w d f

; /

T r a d e T r a d e a n d T r a d e

S t r a t e g i c

by Margaret M. Dean Nat ional Hat Collegm

A p r i l 159 1989

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Standard Form 298 (Rev. 8-98) Prescribed by ANSI Std Z39-18

Trade, Trade and Stratmgic Trade

I n t r o d u c t i o n :

My paper "Some I n t e r n a t i o n a l Elements of P e r e s t r o i k a and

U.S. Nat iona l Secu r i t y " addressed only two of Gorbachev's

goals f o r e n t e r i n g the i n t e r n a t i o n a l economy: secur ing

increased investment from the West and o b t a i n i n g membership

in the i n t e r n a t i o n a l f i n a n c i a l i n s t i t u t i o n s ( I F I s ) .

Gorbachev i s count ing on the t h i r d element - - increased

t r ade - - as another way to ease the i n t e r n a l p ressures in

r e s t r u c t u r i n g the Soviet economy.

Trade can be commercial t rade ! i t can i n c l u d e dual use i tems

which have both commercial and s t r a t e g i c uses, or t rade can

be fo r s t r i c t l y s t r a t e g i c i tems. Changes in any one of

these th ree a f f e c t U.S. n a t i o n a l s e c u r i t y . S t r a t e g i c t rade

c l e a r l y a f f e c t s U.S. na t i ona l s e c u r i t y . Determining what

c o n s t i t u t e s s t r a t e g i c t r ade can be d i f f i c u l t , however, s ince

many products have dual uses. Because the impact of

commercial t rade and dual use t rade on U.S. s e c u r i t y i s less

ev ident than t h a t of s t r a t e g i c t r ade , an examination of

these two i s necessary to complete my a n a l y s i s of the

i n t e r n a t i o n a l economic aspects of p e r e s t r o i k a and U.S.

na t i ona l s e c u r i t y .

H i s t o r i c a l l y , and w i th few depar tu res from tha t p r a c t i c e ,

the U.S. has sought to i s o l a t e the Eastern b loc . B a r r i e r s

NATIONAL UNIVERSITY LiD AR, Y

SPECIAL COLLECTIONS

Dean, p. 2

to trade for the West have been p o l i t i c a l , whi le b a r r i e r s

fo r the East have been both p o l i t i c a l and economic. Now

tha t the Soviet Union i s lowering the p o l i t i c a l b a r r i e r s ,

the U.S. must ask i t s e l f what U.S. goals are and how to

a t t a i n them whi le (1) ensuring tha t U.S. manufacturers can

e f f e c t i v e l y compete in i n te rna t i ona l markets and (2)

~ ~ m a i n t a i n i n g U.S. economic s u p e r i o r i t y .

~ x ~ This paper w i l l support the p r inc ipa l conclusions of the

companion paper: that peres t ro ika , and evidence of i t s t rue

nature, w i l l take time to discover; tha t one of the th rea ts

of perest ro ika is the p o s s i b i l i t y of accentuating the s p l i t

in the Western a l l i ance ; that the long-term goal of the U.S.

should be to in tegra te the Soviet Union in to i n t e rna t i ona l

soc iety ; and that the U.S. can use the time provided by the

process of perest ro ika to evaluate the nature of Soviet

change and proceed in a step-wise fashion. Also included

are a few spec i f i c suggestions on what the U.S. can do to

implement a step-by-step s t ra tegy.

Current S i tua t ion : Although the Soviet Union d e l i b e r a t e l y

created a separate economic system to dominate Eastern

e Europe, to advance world revo lu t ion and spread communism~ to

deepen the c r i s i s of world capi ta l ism and speed i t s demise,

to insu la te the USSR from that crash~ to have o l i gop ic

cont ro l of Eastern Europe's resources p , economic warfare was

part of the West's Cold War po l i cy . The success of the

Dean, p. 3

West in i t s economic warfare only increased the East 's

predetermined i s o l a t i o n .

Despite several economic reforms by the Soviet Union in the

~ ~ 6 ~ s and ea r l y~7¢~ to reform trade wi th in the Soviet bloc~

~ , . ~ / ~ / " t h e resu l t s were unsat is fac tory . Despite a l l r ~ j ~ o E f e f f o r t s , Comecon trade remained hampered by in te rna l

biases against t rade, the Eastern economies" lack of complementarity, the poor qua l i t y of goods produced in the ind iv idua l s ta tes, and p o l i t i c a l unwi l l ingness to delegate power to a supranational body - - espec ia l ly one in which the Soviet Union had a powerful voice. Morover, in t rab loc technological cooperation was not up to the task of overcoming systemic biases against technological innovat ion" (Spero 354).

Neverthelessbthere is considerable debate over the e f f i cacy /

of economic warfare. Some analysts argue that the West's

economic warfare retarded Soviet growth in the long run and

f d, m contr ibuted to containment. Trade, h e ~ o n t e n ight have been small, but i t would have played an important ro le in

the Eastern economies by helping them overcome technological

l i m i t s . Denial o÷ sources of Western technology thus

hindered the i r growth. The counterargument is that the

impact was not s i g n i f i c a n t where it mattered because

economic warfare seems to have had l i t t l e e f fec t on the

source of the Sov ie t 's superpower statusr t he i r m i l i t a r y

capab i l i t y .

Co mmercia! Trade:

Volume: Commercial trade flows in both d i rec t i ons , although

the U.S. tends to th ink only of Western exports f lowing

Dean, p. 4

East. C e r t a i n l y the West to East t rend predominates.

Between the period 1980-86 the USSR turned a $26.7 b i l l i o n

t rade surp lus i n t o a $2.6 b i l l i o n d e f i c i t . In 1986 the USSR

imported $17.7 b i l l i o n from Europe~ $4.5 b i l l i o n from other

Western i n d u s t r i a l coun t r ies and $1.2 from the U.S. During

the same year i t exported $0.6 b i l l i o n to the U.S., $20.2

b i l l i o n to Europe and $1.5 b i l l i o n to other Western

i n d u s t r i a l coun t r i es producing a t rade d e f i c i t . Soviet-U.S.

b i l a t e r a l t rade f lows were about $1.95 b i l l i o n in 19871 $2.5

b i l l i o n in 1988. The U.S. runs a t rade surp lus w i th the

Soviet Union of around $1 b i l l i o n a year. This i s on ly a

small percent of the Soviet GNP of about $2.3 t r i l l i o n (CQ

75-77).

