Environmental Technologies Industries
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ETTAC Recommendations

Environmental Technologies: Impediments to Trade

This paper was prepared by the Environmental Technologies Trade Advisory Committee (ETTAC) to identify the major domestic obstacles to trade that confront the U.S. environmental industry and to express the views of the industry with respect to issues that impact environmental technology exports.

ETTAC is a private-sector advisory committee that was created by Congress to advise the Federal Government on policies and programs to expand U.S. exports of environmental goods and services. The industry the Committee represents is made up of more than 110,000 revenue-generating organizations that employ over 1.3 million people. Over the past several decades, this industry has contributed to America’s economic growth and sustainable development by helping to make our domestic environment one of the cleanest in the industrialized world.

As the industry matures, it becomes increasingly important to look to markets outside the U.S. for future growth and survival. In reaching out to foreign markets, the private and public sectors of our industry must work together in partnership to assist other countries in managing their resources and encouraging environmentally responsible growth. Through public/private cooperation, the U.S. environmental industry can play as significant a role in achieving sustainable development globally as it has domestically.

Congress recognized the need for cooperation between the public and private sectors in 1994 when it passed the Jobs Through Trade Expansion Act. Under this act, Congress authorized the creation of the Environmental Technologies Trade Advisory Committee to provide advice to the Department of Commerce and other federal agencies on how government policies and practices affect the export of U.S. environmental products and services. Pursuant to this mission, the Committee has prepared the following paper to address obstacles that confront U.S. companies seeking to compETI against suppliers of environmental technologies from other major industrialized nations.
Environmental Technologies: Impediments to Trade

There are numerous obstacles to trade that confront U.S. exporters of environmental goods and services. In the global market for environmental technologies, U.S. companies are at a competitive disadvantage as a result of the following trade impediments:

1. FOREIGN ASSISTANCE - Level of U.S. foreign assistance ranks dead last among donor countries as a % of GNP, with little emphasis on commercial opportunities for the export of U.S. environmental goods and services

A. Amount
Foreign aid constitutes approximately 1% of the U.S. federal budget. Of that amount, approximately one-half is for Official Development Assistance (ODA) which includes grants and loans to developing countries for humanitarian programs and economic development. The ODA contribution by the U.S. as a percentage of GNP is the lowest of all donor members of the Organization for Economic Cooperation and Development (OECD), as shown on the following chart:

% of GNP

B. Distribution: Major Recipients of ODA
The geographical distribution of U.S. foreign assistance is traditionally governed by foreign policy and humanitarian considerations rather than commercial opportunity. In 1994, the Department of Commerce identified 18 key nations as “Big Emerging Markets” based on their potential growth in demand for U.S. exports. A comparison of these “Big Emerging Markets” versus the top 10 recipients of U.S. bilateral aid reveals an apparent lack of correlation between market potential and the distribution of foreign assistance:

C. Eligibility: Beneficiaries of ODA
Projects funded by U.S. bilateral aid too often benefit foreign suppliers of environmental goods and services. According to The Wall Street Journal, “In Israel and Egypt, which together receive the bulk of U.S. foreign assistance, the U.S. doesn’t command more than a 20% share of either - and Europe controls about twice as much. U.S. officials have been particularly annoyed, saying that American aid helps to subsidize that country’s whopping $7.5 billion trade deficit with the European Union.”

Besides providing economic assistance to recipient nations, the other primary purpose of U.S. bilateral ODA is to benefit U.S. companies and create jobs for American workers. Too often, however, contracts funded by U.S. bilateral aid are awarded to foreign owned companies with offices in the U.S. whose goods and services are produced with little or no American labor.

D. Sectoral Allocation: Major Uses of ODA
In comparison to other OECD donor countries, relatively little U.S. foreign assistance is allocated toward projects that have the greatest potential for export of U.S. goods and services, such as those dealing with economic infrastructure or the environment. The distribution of U.S. development assistance by major purposes is as follows:
Aid by Major Purposes, 1995

2. EXPORT FINANCE - Government financial assistance for U.S. exporters lags behind most competitor nations.

Foreign governments provide much greater financial assistance to their country’s exporters of environmental technologies. In contrast to other major industrialized nations, the U.S. provides substantially less financial support to its export credit agencies, i.e., the Export-Import Bank, Overseas Private Investment Corporation (OPIC), and the Small Business Administration. As a result, the primary U.S. government source of trade financing, the U.S. Export-Import Bank, finances a much smaller percentage of our nation’s exports than most other major government export credit agencies:

Medium- and Long-Term Export Credit Support
As a Percentage of the Dollar Value of Goods Exported - 1996

EID/MITI = Japan
COFACE = France
Hermes = Germany

Ex-Im Bank = U.S.

