10. Report by the Working Group of the Subcommittee on Soviet Economic Penetration1

I. Terms of Reference of the Working Group

The terms of reference of the Working Group were the following:

A.
To develop an action program which will serve to maximize the possible participation of U.S. private industry in trade and investment in underdeveloped countries in order to strengthen them against possible Soviet economic penetration, and to assist American business enterprises to hold or increase their places in these markets.
B.
In doing so:
1.
To examine current suggested actions and to cull from them the significant points;
2.
To add such other suggestions as appear to be worthwhile; and
3.
To range these proposed actions in order of their priority.
C.
To submit the above as a report to the Subcommittee by March 11.

The Working Group does not understand its assignment to include consideration of the many other broader aspects of Soviet economic penetration problems or of the economic aid program being undertaken by this Government.

II. Summary of Sino-Soviet Bloc Economic Activities in Underdeveloped Areas

A. The Nature and Scope of Bloc Activities.

Since late 1953, the Sino-Soviet Bloc has employed trade promotion, seemingly easy credits, and technical assistance on a growing scale as a tool of its diplomacy in underdeveloped areas. During this period credits extended for development exceeded $1 billion; arms deals involved an additional $360 million. Technical assistance personnel sent abroad for a month or more in 1956 numbered at least 1400. Bloc trade with underdeveloped countries during the first 6–8 months of 1956 moved at an annual rate of about 25 percent above the 1955 level.

The economic offensive has been largely concentrated to date in Yugoslavia, India, Afghanistan, Egypt, Syria, Burma, and Cambodia, [Page 45]in all of which the Bloc clearly hopes to promote its political objectives—notably strengthening of neutralism, disruption of defensive alliances, and reduction of Western influences. Economic considerations have also entered the Bloc calculations, particularly as regards trade promotion, since the more industrialized countries of the Bloc have reached a point where an expanded exchange of their capital goods for food and raw materials would be economically advantageous.

The Bloc has sought to exploit economic difficulties and aspirations in pursuit of its economic offensive. It has particularly capitalized on its ability to make large scale bulk purchases of food and raw materials from underdeveloped countries where they face soft markets in the Free World, and to supply development goods for arms in exchange. On the other hand the Bloc’s appeal to nationalistic fervor, anti-colonialism and neutralism, and Bloc willingness to choose sides and exploit regional political differences have been at least as important determinants of receptivity to Bloc overtures. In some cases such receptivity has been affected by recent developments in Hungary.

In the Middle East, Bloc activities were sparked by a willingness to provide arms, and by an apparent readiness to adjust economic relations to meet short-term needs of the anti-Western Arab nations and make promises for the future. The Bloc has exploited the rising tide of Arab nationalism, fostered existing anti-Western attitudes, fed upon Arab hostility towards Israel, and sought to promote the general image of Soviet support for Arab aspirations. Arms under credits totaling at least $330 million have been provided to Egypt, Syria, and Yemen. Assistance for economic development in the region has so far been on a small scale, but there are signs of possible expansion. The Bloc has also increased strictly commercial relations with the area, particularly with Egypt and Syria.

In South and Southeast Asia, Bloc economic activities have included the provision of long-term developmental credits and some grants, technical assistance, expanded trade relations, and in one country—Afghanistan—the provision of arms. The Bloc has been able to expand trade with the area. In addition to appealing to the economic desires of the South and Southeast Asian countries, the Bloc has played advantageously upon the political environment. Their appeal has included such things as: suspicions of Western motivations and existing ties with the West; socialist predilections which may make the Soviet model for economic development attractive; the desire to stay away from close identification with anti- Communist alliances; a positive desire for neutrality coupled with a willingness to take from both sides as evidence of this non-involvement; local political differences among countries in the region.

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The Bloc economic offensive in Yugoslavia sought to take advantage of grandiose aspirations for industrializing and strengthening the Yugoslav economy, but was pointed largely to securing the rapprochement of Yugoslavia with the Soviet Bloc. Trade relations between Yugoslavia and the Bloc, which had been cut back sharply after Tito’s break with the Soviets, were expanded through a network of trade agreements, and large-scale long-term development credits were extended. However, the recently renewed Soviet-Yugoslav ideological and political controversy has been accompanied by indications of a decline in Soviet readiness to implement its expanded economic program in Yugoslavia. While this is a special case, it may give pause to other countries contemplating reliance on Bloc supply.