, CT n~o ~ the Composition: he pa t te r f Soviet fo re ign t rade in 1980s remains the same as i t did a decade ago. T~e p a t t e r n )

i s a t yp i ca l fo r an i n d u s t r i a l i z e d country such as the USSR,

but i s c h a r a c t e r i s t i c fo r a developing country , p a r t i c u l a r l y

in r e l a t i o n to i t s t rade wi th the developed wor ld. Soviet

imports from OEOEOEOE~countries are dominated by manufactured

products~ espec ia l l y techno logy - in tens ive goods, al though

imports of food products are increas ing. Soviet expor ts

cons is t mainly of pr imary products w i th fue l alone

c o n s t i t u t i n g more than 3/4s of t o t a l exports. Technology

in tens ive goods represent only 9% of t o t a l Soviet expor ts to

OECD coun t r ies . The main f a c t o r , however, r e s u l t i n g in a

Dean, p. 5

pos i t i ve trade balance of the USSR with the developing

nat ions, l i k e India, Syr ia, Iraq and Libya, i s the export of

arms. Arms cons t i t u te 46% of the t o t a l Soviet exports to

these countr ies (1982 data).

Although the level of East to West trade is low, there i s

technology that the West would l i ke to have. The Soviets

are very p r o f i c i e n t in cer ta in areas and the West could be

more aggressive in obtaining non-strategic Soviet

technologies. In his a r t i c l e in the Washinqton PoSt~March

12, %989, aohn Kiser c i tes s i ng le - ce l l protein research,

e lec t ron ic mater ials, medical ul trasound, lasers, pulsed

power, i ron and steel process technologies, space,

f ine-gra ined so l ids , composite mater ia ls, and r a r e earth

technologies as examples o÷ technologies the U.S. should

~pur~ste.) Gordo~n ~T:nd Stanley mention nuclear fusion and

biogenetics as other s i g n i f i c a n t invent ions, patented in the

USSR, which should command U.S. i n te res t . The problem that

the Soviets have is t rans la t i ng research in to consumer goods

and services, an American strength. Kiser notes that

"although the Soviet Union is a system with well-developed brain power and excel lent s c i e n t i f i c education i t has a poor system of incent ives for u t i l i z i n g the output of i t s technical establishment, at least in the c i v i l economy..." (Kiser)

The, Cqnsumer Soc~et~: Normal commercial trade w i l l improve

the l i f e of the average Soviet c i t i z e n . There are two

overwhelming reasons for the government to seek to do t h i s .

Dean, p.6

The f i r s t d i r e c t l y concerns the consumer: more goods are an

incent ive to work; more goods reduce the time cost to the

consumer; more goods o~ higher qua l i t y sustain the status of

the c i t i z e n world-wide and r e f l e c t s p o s i t i v e l y on the Soviet

ideology. Incentives for increased productivity~am~- J

iv . . . . . . . . . . . . . . . . . t y _~ qua l i t y good, w i l l not work i f

there are no goods already avai lable to buy.

The second reason concerns the society in general and the

m i l i t a r y in pa r t i cu la r and i t spins o f f of the need for

incent ives to induce the populace to produce qua l i t y goods.

That production of qua l i t y products by the c i v i l i a n economy

is needed to provide some degree of confidence in the

m i l i t a r y that the c i v i l i a n economy can meet m i l i t a r y needs.

Moreove~c iv i l ian production of c i v i l i a n goods would re l ieve

the m i l i t a r y indust r ies of that requirement. As i t stands

now, according to Hewett, each min is t ry and each enterpr ise

receives a production target for consumer goods. He

s p e c i f i c a l l y notes)among other example~that in 1980 the

Min is t ry of Aviat ion (Minaviaprom) produced about one- th i rd

of a l l vacuum cleaners. The Soviet economy produces many

goods of decent, i f not high, qua l i t y . Compared to several

decades ago, the qua l i t y of l i f e has improved v i s i b l y but

appears now to have peaked.

The one thing Soviets want is improved quant i ty and qua l i t y

of food. This accounts for the e f f o r t s (and d isappoint-

Dean, p. 7

ments) in the a g r i c u l t u r a l sector. Unfor tunately fo r the

j , reform program farmers worldwide are one of the most

~ onservat ive economic groups. One in terv iewer ai Soviets

lose 20-30% of t h e i r grain crop, bO% of t h e i r vegetables,

and 25% of t h e i r meat through waste, fraud and mismangement.

Part of the problem is i n f r a s t r u c t u r e : roads, r e f r i g e r -

a tors, equipment, etc. Improving t h i s i n f r a s t r u c t u r e takes

middresouLrces, and, in the Soviet Union, i t takes resources from

the government. But part of the problem is the lack of a

leman whose funct ion i t i s to provide the in termediat ion

service and make the economy funct ion e f f i c i e n t l y . Ideolo-

g i c a l l y the middleman is a pure c a p i t a l i s t , one who produces

nothing yet l i ves o~f the e f f o r t of others. Economically,

in c a p i t a l i s t terms, the middleman provides a service. In

s o c i a l i s t terms, the middleman is regarded as a leech. In

the USSR many services are not valued i d e o l o g i c a l l y or in

the GDP. One example c i ted in Hewett's book was a t r a i n :

i f the t r a i n de l ivers good , i t i s part of the GNP, but i f i t

i s carry ing people, then i t i s not. Consequent l~there is

no one in the o f f i c i a l economy who has an incent ive to

provide e f f i c i e n t , economical de l i ve ry o÷ goods. Middlemen

~.°~ ~ . ~ ~do f -~ not 'cost ' the government anything, but t h e i r creat ion

~ j ~ . ~ inse r t s an e l e ~ i t a l i s m in to the communist model.

