United States Export Promotion Policies Message to the Congress Reporting on the Administration Policies.

To the Congress of the United States:

In accordance with the requirements of Section 1110(a) of the Trade Agreements Act of 1979, I have had a review conducted of Executive Branch export promotion functions and of potential programmatic and regulatory disincentives to exports. I am submitting today my report on these matters along with the full text of the comprehensive review, which was prepared by the Secretary of Commerce and the U.S. Trade Representative. Their detailed review, while not a statement of Administration policy, reflects an extensive canvass of the views of our exporting community which should assist the Congress and the Executive Branch in the development of policies in this area. My report expresses this Administration's policies.

The expansion of U.S. exports has been, and continues to be, a high priority objective of my Administration. Global events have made international trade substantially more important to the United States than in earlier years, and a strong export position has become a matter of great significance to the economic strength and welfare of our Nation, to the strength of the dollar, and to employment. Exports now account for one in every eight jobs in America's factories, and one in every four on America's farms. I am pleased to be able to report that our recent export performance has been strong. The value of America's merchandise exports has grown 50 percent in the last two years. In the same period, the volume of U.S. merchandise exports has grown at an annual rate of 10 percent, compared to a 6 percent annual growth rate for world trade.

Largely because of this export growth, we achieved a virtual balance in our current account in 1979, despite huge increases in the price of oil imports. It is vitally important that our international accounts be kept in balance. That goal cannot be reached without strong export growth. Over the longer run, the United States has suffered a declining share of world trade and a rate of export growth that has not kept up with imports. Business, agriculture, labor and government must work together to ensure that this historical trend is reversed.

The successful conclusion of the Multilateral Trade Negotiations—the Trade Agreements Act was ratified by Congress in 1979—makes this effort all the more important. The MTN agreements pose challenges to some producers in the form of tougher import competition. But they also present dramatic new- opportunities for U.S. exports through the reduction of foreign trade barriers. The average tariff rate for most developed countries will fall by about 30 percent over the coming seven years, and roughly $21 billion in foreign government purchasing will now be opened to international competition. Other countries are moving aggressively to take advantage of these new trade opportunities. We must do the same.

However, strong export growth depends on the competitiveness of the American economy. We need more innovation, faster growth in productivity, and greater investment in more efficient plant and equipment. And we must reduce the rate of inflation lest we price ourselves out of competition with foreign producers. Only when inflation is under control will our economy be on a sound footing to undertake greater investment. U.S. producers and labor must retain the ability to offer the world high quality goods and services at attractive prices.

Government policies also affect our export position. Improving incentives and reducing or eliminating unintentional disincentives to exports is a continuing and complex process, for policies to encourage exports sometimes conflict with other national goals—such as budgetary soundness, national security, nuclear nonproliferation, health and safety, human rights, discouraging aggression and maintaining respect for diplomatic immunity. Our task is to reduce negative effects on exports without weakening other national objectives.

In response to this challenge, my Administration announced a National Export Policy in September 1978. We assigned exports a higher priority within the Executive Branch, we called on business and labor to devote more effort to exporting, and we initiated a set of measures confirming our commitment to export growth.

In 1979, in order to strengthen and centralize the government's ability to address the export needs of the Nation, my Administration proposed and Congress agreed to a reorganization of trade functions in the Executive Branch. The authority of the United States Trade Representative was expanded to cover export policy and other trade-related policies for which responsibility had previously been scattered among various agencies. Responsibility for the operational aspects of international trade, for the day-to-day implementation of the MTN, and for other trade policy decisions regarding nonagricultural products was concentrated in the Commerce Department.

This reorganization—in effect only since January 1980—has already begun to produce solid results. We are beginning to pursue vigorously our rights and opportunities under the MTN. We have also begun to act more quickly and decisively on matters of export policy, as shown by the Administration's timely interaction with the Congress on the Export Trading Company proposal and on legislation to preserve the confidentiality of Shipper's Export Declarations. Within the interagency mechanisms of govern. ment decision-making, we are providing a stronger voice in support of actions to promote our export growth.

