TFR 24 – East-West Trade at a Crossroads: Economic Relations with the Soviet Union and Eastern Europe

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The alternating waves of amity and antagonism between East and West since World War II have not yet produced among the Trilateral countries1 a comprehensive strategic policy for future relations with the Soviet Union and Eastern Europe. Perhaps the approach must continue to be only a wary eclecticism. Whatever may be in the making, it seems clear that economic factors and forces have not thus far been woven consistently or effectively into the strands of political and military policy with which the Western allies seems to be wrestling.

Too often in the past, any forward planning of grand strategy that has been attempted has been in terms of military objectives, control over nuclear or conventional armaments, and political relations between the Trilateral and CMEA2 countries, individually or collectively. Strategy, in the sense of any longer term, carefully developed Western consensus, has tended to neglect or to override economic dimensions. Yet actual developments have at times caused Western countries to resort to forms of economic pressure against the East. The consequence has been precipitate action, with little coordination, applied in ways that proved relatively ineffective or counterproductive. Governments have also frequently discovered too late that the scope for political maneuver in the implementation of policy has been seriously limited by economic constraints.

Without suggesting what all of the other strands of overall strategy should be, this study attempts to outline an approach in trade and financial affairs which might be suitable for any Western strategic doctrine on relations with the East that presumes: 1) an overriding need to maintain peaceful conditions, 2) a continuing need for a balanced stand-off in military capability, and 3) an unrelenting rivalry between the two sides in attempting to extend the influence of their competing political systems.

By 1982 it has become a recognized truism that "detente," whatever it may have meant in earlier years to the statesmen or the populations of either side, has lost its original lustre in the West. One of the more romantic popular visions of detente had been the belief, or the hope, that the Soviet Union following the series of agreements during the 'sixties and 'seventies on nuclear testing, arms control, space exploration, and scientific and cultural exchange, as well as the development of closer military ties would no longer cross the threshold of military aggression in seeking to strenghten its external bases of political and strategic power. Disillusionments kept recurring even during these years, but a compelling "last straw" for many came with the entry of Soviet troops into Afghanistan at the end of 1979. Another divisive development was the imposition of martial law in Poland on December 13, 1981.

The question for the future is whether there can at some time be a revival of detente in a more viable form, based on a realistic understanding of the differences between the two political systems. The expectation must be that active rivalry will continue, but hopefully within a framework of normal diplomatic exchange and stable military equilibrium. That kind of detente would not impair existing political or military or economic alliances, nor weaken any nation's safeguards on its own unique technology, but it would encourage the expansion of those ordinary commercial and financial relations from which each side could expect an advantage, and from which neither need suffer a disadvantage. Such a relationship would not preclude, in extreme circumstances, the curtailment of some economic relations for a time in response to a serious threat or violation of trust, but it would not include a deliberate curtailment of economic intercourse in the mistaken belief that the adversary could be permanently weakened. Moreover, a new detente would recognize the potential for mutual gains in a widening of the scope for market determination of prices in trade between East and West.

This study examines the possibilities for constructive economic relations between the Trilateral West and the CMEA East in the current environment. At the risk of omitting Hamlet from the play, there has been no attempt to deal with broader political and strategic issues, most notably the scale and nature of the arms race between the USSR and the U.S., or between the Warsaw Pact and NATO. Quite obviously, though, the intricate complexities of any arms limitation agreements that may be reached, or the failure to reach an accord, must have a most profound impact on the economic performance of both sides. The full range of that potential impact cannot be encompassed in a survey focused primarily on trade and finance.

Indeed the year 1982, in which this study is being completed, presents a paradoxical picture of confusion in both political and economic relations. Lengthy exchanges still take place between the diplomats and negotiators in Madrid and Geneva, at the United Nations, and through the media, though often in a combative tone; economic sanctions against the Soviet Union are being applied doggedly though erratically by the United States and some other Western countries; but meanwhile the United States is an eager seller of grain to the East, and leading countries of Western Europe contract for new supplies of Soviet natural gas in return for supplying large credits to finance pipeline facilities produced in the West. Underneath all of this, on both sides, there are suspicions of motives and fears of an accidental stumbling into nuclear war. This is not, it would seem, a propitious time to be surveying the scope for fruitful expansion of trade and financial relations.

