Treasury sources said the Prime Minister will propose that export credit guarantees should not be given to countries with "excessive" military spending, which United Nations guidelines have defined as more than health and education combined.
Of Britain's top customers, Saudi Arabia spent half as much again on the military than on health and education in 1990-91, and Oman nearly three times as much. China spent 14 per cent more on the military than on health and education.
Last year, Britain granted pounds 543m of export credits to overseas borrowers - equivalent to more than one-tenth of its total pounds 5bn arms exports. The guarantee is given to a United Kingdom bank to enable it to extend credit to a foreign purchaser. Last year, China was the largest recipient of export credits, worth pounds 227m, and Saudi Arabia the second largest with pounds 225m.
Even though, in China's case, these credits related to non-military purchases, the proposed new rules, if strictly enforced, would have stopped them. However, much depends on how tightly the rules are drawn. Export credits might be denied when they relate to arms sales, for example, but not to other exports, and a country only spending a little more on the military than on health and education - like China - might be exempt. Obtaining recent comparisons is also difficult.
The World Development Movement, an independent think-tank, which has been pressing for limits on the arms trade and Third World debt, has estimated that since 1990 Britain has paid pounds 800m to underwrite arms sales which have not been paid for. Jessica Woodruffe, the head of campaigns, said: "Ideally we'd like to take this beyond excessive military spending and include repressive regimes as well."
Last year's G7 summit at Halifax, Nova Scotia, Canada, suggested that one criteria for aid to non-G7 countries should be their "non-productive" expenditure - in other words, arms.
The UN Development Programme's 1994 report recommended no nation should spend more on its military than on health and education combined, and that the target reduction in military spending between 1995 and 2005 should be to 3 per cent of gross domestic product (GDP). Britain and France currently spend 3.1 per cent, the United States 3.9 per cent, while the highest spending Nato member is Greece, spending 4.6 per cent.
The Independent Group on Financial Flows to Developing Countries chaired by Helmut Schmidt, the former German Chancellor, recommended special aid should be given to countries spending less than 2 per cent of GDP in the security sector.
Charles Masefield, head of the Defence Export services Organisation (DESO), recently said Britain aimed to increase its share of a diminishing global arms export market from its present 19 per cent to 22 per cent by 2000. That way, Britain would maintain its current pounds 5bn annual arms exports. Following the disintegration of the Soviet Union, Britain is the world's second largest arms exporter after the US.
Although Britain enjoys substantial earnings from arms exports, export credit guarantees mean that about one-fifth of those earnings are subsidised by the taxpayer. Ms Woodruffe said: "Export credits were being given to buyers - like Iraq, for example - long after it became apparent those debts weren't going to be repaid. The priority has got to be to stop the flow of arms to poor countries which can't afford them."