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Title: International Trade Issues
Subtitle:
Report No.: GAO/OCG-93-11TR Date: December 1992
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Author: United States General Accounting Office
Office of the Comptroller General
Addressee: Transition Series
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CONTENTS
International Trade Issues
Enhancing U.S. Competitiveness in an Interdependent World
Promoting U.S. Exports
Managing the U.S. Department of Agriculture's Export Programs
Negotiating and Enforcing Trade Agreements
Analyzing National Security-related Foreign Investments
Related GAO Products
- Enhancing U.S. Competitiveness in an Interdependent World
- Promoting U.S. Exports
- Managing the U.S. Department of Agriculture's Export Programs
- Negotiating and Enforcing Trade Agreements
- Analyzing National Security-related Foreign Investments
- General
Transition Series
- Economics
- Management
- Program Areas
Office of the Comptroller General
Washington, DC 20548
December 1992
The Speaker of the House of Representatives
The Majority Leader of the Senate
In response to your request, this transition series report discusses major
policy, management, and program issues facing the Congress and the new
administration in the area of international trade. The issues include (1)
enhancing U.S. competitiveness in an interdependent world, (2) promoting U.S.
exports, (3) managing the U.S. Department of Agriculture's export programs,
(4) negotiating and administering trade agreements, and (5) analyzing national
security-related foreign investments.
The GAO products upon which this report is based are listed at the end of this
report.
We are also sending copies of this report to the President-elect, the
Republican leadership of the Congress, the appropriate congressional
committees, and the designated heads of the appropriate agencies.
INTERNATIONAL TRADE ISSUES
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International trade has become an increasingly critical part of the U.S.
economy. The share of national income generated by exports has more than
doubled over the past 30 years. Exports now account for about 10 percent of
the U.S. gross domestic product and are an important source of job creation.
Nevertheless, many believe that despite its rising exports the United States
is losing ground in the new global competition.
As we reported 4 years ago, the U.S. economy has become increasingly
intertwined with those of other nations in a new international marketplace;
many of those nations have gained considerable economic power since World War
II. As a result, the United States needed to better balance its domestic
economic goals and policies with the constraints imposed by the realities of
the interdependent global economy. A major priority then was the need to
address the macroeconomic imbalances resulting from the very large federal
budget deficits. The United States was consuming more than it produced and
importing the difference, which led to large U.S. trade deficits. These trade
deficits, and borrowing to finance the U.S. budget deficit, led to the United
States' becoming the world's largest debtor nation. Unfortunately, these
problems remain.
Some progress has been made at the program level in areas we reported on in
1988, but work remains to be done. While the Departments of Commerce and
Agriculture have addressed some of the organizational and management problems
in their export promotion programs, there is now a need to develop and
implement a comprehensive, governmentwide strategy for such programs, which
are spread among several agencies. Multilateral trade negotiations, thought to
be at midpoint in 1988, remain uncertain despite recent progress, and
effective enforcement remains a key to making trade agreements work. New
bilateral initiatives offer the promise of expanded trade, but knotty issues
still need to be addressed. And as international competition sharpens and
foreign firms show interest in acquiring high-technology and other national
security-related firms, continued attention needs to be paid to the impact of
foreign investments in U.S. industries on this nation's defense capabilities
and competitive position.
ENHANCING U.S. COMPETITIVENESS IN AN INTERDEPENDENT WORLD
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In our 1988 transition series report on international trade, we highlighted
the increasing interdependence of the U.S. economy and other nations'
economies. The United States had set in place macroeconomic policies that
differed from other countries'. These policies had helped transform the United
States into the world's largest debtor nation, dependent on capital from
abroad to finance substantial portions of its large, persistent federal budget
deficit. We urged the administration to address the imbalance between savings
and the deficit, specifically by reducing the deficit without endangering
long-term economic growth.
Unfortunately, since our last report, the budget deficit has grown, and the
national savings rate has been insufficient to meet the needs of both private
sector investments and government borrowing. Furthermore, a long period of
slow economic growth and of relentlessly increasing competition from other
nations has prompted the growing realization that the United States needs to
focus on long-term investment as a way to enhance its competitiveness in the
global marketplace. Formulating economic policies will require a difficult
balancing of domestic goals with international economic objectives and
constraints.