Yet the authors of this study do find some prospects for an orderly passage through the confusion. The starting point is to recognize forthrightly that the potential for economic contacts between Trilateral and CMEA countries cannot be explored in the same terms that apply among the countries of the West. Aside from the fundamental problems of political and military competition, there is also a continuing problem of translationibetween economic systems that cope in quite different ways with the cost-benefit issues that arise in the allocation of resources among alternative uses. That is, methods of valuation, and the criteria for determining actual comparative advantage, must be different for a system where business decisions are determined by the mandate of a central plan from those for a system where decisions on prices and costs are reached through the guidance of market forces. Nonetheless, partly because the sluggish economies in both the East and the West currently call for new initiatives in trade, and also because longer term prospects during the decade of the 'eighties and beyond point to a compatibility between the resources and needs of the East and the West, there are compelling reasons even with full recognition of the necessary constraints for trying to enlarge the spread of the international division of labor among the Trilateral and CMEA countries.

There were substantial gains of this nature during the 'seventies, the decade of detente. Aggregate East-West trade (exports plus imports) rose nearly six-fold in nominal terms from 1970 through 1979, although with wide variations among countries and years.3 The overall proportions of this trade in comparison to the estimated GNPs of both sides, while still small, also rose. Although there was some slackening in the pace of the real growth of GNP on both sides later in the decade, the enlarged trade may have helped to keep the decline from going further, particularly for a few countries in Western Europe.

It is with some of this history that the study begins. Section I describes the trends of trade and capital flows between the Trilateral countries and the CMEA countries during the postwar period. It focuses particularly on the more specific dimensions and characteristics of that trade since 1970. How has it been financed? What have been the growth and investment patterns in the CMEA? And what are some of the implications of the most recent developments Afghanistan and Poland for the policies and actioris of the Trilateral countries?

After this broad survey, there will be a more detailed view in Section II of the key economic sectors in which future expansion, if any, might be expected to occur. What are the costs and benefits for the East and the West of continuing, to the extent economically profitable, along the lines of mutual trade expansion that evolved during the '70s? Might a growing interdependence put the West in an exposed position, vulnerable to economic pressures from the East, or might it perhaps create new strains among the Trilateral countries? Do the purely operational difficulties of doing business with the centrally planned economies place serious limits on future expansion? What are the implications of the current overindebtedness of Poland and Romania? Is it possible that mutually profitable commercial exchanges might in the longer run, despite the disappointment thus far, lead to greater political understanding and trust? In any case, what are the comparative advantages, for either the West or the East, in such economic sectors as energy, agriculture, technology and manufactures, services (e.g., shipping and insurance), and finance (both for trade and investment)?

Following that rather clinical diagnosis, the third and final focus will be on practical policies for the future. What kinds of restraints or boundaries should the West put on a general expansion of economic relationships either to control strategically critical exports, or to impose temporary sanctions in support of foreign policy objectives? Conversely, with controls in place over sensitive relations, what govemmental initiatives would be appropriate for actually encouraging useful trade outside the restricted zone? Or might encouragement go too far, leading the East to a position of economic parity that could lessen economic pressures on the USSR to agree to limit or reduce armaments? What scope might there be, in any furthering or conditioning of Trilateral relations with the economies of the CMEA countries, for such international institutions as the International Monetary Fund (IMF), the General Agreement on Tariffs and Trade (GATT), the Organization for Economic Cooperation and Development (OECD), and the Bank for International Settlements (BIS)? What are the potentials for private initiative, within the context of conducting business with an often complex and procrastinating bureaucracy? Do prospects differ significantly among the CMEA countries? More broadly, how can the Trilateral countries, within the context of their relations with the CMEA countries, most effectively promote their own growth while also preserving Western values and democratic institutions?

Initially, it is important to outline several basic propositions which have emerged during the course of this study:

* The West cannot quarantine the East economically; economic relations at some level are certain to continue.

* The West cannot, through any practicable effort to coordinate its economic leverage, prevent the East's economic growth, although it may possibly slow the pace of some elements of that growth.

* The West may be able to delay for a time particular weapons developments in the East by denying access to certain technologies, but it cannot prevent the East from eventually acquiring or equaling whatever technology is available in the West.

* The West must recognize that the extension of economic relations with the East will not lead any of the CMEA countries into a political alignment with the West.

* The West can confidently expect to remain economically stronger than the East, regardless of how much trade expands, because of the inherently superior capacity for innovation and development resulting from the comparatively free rein given to individual initiative in the West's economic system.

* The West should be able to expand two-way non-military trade with the East during periods of stable political relations, subject to the desirability common to all countries of so diversifying trade as to avoid undue dependence upon any one source or outlet.

* The West should be prepared, when political conditions permit, to extend credit on non-concessional terms in support of trade with individual Eastern countries, as their debt servicing capacity and performance may justify.

