S. General Accounting            Office
                                                          Post Office Box 60 15
                                                          Gaithersburg, Maryland             20877

                                                          Telephone      2022756241

                                                          The first five copies of each report                 are ~-,..........,,.,--....-
                                                          $2.00 each.

                                                          There is a 259, discount          on orders for 100 or mort.~&Urr,rrrc
-ESTitim.

                                                          Orders must be prepaid by cash or by check or money order made
                                                          out to the Superintendent of mr
                         _.-,_      -,- ,.,..-




United States
General Accounting    Office
Washington,   D.C. 20548

Official   Business
Penalty    for Private   Use $300
Appendix II

Major Contributors to This Report


                        Phillip J. Thomas, Assistant Director
National Security and   Julie M. Gerkens, Project Manager
International Affairs   Michael J. Morgan, Deputy Project Manager
                        Gezahegne Bekele, Economist
Division,
Washington, D.C.

                        Danny R. Burton, Deputy Project Manager
European Office         Francis W. Conte, Evaluator


                        Karla Springer-Hamilton, Deputy Project Manager
Far East Office         Elizabeth J. Jordan, Evaluator


                        Larry Van Sickle, Deputy Project Manager
Kansas City Regional    Shirley A. Franklin, Evaluator
Office




(483339)                Page 44                                    GAO/NSIAD90204   International   Trade
Total Program Activity by Country and
commodity as of May 31,199O


Targeted country”                                                     Commodityb
Algerta                                                            Wheat, wheat flour, barley, barley malt, semolrna, vegetable 011,table
                                                                 -eggs, and darry cattle
Banaladesh                                                         Wheat
Benrn                                                              Wheat and wheat flour
Brazrl                                                             Wheat and barley malt
Bulgarra                                 _______-                  Wheat and barley
Burundi                                                            Wheat and barley malt
Cameroon                                                           Wheat flour and barlev malt
Canary Islands                                                     Wheat,   frozen poultry, and darry cattle
Central African Republic                                           Wheat flour
Central Amenca (Costa Rrca, El Salvador, Guatemala, and Honduras) Barley malt
China                                                              Wheat and darry cattle
Colombia                                                           Wheat and barley malt
Cyprus                                                              Barley
Dominican Republic                                                 Frozen poultry and table eggs                                          -
East Germany                                                       Wheat
Eavot                                                              Wheat. wheat flour. semolina. frozen ooultrv. and darrv cattle
Finland                                                             Wheat
Gulf states (Bahratn, Kuwatt, Oman, Qatar, and United Arab          Frozen poultry and darry cattle
   Emirates)
Hong Kong                                                    -.-    Table eggs
Hungary                                                             Barley
lndra                                                               Wheat and veaetable oil
lndonesra                                                           Datry cattle
Iraq                                                                Wheat, wheat flour, barley, barley malt, frozen poultry, table eggs,
                                                                    and dairy cattle
Israel                                                              Wheat and barlev
Jordan                                                              Wheat, barley, frozen poultry, and rice
Kenva                                                               Wheat



Morocco                                                              - Wheat, vegetable oil, and darry cattle
Near East (Bahrain, Kuwait, Oman, Qatar, Unrted Arab Emrrates,         Table eggs
  Yemen)
Nigena                                                                 Wheat and barley malt
Peru                                                                   Barley malt
Philippines                                                            Wheat. wheat flour, and barlev malt
Poland                                                                 Wheat, barley, and sorghum
Romania                                                                Wheat and barlev
Saud1 Arabia                                                           Barley, frozen poultry, and darry cattle
Senegal                                                                Wheat
                                                                     _-~~-
                                                                                                                                 (conbnued)



                                                Page 42                                                GAO/NSlADBO-204 International   Trade
              chapter 3
              The Export   Enhancement   Program’s   Effect
              on World Agricultural   Trade




              Counselor attributed recent declines in Australian wheat production to
              historically high wool prices during the mid-1980s, which lured farmers
              out of wheat and into wool production.


Canada        Canadian officials could not demonstrate a loss in market share directly
              related to the program. However, they stated that the program’s price-
              depressing effect resulted in decreased revenue from agricultural
              exports. They also stated that the program’s targeting strategy was
              inconsistent. For example, the officials noted that Canada, not the EC,
              had established major wheat markets in Iraq, Colombia, Mexico, and the
              Philippines, yet all these countries were targeted under the program. In
              addition, Saudi Arabia was a large importer of barley from many
              sources, not just from the EC.When an Export Enhancement Program
              initiative for barley to Saudi Arabia was announced, the whole balance
              of the world barley trade was upset.

              Canadian officials also questioned wheat sales under the program
              during the last 2 years when supplies were greatly reduced, due to
              worldwide drought conditions. In their view, the United States was the
              only supplier, yet it sold wheat under the program to China and the
              Soviet Union, the largest importers of wheat in the world. Canadian offi-
              cials viewed the use of the program as “overkill” in these cases.

              However, Canadian officials added that despite the negative effects of
              the program on export strategies, world price, and the balance of trade,
              Canada has derived some indirect benefits. In 1988, Canadian exports of
              rapeseed oil, or canola, became very competitive in U.S. markets partly
              because of high U.S. domestic vegetable oil prices, driven up (or artifi-
              cially supported) by the Export Enhancement Program. According to
              Canadian officials, annual sales of vegetable oil to the United States had
              increased sixfold. In addition, U.S. livestock growers have been paying
              higher feed grain prices, driving up the cost of U.S. meat products. As a
              result, Canadian pork products have become more competitive in the
              U.S. domestic market.


               Today the Export Enhancement Program is operating in an environment
Conclusions    that contrasts sharply with the world agricultural situation in 1985,
               when U.S. agricultural exports were decreasing and government-owned
               grain surpluses were rising. In the past year, the world supply of wheat
               has become relatively tight, due to adverse weather conditions and deci-
               sions by some producing countries to reduce production. As a result,


               Page 40                                        GAO/NSIAD-00-204 International   Trade
                                           Chapter 3
                                           The Export Enhancement Program’s Effect
                                           on World Agricultural Trade




                                           increased. The loss of these countries’ market shares is not solely attrib-
                                           utable to the program. Other factors, such as adverse weather condi-
                                           tions, availability of export credit, and competing land uses, can all
                                           contribute to decreased market share.


