Comments Concerning Cargo Preference Statute

Gao ID: B-204391 September 18, 1981

GAO was asked whether the cargo preference statutes apply to the sale of butter by the Commodity Credit Corporation (CCC) to the New Zealand Dairy Board. Of concern is the term of the contract which provides for payment 180 days from the date of the CCC invoice and the absence of a contract requirement stating that shipment be made on U.S. flag vessels. Under the law, whenever the United States furnishes any equipment, materials, or commodities to a foreign nation without provision for reimbursement or advances funds or credits in connection with the furnishing of such equipment, materials, or commodities, the appropriate agency must take steps to ensure that at least 50 percent of such equipment, materials, or commodities is transported on privately owned U.S. flag vessels. Thus, the resolution of the questions raised is dependent upon whether the sale is a commercial transaction and whether the 180-day payment period is a loan or an extension of credit. With regard to this matter, the Attorney General has ruled that foreign sales by the Department of Agriculture are not covered by cargo preference acts where the sales are not designed to aid the importing country but rather are made to dispose of inventories on the best terms available. This is so even if the foreign importer is an organization of a foreign nation which controls the trade of the commodity involved. Thus, even though this sale involved financial terms which appear favorable to the buyer, GAO does not believe that this sale is covered by the cargo preference statutes. Further, GAO is not aware of any authority defining the scope of the term "loan" in the cargo preference statutes. However, the Attorney General has defined the term in ordinary commercial usage as a contract by which one delivers a sum of money to another and the latter agrees to return at a future date a sum equal to that borrowed, with or without interest. Thus, according to the Attorney General, the right to defer payments for goods sold is not a loan but a credit. Although the legislative history of the cargo preference statutes is sparse, it supports the view that the term "loan" was not intended to include deferred payments consistent with commercial practice made in the ordinary course of trade. Accordingly, GAO found no basis to conclude that Agriculture's representations as to the commercial nature of the transaction were erroneous.

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