" ~ j ~ / F / N e v e r t h e l e s s ~ c o u l d show improvements w i th in the

. .

Dean, p. 8

w i l l have delivered 'reform' for the population and bought

himself a decade wi th in which to pursue deeper s t ruc tura l

problems.

The conclusion of the Congressional Research Service report

is that

"While attainment of world levels of efficiency and quality may be beyond the USSR's early grasp, positive and significant change over time seems likely." (CRS-13)

The impact for U.S. secur i ty should be pos i t ive. While an

improved a b i l i t y of the USSR to transform a h ighly

productive, competitive c i v i l i a n labor force in to a war

" f~machine is a la tent consequence of reform, the in tegra t ion

~ ~ S o f the Soviet c i t i zen in to the world economy~ as a p r o d u c e r ~

\ ' '~ OL'/x ~ of goods, and as a market for Western products, is a more

~,~r~~b/~YJ ~ probable s c e n a r i o ~

I ~ ~ ~ Mechanism: Gorbachev has given increased trade such a ~ ~ /~ ~ - - ~ ~ vers t of f r n t ra e or a ~a ~ ~ p i o r i y hat o igh o eig d g ni~ t ions,

which used to be almost exclusively under the supervision of

the Min is t ry of Foreign Trade, has now been decentral ized

and sh i f ted to 20 domestic min is t r ies . Seventy enterprises

have been given the r i gh t to unsupervised export and import

a c t i v i t i e s and the way is open for addi t ional enterpr ises.

These groups are to be se l f - f inanc ing so there should be an

incent ive to be p ro f i t ab le and e f f i c i e n t .

9 Dean, p.9 So far)U.S, companies responded to Gorbachev's i n i t i a t i v e on

increased trade~ Some of these f i rms deal with dual use

technologies l i k e chemical and petro-chemical equipment,

computers, information and software. The volume of business

generated from these U.S. ventures remains to be seen.

During Gorbachev's v i s i t to New York and the U.N. in

December 1988, the Soviets had a trade f a i r in New York,

with 50 Soviet trade associat ions, i n d u s t r i a l en terpr ises

and cooperatives exh ib i t i ng 4,500 Soviet export commodities.

( The countr ies of the European Economic Communit~ stand to

benef i t g rea t l y from wider commercial contacts with the

~ ~ Eastern bloc i f succeeds - - both in perestro i ka rece iv ing

e t te r qua l i t y export that are a t t r a c t i v e to European

consumers and in opening up the Soviet market t / E E ~

exports. On June 25, 1988, t h ~ a n d the Council fo r

Mutual Economic Assistance (CMEA or Comecom) establ ished

diplomat ic r e l a t i ons , opening the way for b i l a t e r a l trade

agreements between the EC and CMEA members. Since then, the

EC has signed trade pacts with Hungary and Czechoslovakia to

remove r e s t r i c t i v e quotas against t h e i r exports.

Benef i ts and Problems fg r the USSR: East-West trade

expansion might assist Soviet economic modernization in f i ve

ways,

"by: ( I) providing continuous exposure to the West's superior innovat ive dynamism; (2) serving as a means to acquire high technologies; (3) se t t i ng standards fo r

Dean, p.lO

qua l i t y and p r i c ing w i th in the domestic economy! (4) act ing as a competi t ive spur to improved economic performance! and (5) . . .making ava i lab le more fore ign goods as incent ives to p r o d u c t i v i t y for en te rp r i se managers and workers. (G&S:25)

Free trade increases the need for currency c o n v e r t i b i l i t y ,

however, and any great increase in f ree t rade, even i f only

semi-free, creates balance of trade problems. A consequence

for some~ such as China, has Been a r i s i n g import b i l l ,

t rade imbalance and dupl icated technologies. Freer t rade

can play havoc with c e n t r a l l y planned production decis ions,

d is turb fac tor inputs by causing unemployment or sectoral

manpower shortages. Although fore ign goods w i l l most l i k e l y

not be allowed to compete with domestic products, a higher

qua l i t y fore ign product wi th only a marginal ly higher pr ice

w i l l compete favorably with poorer q u a l i t y , lower-cost goods

and reduce the demand for the l o c a l l y produced item.

A unique problem for closed soc ie t ies is the question of

computers. This has to be an element of concern for the

USSR.

"The c l imate needed for s c i e n t i f i c i nqu i r y , communication, and rapid technological progress i s a n t i t h e t i c a l to one in which the closed, con t ro l l ed s ta te in÷luences key sector developments . . . . The unleashing of Soviet s c i e n t i f i c c a p a b i l i t y , the f u l l u t i l i z a t i o n of i t s technical t a l en t s , requires a more open, equi table system" (CRS, 14).

For example, The Smithsonian Maqazine notes that s c i e n t i s t s

the U.S. and the USSR have set up a b u l l e t i n board

network to compare notes on global warming trends. This

Dean, p . l l

s t reaml ined technology makes i t p o s s i b l e f o r American

s c i e n t i s t s to communicate w i th t h e i r Sov ie t co l leagues

w i t h o u t the expense or p ro toco l problems of f a c e - t o - f a c e

meetings. As t h i s type of openness spreads across Soviet

s o c i e t y i t w i l l f o rce change in u n c o n t r o l l e d and p o s s i b l y

t h r e a t e n i n g ways.

B e n e f i t s and Problems f o r the West: On the Western s ide the

b e n e f i t of t rade i s the p o s s i b i l i t y of vast new markets in

the East. The hope of opening up t h i s new t rade b u i l d s on

the knowledge t h a t the Soviet economy has u n t i l r e c e n t l y

been the w o r l d ' s second l a r g e s t , and even today i s c lose to

the sca le of Japan 's . Plus the Soviet consumer has not had

access to p l e n t i f u l , q u a l i t y consumer goods. The p o t e n t i a l

i s d e f i n i t e l y t he re l the Soviet t rade c o e f f i c i e n t (the

r a t i o of the average of expor ts and impor ts to GNP) was

under one percent compared to e igh t percent f o r the U.S. or

12 percent f o r Japan, and 30-70 percent f o r the Western

European c o u n t r i e s . Moreover, except f o r F in land , Ind ia and

Sy r i a , cases where spec ia l p o l i t i c a l r e l a t i o n s h i p s e x i s t ,

Soviet t rade does not exceed four percent of the t o t a l t rade

of i t s p a r t n e r s .