Shares for Wheat and Wheat Flour           Figures m percent
Exports (Crop Years 1984/1985-1989/1990)                                   19&l/                  19861      1987/      19881
                                           Country                         1995       E’          1997       1988       1989”          :99983
                                           Unlted States                     35.6       29 4       31 3        41 4       38 7          35.9
                                           Canada                            18.1       198        22 9        22 5       136           175
                                           Australia                         14.8       18.8       163         11 6       109           10 2
                                           EC                                173        18.4       16 1        14.1       21 5          21 6
                                           Argentma             ..~-          7.5        72         4.7         35         37            66
                                           Other                              6.3        58         61          6.4       108            73
                                           TotaP                             99.6       99.4       99.4        99.5       99.4          99-1


                                           bForecast November 1989
                                           CTotalsdo not add to 100 percent due to rounding.
                                           Source GAO analysis of data contamed m Agriculture’s Wheat Sltuatlon and Outlook Report, November
                                           1989

                                           The September 1989 OIG report noted that since the program’s inception,
                                           the EC wheat market shares have generally increased, while those of
                                           Argentina, Australia, and Canada have decreased. While the OIG noted
                                           that the decreased market shares could have been the result of lower
                                           wheat supplies, it cautioned that the program’s continuation could
                                           adversely affect these countries’ exports, should their production
                                           increase. The OIG’s analysis showed an inverse relationship between the
                                           U.S. wheat market share and these three countries’ total market shares,
                                           More importantly, changes in the U.S. market share appear to have rela-
                                           tively little effect on the EC market share. OIG thus questioned the pro-
                                           gram’s ability to challenge EC export markets without harming other
                                           competitors.

                                           We were told by Australian and Canadian government officials and rep-
                                           resentatives of grain marketing boards, trade associations, private
                                           traders, and farmers that their countries have been adversely affected
                                           by the program, both in terms of lowering prices for their commodities
                                           and reducing market shares.




                                            Page 33                                                 GAO/NSL4DlW204      Intemational   Trade
                             Chapter 3
                             The Export Enhancement Program’s Effect
                             on World Agriculturai Trade




                             At a midterm review of the negotiations held in Montreal in December
                             1988, the United States and the European Community were unable to
                             reach agreement on agricultural issues. Informal negotiations continued
                             and resulted in the adoption of a framework agreement on agriculture in
                             April 1989. The agreement called for substantial reductions in agricul-
                             tural support over the long term. For the short term, GATT participants
                             agreed to hold domestic and export support at or below the 1989 levels.
                             According to a government source, the short-term agreement does not
                             affect the U.S. use of the Export Enhancement Program or the EC use of
                             export restitutions under its Common Agricultural Policy.

                             In October 1989, U.S. trade negotiators submitted a comprehensive pro-
                             posal for agricultural reform. One aspect of this proposal called for the
                             elimination of export subsidies over a 5-year period. The ECwas highly
                             critical of the proposal and continued to maintain its position that agri-
                             cultural support should be decreased but not totally eliminated. In
                             December 1989, other GAIT participants, including the EC,also submitter
                             comprehensive proposals.


Effect on the Negotiations   U.S. officials have given the program much credit for bringing the ECto
                             the negotiating table and for maintaining pressure on trading partners
                             during the negotiations. According to an October 1989 Agriculture
                             study,“’ the program has focused attention on agriculture in the Uru-
                             guay Round and encouraged U.S. trading partners to support agricul-
                             tural trade liberalization. The study states that there is a continued need
                             for the program to maintain pressure on trading partners during the
                             final months of the negotiations.

                             We were told by agricultural counselors at the U.S. Mission to the Euro-
                             pean Community in Brussels and at the U.S. embassies in Bonn, West
                             Germany, and Paris, France, that the program has been an effective tool
                             in furthering trade negotiations. Its use has shown that the United
                             States is serious about efforts to eliminate trade-distorting subsidies.

                             The ECofficials we contacted generally stated that the program has had
                             little or no effect. A West German government official noted that any
                             pressures from the program on the EC have been negligible. He stated
                             that the EC began to reform its Common Agricultural Policy long before
                             the Export Enhancement Program’s enactment. In his view, the program

                             “‘“Export Enhancement Program Issues and F’mposak for Future Programming” (U.S. Department of
                             Agriculture, Oct. 6, 1989).



                             Page 36                                               GAO/NSIAD-Cl&204 International   Trade
                       in the wheat export market resulting from the use of the program. The
                       study reported probable bilateral trade flows and predicted resulting
                       additional U.S. sales to the targeted markets. This study estimated the
                       program’s additionality for wheat exports at 2 to 3 percent for 1986 and
                        12 to 14 percent for 1987 (due to large purchases under the program by
                       the North African countries and the Soviet Union).


                       The Export Enhancement Program was designed to target specific
Changes in Targeting   market opportunities, especially those that challenge competitors which
Strategies             subsidize their exports. In practice, Agriculture has implemented the
                       program to have the greatest impact on the European Community.
                       According to Agriculture officials, however, the program was not
                       intended to be limited just to those markets where the ECwas a major
                       exporter. Over time, the program was expanded to include countries
                       that had a small ECmarket presence, and then to countries where the EC
                       was only contemplating a sale. As the ECwas displaced in one market, it
                       turned to another, thus making that country eligible for the program.
                       The program grew from 4 targeted countries in 1985 to 69 by 1990 and
                       has included 12 commodities.

                       Perhaps the most controversial aspects of targeting were the adminis-
                       tration’s decisions regarding the Soviet Union. As reported in our March
                        1987 report, the Soviet Union was initially excluded from the program,
                       despite the fact that the ECshare of the Soviet wheat market rose from 5
                       to 22 percent from the 1981 to the 1985 crop year. Agriculture initially
                       stated that the Soviet Union had been excluded from the program
                       because nonsubsidizing competitors had about a 48 percent share of the
                       market in crop year 1985. However, nonsubsidizers had equal or greater
                       shares of other markets targeted under the program, such as Egypt,
                       Iraq, Jordan, and Sri Lanka. Clearly the Soviet Union had been excluded
                       until August 1986 for foreign policy reasons. The Soviet Union was then
                       made eligible for sales under the program and has since become the
                       largest importer under the program.