In charging the Secretary of Commerce and the U.S. Trade Representative to review export promotion and export disincentives, I asked them to consult with other agencies and with business and labor. I also asked the President's Export Council for its views.

The review, now completed, shows significant progress in combining our promotion programs with the implementation of the MTN agreements. For example, the Commerce Department has initiated programs to publicize the opportunities stemming from the MTN and to help U.S. companies take advantage of those opportunities. Promotion initiatives are being targeted to the U.S. industries with the greatest potential to expand their exports. The Agriculture Department's Foreign Agricultural Service is working to ensure that the agricultural sector benefits fully from concessions received in the MTN. The Office of the U.S. Trade Representative has set up a trade policy coordination mechanism to guard our rights under the MTN codes.

In the area of potential programmatic and regulatory disincentives, however, there is no question that certain government policies and programs are perceived as having a detrimental effect on the ability and willingness of U.S. companies to export. Our national interest requires that such policies and programs be reviewed.

In February 1980 I released an interim progress report on the reduction of export disincentives. That report announced certain procedural reforms to reduce further the burden of government requirements and stated that I would convey additional views on export promotion and disincentives to the Congress. On the basis of the review just completed, I have concluded that further actions are necessary to ensure a better balance between our trade policy and other national objectives.

SMALL BUSINESS

The participation of small businesses in exporting must be increased. One hundred companies account for approximately 50 percent of our manufactured exports, and only 10 percent of the nearly 300 thousand U.S. manufacturing firms are exporters. Thousands more produce goods that could be exported but are not. All of the export promotion resources of the Small Business Administration and most of those of the Commerce Department are aimed at encouraging small and medium-sized companies to market their products abroad. But we must do more to encourage these companies to export.

For this reason, my Administration has worked with Congress to develop the Export Trading Company proposal, which would greatly increase the attractiveness of export marketing for thousands of small and medium-sized firms. Export trading companies buying and selling on their own account and offering one-stop service to exporters could materially increase our exports. The key features of this proposal are: (1) to provide U.S. firms limited anti-trust immunity in competing abroad, immunity that would not adversely affect competition within the United States; and (2) to permit U.S. banks to invest in export trading company ventures, as foreign banks are allowed to do, bringing the vast international experience and financial resources of our banking industry more fully to bear on developing U.S. exports.

I believe this proposal is essential to the increased participation of small and medium-sized firms in export markets, and it has the full support of my Administration. I call on the Congress for speedy consideration and passage of this important legislation.

EXPORT FINANCING

Eximbank financing is the most important official incentive for U.S. exports, and my Administration has consistently supported an effective and adequately funded Eximbank. I asked Congress to increase Eximbank lending authority to $5.1 billion for FY 1980. This increase is made essential by present economic and competitive conditions and was approved by both the House and the Senate on August 18. However, while awaiting Congressional action on its authorization, Eximbank exhausted nearly all of its direct lending authority for this fiscal year, and many worthwhile requests for export support have had to be deferred. Congress and the Administration must work together to alleviate this kind of budgetary problem and to ensure adequate and reliable Eximbank financing in the future.

In addition to providing timely and adequate funds for Eximbank, my Administration seeks to reduce the financial subsidies given by our competitor nations and to move to a more market-related system of export credit interest rates. I pursued this matter vigorously at the Venice Economic Summit, and the six other major industrial nations agreed that a new international credit arrangement should be negotiated by December 1, 1980. Such an agreement would substantially lessen the difficulties now faced by many American exporters trying to cope with heavily subsidized foreign credits.

But we must also seek to avoid a recurrence of this year's shortfall. Accordingly, I will be working with Congressional leaders and members of my Administration this fall to determine how best to ensure adequate and reliable Eximbank financing in the years ahead, taking into account progress in international negotiations.