Moreover, with the end of the Cold War, the traditional national security and
foreign policy concerns--formerly centered on military confrontations--have
receded in importance; new ones focused on economic competition with other
major industrialized countries have become more prominent. Some of these
countries have relationships between their governments and their business
communities that differ significantly from those in the United States. The
perception that the United States is losing ground in the transnational
marketplace to these countries has forced leaders in business and government
to question current economic and social policies, including the role of
government in rebuilding the economy and developing a national strategy for
enhancing the United States' competitive position.
The new economic environment will require a careful examination of how
government programs and policies affect the competitive position of the U.S.
economy. For example, at the macroeconomic level, the new administration will
need to adopt policies that support private sector investment by keeping the
cost of capital at reasonable levels. At the government program level, it must
develop efforts that support rising productivity in the private sector, such
as an improved infrastructure and a better educated and trained labor force.
Finally, it must encourage private sector firms to improve their own goals,
policies, and management systems as their critical contribution to enhancing
U.S. competitiveness. Such a comprehensive effort is needed to help ensure
that the United States will be able to sell its goods and services on world
markets and that its citizens can enjoy a rising standard of living.
PROMOTING U.S. EXPORTS
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The U.S. government spends significant amounts on export promotion
programs--about $2.7 billion in fiscal year 1991--in addition to about $21.4
billion in export loans, credit guarantees, and insurance. Both the Commerce
and Agriculture Departments have major responsibilities for export promotion.
However, as we said in our 1988 transition series report, Commerce's
activities in that area faced significant difficulties. Since then, attention
has been focused on the fact that there is no explicit governmentwide strategy
or set of priorities to apportion export promotion funds. This situation has
been addressed recently in legislation, but carrying out the new legislative
mandate poses challenges. As our economic advancement becomes more dependent
on success in trading with others, the way we spend federal money to help
market U.S. products and services abroad will be of great importance.
Our 1988 transition series report said that the effectiveness of the
Department of Commerce's export promotion activities was weakened by
significant organizational and management problems. Commerce has since
addressed a number of these problems. However, compared with total government
support for exporting, Commerce has relatively few budgetary resources with
which to carry out its programs. Consequently, because of these resource
constraints, improvements in the management of this department's programs can
have only a limited effect on government efforts to assist exporters.
Export promotion programs are spread over 10 different agencies, and funds are
not allocated on the basis of any specific governmentwide strategy. As a
result, for example, agricultural exports receive about 75 percent of the
total outlays for export promotion, yet they represent only about 10 percent
of U.S. exports. Consequently, the federal government does not have any
reasonable assurance that its export promotion funds are being channeled into
areas with the greatest potential returns.
While various reorganization proposals were advanced during the 1980s, none
were adopted. However, the Export Enhancement Act of 1992 (P.L. 102-429)
incorporated our recommendations for devising a governmentwide strategic plan
to promote exports and for creating a unified federal budget for export
promotion that would be consistent with priorities established in the plan.
The law also gave the Trade Promotion Coordinating Committee (TPCC), an
interagency committee chaired by the Secretary of Commerce, responsibility for
coordinating export promotion programs.
The new legislative mandate and the TPCC's organizational responsibility for
developing a cohesive federal export promotion program have been established.
But successfully implementing this new authority will be the key to defining a
stronger, more effective federal role in assisting U.S. exporters. Therefore,
the administration needs to develop a sound strategy and policies for carrying
out this role.
MANAGING THE U.S. DEPARTMENT OF AGRICULTURE'S EXPORT PROGRAMS
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Agricultural trade has continued as a major issue in recent years. World
surpluses of agricultural commodities have increased, subsidized agricultural
export competition has intensified, and the number and costs of U.S.
agricultural export programs have risen. Moreover, disputes over agricultural
subsidies have been the major impasse in the current round of multilateral
trade negotiations under the General Agreement on Tariffs and Trade (GATT).
Our November 1988 transition series reports on agriculture issues and on
international trade issues urged greater management control over the U.S.