                       In May 1989, Agriculture released the results of an internal study
                       assessing past performance under the program. The analysis focused on
                       wheat sales, which had historically constituted about 85 percent of the
                       program’s export volume. It illustrates how the targeting strategy has
                       evolved over time.”

                       ‘~“Tk! Export Enhancement PrOgram: Review of Progmm Criteria and Objectives” (U.S. Department
                       of Agriculture, May 15, 1989).



                       Page 34                                              GAO/NSL.4LW@2O4 Intematlonal     Trade
chapter 3
The Jsxport Enh.¶ncement Plw!mn’s   Effect
on world Agricultural Trade




Although dairy cattle exports did increase, it is unclear how much of the
increase was due to the program. One major importer told us that they
would probably have bought some U.S. cattle even without the program;
however, the higher US. price might have affected the number
purchased.

At the time of our review, it was not clear that the U.S. market would be
sustained, with or without the program. We were told that U.S. cattle
were not producing as much milk as expected, were experiencing
problems with impregnation, and were not adapting to Indonesia’s cli-
mate. Moreover, high transportation costs would always necessitate a
subsidy to keep U.S. dairy cattle competitive.

In our February 1990 report on Export Enhancement Program activity,
we reported that as of February 1989, U.S. exporters had received over
$18 million in bonuses for sales of 15,297 head of cattle to Indonesia. We
noted that the amount of bonus needed to make U.S. dairy cattle exports
competitive varied over time and, in some years, greatly exceeded the
sales price. For all dairy cattle sales under the program, the average
bonus value was 146 percent of the average sales price in fiscal year
 1986 and 121 percent in 1987. A complete comparison of average
bonuses as a percent of average sales by commodity is included in
appendix VII of our February report.

The 01~‘s September 1989 report on the program stated that FAS did not
effectively manage its dairy cattle program during initial implementa-
tion. The OIG found that FAS did not have sufficient cost data to compute
bonus amounts. Instead of computing bonuses based on actual costs
under current market conditions, FAS had established bonus ceilings at
50, 100, or 150 percent of the contracted sales prices. Other problems
also plagued the dairy cattle program. The OIG found that FAS did not
anticipate some of the difficulties that were encountered when
exporting live animals. In addition, participating exporters did not
always have the necessary expertise or financial means to operate, nor
were they always aware of significant import restrictions.

 Due to the large bonuses being paid, in April 1988 FAS suspended the
 dairy cattle program, and then in July 1988 it announced two new dairy
 cattle initiatives with pre-set bonuses. These new initiatives expired in
 December 1988, and since then no new dairy cattle initiatives have been
 announced.




 Page 32                                     GAO/NSIAD90204   International   Trade
                            chapter 3
                            The Export Enhancement F’ro~‘s   Effect
                            on World &riculturai Trade




                            Further evidence of GSM-102’s importance to market expansion was dis-
                            cussed in a 1989 report that the U.S. Agricultural Trade and Develop-
                            ment Mission in Algeria and Tunisia prepared. The report stated that
                            because of Algeria’s increasing need for financing, the US. export credit
                            guarantee program had become one of the most important factors in
                            expanding U.S. agricultural exports to Algeria. The report noted that
                            the GSM-102 program had grown from $97 million available for fiscal
                            year 1986 to $750 million available for fiscal year 1989.


Long-Term Market            We analyzed two markets targeted under the Export Enhancement Pro-
                            gram-table eggs to Hong Kong and dairy cattle to Indonesia-and
Expansion Is Questionable   found that the program had increased exports of U.S. agricultural com-
in Two Markets              modities in these markets. However, we question whether long-term
                            market expansion can be sustained. In Hong Kong, where price was an
                            important buying decision determinant, it appeared that the continued
                            competitiveness of U.S. table eggs depended on the program’s continua-
                            tion. In Indonesia, further dairy cattle sales were unlikely because of
                            other problems unrelated to price.


Table Egg Exports to Hong   The U.S. share of the Hong Kong table egg market increased signifi-
                            cantly after sales began under the program in 1986. U.S. table eggs com-
Kong                        pete primarily with Chinese and Dutch table eggs for the Hong Kong
                            market. Chinese table eggs have historically dominated the market
                            because they are cheaper and because Hong Kong’s Chinese population
                            generally prefer their taste and color. Dutch table eggs are closer to US.
                            table eggs in quality, taste, and appearance. Subsidized sales of Dutch
                            table eggs began gaining momentum during the mid-1980s. According to
                            Hong Kong egg traders, price is the most important determinant of
                            whether consumers will buy Dutch or US. table eggs.

                            The U.S. share of the Hong Kong market increased from 6 percent in
                            1986, when the program was initiated in response to Dutch subsidies, to
                            about 13 percent as of March 1989. At one point, the U.S. share was as
                            high as 18 percent. Table 3.1 illustrates changes in the relative market
                            shares for the three main suppliers since 1984.




                             Page 30                                   GAO/NSIAD90-204   International   Trade
                            chapter 3
                            The Jkport Enhancement l+.ogmds      ErYect
                            on World Agriculhunl Trade




                            may respond to U.S. competition by displacing potential U.S. sales in
                            untargeted markets. Moreover, when prices decline, it is unclear how
                            much more importers will buy of the lower-priced commodities or
                            whether they will use the resources saved to buy other commodities,
                            either U.S. or foreign. Nontargeted countries may respond by reducing
                            their U.S. purchases, thereby creating the need to target those countries
                            to regain lost market shares. Thus, while exports may increase in the
                            targeted markets, the overall effect on US. exports worldwide is uncer-
                            tain. If this displacement occurs, the use of targeted subsidies may
                            merely reroute trade flows, and total export volume would not necessa-
                            rily increase.


