Bartering for Oil

"Middle East financiers are buying technology," reads an ad in Milan's Corriere della Sera. "Encounter with the Middle East!" cries a come-on in Paris' Le Monde. Another ad in London's staid Financial Times crooks an inviting finger: "The Middle East wants to do business with you."

Not half so much as Europe wants to do business with the Middle East. When the price of oil for the nine nations of the Common Market leaped by $25 billion a year ago, the Continent nearly panicked. Recycling petrodollars--that is, borrowing money back from the oil producers to buy yet more petroleum from them--was clearly a stopgap. Europeans soon realized that the only solution was to pay for the oil by selling more goods and services to the oil-exporting nations, but many economists were afraid that the mostly pre-industrial producing countries simply could not buy in sufficient volume.

To their happy surprise, the economists have been proved wrong. Italy's 1974 exports to Iran and the Arab countries rose 93%, France's 60%, Britain's 53% and West Germany's 85%. Total sales from Western Europe to all Arab nations, plus Iran, rose to an estimated minimum of $16 billion in 1974 from $10.6 billion in 1973, and seems sure to shoot up even more this year.

The effects are already showing up in Europe's accounts. Italy's trade deficit is expected to drop to $6 billion this year, compared with $10.7 billion in 1974; the nation no longer faces a threat of outright bankruptcy, as it did last fall. The French government estimates that its trade deficit will shrink from $3.7 billion in 1974 to $2.3 billion this year. Even sickly Britain is managing to reduce its huge trade deficits.

France so far is leading the export race, showing marked ability to sell "product-in-hand" plants--highly automated factories already functioning with trained personnel. Premier Jacques Chirac recently agreed in principle on more than $6 billion worth of contracts in Iran: a subway for Tehran, a steel mill, an auto assembly plant, a color television system and 200 housing units. In Iraq, he signed a similar $3 billion deal.

Fall Apart. The second-place West Germans are moving smoothly into the Middle East with an impressive mixture of direct exports and joint-venture projects. The Italians are third; they have built a reputation for handling vast projects more cheaply than either the French or the British, and with an outstanding technical flak. For example, in Bahrain, the Societ`a Italiana Resine of Milan is completing a $12 million desalination plant that it says will be the largest in the world. During March the company and the Cairo daily Al Ahram jointly sponsored a conference on desalination that brought together representatives of nine Arab countries, Britain, France, West Germany, the U.S., Japan and Hong Kong.

Such successes are not always as impressive as they look. For one thing, many European contracts with the Arabs are spread over periods as long as ten years. Also, some deals simply fall apart later under hard negotiation. A year ago the Libyans placed an order with Italy for a small 1.5 million-ton steel plant. But just when the construction plans and contracts were set, Tripoli changed its mind. What the Libyans wanted instead was a 5 million-ton plant. Back to the drawing boards went the Italians to work on new plans, new contracts, new financing. Then the Libyans decided that they would prefer a 3 million-ton plant, and that is where matters now stand.

Europe also faces some stiff potential competition in keeping its exports to the Middle East booming. The U.S. so far has not expanded its trade with the oil producers as rapidly as it could. American sales to the Arab world and Iran last year were $5.2 billion, double the 1973 figure but still less than a third of the European total. In dealing with the Middle East, Europeans have the formidable advantages of geographic proximity and a history of cultural contacts going back to the Crusades--besides which, they are under far more compulsion to deal, since they must buy much more Arab oil than the U.S. Still, many Arabs look upon the U.S. as a more desirable potential trading partner than Europe; they admire the technological sophistication and global scale of American industry.

Exporting Growth. The European countries' worst problem in selling to the Middle East is that to some extent they may be exporting their own industrial growth. In order to pay for oil, France, Britain and Italy are selling to the Arabs and Iran new plant and equipment that they otherwise would build for themselves. Indeed, some Europeans feel that industries now abuilding in the Middle East will one day compete directly with Europe while enjoying the benefit of cheaper labor. One possible solution: "triangular ventures" in which technologically rich nations cooperate with resource-rich states to develop countries that have neither technology nor resources.

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