* The West can hope that mutually beneficial trade relations, as and if they develop, will help provide an atmosphere conducive to constructive negotiations aimed at

- reaching enforceable agreements that assure a stable military equilibrium between East and West, and

- reducing the military burdens that now divert so large a proportion of the economic resources of most countries on both sides away from productive uses and the meeting of human needs.

Briefly to foreshadow the study as a whole, a major underlying theme is that the sheer facts of economic geography and human resources in the Trilateral and the CMEA countries, were it not for their basic political differences, would impel a broad two-way flow of materials, products, and services between these vast areas. Political and strategic considerations inescapably limit the extent to which these economic potentials can be realized. That is why, after reviewing the remarkable trade expansion that did occur under the umbrella of detente during the 'seventies (Section I), and after considering some of the potentials that might lie ahead along many of the same lines (Section II), this study has focused in Section III on the kinds of boundaries on trade that need to be drawn by the West.

The analysis does suggest that the West can, without weakening its own relative strength, realize some economic gains from a renewed expansion of trading relations with the East during the course of this decade. The key premise is that any increase in trade, if it is to occur, must be mutually beneficial. There may be a further useful carryover if greater trade improves the climate for political relations.

Yet it should be equally clear that the West must place effective limits on any development in economic relations that could seriously weaken its own strategic position, or uniquely advance the strategic or military capability of the East. That is why the study takes a close look at the existing arrangements among the NATO countries and Japan for control over trade with the East in highly sophisticated technology or weapons (that is, through the CoCom, the Committee for the Control of the Export of Strategic Commodities). Such controls, preferably through a system of treaties, should be strengthened, sharpened, and adapted to the current need for control over the transfer of unique scientific processes as well as products.

Given such a specific and effective check on transfers of critical technology, the way should then be open for a renewed development of trade, with the approval of Western governments, subject to three other policy constraints on which the Trilateral governments should negotiate understandings: 1) the possible but rare, selective, and coordinated use of sanctions or embargoes on the sale of particular goods or on the extension of credits, for the purpose of penalizing or deterring specific aggression; 2) the prudent need to maintain a diversification among sources and markets as trade with the East grows; and 3) restraint on the use of concessional terms in trade or finance.

As for sanctions, this study finds that their use thus far has been of limited effectiveness. They may have helped to amplify diplomatic protests against the aggressive actions of others, but their punitive impact on aggressors has been slight and their disruptive impact on the sanction-imposing countries substantial. A better approach, so far as the possible use of sanctions by the West against the East is concerned, would be to work toward an understanding among the Trilateral countries perhaps within the CoCom framework on the conditions for imposing sanctions in the future, including some sharing of the costly burdens of such sanctions among those countries. The mere existence of such an understanding may help as a deterrent to future aggression and should provide powerful support for diplomatic initiatives, perhaps thereby avoiding an actual invoking of sanctions, and at the least assuring meaningful consultation among allies before any precipitate use of sanctions.

Some who are critical of the approach taken in this study would instead go much further in politically constraining or shaping Trilateral-CMEA economic relations. At the extreme, there are some, particularly in the United States, who would want to virtually shut down economic relations with the Soviet Union in a kind of undeclared economic warfare. As will already be quite obvious, this is emphatically not the authors' view. Soviet autarky is sufficiently powerful to thwart any attempt to force a collapse of the Soviet system through economic action. If instead there were an effort to use trade mainly as a tool for leverage to weaken or manipulate the other CMEA countries, there woujd be a grave risk of creating a new fortress mentality among the CMEA countries with unpredictable consequences in the decades ahead.

The approach of this study isinstead to set certain constraints or boundaries of the varieties mentioned above with economic relations then relatively free to run their course outside of those limits. That seems to the authors to be the best and most practicable way to give political guidance to East-West economic relations.

For other critics, this is still not enough. They would want Western governments to look more deeply into the political impact in the Soviet Union of economic relations "outside the boundaries and actively use these economic relations to shape Soviet development and overall relations. They speak aggressively of a political "strategy" for the use of economic relations to leverage down the rate of economic growth inthe East, in contrast to this study's more modest approach, which limits any deliberate restriction of the non-sensitive trade to the use of sanctions only in very unusual circumstances.

The lines of argument of these critics often begin by citing thededine in the rate of growth of the Soviet economy; some observers describe this as a growing crisis of the Soviet economic system. Some critics in the West relate the decline in growth in large part to investment in military strength, so that the capital investment which would be required for growth is crowded out. Is it a wise Western strategy, they ask, to help fill this investment gap, and thus to make it easier for the Soviet Union to overcome its declining growth rate? Others would put more stress on a technology gap rather than an investment gap, but ask a similar question concerning the transfer of technology through trade. Some take this argument one step further and contend that Western economic ties, by reducing internal pressures to shift resources to civilian economic growth, would help the Soviet Union to devote larger amounts of its resources to military power.