TAXATION OF AMERICANS ABROAD

The Internal Revenue Code (sections 911 and 913) provides special deductions for extraordinary living expenses incurred abroad, a deduction for hardship conditions, and an alternative $20,000 exclusion of foreign earnings for individuals living in camps in remote hardship areas. These provisions were enacted in November 1978, in the Foreign Earned Income Act of 1978.

Many U.S. companies have pointed out that the United States is the only major nation that taxes the earnings of its citizens abroad and have criticized the current rules as insufficiently generous, excessively complicated, and discouraging to exports.

The Secretary of Commerce and the U.S. Trade Representative have undertaken a review of this matter. They report an increasing tendency to replace Americans overseas with foreign nationals, since, in many cases, our tax laws make it more expensive for American firms to employ Americans than foreigners.

Most of our competitor nations exempt from tax all or many of their nationals who reside and work abroad. The tax liability of American citizens employed abroad makes it more costly to hire Americans wherever the local income tax is lower than the U.S. tax. Various segments of the exporting community argue that these additional costs have some or all of the following consequences:

1. U.S. companies are replacing many of their American personnel with foreign personnel.

2. When American companies engaged in engineering or construction work abroad hire Americans in spite of the greater cost—because the companies are more confident of the skills and reliability of American employees—the companies risk losing contracts for overseas projects as a result of the higher cost of employees, and U.S. exports are lost.

3. When companies hire the nationals of other countries instead of Americans, they may gain the contracts, but much of the valuable follow-up exports of supplies and equipment are lost because foreign nationals favor foreign suppliers who are more familiar to them.

4. Foreign operations by American companies tend to create exports from the United States and also to generate substantial earnings that benefit the U.S. balance of payments. Some companies feel they can conduct such operations more successfully if they are free to use American rather than foreign employees.

5. American companies operating abroad sometimes pick up or develop valuable technology in the course of their foreign operations. This technology is less likely to be lost with American employees than with foreign employees, who are more apt to move to foreign-owned companies when they change employment.

6. The present detriment to competitiveness has a snowballing effect on future competitiveness as foreign companies gain strength at our expense.

7. The special deductions allowed for foreign living costs and hardship conditions under present law are insufficiently generous and too complicated.

The cornerstone of U.S. tax policy has always been that all citizens must share in the obligation to finance their government. This policy must not be set aside lightly. In addition, it is difficult to quantify the effect of U.S. tax policy on exports in the aggregate. Not all Americans working abroad have an effect on exports. Many pay high foreign taxes, and therefore pay little or no U.S. tax after the foreign tax credit. And of course other factors, such as increased foreign competition, affect the success of U.S. exports as well. Taxation of U.S. employees working abroad is not solely responsible for the difficulties exporters are encountering.

The U.S. tax is most likely to be significant where employees are in a position to influence exports, where the foreign tax is low (so the foreign tax credit does not eliminate the U.S. tax liability), where compensation is necessarily high to offset hardship conditions (so the tax bracket is also high), or where the industry in question is labor intensive (so the tax cost of U.S. personnel is a significant component of total costs). Various combinations of these and other factors can give the U.S. tax greater impact than it might otherwise have.

Clearly, those who single out the tax factor as a serious export disincentive are convinced that further tax relief for Americans overseas is desirable and important. It is also clear that the consequences of recent changes in the tax laws affecting overseas Americans are likely to vary with the taxpayer's situation. Americans subject to a high foreign tax can be expected to profit little from changes in sections 911 and 913, because their foreign income tax presently offsets most or all of their U.S. tax liability.

It is difficult to measure the aggregate effects of taxation with any precision. The attempts undertaken to date have been inconclusive. Political factors, such as the removal of the U.S. presence from Iran, and other economic factors such as marketing technology and quality control, complicate the picture. We do not yet have data on how the new tax provisions are operating. (Data will be available in the spring of 1981.)

Although we do not have answers to all the relevant questions, the evidence gathered in preparing this report does illustrate the importance that the export community attaches to this tax issue. U.S. taxes on the earned income of U.S. individuals abroad do clearly have an adverse effect on the ability of some U.S. exporters to compete in some markets. Accordingly, I will propose to the Congress, in my 1981 legislative program, revisions of the current law in order to deal with this problem.