Not on ly i s the market t h e r e , but the i n t e r e s t and

w i l l i n g n e s s to t rade are growing. The Economist of October

15, 1988 r e p o r t s t h a t Gorbachev said in V lad ivos tok t h a t the

USSR wants to increase t rade w i th the P a c i f i c Basin

Dean, p.12

c o u n t r i e s t h r e e - f o l d in the next 12 years. Although

Gorbachev did not s p e c i f y , he most l i k e l y was referring to

two-way t rade inc reases , and not j u s t to an increase in

Soviet expor ts or in P a c i f i c Basin impor ts . U.S. t rade

across the P a c i f i c i s now g rea te r than U.S. t rade across the

A t l a n t i c , so the U.S. should be concerned about who i s in

the market. Trade, f o r t u n a t e l y , i s one of those areas t ha t

need not be a zero sum game! more p laye rs can be b e t t e r .

But the U.S. should not wa i t u n t i l the Sov ie t Bear i s in the

P a c i f i c china shop, look ing at the Spode, to r a t i o n a l i z e i t s

t rade p o l i c i e s w i th i t s a l l i e s in the P a c i f i c Basin.

There are, adm i t t ed l y , many obs tac les , i nhe ren t in the

Soviet economic system, to conduct ing p r o f i t a b l e business in

the USSR. These obs tac les are s u f f i c i e n t t h a t the growth of

t rade w i l l be s lower than the Sov ie ts would l i k e . The

r e l a t i v e lack of economical ly a t t r a c t i v e Soviet expor ts , and

the i n c o n v e r t i b i l i t y of the r ub l e are j u s t two such

problems. Another i s the Soviet requi rement t ha t j o i n t

ven tures , and o ther investments, be p r i m a r i l y r espons ib l e

f o r genera t ing enough hard currency to ca r r y the

p a r t n e r s h i p , i n c l u d i n g s u f f i c i e n t funds f o r the r e p a t r i a t i o n

of the p r o f i t s of the Western p a r t n e r .

One t rade issue t h a t might r a i s e m o r a l - e t h i c a l ques t ions Sot

the U.S. i s computer technology t r a n s f e r , mentioned e a r l i e r .

Aside from the p o t e n t i a l f o r m i l i t a r y a p p l i c a t i o n s , and the

Dean, p.13

concern about a general upgrade of s k i l l s of every Sov ie t

k id w i th access to h i s own Apple, some worry t h a t the

neo-conserva t i ves w i t h i n the Soviet Union would use

increased computer c a p a b i l i t y

" t o enhance the q u a l i t y of i n fo rma t i on and p lann ing dec i s i ons handled by the cen te r . With t h i s system, c e n t r a l p lanners w i l l be able to keep tabs on each e n t e r p r i s e , each a s s o c i a t i o n , each m i n i s t r y . . . . For the neo-conserva t i ves the computer i s the v e h i c l e through which the Soviet Union can rec rea te the e f f i c i e n t l y run, c e n t r a l i z e d system of the 1940s." (Hewett 382).

And t h i s i s j u s t cen t ra l p lann ing of the economy! i t says

no th ing about r e s t r i c t i n g the freedoms of the i n d i v i d u a l .

The o p t i m i s t s be l i eve , however~ t h a t in un leash ing the

personal home or o f f i c e computer the USSR would be r i n g i n g

i t s death k n e l l . One computer ph i losopher sa id , in t a l k i n g

about a t tend ing a seminar o n - l i n e , " E l e c t r o n i c a l l y , I was

the re . This was a nowhere place and . . . I could be

anywhere" (A l len 93). This freedom i s appeal ing but i t does

not a l l ow f o r vast Soviet computer data banks focused on

c o n t r o l l i n g the i n d i v i d u a l , i n t r u s i v e hacking by the

government~ or o n - l i n e modem mon i to r i ng , i . e . , a l l computers

go through te lephone l i n e s . Perhaps high tech t r ade w i l l

c rea te a moral dilemma fo r the U.S. by r~ducing those very

freedoms the U.S. seeks to s t reng then .

Sov ie t economic modern izat ion con ta ins some t h r e a t s t o

Western s e c u r i t y i f i t r e s u l t s in a more e f f i c i e n t , b e t t e r

equipped m i l i t a r y , and/or i f i t produces a new compet i to r

Dean, p. 14

for Western markets without a corresponding opening of

Soviet markets. I t is possible that the West or elements of

i t could become dependent on Soviet resources or goods; the

French dependence on natural gas from the Soviet Union is

one case in point. In addition, the West subsidizes new

technology which is sold to the East, especial ly i f the

government supported the i n i t i a l research, because the

market price does not begin to approximate the real costs

~ that the Soviet Union would have had to spend to create the same technology on i t s o w ~ Western securi ty analysts also that new technologies may allow the Soviets to

sho r t - c i r cu i t the development process and improve commercial

technologies for m i l i l t a r y purposes. Another threat for a

representative government, such as the U . S . , ~ has a ~ = ~

large open e c o n o m ~ i ~ h > o s t s thousands of mult inational

\ J corporations, is t h ~ h o s e mult inationals in pursuing the i r

"~\own corporate interests sometimes undercut those of the U.S.

~ r y T ~ ~ ~ But perhaps the most threatening tO ~estern securi ty is the

a b i l i t y of trade issues to accentuate the natural economic

~ ~ ~ competitiveness of the U.S. and Europe, and to sunder the

NATO al l iance nations s t ra teg ica l l y by dividing them

economically, pa r t i cu la r l y over the def in i t ion of s t rategic

and dual use trade.

