Last year might have been a banner year for one small Ohio manufacturer but for a bare-knuckle tactic used more and more in the international competition to increase exports.
French Oil Mill Machinery Co., of tiny Piqua, Ohio, had lined up a $20-million contract to sell Egypt a gleaming, advanced-design machine that grinds oil-bearing seeds into food oils. The deal had financing from the U.S. Export-Import Bank, the blessing of the State Department and, company officials thought, a commitment from the Egyptian government.
But the deal went bust when the West German government made a German firm’s offer more attractive by matching the U.S. company loan package and throwing in $10 million from its foreign-aid fund to make the purchase cheaper. “There was just no way we could match that,” says company Vice President Evan Werling, whose job-needy community is located 35 miles north of Dayton. “We were just shut out.”
The Germans were using “mixed-credit” export financing, in which liberal financing terms are combined with foreign-aid funds to help government-backed exporters prevail in competition with foreign firms. The practice has brought ever-louder denunciation from an unlikely alliance of export-minded Republicans and liberal Democrats, who believe such credits are unfair competition and--worse--divert for commercial purposes foreign aid that would otherwise give poor countries food, education and other humanitarian help.
In the past year, the Reagan Administration has begun trying to counter such mixed-credit offers through the Ex-Im Bank, the federally funded corporation that provides loans to U.S. companies to subsidize sales of their products abroad. But the effort has made little headway, most agree. And now, in its budget plan, the Administration has proposed to change the Ex-Im Bank’s export-finance operations in a way critics say would undermine even those halting efforts.
The Administration proposal is “the worst move we could make,” said Sen. John Heinz, the Pennsylvania Republican who is chairman of a Senate subcommittee overseeing international finance programs. “We’d be unilaterally disarming in the midst of a trade war.”
Others, including Budget Director David A. Stockman, question whether the federal government should tinker at all in international markets on behalf of U.S. exporters. Those on both sides of the issue agree, however, that the trade war waged with mixed credits has taken a toll on U.S. businesses and probably cost Americans thousands of jobs.
In relative terms, the value of exports financed through such programs is still small. Only about 10% of world exports are sold with government financing, and only 10% of that share is sold with a foreign-aid sweetener, officials say.
More Offer Package
But the amount of such aid grew to about $3 billion last year from about $2 billion in 1982, according to Ex-Im Bank estimates. And at least 18 countries offer mixed credits today, up from six in 1980, said the Coalition for Employment Through Exports, a lobbying group.
Significantly, countries usually earmark such funds to gain market share in key industries, such as high technology, and to finance big-ticket projects, such as airports, power plants and giant industrial facilities. Winning such contracts not only boosts employment immediately but can cement a continuing relationship in which the domestic industries sell a stream of products and services to the client country.
“It’s not that the sums involved are so large, it’s that winning these markets is crucial in a world where trade is more and more important,” said Michael W. Liikala, a U.S. Commerce Department official charged with following the issue. Besides, he added, “we consider what they’re doing to be cheating.”
Officials of French Mill Oil Machinery Co. say the Egyptian contract would have enabled them to add another 350 persons to their staff of 175. Other failed bids from U.S. companies have involved far higher stakes.
Kellogg Rust Inc., an industrial construction firm in Houston, last year lost a bid to build a $300-million fertilizer plant in Thailand in a competition with companies backed by the governments of five countries. The Ex-Im Bank offered to finance the deal with a loan on competitive terms, but the Italians and Japanese offered foreign-aid sweeteners of more than $100 million each, said Donald McGraw, Kellogg Rust’s senior vice president for finance.
Cost Many Jobs
The Japanese-backed firm ultimately won the job, which McGraw estimates might have generated 3,400 American jobs.
In 1983, a mixed-credit offer helped a European consortium prevail in competition with Bechtel Corp., an industrial construction firm in San Francisco, for a $150-million Egyptian power station. Bechtel had a good chance to win the job, says Bechtel Vice President John Cooper, since the company had already built an identical plant for the Egyptians.
The project would have provided the equivalent of a year of work for 1,250 persons, he said. Like other U.S. firms, Bechtel has made “a number” of bids through foreign subsidiaries to gain the financial backing--including mixed-credit support--of their governments, Cooper said.
“We’d prefer to give our business to Americans, but we don’t want to lose all hope of winning the contract,” he added.
Concerned about the growing problem, Congress passed a law in 1983 authorizing the U.S. government to match foreign governments’ mixed-credit offers in selective circumstances. The plan was for the Ex-Im Bank to extend such offers in a partnership with the Agency for International Development, the federal agency that is chiefly responsible for U.S. foreign aid.