EDC = Canada
Source: Export-Import Bank of the United States
% of $ Value of Exports

3. TIED AID - Competing nations link aid to the purchase of their goods and services
Tied aid is development assistance (such as grants or financing offered on concessional terms) that is contingent upon the purchase of goods and/or services from the donor country. The U.S. government opposes the use of tied aid to gain commercial advantage in export trade. In contrast, other countries such as France and Germany view tied aid support as a legitimate aid mechanism, as indicated in the following comparison of tied aid offers reported to the OECD:

Volume of Tied Aid Offers Reported to the OECD, 1994

4. TECHNICAL ASSISTANCE - Governments of competing nations put heavy emphasis on business development in the early stages of foreign projects to support their exporters of environmental technologies.

The governments of other major industrialized nations provide extensive technical assistance to developing countries to influence their procurement of environmental products and services. This assistance typically takes the form of grants for feasibility studies, training programs, reverse trade missions and other advisory services that inevitably dETIrmine which companies are chosen for the design, construction or supply of equipment for environmental projects. Within the U.S. government, technical assistance of this type is funded by the U.S. Trade and Development Agency. In comparison to TDA’s 1998 budget of $43 million, Canada, Japan and Germany provide 10 times or more the amount of funding for such activities to stimulate exports. These governments understand the strategic importance for companies to position themselves in the early development stages of projects to influence their eventual design and technical specifications.

Technical Assistance Spending - 1998 Expenditures in Relation to GDP
Spending per Thousands U.S. Dollars of GDP

Source: U.S. Trade and Development Agency

5. TRADE PROMOTION - The U.S. government spends less on export promotion than other G-7 nations, and it promotes agricultural and arms exports more aggressively than environmental technologies

A. Amount
U.S. government funding for non-agricultural and non-financial export promotion as a percentage of GDP is among the lowest of all G-7 countries.

Non-Financial and Non-Agricultural Export Promotion Spending - 1997
Spending per Thousand U.S. Dollars of GDP

Source: Based on Commercial Service spending estimates and OECD GDP figures
* German figure is likely understated since it excludes German Economics Ministry headquarters personnel.

B. Allocation
The U.S. environmental industry receives an extremely small share of the federal government’s total budget for trade promotion. Approximately 35% of all federal government trade promotion expenditures are devoted to agriculture, which represents about 10% of all U.S. exports. Compared to the U.S. arms industry, which is approximately the same size as the environmental industry, roughly 12 times as much is spent on promoting the export of arms as on environmental technologies.

6. SHERMAN ANTI-TRUST ACT - The U.S. government severely limits partnerships between U.S. companies pursuing work overseas Federal anti-trust legislation strictly limits cooperation between U.S. companies engaged in the export of goods and services on the basis that it results in a lessening of competition within the United States. No other country imposes such rigid constraints on the activities of companies doing business overseas.

7. FOREIGN CORRUPT PRACTICES ACT - In comparison to the U.S., other competing nations are lax about corruption and bribery The U.S. Foreign Corrupt Practices Act requires U.S. companies to adhere to standards of business conduct that are more stringent than those of any other major exporting country. To encourage the rest of the industrialized world to abide by these same standards, the OECD adopted an accord in December 1997 to criminalize bribes to officials of foreign governments and executives of state-owned companies. Although the OECD Antibribery Convention was ratified in October 1998 by the U.S. Congress, few other nations have enacted it into law or implemented any mechanism for its enforcement. In fact, several OECD member nations still allow tax deductibility of bribes as a regular business expense.

8. U.S. TAX CODE - Many aspects of the U.S. Tax Code serve as a disincentive to doing business overseas. Current provisions of the U.S. Internal Revenue Code create disincentives for U.S. companies to participate in foreign markets. Among the current tax policies that adversely affect the ability of U.S. exporters to companies are the following:
A. The U.S. is one of the few countries in the world that taxes the foreign earned income of its citizens abroad. Section 911 of the U.S. Internal Revenue Code requires that employees assigned to work overseas are required to pay taxes on compensation and benefits in excess of $74,000 per year.
B. U.S companies investing in overseas projects are not allowed to take full advantage of tax incentives offered by host countries that benefit investors from other countries.
C. U.S. companies cannot deduct business expenses or interest on the borrowings of foreign subsidiaries.