For example, the Germans have agreed to sel l the Soviets a

nuclear reactor. The reactor, to begin operation in 199b at

Dean, p.15

Dimi t rovgrad on the Volga, w i l l generate 200 megawatts o÷

thermal power through a high temperature process, a process

the Sov ie ts have been working f o r several years. The deal

i s expected to have a value of more than one b i l l i o n marks

($555.3 m i l l i o n ) . The reac to r sa le has not yet been

approved by COCOM, and i t i s not known yet i f the U.S. w i l l

concur w i th the s a l ~ b u t we can a n t i c i p a t e t h a t U.S.

o p p o s i t i o n would cost German good w i l l .

Dual Use Trade:

D e f i n i t i o n s : Dual use i tems have both c i v i l i a n and m i l i t a r y

a p p l i c a t i o n s . Much of the d i scuss ion above a p p l i e s to dual

use t r a d e , given the c i v i l i a n commercial a p p l i c a t i o n s of

such t r a d e , but w i l l not be repeated here. Export c o n t r o l s

t r y to l i m i t the Soviet a c q u i s i t i o n of advanced m i l i t a r y

hardware and high tech methodologies w i th m i l i t a r y

a p p l i c a t i o n , and items in the dual use category which s t i l l

have s e n s i t i v e t echno log ies . The West uses the mechanism of

the Coord ina t ing Committee f o r M u l t i l a t e r a l Export Con t ro l s

(COCOM) to e s t a b l i s h those c o n t r o l s . COCOM was ÷ounded in

1949 and now has 16 members, i n c l u d i n g Greece, and Spain.

I t has no formal r e l a t i o n s h i p w i th NATO, but was i n i t i a l l y

based around the NATO a l l i a n c e c o u n t r i e s . COCOM opera tes on

in fo rmal agreements and according to r u l e s of unan imi ty .

Conflictinq Views: Establishing the U.S. position within

COCOM is difficult. Conflicting but legitimate views within

Dean, p.16

;. bureaucracy, e . g . , f ree t rade advocates at the

~ent of Commerce or p ro tec to r s of U.S. nat iona l

iy at the Department of Defense, compl icate po l i cy

~tion and implementat ion. Domestic p o l i c y problems

es tab l i sh ing a p r a c t i c a l l i n e of demarcation on

; ic i n fo rmat ion , the format ion of a reasonable l i s t of

ited export items and technolog ies, a respons ib le

~rat ic center , coordinated p ro tec t i on of re la ted

-y i n fo rmat ion , and the d i v i s i o n of power and

resources w i t h i n the government.

With the Soviet invasion of Afghanistan and Soviet act ions

in Poland, the U.S. s ta r ted in 1981 to st rengthen the COCOM:

agreements were updated; the l i s t of c o n t r o l l e d products was

re in fo rced ; t rade wi th china expanded; COCOM s e c r e t a r i a t was

renovated; enforcement procedures were harmonized; and the

cooperat ion of developing coun t r ies was sought.

U.S. views vary considerably from those of the Europeans.

The European nat ions have a long, strong t r a d i t i o n of

governmental non- in te r fe rence in t rade issues. The

Congressional Research Service repor t to the Congress on

U.S.-Soviet r e l a t i o n s po in ts out tha t many a l l i e d

governments oppose the use of export con t ro l s f o r fo re ign

p o l i c y purposes. The Europeans are not only w i l l i n g to

increase t rade wi th the Soviet Union2but they are also

w i l l i n g to extend t rade f inanc ing . While former Nat ional

Dean, p. 17

Secur i ty Council~Chief o$ S ta r ,Genera l Colin Powell

bel ieves that the $5-6 b i l l i o n in trade c red i t s is not going

to hurt the West or help the East s i g n i f i c a n t l y , Senator

B i l l Bradley (D-N.J.) does not agree. He bel ieves that :

"Cheap c red i t s play in to the hands of pe res t ro i ka ' s opponents by defer r ing the day of reckoning . . . . The developing world and the Soviet Union are in competit ion for a l im i ted pool of worldwide cap i t a l . I f the West can af ford subsidies, then l e t ' s reserve them for the t r u l y needy." (CQ-79)

There are several problems under considerat ion in COCOM now.

One is the 'no exceptions' regu la t ion under which COCOM does

not al low any exceptions to i t s regula t ions fo r the Soviet

Union. This po l i cy was begun when the USSR invaded

Afghanistan. The Department of Defense would now l i k e COCOM

to extend t h i s po l i cy s~ying that i t makes sound nat ional

secur i t y sense. The State Department pos i t ion i s that the

U.S. imposed the regula t ion in response to a Soviet action~

~ d , there fore , when those condi t ions no longer applyv the

U.S. should remove the r e s t r i c t i o n . Beyond providing an

incent ive for the Soviets to change t h e i r behavior~ and to

t r u s t U.S.~ removing the r e s t r i c t i o n may be in the nat ional

i n te res t of the U.S. CThe~national i n t e res t is defined here

as the maintenance of the Western a l l i ance . Fa i lu re to l i f t

the ' n o - r e s t r i c t i o n ' clause may weaken NATO as i t erodes the

consensus underpining the a l l i ance . R e i n s t i t u t i n g the

'no-except ion' clause does not ra ise the threat to U.S.

secur i t y appreciably because the U.S. can evaluate any

Dean, p.18

except ion requests on a case by case bas is . The scenar io

f o r weakening NATO goes: in the face of an i n t r a c t a b l e U.S.

p o s i t i o n , var ious NATO coun t r i es begin to use the ' n a t i o n a l

d i s c r e t i o n ' clause of COCOM and not br ing items to COCOM fo r

rev iew. The U.S. would then f i n d i t d i f f i c u l t to take

measures against a NATO member which do not weaken the

a l l i a n c e . A s i m i l a r s i t u a t i o n could evolve i f the U.S.

f a i l s to shorten the COCOM l i s t f u r t h e r and to t i g h t e n

compliance procedures. The Bush Admin i s t r a t i on has not yet

made any dec is ions on these two quest ions. As long as i t

does not , the U.S. government cannot speak wi th one vo i ce ,

and cannot lead COCOM.