U.S. Agricultural Exports   The program does appear to have been critical to making sales in certain
                            markets, such as wheat sales to the Soviet Union and China. During
Increased in Certain        periods of surplus supplies on the world market, these importing coun-
Markets                     tries took advantage of competition among exporters to obtain the best
                            possible price and terms. Without the program to make US. exports
                            competitively priced, it is highly unlikely that these sales would have
                            taken place.

                            For example, when the Export Enhancement Program was established
                            in 1985, it lowered the price of wheat to many importers but not to the
                            Soviet Union. This exacerbated ongoing United States-Soviet differences
                            over the price of U.S. grain. In 1983, the Soviets had entered into a long-
                            term bilateral grain agreement with the United States and had agreed to
                            purchase a minimum of 4 million metric tons of U.S. wheat annually for
                            5 years.’ Beginning in 1985, the Soviets bought significantly less wheat
                            from the United States-2.9 million metric tons in 1985 and a mere .15
                            million metric tons in 1986-because of continuing differences over
                            price. To encourage the Soviets to purchase the minimum quantities of
                            U.S. grain specified in the agreement, Agriculture offered wheat to the
                            Soviet Union under the Export Enhancement Program on August 1,
                             1986. The offer expired on September 30, 1986, without the Soviets
                             purchasing any U.S. grain. According to Soviet trade representatives,
                             the U.S. price was too high despite the $15 bonus per metric ton offered
                            to U.S. exporters. The Soviets did purchase wheat from the European
                             Community during this time.



                             ‘For more information on the agreement, see     Trade: Long-Term Bilateral Grain Agree
                             ments with the Soviet Union and China (GA     9-63, Mar. 22,1989).



                             Page 28                                         GAO/NSIAD!W204       International   Trade
                      chapter 2
                      F%-ogmmoperations   can Be
                      Purther Improved




                      documentation leaves         FAS   vulnerable to allegations of impropriety   and
                      favoritism.

                      We believe that all information required to prove exporter eligibility
                      should be at least randomly verified. For example, FAS was not routinely
                      verifying sales contract information. We believe that without verifica-
                      tion, FM cannot ensure that only eligible exporters with valid sales con-
                      tracts were participating in the program.

                      Participating exporters were generally satisfied with FAS program
                      administration, but they identified areas that could be improved. They
                      suggested that FAS decrease its performance bond requirements, adopt
                      the commercial definition of contract fulfillment, accept alternative
                      forms of documentation to prove contract fulfillment, simplify the bid-
                      ding process, and reactivate the Export Enhancement Advisory Group.
                      FAS officials do not agree that these suggested changes are necessary.



                      We recommend that the Secretary of Agriculture continue to improve
Recommendations       the Export Enhancement Program’s operations by directing the FAS
                      Administrator to

                  . require the Commodity and Marketing Programs section to expand its
                    status report on proposals by including those being analyzed in the com-
                    modity divisions so that the General Sales Manager can monitor their
                    progress and ensure their consistent, fair, and timely treatment;
                  . require written justification for each decision to reject an official pro-
                    posal for a new program initiative, including decisions made by the
                    Under Secretary for International Affairs and Commodity Programs;
                    and
                  l randomly verify all categories of information needed to prove exporter
                    eligibility to help ensure that only eligible exporters with valid sales
                    contracts participate in the bidding process.




                       Page26                                             GAO,‘NSIADWMO4 Intematlonal   Trade
                       chapter 2
                       Program opemtiom   can se
                       Further rmpmved




                       proof of contract fulfillment   and allow for alternative documents that
                       are more easily acquired.

                       According to FAS, the targeted nature of the program demands a strict
                       requirement for proof of delivery to the specified destination. FM has
                       considered other alternatives to landing certificates, but none has been
                       deemed viable. Landing certificates can be issued by one of several
                       importing country officials, including a customs or port official, in addi-
                       tion to the actual buyer. Even so, FAS acknowledged that landing certifi-
                       cates are sometimes difficult to obtain. In these cases, FAS agricultural
                       attaches can assist the exporters in getting certificates from importing
                       country officials. Further, according to FAS officials, FAS has released
                       performance bonds when unwarranted delays have occurred due to
                       exporter difficulty in obtaining landing certificates.


Simplify the Bidding   In order to compete for a sale under the program, each exporter must
                       submit a bid through the FM-administered bidding process. Each bid
Process                includes the negotiated sales price and required bonus amount. In order
                       to be acceptable, bids must fall within FAS predetermined minimum price
                       and maximum bonus levels, which are not publicly announced.

                       While exporters recognized that the bidding process enhances competi-
                       tion, several of them noted that it puts them in an unusual position. In a
                       commercial sale, the exporter and the importer negotiate and agree on a
                       price. In a sale under the program, an exporter often has to return to the
                       purchaser several times to renegotiate because FAS has turned down the
                       bid. We were told that this process gives the sale an unprofessional
                       appearance and frustrates the buying officials. These exporters sug-
                       gested that FAS eliminate the minimum price, and that FAS need only
                       ensure that the maximum bonus allowed reflects the difference between
                       the U.S. and the competition’s delivered prices.

                       FASacknowledged that the bidding process can often be time consuming
                       and cumbersome. However, the competition generated by setting a min-
                       imum price is important to the credibility of the bidding process.




                        Page 24                                      GAO,‘T’JSL4D9@204 Intendhmal   Trade
                          chapter 2
                          Program OpenrtioIla can Be
                          FurtherImproved




                          We previously reported that as of February 1989,71 exporters had par-
Exporters’ Comments       ticipated in the program. We spoke with 16 of these exporters, who
and Suggestions for       together received 65 percent of the total bonuses awarded, to obtain
Program                   their views on how well the program was being administered. These 16
                          exporters had sold 9 of the 12 commodities targeted under the program.
Improvements              In general, these exporters were satisfied with how FAS was adminis-
                          tering the program and stated that FAS management was competent and
                          fair. The consensus was that FAS had generally done a good job running a
                          complicated program with limited resources. However, the exporters
                          raised a number of concerns about program operations and made sev-
                          eral suggestions for improvement. Their suggestions addressed perform-
                          ance bond requirements, contract definition, documentation, bidding
                          procedures, and the need for an export advisory committee.


