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GROWING GOVERNMENT INVOLVEMENT IN TRADE 88 industry in which to participate. Financing is an area in which competitive advantage can be established much more easily than in technical superiority, better product planning, or better service. Private firms face abnormal forces when they attempt to compete in such a market. In an era in which balance of payments looms as a problem of major and continuing concern, it is important for government policy to recognize the realities of the international market in which a major source of exports operates. Small Aircraft In the case of small aircraft the impact of financing terms can be so large that it changes the competitive balance in the purchase of aircraft and can induce an airline to purchase foreign equipment. In some cases, if there were no access to very attractive terms, no equipment would be purchased at all. The preferential financing terms being offered by some foreign export agencies and manufacturers include a minimal down payment, below-market interest rate, lengthy maturity, and deferral of the repayment of principal for a number of years. Some U.S. regional airlines, with balance sheets and income statements that would not permit raising funds in the private debt markets, are purchasing foreign aircraft with these below-market financing terms. These arrangements are the equivalent of discounting. For example, increasing the repayment period from 7 to 19 years produces savings to the buyer equal to a discounted present value of 11 percent of the purchase price. Alternatively, offering an interest rate of 6 percent versus 12 percent provides a reduction equivalent to 16.7 percent of the purchase price at a given repayment interval, (Differentials of this magnitude have, in fact, been encountered.) These savings in cash have a significant effect on breakeven point and thus on the competitive position of an airline. Naturally, cash-limited airlines welcome such concessionary credit terms. To meet this competition, the Eximbank now offers the Medium Term Credit Program for U.S. manufacturers seeking to export general aviation aircraft. This program is directed at exports of all products including aircraft, providing funds for loans with a term normally of seven years, where foreign competition can be demonstrated to be drawing on subsidized export credits. The program provides no help in meeting foreign competition in the domestic market. This program is especially important because, as noted earlier, the market potential for regional aircraft is growing dramatically. Since aircraft of these sizes are within the capability of a modest-sized economy (especially if it purchases sophisticated components from the
GROWING GOVERNMENT INVOLVEMENT IN TRADE 89 United States), a number of countries are competing in the marketplaceâand offering attractive financing as part of the package, e.g., the United Kingdom, France, Brazil, and Indonesia, Under the Medium Term Credit Program the Eximbank makes a fixed interest-rate loan commitment to the U.S. bank financing the export sale by loaning its funds on a recourse basis. Eximbank lends up to 85 percent of the contract value, and the buyer must make a 15 percent cash payment. Most transactions under this program do not exceed $5 million, but recently the Eximbank agreed to change this limit to $10 million. The term for this type of loan is generally seven years; however, exceptions have been made extending the term to 10 years. Loan pricing (cost) is based on whether the purchaser's country is rated 1, 2, or 3 in order of increasing risk. At present, for a "1" country the interest rate would be 12.4 percent, plus the usual 0.5 percent commitment fee. To qualify for this program the U.S. aircraft manufacturer must provide evidence of subsidized competition from a foreign manufacturer. While the Eximbank has played a major role in support of the export of large transports, similar assistance for rotorcraft, business, and commuter aircraft exports has been less abundant and/or effective until the inauguration of the medium-term Eximbank facility. Despite the limited participation in this program at this early date, the panel endorses the action, and recommends its continuation. The Eximbank medium-term credit program has the potential to assist in exports of many industries, including those outside the aircraft industry, where the individual transactions tend to be modest in size. The panel believes that the Eximbank's operations and policies should give highest priority to supporting the ability of U.S. exporters to offer comparable financing. The fact that in the case of smaller transactions such actions would incur higher administrative burdens should not be used as a deterrent. Predatory financing presents a dangerous problem for imports. Although presently prohibited by "informal" understandings, a more certain solution should be sought. Establishing the capability at Eximbank to match terms offered in the U.S. market is better than providing a penalty after the fact through countervailing duties. The latter does not restore to a U.S. bidder the opportunity to win a sale. Matching terms is not prohibited in the Eximbank charter, but it would require a major change in practice. The panel recognizes that use of such a capability should be approached with caution because it could invite domestic customers to stimulate foreign competition in