9. PROLIFERATION OF SANCTIONS - The U.S. government’s use of economic sanctions narrows the foreign market for U.S. environmental exports
Economic sanctions are increasingly being imposed against foreign countries by the U.S. Congress without clearly defined objectives and without considering the economic impact on U.S. exporters. According to The Wall Street Journal, “the U.S. has imposed sanctions 104 times since World War II, and a stunning 61 times since President Clinton came to office. More than 70 countries, home to half the world’s population, are subject to some kind of economic sanction if they engage in behavior we don’t like.” “From a domestic perspective, [sanctions] are expensive, costing U.S. businesses billions of dollars a year and many thousands of workers their jobs.”

10. ACCESS TO FOREIGN MARKETS - Lack of U.S. participation in trade agreements and foreign government imposed trade barriers impede access into overseas markets.

A. Trade Agreements
The ability of the United States to negotiate free trade agreements has been severely hindered by the failed attempts in 1997 and 1998 to renew fast-track authority for the President. As a consequence of Congress having defeated the fast-track measure, many emerging market nations are reluctant to engage in serious dialogue with the U.S. since we are perceived as lacking any credible commitment to free trade.

The absence of fast-track authority has caused the U.S. to fall behind in the negotiation of bilateral and multilateral trading agreements. Since 1992, in Latin America and Asia alone, our competitor nations have entered into 20 free trade pacts that exclude the United States. Failure to participate in these newly formed alliances has resulted in U.S. exports becoming less competitive in some of the fastest growing markets of the world. One example of a country with which every major economy in the Western Hemisphere except the United States currently has a preferential trade deal is Chile. As a result of our not having approved the entry of Chile into NAFTA, U.S. suppliers of environmental goods and services must overcome an automatic 11% cost disadvantage when competing against non-U.S. envirotech companies from elsewhere in North and South America.

B. Barriers to Free Trade
When competing on overseas projects against suppliers from countries that have trade
agreements with the country in which a project is located, U.S. envirotech companies are typically subject to higher import tariffs and other non-tariff trade barriers. Among the barriers to trade that are most often encountered by U.S. exporters of environmental goods and services are the following:
1. Import tariffs and quotas
2. Constraints on engineering and professional/technical services
3. Restrictive procurement practices and procedures
4. Lack of protection of proprietary technology and intellectual property rights

5. Restrictive import policies and rules of origin
6. Foreign investment restrictions
7. Anticompetitive practices
8. Nonconfidentiality of bids
9. Restrictive standards, testing, labeling & certification

Whereas the use of standards by developed nations to limit access into their own domestic markets is common practice, the Europeans and Japanese have also devoted considerable resources to influencing the standards that are adopted by emerging market countries, thus impeding the entry of U.S. environmental goods and services into these markets. Activities by competitor nations to influence the adoption of their respective standards include training programs, donated equipment, and advisors to key laboratories and government ministries. The disparity in spending by the world’s major exporters to influence international standards is shown below:

Expenditures to Influence International Standards
(1996 figures based on ISO Member Body Annual Budget)

In order to overcome the competitive disadvantages caused by tariff and non-tariff barriers to trade, U.S. suppliers frequently opt to manufacture overseas within major free trade markets rather than producing goods domestically. Hence, jobs are created outside the U.S. by U.S. companies seeking to circumvent the tariff and non-tariff barriers that exist due to nonparticipation in trade agreements. The loss of jobs as a result of not participating in free trade agreements is contrary to the commonly held belief that free trade is a primary cause of the displacement of jobs from the U.S.

11. PUBLIC OPINION - Political interests distort trade and development assistance issues

A. Trend Toward Protectionism
In general, the U.S. public does not support free trade. According to a December 1998 Wall Street Journal/NBC News poll, only 32% of adult Americans believe that foreign trade is good for the U.S. economy, as compared to 58% who think it’s bad because cheap imports hurt wages and cost jobs. This anti-trade sentiment has shown a dramatic increase over the past year and a half. A similar Journal/NBC poll conducted in June 1997 revealed that 42% of Americans were of the opinion that globalization is good for the U.S. economy, versus 48% who thought that an increasingly global economy is bad.

54% of Americans also think that trade agreements have cost the U.S. jobs, as evidenced by surveys which reveal that most people believe that NAFTA has had a negative impact on our country by a 43% to 28% margin. The November 1997 defeat of the bill to renew fast-track authority for the President was primarily attributable to public opinion polls which indicated that Americans by 56% to 35% opposed the measure.

Recent world events such as terrorist attacks and nuclear tests by India and Pakistan have also had a chilling effect on free trade. The American public and many politicians have become less comfortable with the notion of allowing commercial interests to be an influential factor in the formulation of U.S. foreign policy.

B. Public Misconceptions
Expenditures by the federal government in support of U.S. exports are viewed by most
Americans as “corporate welfare.” Unfortunately, few realize that the U.S. spends less as a percentage of its total GNP on foreign development assistance and trade promotion than any other developed nation in the world. A majority of Americans think that 20% of their tax dollars are spent on foreign aid, even though it actually represents only 1% of the total federal budget.