In Latin America, and in such pro-Western countries as Turkey, Greece, Iran, Pakistan, Portugal, and Iceland the willingness to expand economic relations with the Bloc depends very largely on grounds of economic advantage or necessity, and these countries are confident that their institutions and alliances are sufficient to withstand the Communist threat. Bloc offers to extend long-term credits have been generally rebuffed and the principal channel for Bloc economic activities remains through expanded trade relations. Bloc economic activities in Africa (other than Egypt) have to date been minor. However, Bloc willingness to exploit opportunities which may arise in the newly independent countries can be expected.

The Bloc assistance program has capitalized on the fact that most underdeveloped countries want more capital and trained personnel to meet their pressing demands for rapid economic growth. Practically all Bloc credits have been provided for projects in the public sector. While many of the projects are of types which might be suitable for private investment, the recipient countries have generally allotted them to the public sector under development concepts and programs envisaging a large share of direct government activity.

In addition to economic considerations, most countries which have accepted aid stress “neutralism” in their foreign policy. Nominally, at least, they are receptive to Bloc aid as evidence of their neutrality; and the availability of private Western capital would probably have little influence on their willingness to accept aid from the Soviets, particularly since all of the recipients tend to underestimate the dangers of the economic offensive and feel well able to control any increase of Communist influence in their countries.

Without attempting to minimize such Soviet inroads upon Free World trade, Free World economic relations greatly overshadow those of the Bloc. Free World economic activity remains, for the [Page 47]most part, on a private commercial and investment basis, in contrast to the Bloc’s reliance on state trading. Over 95 percent of the trade of the underdeveloped countries is with the Free World. The long run advantages of trading with Western private enterprise for quality goods at free market prices without political dangers should, it is hoped, become increasingly evident to the underdeveloped nations.

While Bloc trade with the Free World has been growing at a rapid rate, it still constitutes less than 3 percent of world trade. Although the Bloc has extended over $1 billion of developmental credits to underdeveloped countries since 1954, Free World private and governmental credits and investments to the same areas dwarf this figure. The United States alone in the fiscal year 1956 provided for about $1.6 billion of economic aid, and about $620 million of P.L. 480 credits to the underdeveloped areas. Export-Import Bank and IBRD credits and commitments authorized for this area totaled $950 million in 1956. Additionally, U.S. total private investments and reinvestments in underdeveloped countries increased net by about $1.5 billion in 1956.

However, in any comparison of Soviet Bloc and Free World foreign economic activities, recognition should be given to the fact that the Bloc’s economic offensive has been concentrated to date on particular underdeveloped and vulnerable areas, where Bloc activities have had a significant impact.

B. Soviet Capabilities and the Outlook for Continuation of the Economic Offensive.

Exports under present trade or credit agreements with the Free World represent a very small fraction of total Bloc output and could be further expanded without jeopardizing domestic investment targets or creating serious Bloc dependence on foreign suppliers. The scope of new Bloc assistance commitments will probably depend largely on Bloc calculations of the potential political gains. New aid commitments may be entered into at a slower rate than in 1955–56, partly because the USSR may estimate that it already has agreements with the most susceptible countries and that additional assistance to countries already receiving or scheduled to receive aid would produce minimal political returns until current projects have been implemented. Moreover, the Soviet leadership, preoccupied with problems of Bloc solidarity and facing the prospect of present and future economic concessions to its own Bloc satellites and Communist China, may be less confident than a year ago and may question the wisdom of substantially expanding foreign economic assistance outside the Bloc at this time. Trade might, nevertheless, be somewhat expanded to reap economic as well as political gains.

The new economic tactics are likely to persist as an important element of Soviet policy in what the Kremlin has described as a [Page 48]period of “Competitive coexistence.” The programs begun over the past two years have developed a momentum of their own which should produce a steadily expanding level of Bloc trade with underdeveloped countries and enlarged technical assistance activities as present commitments are fulfilled. The Bloc can also be expected to continue to be alert to situations susceptible to exploitation and offering a promise of political gain in exchange for economic assistance.

III. Combatting Soviet Economic Penetration with United States Private Investment and Trade

Basic U.S. effort should be addressed to strengthening the national institutions and economies of the underdeveloped areas if their resistance to Soviet penetration is to be increased. Both government and private enterprise must play a role in meeting this threat.