FOREIGN CORRUPT PRACTICES ACT

The Foreign Corrupt Practices Act (FCPA) was passed unanimously by the Congress in the wake of disclosure of widespread illicit payments by many American companies. The Administration and the Congress have taken the unequivocal position that corruption in international business transactions is morally repugnant and economically unnecessary. I remain deeply committed to the principles of the Act and am steadfastly opposed to weakening the intent of the Act. Eliminating illicit payments in international business should be a matter of concern to all nations. My Administration has been pressing—unsuccessfully to date—for a multilateral agreement in the United Nations.

At the Venice Economic Summit meeting in June 1980 I urged that these seven industrial democracies renew efforts to work in the United Nations toward an agreement to prohibit illicit payments by their citizens to foreign government officials; and, if that effort falters, to seek an agreement among themselves, open to other nations, with the same objective. While we did not set a time by which an agreement should be reached in the United Nations, I believe that one further year of negotiation should be sufficient. Accordingly, if an agreement has not been obtained in the United Nations General Assembly, I intend to ask the other heads of government at the 1981 Economic Summit to direct the prompt negotiation of such an agreement among our seven nations, but open to others.

Some in the business community have expressed their uncertainty about what conduct is prohibited and what conduct is not prohibited by the FCPA. Because of this uncertainty, some businessmen say that they are acting with a degree of caution that is resulting in the needless loss of exports. In an effort to deal with the problem of uncertainty, I announced in February 1980 the Justice Department would begin providing guidance under the Act to inquiring companies on proposed international transactions. This guidance is now available through the FCPA Review Procedure, and I urge business to use that procedure.

I also announced in February that the effectiveness of this procedure would be examined by the Attorney General and the Secretary of Commerce after one year of operating experience. I believe that, until the review is completed, it is premature to judge the effectiveness of the Review Procedure. I am transmitting the review conducted by the Secretary of Commerce and the U.S. Trade Representative for the information of the Congress and not as a final judgment on the effectiveness of the Review Procedure.

I have directed that the Attorney General and the Secretary of Commerce report to me by March 1, 1981, not only their assessment of the first year of operation of the FCPA Review Procedure, but also their recommendations of whatever actions may then be necessary to remove any ambiguities in the Act. Uncertainties should not be allowed to hamper exports, but in no event will I propose nor will I support any amendments which would weaken the Act's proscription of bribery or which would result in loopholes for bribery of foreign government officials.

EXPORTS CONTROLS

Another key concern of exporters has to do with the use of export controls when the goods being controlled are available from other supplier nations. I addressed this concern in my February 27 statement on export disincentives. In considering new export controls to achieve foreign policy objectives and in reassessing current sanctions—except in the field of arms exports—my Administration would be highly selective in the use of controls where the affected country has access to alternative supply. I reaffirm that position today.

In addition, my Administration continues to confront the problem of the administrative costs and delays associated with export control licensing. Based on the present review, I have decided on a change in the licensing requirements for our national security export controls that will lessen the burden on business without weakening the effectiveness of our controls or our ability to protect vital national security interests. The change is that we will stop issuing a separate U.S. reexport license in cases where we have already approved reexport of the same product as part of the COCOM process (the multilateral review procedure which oversees exports of strategic commodities to certain communist countries). In such cases, the separate U.S. licensing procedure is redundant.

We will continue to examine the export control system to seek additional ways of streamlining the process while assuring that national security needs are met.

FUTURE ACTION

The just completed review of export promotion and potential disincentives to exports is the most comprehensive study of its kind ever undertaken by the U.S. government. It contains a considerable amount of information that must be weighed and examined, and will serve as a solid basis for future actions by the Federal government. I look forward to close cooperation with the Congress in this important process.

JIMMY CARTER

The White House,

September 9, 1980.