Decreasethe Performance   To participate in the program, an exporter must post a performance
Bond Requirements         bond in favor of Agriculture’s Commodity Credit Corporation. Perform-
                          ance bonds can equal either 55 percent or 155 percent of the total bonus
                          requested, plus 5 percent for shipping tolerance, depending on when the
                          exporter wants the bonus award. The 155 percent bond allows the
                          exporter to receive the bonus upon proof of shipment. The 55 percent
                          bond allows an exporter to receive the bonus award only after submit-
                          ting proof of delivery. However, under either option, performance bonds
                          are not released until the exporter provides FAS with a landing certifi-
                          cate as proof of delivery.

                          According to several exporters, both options are often too highly priced
                          for many of the smaller exporters to handle on their own. Obtaining
                          outside financing is difficult and, when found, the outside financier
                          requires compensation. This compensation adds to the smaller
                          exporter’s bonus bid and generally makes it too high to be acceptable
                          and competitive.

                          The exporters suggested that FM reevaluate the performance bond
                          requirements, with particular attention to whether equal opportunity
                          exists for small and large exporters to post bonds. They stated that low-
                          ering the percentage of the requested bonus to be secured by a bond
                          could allow more exporters to participate in the program.

                          According to FAS, the offering of either a 55 percent or 155 percent per-
                          formance bond gives smaller exporters an opportunity to participate,
                          while limiting the risk to the Commodity Credit Corporation should the
                          exporter not perform.


                          Page 22                                    GAO/NSIAD9O.2U4   Intematiod   Trade
                      chapter2
                      FTogmll operationa can se
                      Further Improved




                      FAS sets minimum prices and maximum bonuses for commodities sold
Improvements to the   under the Export Enhancement Program. These parameters are then
Price- and Ebnus-     used as the criteria for accepting exporter bids for sales under the pro-
Setting Process       gram. In March 1987, GAO reported that the price- and bonus-setting pro-
                      cess involved considerable subjective judgment.

                      During our current review, we reexamined this process. We found that
                      the data collection efforts and methodology for price- and bonus-setting
                      can vary by commodity, due to the nature of the market, the availability
                      of commodity price information, and the need to consider other factors,
                      such as quality, packaging, processing, and transportation rates. We
                      determined that FM program officials were receiving the information
                      necessary to make informed price and bonus decisions. However, they
                      were not documenting adjustments made to this information when cal-
                      culating price and bonus levels. Although FAS officials were preparing
                      price sheets that listed each of the figures used in price and bonus calcu-
                      lations, they were not providing either narrative or statistical support to
                      explain how they arrived at these figures. As a result, it was difficult to
                      determine whether bonuses were higher than needed to make sales. This
                      inability was of greatest concern when bonuses exceeded sales prices.
                      For example, in February 1990, we reported that for dairy cattle, the
                      average bonus value was as high as 146 percent of the average sales
                      price in 1986; for semolina, as high as 140 percent in 1987; and for
                      frozen poultry, as high as 111 percent in 1986.

                      During 1989 and 1990 hearings, we outlined these problems and empha-
                      sized the need for better documentation of price- and bonus-setting deci-
                      sions. The OIG also found problems with FAS documentation of price- and
                      bonus-setting decisions.

                      In response to GAO and OIG concerns, in December 1989, FAS developed
                      written guidelines detailing the procedures to be followed by each com-
                      modity division when determining price and bonus levels. Further, in
                      April 1990, FAS instructed commodity divisions to document all relevant
                      price and bonus determinations and adjustments to price information.
                      We support these FAS actions because we believe that price- and bonus-
                      setting determinations must be well documented in order to strengthen
                      the integrity and credibility of the price- and bonus-setting processes. In
                      turn, the bidding process, which relies on price and bonus levels for its
                      criteria, will be less vulnerable to claims of unfair or inconsistent
                      treatment.




                      Page 20                                     GAO/NSLUMW204   International   Trade
                       chapter 2
                       Program opelntiona can Be
                       Further Improved




                       the minimum program criteria, it is forwarded to FAS top management
                       for further review. The Commodity and Marketing Programs section
                       establishes a central file on each proposal forwarded by a division,
                       tracks its progress, and compiles a weekly status report containing
                       information on all proposals forwarded by the divisions and currently
                       under review. This report contains market-sensitive information’ and,
                       therefore, its distribution is restricted to the General Sales Manager and
                       a few selected staff.

                       During our review of the Commodity and Marketing Programs section’s
                       central files, we found that they contained information forwarded from
                       the divisions, including documentation of how the proposal met the pro-
                       gram criteria, and signatures collected during the review and approval
                       process. However, when a proposal was rejected by the Under Secretary
                       for International Affairs and Commodity Programs, written justification
                       was not provided. Generally accepted internal control practices dictate
                       that key decisions be clearly documented. FAS lacks the complete docu-
                       mentation necessary to defend its decisions to accept or reject proposals.
                       Therefore, we believe that FAS is vulnerable to allegations of impropriety
                       and favoritism, particularly by those whose proposals are rejected.


                       Currently FAS internal controls over the exporter qualification and bid-
Exporter Eligibility   ding processes are not adequate to ensure that only eligible exporters
not Verified on a      with valid sales contracts participate in the bidding. We reviewed FAS
Random Basis           files on 71 participating exporters and found that they contained the
                       required information. However, we found that while FAS verified some
                       categories of information submitted by exporters, information on the
                       form of doing business, name and address of U.S. agent, and sales con-
                       tract was not routinely verified, even on a random basis.

                       To be eligible to participate in the program, exporters must provide the
                       following types of information no later than 3 days before submitting a
                       bid: (1) evidence of having traded in the commodity offered during the
                       preceding 3 years, (2) the name and address of the exporter’s U.S. agent,
                       (3) a certified statement of the form of business under which the
                       exporter practices (e.g., U.S. corporation, foreign entity), and (4) evi-
                       dence of the exporter’s financial responsibility either in the form of an

                        ‘According to Agriculture. market-sensitive infonnatwn includes production estimates, trade and ccc-
                        nomic forecasts, acreage reduction and price support programs, export sales, all activity under the
                        Export Enhancement Program and Targeted Export Assistance Program, and all actions by the Gen-
                        eral Sales Manager that might influence or affect the market value of any agricultural product traded
                        on a commodity market.