Neither of these can alone adequately meet the problem. However, the greater the successful effort which can be asserted by private industry, with or without government assistance, the less will be the need for U.S. Government aid to the underdeveloped countries, the greater will be their industrial development along democratic lines and the more quickly will they achieve effective strength against Soviet penetration.

This paper deals with the ways to increase private U.S. investment and trade in the less developed areas as an effective measure to cope with Soviet penetration of such areas. Clearly, efforts to increase private trade and investment is not a sufficient answer to the Soviet penetration issue but it can be an important part of the answer. While this importance will vary from country to country and may find little current applicability in some countries, such efforts should nevertheless be facilitated and increased wherever possible.

Although the problems and dangers in a number of underdeveloped areas such as Afghanistan, Egypt, Syria, India, Indonesia and Burma are highlighted by current Soviet penetration efforts, the trade and investment problem posed for U.S. private industry is much broader geographically. That problem covers all underdeveloped countries where any significant advantage from current or later penetration may accrue to the Soviet Bloc. At the same time it is recognized that the action program proposed in Part V of this paper must vary in application and priority from country to country.

It is expected, however, that implementing agencies will make appropriate determination as to which countries particular projects would concern and the priorities to be given them. In making such determination it is expected that implementing agencies will base [Page 49]their judgments on the significance which a particular project may have both to the economic development of the country concerned, the strengthening of its institutions against Soviet penetration and the promotion of other relevant U.S. interests in the area. It is recognized that, while in some countries the private trade and investment climate may be satisfactory, in many countries (particularly certain of those now being penetrated) it is quite unsatisfactory currently, and any marked increase in U.S. trade and investment must be preceded by a major change in such climate.

The action program proposes that U.S. private industry be encouraged and assisted in increasing private trade and investment in underdeveloped areas. In the end, success in this effort will depend on the effort and initiative which private industry exerts.

IV. Recommended Action Program

From the recommendations submitted to it by the Subcommittee on Soviet Penetration and other recommendations suggested during its deliberations, the Working Group has selected those proposed actions which seem likely to be effective in increasing U.S. private trade and investment with underdeveloped areas and which would contribute most to strengthening the areas against Soviet penetration. In each case an attempt has been made to describe the action program in sufficiently specific terms to provide a general but clear idea as to what is intended. It is anticipated that the conversion of the program into more specific action projects will be left to further assignment to agencies which may be selected to implement various parts of the program.

Although an attempt was made by the Working Group to assign relative priorities to the several proposed action programs, the result was unsatisfactory. It was concluded that all proposed actions were desirable and the priority of their application would be largely determined by implicit conditions facing implementing agencies.

In compiling this action program reference has been made to the report approved by the NAC entitled “U.S. Foreign Investment in Less Developed Areas”.2 Much of the action program is based on this approved policy.

The Working Group recommends to the Chairman of the Subcommittee on Soviet Economic Penetration the following action program:

(Notes: 1. Single asterisks denote that activity is not now being done.

2. Footnotes identify reservations.)

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A. Promote Increased and Continuing U.S. Imports from Underdeveloped Areas and Avoid Taking Governmental Actions That Would Unduly Disrupt the Stability of the United States as an Export Market for Such Areas.

Action:

1.
Expand informational and other business services designed to impress U.S. businessmen with import opportunities from underdeveloped areas.
2.
Expand informational and other business services designed to impress businessmen in underdeveloped areas with their export opportunities in the U.S. market.
3.
In considering pending actions such as on “escape clause”,3 Section 224 import restrictions, and negotiation of “voluntary” restrictions, give increased consideration to the adverse repercussions of such actions on the stability of the U.S. market as an export outlet for underdeveloped countries.

B. Maximize the Economic Benefits of Surplus Agricultural Disposal Programs for Underdeveloped Areas and Minimize Adverse Interference of Such Programs on Export Markets of Underdeveloped Areas.

Action:

1.
Seek to maximize the direct and indirect benefits of surplus agricultural disposal actions on the economic development of the areas with particular emphasis on the private sectors.
2.
In considering surplus agricultural disposal actions, afford increased recognition to the direct and indirect adverse impact of such actions on the export markets of underdeveloped areas.