Department of Agriculture's export programs--including preparing better
funding criteria, providing written guidelines, and developing an evaluation
methodology--to improve U.S. agricultural export performance. Improved
internal controls were needed to enhance the management and operations of
export programs. While some improvements have been made in the management of
Agriculture's export programs since then, a number of management changes are
still necessary.
The Department's Foreign Agricultural Service (FAS) now manages over $10
billion a year in agricultural export programs and export credit assistance.
These programs are designed to increase U.S. agricultural exports, and develop
and maintain foreign agricultural markets for U.S. products. They include the
Export Enhancement Program, the Export Credit Guarantee Programs
(GSM-102/103), the Market Promotion and Cooperator Foreign Market Development
Programs, the Food for Peace Program (P.L. 480, title I), the Trade Show
Program, and a wide variety of overseas agricultural trade-related activities.
Congressional support for enhanced agricultural export promotion and foreign
market development was underscored in the export title of the Food,
Agriculture, Conservation, and Trade Act of 1990.
However, FAS lacks a coherent and comprehensive strategy to promote
agricultural trade. Internal controls in programs remain inadequate, program
evaluation is limited and generally ineffective, and program accountability is
insufficient. Problems in the management and operation of agricultural trade
offices overseas and trade shows abroad also need to be addressed. Our work on
Iraq and the former Soviet Union raised concerns over compromising the export
credit guarantee programs for foreign policy and national security
considerations. Questions persist about the creditworthiness of these
countries and the financial impact on U.S. taxpayers.
To address the above concerns, FAS needs to, among other things, expedite
development and implementation of a long-term agricultural trade strategy
consistent with legislative requirements under the export title of the 1990
act; establish enhanced planning, decision-making, and program evaluation
processes; and improve internal controls and documentation to ensure greater
accountability and more efficient and effective program management. FAS should
also develop clear, consistent, and appropriate export program criteria to
ensure that taxpayers' funds are correctly used. FAS is in the process of
implementing some program management reforms. These changes must be monitored
and their effectiveness assessed.
Other matters related to agricultural trade appear in our transition series
report _Food and Agriculture Issues_ (GAO/OCG-93-15TR, Dec. 1992).
NEGOTIATING AND ENFORCING TRADE AGREEMENTS
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The aim of U.S. trade negotiations is to remove foreign barriers to imports
and unfair governmental incentives to exports, thus encouraging the free flow
of international trade. The principal multinational trade regime has been the
GATT. In 1988, the parties to GATT were at what they believed was the midpoint
in negotiations on the so-called Uruguay Round. At this writing, the round has
still not been concluded. However, initiatives to reach bilateral agreements
with other countries have advanced. Some of these initiatives, nevertheless,
need the attention of the new administration.
The United States has historically been a leader in GATT negotiations.
Therefore, the new administration must quickly determine its position on the
current GATT round. The expiration date for the current fast-track authority
gives the new administration very little time to act without congressional
extension of the authority. Vigorous and effective systems for monitoring and
enforcing agreements are essential to avoid violations, delaying tactics, and
drawn-out dispute settlements. The administration should show resolve in using
the powers granted in the Omnibus Trade and Competitiveness Act of 1988, which
provided authority for a unilateral response to unfair trade practices when
established processes prove ineffective or untimely.
Despite the difficulties in reaching a GATT agreement, the United States has
been able to advance trade liberalization through bilateral and regional
initiatives. The U.S.-Canada Free Trade Agreement, effective in 1989, put in
place a process to gradually remove all tariffs and most other barriers by
1999. By closely monitoring implementation and seeking issues in which U.S.
and Canadian interests coincided, the two countries were able to accelerate
tariff phase-out, with industry support, on many items.
Furthermore, the U.S.-Japan Structural Impediments Initiative attempted to
deal with the two countries' basic economic (and social) structures that
caused the growth of trade imbalances. This attempt underscored the close
interrelationships between the two economies. Facing structural
questions--such as the technology policies, the financial market structures,
and the business/government relationships of other nations--will be of even
greater significance in the more closely integrated global marketplace.