                        Page 18                                                   GAO/‘NSIAD80.204      International   Trade
Chapter 2

Program Operations Can Be F’urther Improved


               The Foreign Agricultural Service manages the Export Enhancement Pro-
               gram’s day-to-day operations. The difficulty in administering such a
               complex program is reflected in the number of activities required to
               carry out its objectives. Our review focused on four of these administra-
               tive activities: tracking proposals, ensuring exporter eligibility, setting
               price and bonus levels, and monitoring bonus payments. We found that
               FAS did not (1) centrally track all proposals, (2) adequately verify infor-
               mation used in the exporter qualification and bidding processes, and (3)
               adequately document price- and bonus-setting decisions. In addition, we
               identified several cases where bonuses had been overpaid.


               Past reviews by GAO and by Agriculture’s OIG have criticized the pro-
Background     gram’s operations and management. In March 1987, we reported that FAS
               had not set appropriate guidelines for applying program criteria and
               had not developed procedures to properly document price and bonus
               determinations.l In addition, in 1989 and 1990 we testified before con-
               gressional agriculture committees on improvements still needed in pro-
               gram operations. In September 1989, the OIG reported that internal
               controls were not adequate to ensure that the program was meeting its
               stated objectives in the most cost-effective manner.Z Among its findings,
               the OIG reported that FAS had not (1) developed written guidelines to fur-
               ther define program criteria established by the Economic Policy Council,
               (2) evaluated the program to determine if program objectives were being
               met, (3) established written policies and procedures for price and bonus
               calculations, and (4) adequately documented these calculations. In Feb-
               ruary 1990, we reported on internal control weaknesses that had
               resulted in bonus overpayments?

               In response to GAO and OIG concerns, FAS has been working to improve
               Export Enhancement Program operations. It is developing written poli-
               cies and guidelines for many aspects of the program, establishing new
               procedures, and strengthening internal controls to help ensure that pro-
               gram objectives will be met.



               ‘International Trade: Implementation of the Agricultural Export Enhancement Program (GAO/
               NsIAD87-7wK,       Mar. 17,1987).

               “Audit of the Foreign Agricultural Service’s Export Enhancement Program (U.S. Department of Agr-
               culture’s office of Inspector General Audit Report No. 07099-l&Hy, Sept. 29, 1989).

               %emational    Trade: Export Enhancement Program Bonus overpayments (GAO/NSIAD9043.            Feb.
               7, 1990).




               Page 16                                                 GAO/NSIAlMW204       International   Trade
chapter1
Rolpam     Activity   and Focus




We have also testified on our preliminary findings on three occasions
before Senate and House agriculture committees5 In addition, an April
1990 GAO report on the 1990 farm bill contains a summary of the issues
addressed in our testimony and suggestions for congressional
considerationP

Our objectives were to (1) review program operations, including recent
changes, and (2) examine the program’s effect on world agriculture
trade and its use as a trade policy tool during the ongoing agricultural
trade negotiations.

To assess program operations and management, we identified written
guidelines and procedures used in all phases of program implementa-
tion. We examined program operations to determine whether internal
controls were adequate to ensure that established guidelines and proce-
dures were followed in tracking proposals, ensuring exporter eligibility,
setting price and bonus levels, and monitoring bonus payments. We
reviewed program documents at FAS headquarters in Washington, D.C.,
and at the Agricultural Stabilization and Conservation Service in Kansas
City, Missouri, We also interviewed officials in both locations who were
responsible for administering the program. In addition, we discussed the
program with officials from the State Department and OMB. To obtain
the exporters’ perspective on program operations, we conducted a tele-
phone survey of 16 participating exporters, 3 of which accounted for
over half of the total bonuses awarded through February 1989.

To determine the program’s effect on world agricultural trade and the
ongoing multilateral trade negotiations, we interviewed U.S. government
officials; representatives of U.S. trade associations; farmers’ coopera-
tives and unions; grain exporters; transportation entities; and other
members of the U.S. agricultural trade community. In addition, we
reviewed documents and studies provided by these parties as well as
those prepared by Agriculture’s Economic Research Service and other
independent researchers.


‘On July 31,1989. we testified on the status of our review of the Export Enhancement Program
before the Subccnnmitke on Wheat, Soybeans, and Feed GM, House A@iculture Gxnmittee (GAO/
T-NSIAD-SP-46). We also testified on November 16, 1989, at a joint hearing of the Howe Agriculture
Committee’s Subcommittees on Department Operations, Research, and Foreign Agriculhw Tobacco
and Peanuts; and Wheat, Soybeans, and Feed Grains (GAO/T-NSIAD-90-12). We testified before the
Senate Committee on Agriculture, Nutrition. and Forestry on February 21,199O (GAO/
T-NSIAD-9042).
 “1990 Farm Bii Opportunities for Change (GAO/RCED90-142,       Apr. 10,199O).



 Page 14                                                 GAO/NSlALM%204       Jntemational   Trade
chapter 1
l’m@am Activity   and Foeus




Measuring the program’s success based on the achievement of these cri-
teria has proved difficult. Problems with measuring the program’s addi-
tionality and with the targeting strategy are discussed in detail in
chapter 3. Cost effectiveness and budget neutrality also proved to be
troublesome criteria. In November 1988, as part of its fiscal year 1990
budget review of Agriculture programs, the Office of Management and
Budget (OMB) requested that Agriculture examine the program’s per-
formance baaed on the above criteria, concentrating on the program’s
budgetary effect under a range of market conditions.

