If US firms can't compete
The concern now being expressed throughout the United States business community about the tendency of many industrial nations to distort world trade patterns by providing low-interest, subsidized loans for their exports warrants the closest attention of both Congress and the Reagan administration.
The extent to which the unfortunate practice has grown is underscored by the fact that the Reagan administration is considering providing a hefty $250 million subsidy for the Budd Company, which - without help - may be knocked out of a lucrative New York City subway contract because of just such a government subsidy to a Canadian competitor. The fact that Washington is now weighing help for Budd has major policy implications.
Up until now the administration has been adamant against any financial effort that could be construed as a ''bailout program'' for American business, as occurred in a somewhat different situation when the Carter administration sought and obtained loan guarantees for the Chrysler Corporation. Indeed the administration has slashed the budget of the US Export-Import Bank, whch provides low-cost loans or loan guarantees to buyers of US exports - in effect another form of subsidy to American industry.
In the international trading community at large financial subsidies - primarily through low-cost loans - have become widely accepted, particularly for ''big ticket'' projects such as electrical generators, nuclear facilities, and aircraft sales. The US has tended to lag behind most other industrial nations in the extent to which it offers such subsidies. A sizeable 43 percent of all Japanese exports, for example, received government assistance in 1980, the latest year for which full figures are available. In the case of the United Kingdom, 37 percent of exports were subsidized that year. For France, the figure is 30 percent. By contrast, only 8.2 percent of US exports received government assistance.
American business officials argue that because foreign government backing for exports has become so widespread the US must step up its own subsidy programs or lose precious contracts abroad and jobs at home. Such arguments can no longer be easily dismissed. A 1981 survey by the Machinery Institute suggested that some US firms may be shifting orders to overseas subsidiaries so they can qualify for better export financing.
The Budd case illustrates the type of competition that many US firms now face. Budd actually offered a lower price to New York City for purchase of its subway cars than did the Canadian firm that finally won the contract. Some $28 million lower. The difference, however, was in the financing agreement. The Canadian company provided a subsidized 9.7 percent interest rate, which just happened to be below the 11.4 percent base rate on exports agreed to at that time by the major industrial nations. If budd were now to receive federal assistance it might be able to make a competitive offer to New York by the contract's closing date late next week.
Earlier this month the European nations, Canada, Japan, and the US all raised their export financing rates slightly above the base rates agreed upon at Geneva last year. That is a step in the right direction in that it makes subsidies smaller by bringing export loan rates into closer alignment with market rates. The new US base rate, it might be noted, is roughly l percent higher than that of its major trading partners.
Subsidizing export trade is a cutthroat practice that should be ended as quickly as possible by all major trading nations. It distorts normal trading patterns and rewards inefficiency. The US should continue to press its allies vigorously to bring their loan rates closer to market rates when the current agreement expires in May 1983. In the meantime, the administration and Congress should carefully rethink whether cutting back Eximbank funding will actually encourage other nations to end their subsidy programs. Just the opposite may occur, as some nations are emboldened to step up their own subsidized export sales.
In the long run, the US must seek to end international subsidies. In the short run, the administration would be wise to continue a substantial export loan program as a negotiating weapon to prod other nations into reducing such subsidies. Failure to do so - as the Budd Company has now discovered - is to put many US firms at a real disadvantage no matter how low they can bring in a bid on a potential contract.