C. Expand U.S. Participation in Trade Fairs and Industry Exhibits in Underdeveloped Countries.

Action:

1.
Accelerate shift in financing of U.S. participation in trade fairs from European and other more developed areas to the underdeveloped areas.
2.
Tailor product and equipment displays more closely to the specific interests and potential interests of the individual underdeveloped countries in which trade fairs are held.
*3.
Arrange, on an experimental basis, for the development of
a.
“solo” U.S. exhibits, based on industrial fields having a particular local interest, in underdeveloped countries in which major trade fairs are not held or scheduled only periodically;
b.
permanent, rotating, or mobile exhibits and displays in underdeveloped areas, with such participation and exhibits allied to the interests of the people and the industrial potential of the individual areas.
4.
Urge U.S. private firms to participate in such fairs and exhibits in their own commercial self-interest and, where such self-interest is limited, to participate where appropriate on a public service basis.

D. Increase U.S. Industry’s Awareness of Trade and Investment Potentials of Underdeveloped Areas, and Increase Related Information and Supporting Services to U.S. Industry.

Action:

1.
Expand and accelerate preparation of general investment surveys and investment supplements for all underdeveloped areas; *develop on a trial basis special industry-by-industry investment and trade surveys covering underdeveloped areas; initiate new census of U.S. foreign investment; and urge private trade associations, financial institutions, and other non-governmental organizations to expand appropriate similar services.
2.
Expand the use of trade missions to underdeveloped countries and staff them adequately with qualified businessmen and appropriate technicians with particular emphasis on the more promising areas of trade and investment potentials for each country.
3.
Expand current commercial and investment activities of U.S. missions in underdeveloped areas by assignment of adequate personnel experienced in business matters; direct U.S. missions to expand the promotion of U.S. trade and investment in such areas by increased local assistance to U.S. businessmen abroad, by providing wider and prompter service in reporting developments within such areas of interest to businessmen.
4.
Expand and improve information service to U.S. business, in current and special publications, concerning (a) current and projected levels of economic activity in underdeveloped areas, (b) evaluation of trade and investment opportunities in such areas, (c) illustrative, successful investments by U.S. firms in such areas, (d) financial assistance obtainable (from private banking sources, Export-Import Bank, World Bank, tax benefits, investment guarantees, availability of P.L. 480 funds, etc.) for U.S. investors in such areas, (e) competitive activities in underdeveloped countries, emphasizing, where appropriate, the threat to existing U.S. markets in such countries; and encourage U.S. business associations, financial institutions, and business publications to expand similar types of publicity.
5.
Increase direct contact by U.S. Government officials with U.S. businessmen, trade associations, business publications, and business administration schools (a) to improve dissemination on trade and investment opportunities in underdeveloped areas, (b) to encourage [Page 52]businessmen to make field trips to such areas, and (c) to sponsor or encourage trade and investment conferences periodically on underdeveloped area opportunities.
6.
Increase direct contact by U.S. Government officials with businessmen of both the U.S. and underdeveloped areas so as to facilitate, where appropriate, preliminary arrangements for trade and investment ventures in such areas.

E. Expand Public Information and Educational Programs in Underdeveloped Countries, Where Appropriate, to Demonstrate Benefits of Private Enterprise and Trade with Free World.

Action:

1.
Encourage private groups such as U.S. Chamber of Commerce, Advertising Council, U.S. Council of the International Chamber of Commerce to develop informational and educational programs with appropriate groups in underdeveloped countries; this might include case studies of the type prepared by the National Planning Association.
2.
U.S. Government should develop integrated information program for underdeveloped countries, including
a.
Examples of how free world private trade and investment activities benefit underdeveloped areas (i.e., such as the recent Commerce Department report on U.S. investment in Latin America).
b.
Periodic comparisons of U.S. and free world trade, investment, and aid to underdeveloped countries with that of Soviet Bloc.

F. Expand Efforts to Encourage Underdeveloped Countries to Establish Better “Climate” for Private Investment.5

Action:

1.
Vigorously pursue the negotiation of Treaties of Friendship, Commerce and Navigation with underdeveloped countries.
2.
Negotiate investment guarantee treaties with appropriate underdeveloped countries.
3.
Strengthen U.S. missions abroad by assigning officers to appropriate underdeveloped countries, competent to advise on investment problems.
4.
Provide technical advice and assistance in private investment field in underdeveloped countries where appropriate, such as: [Page 53]
a.
Encourage or assist in the establishment of business extension services for the purpose of stimulating local private capital investment.
b.
Encourage the development of local capital markets and financial institutions, preferably with private participation, and with functions and objectives similar to those of the International Finance Corporation.
c.
Tie-in more closely technical advice with local and foreign currency financing through such organs as local Development Corporations.
d.
Advise on the legal institutional and administrative steps which can be taken by foreign governments to create a climate favorable to the development of private enterprises, both local and foreign.
e.
Utilize more intensively the services of American management associations to development improvement training programs in underdeveloped countries.
f.
Arrange more two-way team visits to persuade top level government officials abroad of the benefits and advantages of private investment for more rapid economic development.
g.
Arrange for long range economic development reports such as economic surveys, mineral explorations, market studies, and investment needs and opportunities studies.
5.
Where fully private enterprise in some sectors is not acceptable to underdeveloped countries, encourage them at least to permit greater use of flexible forms of business organizations that will associate a maximum of private capital with public funds in such a way as to permit, as soon as possible, the replacement of public ownership by private ownership.
6.
Utilize surveys, such as the recent Commerce report on U.S. investment in Latin America, of private investment abroad, to emphasize the total contribution being made by the U.S. to underdeveloped countries.
7.
Encourage underdeveloped countries to take appropriate measures (legislative and others) which would encourage the flow of private investment.

G. The Appropriate Taxation and Investment Guarantee Measures to Encourage Private Investment in Underdeveloped Countries.

Action:

*1.
Propose legislation to reduce the corporate tax rate by 14 points on income derived from production activity abroad.6
*2.
Propose legislation to extend investment guarantee program to cover insurrection and civil disturbance.7
3.

a. Make further efforts to conclude tax agreements with foreign countries

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1)
to eliminate or mitigate double taxation by establishing rules of source of income and by tax reductions or exemptions where appropriate (for example, with intercorporate dividends and royalties), and
2)
to encourage by tax incentives the flow of technicians and experts from the United States to underdeveloped countries.

b. Exert special effort to give recognition in such treaties to the tax incentive laws adopted by underdeveloped countries to attract United States investment by giving a credit to the income derived abroad on such new investment.

H. Expand Program of Exchanges of Leaders and Technicians With Underdeveloped Countries.

Action:

1.
Encourage foundations, universities and business firms
a.
to expand programs and scholarships to bring business, agricultural and labor leaders from underdeveloped countries to U.S. for period of study and training;
b.
to expand programs and scholarships to bring administrative and technical personnel from underdeveloped countries to U.S. for study and training.
2.
Plan greater emphasis on governmental programs to increase such exchanges with underdeveloped countries.

I. Clarify Anti-Trust Applicability to Foreign Trade and Investment Activities.

Action:

Seek to have the Justice Department develop and publish some basic principles on antitrust aspects of foreign trade and investment which will provide private industry with better guidance than now exists on the applicability of antitrust laws to foreign trade and investment.

  1. Source: Washington National Records Center, ICA Director’s Files: FRC 61 A 32, Box 315, Finance–Investments. Confidential. The actual title is “Report of the Working Group of the Subcommittee on Soviet Economic Penetration Proposing an Action Program on Increasing the Efforts of Private Industry in Underdeveloped Areas to Strengthen Such Areas Against Soviet Penetration.”
  2. Attached to Document 137.
  3. Section 6 of the Trade Agreements Extension Act of 1951, popularly known as the “escape clause,” provided that whenever an imported product threatened to cause serious injury to domestic manufacturers, all tariff concessions on that product would be withdrawn. For text, see 65 Stat. 74.
  4. Section 22, first enacted into law on August 24, 1935, as a provision of the Agricultural Adjustment Act of 1935 (P.L. 320), authorized the President to raise tariffs or establish quotas on certain imported commodities whose low prices tended to undermine domestic agricultural programs. For text of Section 22, see 49 Stat. 773. Section 8b of the Trade Agreements Extension Act of 1951 (P.L. 50), enacted June 16, 1951, further stipulated that no international agreement could be administered in a manner inconsistent with the requirements of Section 22. For text of Section 8b, see 65 Stat. 75.
  5. The importance of the contribution of U.S. economic aid programs to help in providing a proper foundation for private investment should be noted. For example, Mr. Randall has pointed out that certain basic facilities such as roads, ports, communication and power, are prerequisite for effective operations by many types of private enterprise, and that in many underdeveloped countries improvement of such facilities requires the outside financial and technical assistance. [Footnote in the source text.]
  6. Treasury disagrees on the desirability of such legislation. [Footnote in the source text.]
  7. Treasury reserves. [Footnote in the source text.]