In February 1989, Agriculture and OMB staff agreed to the scope, outline,
and schedule for Agriculture’s review of the program criteria and objec-
tives. The first phase of the review, completed in May 1989, focused on
the program’s past performance, budget effects, and additionality, with
emphasis on wheat sales. While Agriculture acknowledged the difficulty
of measuring program compliance with program criteria, particularly
the additionality and budget neutrality criteria for specific targeted
markets, it generally concluded that the program had met its objectives.
The program had enhanced exports, challenged unfair trade practices,
and been an important factor in encouraging U.S. trading partners to
begin serious negotiations on agricultural trade reform under the Uru-
guay Round of the multilateral trade negotiations.

The second phase of the review, completed in October 1989, addressed
future operation of the program. Agriculture concluded that at times,
operational criteria rather than program objectives had driven the deci-
sion-making process for approving program initiatives. This might have
affected the program by constraining the approval of initiatives that
would have met program objectives, but did not meet operational cri-
teria. Agriculture clarified the program’s objectives and reestablished
their primary importance in program operations. It identified support
for trade policy goals as the Export Enhancement Program’s primary
objective. According to Agriculture, this focus on trade policy would
also provide the basis for increasing agricultural exports through the
eventual elimination of trade-distorting policies and practices.

The second phase resulted in proposed new guidelines to replace the
original operating criteria. The guidelines would be used when deter-
mining annual program levels and in reviewing and selecting proposal
initiatives. On November 27, 1989, Agriculture published a notice in the
Federal Register proposing interrelated guidelines, which would be con-
sidered together when selecting countries and commodities to target
under the program.


 Page 12                                   GAO/NSLABSO-204 International   Trade
                                                                                                                           -
                            Chapter   1
                            Pro@un Activity   and Focus




                            and distributes the proposal to member agencies of the Trade Policy
                            Review Group (TPRG).’

                            Members of the TPRG’S informal working group are given 5 working days
                            to express concerns about the proposal. When members of the working
                            group raise concerns or objections to the proposal, subcabinet members
                            of the full TPRG meet to discuss the problems. If the TPRG cannot reach
                            consensus on the proposal, it is forwarded to the Economic Policy
                            Council. If the Council cannot agree, the proposal can be sent to the
                            President for approval or rejection.

                            After a proposal is approved, it is sent back to Agriculture and
                            announced as an initiative. Each initiative specifies a fixed quantity of a
                            commodity (e.g., 100,000 metric tons) approved for sale. Once the initial
                            quantity is awarded, new allocations can be approved through the inter-
                            agency process and announced under a revised initiative.


Setting Minimum Price and   FAS sets minimum prices and maximum bonuses for commodities sold
                            under the program. Price and bonus amounts are calculated separately
Maximum Bonus Levels        for each destination, type of commodity (e.g., hard red winter wheat,
                            soft winter wheat, durum wheat), and time of shipment.

                            FAS collects information on competitor selling prices from daily and
                            weekly market intelligence reports and from overseas sources such as
                            agricultural attaches, private contractors, and trade contacts. It then
                            sets a minimum acceptable price that is competitive with the delivered
                            price of the subsidizing supplier. FAs also estimates the U.S. domestic
                            price plus freight and special handling to the same destination. Informa-
                            tion is collected from trade publications, trade contacts, freight compa-
                            nies, and other Agriculture divisions. The difference between the US.
                            and the competitor’s delivered prices becomes the maximum acceptable
                            bonus.

                            With few exceptions, bonus payments are made to exporters in negoti-
                            able “generic” commodity certificates, with specified expiration dates
                            and dollar amounts. The Department of Agriculture’s Agricultural Stabi-
                            lization and Conservation Service issues the commodity certificates and
                            maintains documentation on contract fulfillment. The exporter may sell

                             ‘The Trade Policy Review Group is chaired by a deputy U.S. Trade Representative and is made up of
                             representatives from the Departments of Agriculture, State, Commerce, Labor, Treasury, and Trans.
                             portation; the Office of Management and Budget; the Councd of Economic Advisers; and other agen-
                             cies with interest in the proposal.



                             Page 10                                                  GAO/NSL4B90204      International   Trade
Chapter 1                                                                                                               -
Progmm Activity and Foeus


                       In May 1985, the Export Enhancement Program was established by the
                       Secretary of Agriculture in reaction to continuing declines in U.S. agri-
                       cultural exports. Under the program, government-owned surplus agri-
                       cultural commodities were to be made available as bonuses to US.
                       exporters to enable them to lower the prices of U.S. agricultural com-
                       modities and make these commodities competitive with subsidized for-
                       eign agricultural exports, particularly those of the European
                       Community (EC). According to guidelines established by the cabinet-level
                       Economic Policy Council,l sales were to be targeted at specific market
                       opportunities where U.S. agricultural exports could be increased above
                       those that would have occurred without the program.

                       The Food Security Act of 1985 codified the Export Enhancement Pro-
                       gram as a 3-year export subsidy program providing $2 billion worth of
                       surplus agricultural commodities as bonuses. The Food Security
                       Improvements Act of 1986 limited the overall amount of bonuses to be
                       awarded during the 3-year period to not less than $1 billion nor more
                       than $1.5 billion. In July 1987, the Department of Agriculture
                       announced that the program would continue under the provisions of the
                       Commodity Credit Corporation Charter Act of 1948 once the $1.5 billion
                       of authorized commodities had been exhausted. The Omnibus Trade and
                       Competitiveness Act of 1988 authorized the continuation of the program
                       and an additional $1 billion in commodities through fiscal year 1990,
                       thus raising the ceiling to $2.5 billion. This level was reached in late
                       fiscal year 1989. Through the Omnibus Budget Reconciliation Act of
                        1989, Congress limited the amount of commodities available during
                       fiscal year 1990 to $566 million.


                       The Export Enhancement Program is managed and administered by the
Nature and Extent of   U.S. Department of Agriculture’s Foreign Agricultural Service (FAS).
the Program            Since its inception, the program has grown dramatically-as    of May 3 1,
                       1990, FAS had announced 107 initiatives targeting 12 commodities in
                       69 countries. The targeted countries and commodities are listed in
                       appendix I. In February 1990, we issued a fact sheet containing informa-
                       tion on activity under the program from May 1985 through February 28,



                       ‘The Economic Policy Council is chaired by the Secretary of Treasury and includes the Secretaries of
                       Agriculture, C!ommerce,Labor, State, and Transportation; the U.S. Trade Representative; the Director
                       of the Office of Management and Budget; the Chairman of the Council of Economic Advisers; the Vice
                       President; the Assistant to the President for National Security Affairs; and the White House Chief of
                       Staff.