More recently, the United States, Mexico, and Canada concluded negotiations
and signed the North American Free Trade Agreement (NAFTA), scheduled to
become effective in 1994. The most significant aspect of NAFTA is that it
binds Mexico's recent market-oriented economic reforms to international
obligations, thereby making these reforms more permanent. Though NAFTA will
likely have only a modest net effect on the U.S. economy, much controversy
remains as to the scope and extent of social and economic adjustments that
will be caused by its implementation, such as effects on employment,
immigration, and the environment.
The new U.S. leadership must quickly assess the consonance of NAFTA with its
own priorities and determine what actions it needs to take. If the
administration is not satisfied with the agreement in its current form, it
could try to (1) use implementing legislation to overcome concerns about the
social and economic adjustments or
(2) reopen negotiations with Mexico and Canada to modify the agreement or to
obtain clarifying side agreements.
ANALYZING NATIONAL SECURITY-RELATED FOREIGN INVESTMENTS
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Sharp increases in foreign direct investment in the United States in the late
1980s generated concerns about the consequences of foreign ownership of U.S.
assets. Our 1988 transition series report noted that experts feared that
foreign acquisitions of national security-related or high-technology U.S.
firms could affect this nation's defense capabilities. We noted the potential
competitive effects of transferring U.S. technology secrets to other countries
through foreign purchases of and joint ventures with U.S. firms. These
investments also raised a number of other potential issues, such as increased
foreign political influence and effects on domestic employment. And at that
time a perception existed that the information available to analyze foreign
investment was inadequate.
In response to these concerns, the Congress enacted the Exon-Florio Amendment
to the Defense Production Act in 1988, authorizing the President to
investigate and block or suspend new foreign acquisitions or mergers that
threaten U.S. national security. It also passed the Foreign Direct Investment
and International Financial Data Improvements Act of 1990 to expand government
statistical information on foreign investment.
Under the Exon-Florio Amendment, the interagency Committee on Foreign
Investment in the United States has reviewed over 700 foreign investments of
possible national security concern. In practice, the amendment's review
criteria have been applied to a very narrow range of circumstances, with the
President deciding to block only one investment. Although the Congress
intended that national security be defined very broadly, it has proved
especially difficult to assess the national security impact of acquisitions of
U.S. firms by those of our allied nations, such as Japan or France. Moreover,
at the point when the acquisition is reviewed, the President may be faced with
limited choices--either to approve the proposed investment that may be a
welcome capital infusion, helping to maintain the firm's U.S. production and
employment, or to oppose the acquisition and perhaps see the U.S. firm suffer
continued business difficulties.
Furthermore, the case-by-case reviews under the Exon-Florio provision are not
required to address broader issues of U.S. competitiveness in industry sectors
essential to maintaining leadership in advanced technologies. In addition, the
review process is not designed to cover other international business
relationships, such as research and production agreements, that raise
technology transfer issues similar to those surfaced by foreign direct
investments.
In mid-1992, the proposed sale of a U.S. defense contractor to a company
partially owned by the French government raised the level of concern about the
Exon-Florio process. Revisions to the statute were made as part of the fiscal
year 1993 Defense Authorization Act. These revisions include certain
prohibitions on foreign government ownership of U.S. defense contractors and a
requirement that foreign government-controlled entities acquiring U.S. firms
producing defense-related technologies undergo the full Exon-Florio
investigation process. The new statute also broadened the analytical criteria
to be used in the investment review process to include the impact of the
acquisition on the
(1) United States' international technology leadership in areas affecting
national security; (2) proliferation of nuclear, chemical, and biological
weapons; and
(3) capabilities of countries that support terrorism.
Further, the government's official statistical base on foreign investment has
been improved under the 1990 act. Although data are still about 2 years old
when they are published, there is now greater detail available, for example,
in the industry categories and the separation of firm operations such as
wholesaling and retailing.
Nevertheless, the new administration will need to establish guidelines and
precedents for interpreting these statutory changes at a time when the
streamlining of U.S. defense industries may bring continued foreign
acquisitions of national security-related U.S. firms. In addition, the
administration will have to consider supplementing the current case-by-case
analysis of foreign acquisitions with efforts to anticipate and deal
proactively with the broader competitive and defense concerns raised by
foreign acquisitions and investments.