Two Types of Offers
The agencies could assemble those financing offers two ways. They could use Ex-Im Bank loans at highly favorable rates and extended terms; they could further sweeten the offers by throwing in AID funds that would otherwise have been spent in foreign-aid grants.
The aim was to demonstrate that the United States would fight back in the new hardball game, and thus force the Europeans, Japanese and others to a negotiated settlement of the trade war.
William S. Draper III, president and chairman of the Ex-Im Bank, contends that the bank has carried out its orders from Congress. “We have been selective in making counteroffers, and I’m hopeful we’re going to see some real progress in negotiations,” he said in an interview.
Few observers concur with this assessment. “Neither the Ex-Im Bank nor AID have been at all aggressive on this, despite the congressional mandate,” Bechtel’s Cooper said.
Since the program began, only twice have AID funds been offered as a sweetener. In six cases, the Ex-Im Bank has tried to counter a mixed-credit offer with a heavily subsidized loan, according to Ex-Im Bank officials, who say that in only one case did the U.S.-supported bidder win the deal.
Part of the problem is AID’s acknowledged reluctance to spend its $3 billion in aid on trade development. After all, nations that most often would be offered trade financing are not those that have been the target of most AID funds, observers note.
Aren’t the Poorest
Countries likely to be buyers of U.S. goods are “not the poorest of the poor--the Chads of the world,” said Paul Friedenberg of the Senate Banking Committee staff. Among the chief purchasers of government-financed exports are India, Malaysia, Indonesia, Algeria and Pakistan.
One of AID’s two subsidy offers was made in connection with bids from General Electric Co. and Westinghouse Electric Corp. to sell locomotives to the government of Botswana, said Carol Grunberg, an aide to Rep. Don Bonker (D-Wash.).
The Botswana government voiced indignation that it might be losing no-strings-attached U.S. aid--then accepted a $25-million bid from General Motors Corp.'s Canadian subsidiary, according to Grunberg.
U.S. officials are also reluctant to offer mixed credits because of their enormous cost. Over the extended term of an export-finance loan, the cost of a mixed credit is typically as much as the contract itself, said Liikala of the Commerce Department.
“It’s like the government buying the goods,” he said. “You can see why we have to be selective.”
But if the program to date has been modest in scope, most predict it would fade entirely under the export-financing scheme proposed for the Ex-Im Bank in the Administration’s pending budget.
Would End Direct Loans
Under the proposal, intended to help ease the federal deficit, the Ex-Im Bank would no longer provide direct loans. Rather, it would guarantee loans made primarily by commercial banks and would put up funds to reduce loan rates to levels that would make them competitive with other nations’ finance packages.
Draper insists there is no reason why the Ex-Im Bank cannot continue to rely on AID funds and “buy down” loans in this manner to levels that make them competitive with mixed-credit offers from other countries.
But many dispute this contention. Sen. Heinz, for example, asserts that the new program would make effective counteroffers impossible. He said that, under existing international agreements, the interest rate on Ex-Im Bank-backed loans can only be lowered so far.
And the new financing scheme would likely limit exporters in stretching out loan terms, since commercial banks are likely to insist on terms of no longer than six years, Heinz said. Ex-Im Bank loans are typically extended for 7 to 10 years.
“We’d be tying our hands to counter mixed credits,” Heinz said. “And in the process we’d be giving up any leverage we’ve had to force other countries to the bargaining table.”
Moreover, the Ex-Im Bank has proposed to spend only $136 million in the coming fiscal year for its interest-rate “buy down” program. The sum would finance an estimated $1.8 billion in exports, down sharply from last year’s authorization to finance $3.85 billion in exports.
That $136 million could be used up in one or two mixed-credit offers, said the Commerce Department’s Liikala.
Expected to Worsen
Although mixed-credit offers have become a major headache for U.S. exporters in the last several years, some believe that in the next several years the problem can only worsen.
As the economies of developing countries continue to improve, demand for foreign products will increase. Meanwhile, however, American concerns with reducing the budget deficit make it unlikely that funds will be allocated to deal with the mixed-credit problem, many believe.
Last week, the Senate Budget Committee approved a Democratic-sponsored bill that would double the funds available to the interest-rate subsidy program, to $2 billion. The bill would also create a $1-billion “war chest” of funds to be parceled to counter foreign nations’ “predatory” financing plans.
But many believe the bill is still a long shot. Exporters “are really scratching their heads to come up with some solution,” a lobbyist for one firm said. “So far, though, nobody’s got any great ideas.”
The Growth of Mixed Credit Offers Mixed credits combine foreign-aid funds with liberal lending terms to promote exports.
Number of Year offers worldwide 1980 37 ’81 45 ’82 102 ’83 219 ’84 305