The problem wi th r e s t r i c t e d t rade i s t ha t where the

r e s t r i c t i o n s have not been c l e a r l y nego t ia ted , e i t h e r

i n t e r n a l l y w i t h i n the U.S. government or w i t h i n COCOM,

another nat ion may se l l the item or se l l i t f i r s t . Since

the U.S. uses more r e s t r i c t i v e u n i l a t e r a l r e s t r a i n t s on U.S.

components and technology than other COCOM members do on

t h e i r s , many producers avoid U.S. sourced components in

t h e i r design, not j u s t fo r products fo r sale to the Bloc but

also to Western markets. Howard Lewis, v i c e - p r e s i d e n t f o r

export f i nanc ing at the National Assoc ia t ion of

Manufacturers, said t ha t w i thou t

"an agreed-upon m u l t i l a t e r a l approach wi th our a l l i e s . . . t h e U.S. i s p r e t t y much condemned to shoot i t s e l f in the f o o t . " (CQ 79)

Dean, p.19

Although other COCOM nat ions promise to deal only wi th the

Eastern bloc on deals tha t are unsubsidized, Western

Europeans concluded t rade agreements w i th the USSR in 1988

worth $5 b i l l i o n fo r i n d u s t r i a l development, inc lud ing

machinery to produce consumer goods, f l e x i b l e product ion

systems using robots and laser technology, and the nuclear

power p l a n t , noted above. The West 8ermans sometimes

provide government guarantees. Without coherent

i n t e r n a t i o n a l p o l i c y , the U.S. f o r f e i t s the leadership r o l e

in East-West t rade, and, i f Senator Bradley i s r i g h t , in

other areas as we l l . Without coherent domestic p o l i c y ,

review takes t ime, loses sales and market share fo r U.S.

companies.

U.S. Po l i cy : While the Soviet Union complains about COCOM

r e s t r i c t i o n s in the l i g h t o÷ pe res t ro i ka , i t i s too soon to

t e l l whether pe res t ro i ka i s tak ing e f f e c t . At best the

economic aspects of pe res t ro i ka w i l l take years to i n s t a l l .

Just as important as wa i t i ng to see i f p e r e s t r o i k a ~ a k i n g

e f f e c t i s v e r i f y i n g i f pe res t ro i ka i s benign to Western

s e c u r i t y . A l len Wendt, Deputy Ass is tant Secretary of State

fo r East-West Trade, notes t ha t :

" the r e l a t i o n s h i p between the U.S. and the USSR remains compet i t ive and adversar ia l . . . . So long as the adversar ia l dimension r e m a i n s . . . r e s t r i c t i o n s on s t r a t e g i c t rade w i l l remain in f o r c e . . . " (Wendt 21).

The U.S. sees tha t improvements in Soviet weaponry are both

real and s u b s t a n t i a l . Moreover, the U.S. bel ieves tha t

Dean, p.20

Gorbachev and the leaders of the USSR may be gearing up to

meet the techn ica l chal lenge of the 1990s when a new

generat ion of weapons must be developed and produced. An

i n d i r e c t i n d i c a t o r of the S o v i e t ' s p r i o r i t y on technology

has been tha t a greater number of spy cases uncovered in the

West have focused on the t r a n s f e r of technolog ies r a t h e r

than on other missions. Consequently the U.S. f e e l s no

compunction to rush i n t o u n i l a t e r a l acts l i k e reducing the

dual u s e / s t r a t e g i c t rade r e s t r i c t i o n s .

Nevertheless, General Powel l , in h is address before the New

York Stock Exchang~agreed tha t the export con t ro l l i s t s had /

grown tremendously, and he a t t r i b u t e d the growth to r a p i d l y

expanding technology and the bureaucra t ic e f f o r t necessary

t o ( d e l i s t ~ i t e m s . U.S. concurrence in d e l i s t i n g i s slow even

when the technology i s old and r e a d i l y ava i l ab le elsewhere.

In an era of increas ing East-West commercial t i e s , any

c o n t r o l s , p a r t i c u l a r l y gener ic , broad-spectrum c o n t r o l s over

what the Europeans see as dated technology, s t r a i n the

West-West r e l a t i o n s h i p . The U.S. has already agreed in

p r i n c i p l e at the Jan 1988 COCOM meeting to shorten the l i s t s

in exchange fo r be t t e r enforcement. The problem appears to

be the d e l i s t i n g process i t s e l f and not j us t the debate over

s p e c i f i c items.

Also " i t i s not (the stated U.S.) p o l i c y to wage economic

warfare against the USSR and i t s a l l i e s . " (Wendt, p. 20)

Dean, p.21

U.S. o f f i c i a l s have f u r t h e r s ta ted t h a t the U.S. can

cooperate w i th minimum s t r a t e g i c techno logy problems in

medical areas, consumer products and the food sec to r . In

f a c t the U.S. has re laxed c o n t r o l s on some dual use

equipment and techno logy , e . g . , t h a t u t i l i z e d f o r se ismic

e x p l o r a t i o n fo r o i l and gas, which can be used in

ant isubmar ine war fa re , nuc lear research , and weapons

development and design.

Conclus ions

As w i th a l l the changes generated by p e r e s t r o i k a , i n c reas i ng

t r a d e , even only commercial t r ade , has i nhe ren t dangers f o r

the West. One of the lead ing dangers i s the r i s k of

s p l i t t i n g of the U.S. and the na t i ons of Europe. However,

' t he economic problems of the Soviet Union are only pa r t of a much wider and more funadmental c r i s i s of the Soviet system . . . . Western s e c u r i t y r e q u i r e s a w e l l - c a l i b r a t e d approach to economic con tac ts w i th the Soviet Union~ favo r i ng a gradual s o l u t i o n of the complex of problems which the USSR i s fac ing . F ind ing t h i s s o l u t i o n i s something which depends overwhelmingly on Soviet e f f o r t s . The West's main c o n t r i b u t i o n w i l l be coopera t ion - - and normal commercial exchanges may be an impor tant element here - - in b r i n g i n g about a l ess s t r e s s f u l i n t e r n a t i o n a l c l ima te " (Feldbrugge, p. 21).

apar t f r o m ~ h ~ any b e n e f i t s t h a t may accompany Qui te

expanded t rade wi th the USSR, the Europeans, whether

consc ious l y or no t , see such t r ade as a psycho log ica l

reassurance aga ins t the p o s s i b i l i t y of Soviet aggress ion.

