US Studies Use of Tied Aid

FOREIGN AID

OVER the last two decades, China bought most of its nitrogen fertilizer factories from the Houston-based M.W. Kellogg Company. But in 1988, the orders stopped coming. The Chinese switched entirely to using companies in France and Italy - costing M.W. Kellogg business worth about $300 million. Some analysts say the shift was prompted not by superior European technology or even lower prices, but by the ``tied aid'' credit offered by the French and Italian governments.

Tied-aid credit blends foreign aid money with export financing. In such deals, the government of a rich country lends money at advantageous terms to a developing country, money then used to help buy big-ticket items such as power plants and telephone systems from companies in the developed country. In an extreme form, tied-aid credit is used by industrial nations to land export contracts for home industries.

Developing countries like tied aid, because it drives down the cost of borrowing.

The US opposes the practice - but hasn't had much success in convincing other developed nations to stop.

That could change, however.

The Bush administration and Congress are studying the issue to decide whether the US needs to develop more-powerful weapons to fight tied aid, such as giving the US Export-Import Bank power to match other nation's tied-aid packages. This would give the US greater leverage in international negotiations.

The Economic Policy Council, a Cabinet-level panel of economic advisers, met earlier this month to review a list of possible solutions. But they failed to reach a conclusion. The administration is under pressure from Congress, which wants more aggressive US action.

``This administration is opposed to tied aid - but doesn't see many ways it can respond,'' says a Capitol Hill source familiar with the issue. According to the US view, tied aid skews trade patterns and undermines the notion of foreign aid as a form of humanitarian assistance. It's also expensive.

``We realize we have to do something,'' says the Capitol Hill source, ``but we also realize that we don't have the money to launch our own full-scale tied-aid program, due to budget constraints.''

In 1987, the Organization for Economic Cooperation and Development (OECD), a group of industrial democracies, implemented an agreement aimed at restricting the use of tied-aid credit by making the practice more expensive for industrialized countries.

But so far, experts say this has done little to stem the activity.

One proposal now gaining support among lawmakers in Washington would increase the power of the Export-Import Bank to fight-tied aid with its own system of tied-aid credit. This is already being done, in a limited form. The US set up a special tied-aid fund at the Export-Import Bank in 1986, which was supposed to be used as a ``war chest'' to pressure other countries to agree to limits on tied-aid credit. But of the $300 million originally authorized, only about $100 million has been used. And most of that was during the first year, when the US was pressing for the agreement at the OECD.

Now the administration has asked Congress to extend the fund for one more year - opening up the possibility that this legislation could be used as a vehicle for strengthening the program.

Some critics blame the Treasury Department for the current problems. Treasury negotiated the original OECD agreement, and the department is hesitant to allow Export-Import Bank funds to be used for anything more than monitoring that agreement.

But the cost of not responding more forcefully, some analysts say, is the erosion of US competitiveness.

A study by the Export-Import Bank, released earlier this year, estimated that the use of tied aid by foreign lending agencies costs the US between $400 million and $800 million in lost contracts every year. US business groups insist it's much higher - perhaps as much as $4.8 billion.

``We have a choice - either compete or get out of the game,'' says Roger Sullivan, president of the US-China Business Council, and a staunch critic of US policy toward tied-aid financing.

According to Mr. Sullivan, who testified earlier this year before Congress on the issue, tied aid is a fact of life in international trade. The question is whether the US is going to recognize this and take the steps necessary to respond. He also emphasizes that this is a ``national issue,'' rather than a rallying flag for big business.