                       Page 8                                                    GA0/NSuD00.204        International   Trade
Contents


Executive Summary                                                                                       2

Chapter 1                                                                                               8
                           Nature and Extent of the Program                                             8
Program   Activity   and   How the Program Works                                                        9
Focus                      Recent Changes to Program Criteria                                          11
                           Objectives, Scope, and Methodology                                          13

Chapter 2                                                                                              16
Program Operations         Background                                                                  16
                           Not all Proposals Are Centrally Tracked                                     17
Can Be Further             Exporter Eligibility not Verified on a Random Basis                         18
Improved                   Improvements to the Price- and Bonus-Setting Process                        20
                           Improvements to the Bonus Payment Process                                   21
                           Exporters’ Comments and Suggestions for Program                             22
                               Improvements
                           Conclusions                                                                 25
                           Recommendations                                                             26

Chapter 3                                                                                              27
The Export                 Impact on U.S. Agricultural Exports                                         27
                           Changes in Targeting Strategies                                             34
Enhancement                Use as a Trade Policy Tool                                                  35
Program’s Effect on        Impact on Other Competitors                                                 37
World Agricultural         Conclusions                                                                 40
                           Matter for Congressional Consideration                                      41
Trade
Appendixes                 Appendix I: Total Program Activity by Country and                           42
                               Commodity as of May 31,199O
                           Appendix II: Major Contributors to This Report

Tables                     Table 3.1: Major Suppliers’ Market Shares of Hong Kong
                               Table Egg Imports
                           Table 3.2: Major Exporters’ World Market Shares for                         38
                               Wheat and Wheat Flour Exports




                           Page 6                                   GAO,‘NSIAIM6.204 International   Tndc
                     Executive summary




Effect on World      The Export Enhancement Program has helped to increase US. agricul-
Agricultural Trade   tural exports, particularly wheat, to many countries. The extent of the
                     program’s effect is generally difficult to quantify. Studies published in
                     1988 and 1989 have estimated that the program was responsible for
                     between 2 and 30 percent of the increase in wheat exports, depending
                     on the assumptions made and the time period covered by the study.
                     However, in a few cases, the program has been critical to making sales
                     in certain markets, specifically wheat sales to the Soviet Union and
                     China. In addition, GAO found that the program, coupled with U.S.
                     export credit guarantees, was essential to U.S. sales in Algeria and
                     J&W.

                     The program’s targeting strategy has evolved over time. Originally its
                     primary target markets were in countries that made significant
                     purchases of subsidized exports from the European Community. How-
                     ever, over time the program changed and expanded to include countries
                     that had a small Community presence and then to countries where the
                     Community was only contemplating a presence. The program grew from
                     4 countries in 1985 to 69 countries in 1990.

                     Agriculture has reestablished the program’s importance as a trade
                     policy tool to maintain pressure on some trading partners during the
                     final months of the Uruguay Round of multilateral trade negotiations on
                     agricultural trade reform. U.S. officials have given the program much
                     credit for pressuring the European Community to begin negotiations on
                     agricultural reform. However, the Community has resisted major con-
                     cessions to the United States on the elimination of agricultural subsidies.

                     GAO agrees that the program is an important trade policy tool. Aban-
                     doning the program now would undermine any progress made thus far.
                     Once the Uruguay Round of multilateral trade negotiations is completed,
                     the Secretary may need to reevaluate the program in light of any agree-
                     ments reached on agricultural subsidy issues.


                     GAO   makes several recommendations to improve program operations,
Recommendations      including expanding the central proposal tracking system and estab-
                     lishing better internal controls over exporter eligibility.




                     Page 4                                      GAO/NSIAD-96204 International   Trade
Ekecutive Summ~


                   In preparation for drafting the 5-year 1990 farm bill, Chairman of the
Purpose            House Agriculture Committee E (Kika) de la Garza, Congressman Silvio
                   0. Conte, and Congressman Charles E. Schumer asked GAO to review the
                   Export Enhancement Program, including its operations and recent
                   changes, its effect on world agricultural trade, and its use as a trade
                   policy tool during ongoing trade negotiations.


                   Established in May 1985, the program provides government-owned sur-
Background         plus agricultural commodities as bonuses to U.S. exporters to help lower
                   the prices of US. agricultural commodities and make them competitive
                   with subsidized foreign agricultural exports. The program was designed
                   to increase U.S. exports and encourage U.S. trading partners, particu-
                   larly the European Community, to begin serious negotiations on liberal-
                   izing agricultural trade.

                   As of May 1990, over $2.7 billion worth of surplus commodities had
                   been made available as bonuses to eligible U.S. exporters for sales to 69
                   countries. These sales totaled over $10 billion. The primary commodity
                   sold under the program has been wheat, accounting for over 80 percent
                   of total export sales. The Soviet Union and China have bought about 50
                   percent of the wheat sold; Algeria, Egypt, and Morocco have accounted
                   for another 25 percent. Other commodities sold have been wheat flour,
                   barley, barley malt, dairy cattle, table eggs, frozen poultry, mixed
                   poultry feed, rice, semolina, sorghum, and vegetable oils.


                   Today the Export Enhancement Program is operating in an environment
Results in Brief   that contrasts with 1985’s world agricultural situation. At that time,
                   U.S. agricultural exports were decreasing and government-owned grain
                   surpluses were rising. Since then, agricultural exports have increased
                   and grain surpluses have diminished, but accurate measurements of the
                   program’s effect have been elusive due to the many policy and economic
                   variables that also influence exports. However, the U.S. government
                   continues to emphasize the program’s importance as a trade negotiation
                   tool. The Department of Agriculture’s Foreign Agricultural Service has
                   been working to improve program operations in response to GAO and
                   Office of Inspector General concerns, but further improvements in man-
                   agement controls are still needed.




                   Page2                                      GAO/NSLADW264   Intemationd   Trade
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