Furthermore, by being h e l p f u l to the Soviet Union in general

Dean, p.22

and by a s s i s t i n g i t s f a l t e r i n g economy w i th technology

t r a n s f e r s and c r e d i t s at the going r a t e of i n t e r e s t , many

Europeans fee l t h a t they are, so to speak, domest ica t ing the

Sov ie ts .

As e a r l y as 19bb Secre ta ry of State Dean Rusk said

"A hea l thy growth of t rade w i l l help to reduce the present dependence of these Eastern European c o u n t r i e s on each o ther and the Sov ie t Union." (Spero 358).

Thus f r e e r t r ade may have the s ide e f f e c t of d i v i d i n g the

Warsaw Pact c o u n t r i e s w i thou t the a t tenden t r i s k s of d i r e c t

p o l i t i c a l ac t i on by the West.

Detente I I needs to be based on the unders tand ing t h a t even

though the two superpowers cont inue in an adve rsa r i a l

r e l a t i o n s h i p , they are moving to e s t a b l i s h an environment in

which they can r e g u l a t e and r e s t r a i n t h e i r d i f f e r e n c e s .

Secre tary of State Baker sa id in the Washioqton post Feb.

22, 1989, t ha t

" the s t a t u s o f . . . l e g i s l a t i v e r e s t r i c t i o n s on Soviet t rade i s among the issues to be s tud ied in the a d m i n i s t r a t i o n ' s review of East-West p o l i c i e s (which) . . . w i l l take about two months" (p. A20).

Moreover in an i n c r e a s i n g l y m u l t i p o l a r world where our

i n t e r e s t s and those of the c o u n t r i e s of the EEC (or NATO~

are beginning to d iverge , the U.S. needs to e s t a b l i s h i t s

p o l i c i e s and then move out to persuade i t a l l i e s t h a t i t i s

in our mutual i n t e r e s t t o

Dean, p.23

( I ) Be aggress ive in t rade arrangements and seek

t echno log ies new to the West;

(2) Forego government guarantees or any hidden

s u b s i d i z a t i o n of t rade c r e d i t s ;

(3) S t reaml ine COCOM procedures to keep an expor t c o n t r o l

l i s t which has fewer i tems w i th s t ronger enforcement.

(4) Consider the p o l i t i c a l consequences of t h e i r economic

a c t i o n s , and, eva luate whether the re i s some p o l i t i c a l -

economic l i nkage which we can j o i n t l y f o l l o w . For example,

West Germany might contemplate the consequences of i t s

p o l i c y of c l ose r a l l i a n c e w i th East Germany as i t cons iders

whether i t s ass i s tance to East Germany a l l ows t h a t coun t r y

to be one of the most extreme regimes in the Sov ie t b loc .

As mentioned in the companion p iece, the European n a t i o n s

have a d i f f e r e n t po in t of view on the separa t i on of t r ade

and p o l i t i c s which in the U.S. most c l o s e l y p a r a l l e l s the

separa t ion of church and s t a t e . The EEC and the Sov ie t b loc

may c rea te a t r a d i n g group t h a t the U.S. f i n d s hard to

pene t ra te . P o l i t i c a l i n t e r e s t s f o l l o w economic i n t e r e s t s

and the Soviet Union i s p rov id ing a cha l lenge to the s t a t u s

quo which the U.S. cannot a f f o r d to l e t g~ unanswered.

The U.S. should not neg lec t c lose c o o r d i n a t i o n w i th the

P a c i f i c Basin c o u n t r i e s . A f a i l u r e to r ev i se methods of

economic coopera t ion a f f e c t s Western s e c u r i t y s t r a t e g i e s ,

i . e . nuc lear n o n - p r o l i f e r a t i o n , i n t e r n a t i o n a l a g r i c u l t u r e

Dean, p.24

and high technology. If the situation degenerates into

retaliatory trade warfare or unrestrained competitive

currency devaluations, strategic cooperation will be damaged

and it will be difficult to follow an active but cautious

testing of the new East-West relationship.

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NATO

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Dean, Appendix I I , p. 3

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Dean, Appendix I f , p. 4

Kennedy, Paul. "The United States: The Problems of Number One in Relat ive Decl ine", The R~se and Fal l of the Great Powers. Random House, N.Y. 1987.

Kiser, John• "A Soviet Open Book", The Washi~qton Post, March 12, 1989. p. D-3.

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Lee, Chr is t ina. "Soviets Urge Washington to End Res t r i c t ions on Exports to US" Journal of Commerce, January 20, 1989, p 3.

Legvold, Robert. "The Revolution in Soviet Foreign Po l i cy " , Foreiqn A f f a i [ s , 1988/89. pp. 82-98.

Lord, Charles. "How Our Money Becomes Theirs" , !he Wall Street Ooc!rnal, March 22, 1988. p. 34.

Markowitz, Diane. Off ice of In te rnat iona l Trade Organizations, EB, Department of State. Interview, March 8 and I0, 1989.

Oberdorfer, Don. "Soviets Must Do More to J u s t i f y L i f t i n g Trade Curbs, Baker Says"~ Washinqton Post, February 22, 1980, p. A20.

O'Boyle, Thomas F. "German Group, Soviets to Sign Nuclear Venture", The Wall . . . . . . Street Journal. Oct. 24, 1988. p. A I0.

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Vol 67, #2.

Peel, Quentin. "Moscow to Draft New Customs T a r i f f System", F~nanci~l Times, London, December 18, 1988, p2.

Pomorski, Stanislaw. "P r i va t i za t i on of the Soviet Economy Under Gorbachev I : Notes on the 1986 Law of Indiv idual Enterpr ise"• Paper # 13 Berkeley-Duke Occasional Papers on the Second Economy in the USSR. Durham, N.C. October, 1988.