What the American public also fails to recognize is that exports create jobs and generate significant tax revenues. Whereas government financing of exports might seem to most taxpayers like just another form of “corporate welfare”, it is worthy to note that for every $1 appropriated to Ex-Im Bank’s program budget, American taxpayers receive nearly $20 in U.S. export value.

In addition to public misconceptions, there is also an issue of public mistrust. A joint survey by the Washington Post, the Kaiser Family Foundation and Harvard University revealed that nearly half (48%) of all Americans suspect that economic statistics are manipulated by the federal government to mislead the public about how the economy is really doing. Furthermore, the average American thinks that U.S. corporations earn an annual rate of profit of 47% and that the U.S. unemployment rate is approximately 21%.

In spite of these mistaken perceptions and widespread negative attitudes toward government, free trade and business, it is significant to note that many Americans still believe that our government should play an active role in promoting the competitiveness of U.S. exports. This sentiment is supported by the December 1998 Wall Street Journal/NBC News poll which revealed that those who think it’s the responsibility of the private sector to make America globally competitive are outnumbered 49% to 41% by those who think that government should play an active role.

Source: "American Opinion," The Wall Street Journal , December 10, 1998.

Considering that the environmental movement originated in the United States and that many environmental technologies were pioneered by U.S. engineers and manufacturers, most Americans might also assume that the U.S. is the world’s leader in the global environmental market. Unfortunately, this is not the case. In 1997, U.S. companies held only a 6.3% share of the worldwide market for environmental goods and services, and less than 10% of the industry’s revenues were generated from exports, as compared to Japan, Germany and other western European countries who derive between 15% and 20% of their environmental revenues from outside their borders. Clearly, U.S. exporters face an uphill battle against foreign competitors who receive substantial support from their governments to ensure that they maintain a dominant position in the global environmental market.

The U.S. environmental technologies industry endorses the following positions regarding the aforementioned impediments to trade:

1. FOREIGN ASSISTANCE - We recommend reallocation of the U.S. federal budget to provide increased funding for the development of projects in overseas markets with the greatest potential for the export of U.S. environmental technologies by qualified U.S. suppliers.

2. EXPORT FINANCE - We recommend enhanced federal funding for the financing of environmental exports through the export credit agencies of the U.S. government (i.e., Export-Import Bank, Overseas Private Investment Corporation and the Small Business Administration).

3. TIED AID - We support the efforts of the Export-Import Bank and the U.S. Treasury to combat tied aid through the use of matching offers in instances where U.S. exporters of environmental goods and services are confronted with government-subsidized foreign competition.

4. TECHNICAL ASSISTANCE - We recommend reallocation of the U.S. International Affairs budget to provide increased funding for the activities of the U.S. Trade and Development Agency (TDA), including feasibility studies, reverse trade missions and other forms of technical assistance.

5. TRADE PROMOTION - We recommend reallocation of the federal export promotion budget to provide increased funding for the promotion of U.S. environmental technology exports in closer proportion to the industry’s contribution to total exports.

6. SHERMAN ANTI-TRUST ACT - We encourage cooperation between companies engaged in the marketing of environmental technologies for projects outside the U.S. through expanded use of the federal government’s Export Trade Certificate of Review.

7. FOREIGN CORRUPT PRACTICES ACT - We endorse the Antibribery Convention of the Organization for Economic Cooperation and Development (OECD) which seeks to promote multilateral adoption of the prohibitions set forth in the U.S. Foreign Corrupt Practices Act, and we support the proposed participation by the Department of Commerce Trade Compliance Center in the process of monitoring the enforcement of the OECD Convention following ratification and enactment by its signatories.

8. U.S. TAX CODE - We recommend the amendment of the U.S. Tax Code to eliminate disincentives for U.S. envirotech companies engaged in business overseas.

9. TRADE SANCTIONS - We support Sanctions Reform legislation that requires Congress and the U.S. government to consider the economic impact on U.S. exporters prior to imposing unilateral trade sanctions.

10. ACCESS TO FOREIGN MARKETS - We support the renewal of fast-track authority to facilitate the negotiation of trade agreements, and we support the efforts of the U.S. Trade Representative to negotiate reductions in tariffs and the liberalization of non-tariff barriers to trade in the environmental sector.

11. PUBLIC OPINION - We recommend that the U.S. environmental industry undertake a campaign to promote greater public awareness of the industry’s contribution to the U.S. economy, and to inform the American public of the revenues and jobs that are created as a result of the export of environmental technologies.
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