The authors' sense of Soviet decision-making, however, is that military "requirements" will always be met ahead of civilian consumption, and that any gain in Soviet production related to East-West trade will largely accrue to the general public. Moreover, it is important not to overestimate the unique contribution of economic relations with the West to the Soviet growth rate. On balance, the gain, though modest, should be as great for the West as for the East. Beyond that qualification is another significant consideration. The implementing of any strategy for treating the USSR and Eastern Europe as pariahs by putting a blight on general trade quite apart from the problem of getting intraTrilateral agreement on undertaking such an approach would break down over the problems both of defining the kinds of goods or credits to constrict, and of maintaining a coordinated and sustained compliance.

The alternative of using the crude tactics of across-the-board embargoes on the major categories of trade, moreover, would stand little chance of wide Trilateral support, would be circumvented by countries outside the Trilateral circle, and would risk degeneration into the sort of outright economic warfare that the advocates of influence through economic strategy would presumably wish to avoid. All in all, the authors are persuaded that the suggestions in this study for concentrating on various limited constraints or boundaries represent the most practicable way to define the political guidelines for trade.

Another kind of argument made with regard to Western political control of economic relations "outside the boundaries" is that Western governments should be more actively involved in these transactions, suggesting for example that loans should be made only with govemment guarantees and government permission. The authors recognize and support the need for thorough government monitoring of economic relations with the Soviet Union and Eastern Europe, but to require governmental permission and guarantees for all or most credits and exports "outside the boundaries" would be a shift toward the techniques of the command economy. The Trilateral countries might paradoxically risk, in that way, a drift into use of the very methods which their policies are presumably designed to oppose.

The authors' conclusion is that, outside the necessary constraints, there can be useful economic gains for the West, and that these gains can reinforce political objectives. It is, to be sure, naive to believe that trade expansion necessarily brings peace, or that economic inducements alone could lead the Soviet Union to give up any efforts to extend its external bases of political and strategic power. Nor should the West expect, as mentioned earlier, that the extension of economic relations will lead any of the East European countries into a political alignment with the West.

The general aim should be to develop along any non-sensitive lines that are clearly supportive of economic growth and expansion in the West, so long as practicable alternatives would be available if serious interruptions were to occur in East-West relations. Running through all of the analysis of this study, moreover, is recognition of the great comparative advantage that the West enjoys because of its reliance upon the dynamism of its free and flexible market economies. That is the West's greatest assurance of continued strength, regardless of how much or how little occurs in the future expansion of trade and credit flows with the East.

The succeeding sections of this study outline the results of the authors' efforts, with the help of many others whose contributions are acknowledged in a prefatory note, to identify the kinds of constructive East-West economic relations that may develop whenever the tensions and strains of early 1982 subside. The study will follow the outline already indicated: (I) East-West Economic Relations since World War II; (II) Potentials and Problems in Key Economic Sectors; and (III) The Realistic Prospects for Trilateral Policy.

Authors

Robert V. Roosa, Partner, Brown Brothers Harriman & Co., New York
Michiya Matsukawa, Senior Advisor to the President, Nikko Securities, Tokyo
Armin Gutowski, President, Hamburg Institute for Economic Research (HWWA)

William M. Reichert, Brown Brothers Harriman & Co. New York (Associate Author)

Table of Contents

Introduction: Perspective on East-West Relations
I. East-West Economic Relations since World War II
A. Trends in Trade
B. The Current Structure of Trade
C. Financing the Growth of Trade
D. Growth and Investment in the CMEA
E. Recent Developments: Implications for Trilateral Action
II. Potentials and Problems in Key Economic Sectors
A. Energy
B. Agriculture
C. Technology: Machinery, Manufactures, and Mining
D. Services and Other Non-Merchandise Trade
E. Finance
III. The Realistic Prospects for Trilateral Policy
A. Policies of Restraint
- CoCom Controls Over Sensitive Strategic Goods and Technology
- The Western Use of Economic Sanctions
B. Policies to Promote Expansion of Economic Relations
- Governmental Initiatives to Encourage Trade
- The Scope for International Institutions
- The Potentials for Private Initiative
Conclusion: Constraints and Opportunities

  • Topics: Economics, Trade
  • Region:  North America, Europe, Pacific Asia
  • Publisher:  Trilateral Commission (New York University Press)
  • Publication Date:  © 1982
  • ISBN:  0-8147-7385-0
  • Pages:  119
  • Complete Text: Click here to download
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