Powell, Lt . Ben. Colin L. "Remarks", Unpublished Remarks before the American Stock Exchange Conference on U.S. Perspectives, Washington, D.C., November 8, 1988.

' ~ ~

Dean, Appendix I I , p. 5

Reischauer Center for East Asian Studies, The Edwin 0. The United States and Japan in 1988: A Time o f .T rans i t i on , Johns Hopkins Univers i ty , Washington, D.C. 1988.

Rohatyn, Fel ix . "America's Economic Dependence", For eiqn A f f a i r s , 1988/89. p. 53-67.

Rosefielde, Steven. "A (Pa r t i a l l y ) Convertible Ruble", U.S,-Soviet Relations; .... An Aqenda for the Future, Foreign Pol icy I n s t i t u t e , Johns Hopkins Univers i ty , Washington, D.C. Nov. 1988.

Rowley, Anthony. "OECD Looks East", ~ar Eastern Economic Review, March 31, 1988. pp.48-49.

Rubinstein, Alvin Z. "The Soviet Union and Western Europe", Soyiet Foreiqn Policy Since World War I I : Imperial and Global, pp 83-134. Scott, Foresman & Co.

Saxena, Rohan. "This Trade Spreading", Far Eastern ~conomic Review, June 23, 1988. p. 21-22.

Schwearing, Catherine. "Soviet and Eastern European Bloc Debt the West". Unpublished unclassi f ied paper. Department of State. Feb. 1989.

Schwearing, Catherine. Interview. EB/OMA, Department of State, Washington, D.C. Feb. 22, 1989.

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Smith, Charles. "Courting the Bear Market", Far Eastern Economic Review, June 23, 1988. p. so.

Southerland, Daniel. "China Seeks to Rein in Economy~ Auster i ty Budget Imposes Controls on Key Reforms", The Washinqton Post, March 22, 1989. A-I.

Spero, Joan Edelman. The Pol#t ics of Internat ional Economics, St. Mart in 's Press, New York. 1985.

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Analyzing the 'Basic Vol. 3b, #4.

Dean, Appendix I I , p. 6

Ulam, Adam. "Europe in Soviet Eyes" Problems of Communism, May-June 1983, Vol. 32, pp 22-30. Center for S t ra teg ic and In te rna t iona l Studies, Georgetown Un ivers i t y , Washington, D.C.

Weiner, Ben. "U.S.-Soviet Trade: Lessons of Detente", The Wall Street ~o~rnal, September 9, 1988. p. 20.

Wendt, E. Al lan. "U.S. Stance Toward the Soviet Unin on Trade and Technology", Address be÷ore the Houston Club, Houston, October 27, 1988. Department of State B u l l e t i n , Vol 89, #2142, Jan. 1989, p. 20-24.

Whitehead, John C., Deputy Secretary of State. "Remarks on U.S. Soviet Economic Relat ions" , Unpublished Remarks made to the U.S. Chamber of Commerce In te rna t iona l Forum. December 6, 1988, Washington, D.C.

Woroniak, Ale>:ander. "Book Review: Morr is Borns te in 's East-West Technoloqy Transfer: ...... The Transfer Of Western Technoloqy to the USSR (Paris, OECD, 1985), Oournal of Comparative Economics, Vol i i , 1987. pp. 252-257.

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Jan. 28,

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Jan 28,

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Dean, Appendix I I , p. 7

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October 9, 1988, p.

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- - . "Roubles, Roubles Everywhere", The Economist. 1989, p 46.

Jan. 8,

- - "Russia, Very Pac i f i c about the Pac i f i c " The Economist. • , = October 15, 1988, p. 42.

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- - . "Stepping Out: 1989, p. 62.

Rouble Trouble", The Econo~!ist. Jan 14,

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Apr i l 29,

- - . "Tsar Peter 's Pence", The Economist, Jan. 7, 1989.

- - World Bank and IDA: Questions and Answers. The In ternat iona l Bank for Reconstruction and Development, Washington, D.C. 1971.

See

"On s o c i a l i s t countr ies in i n te rna t iona l economic organizat ions" Paul Mater, "Cent ra l ly Planned Economies in the IMF, World Bank and GATT, in 3ose÷ C. Brada, Ed. A Hewett, and Thomas A. Wolf, eds., Economic Adjustments and Reform in Eastern Europe and the Soviet Union:. Essays in H qnor of Frankly D. Holzman (forthcoming).

Aganbegyan, Abel. The Economic Challenqe of Perestroika (Bloomington, Indiana Univer is ty Press, 1988)

Dean, Appendix I f , p. 8

Wiles, J. Peter. "On purely f inanc ia l c o n v e r t i b i l i t y " Bank, Money and Credit in Eastern Europe, M.Y. Laulan, ed. (Brussels: NATO, Directorate of Economic A f fa i r s , 1973)

Colombatto, "CMEA, Money, and Ruble C o n v e r t i b i l i t y " , Aoolied E pooom~s, August 1983, 479-506.

Congressional Research Service, Issue Br ief #88065: "US. - Soviet Commercial Relations in a Period of Negotiat ion".

Hansen, Carol Rae. U.S.-Sov~e t Trade Pol icy (Washington, D.C.: The Johns Hopkins Foreign Policy I n s t i t u t e , 1988).

Gardner, Steven. "Restructuring the Soviet Foreign Trade System' The Columbia 30urnal of World Business, Vol. 23, #2 (Summer 1988), 7-12.

Papers published at the Conference on Joint Ventures with the USSR and U.S. National Security Interests, Center for Foreign Policy Development, Brown Univers i ty , December 2, 1988.

Winiecki, Jan . The Distorted World of Soviet-Type Economies !Pittsburqhl Universi ty @f Pittsburqh Press, 1988)

Ivanov, Ivan. Soviet Business and Trade Vol 16, #2 (February 9, 1988). A r t i c l e on ruble c o n v e r t i b i l i t y .