161. Report of the President’s Task Force on Foreign Economic Policy1
INTRODUCTION AND SUMMARY
5. East-West Trade
United States trade policy toward trade with Communist countries has been largely a reflection of our political relations. Trade with all Communist countries is restricted to some extent. The scope and intensity of the restrictions fluctuate from time to time with the harshness of our relations with the particular country involved.
Experience has shown that we, and even the West as a whole, have little capacity to affect the viability of Communist countries by denying the trade. The economies of Russia and China are relatively little depend-ent upon outside trade and the Bloc as a whole could, if necessary, satisfy its minimum requirements at least to the extent required to prevent defection. Unless the West acts together, the force of trade restriction is marginal. Efforts to achieve this unity of action have not been particularly effective except in times of actual hostilities, and they have been a continuing source of friction within the Alliance.
It is generally asserted that prospects for American trade with Communist countries are severely limited. But our review of the situation indicates that under relatively favorable circumstances United States exports to the Soviet Union and Eastern European countries could reach as much as $500–$700 million annually by 1970.
Even if we do not accept this optimistic estimate, the Task Force concludes that in the years to come United States policy should actively encourage trade in both directions with Soviet Russia and Eastern Europe. (Of course, exports of items and technology which really make a direct and significant contribution to Communist military potential should continue to be prohibited.) This would involve some changes in our stated policies toward the Soviet Union, though not toward Eastern Europe. In practice, more realistic licensing policies and more aggressive trade promotion will both be needed.
[Page 468]It has been argued that trade with Russia stands on a different footing than trade with the other European Communist countries because we are more interested in shifting Soviet resources away from military uses. It is said that by denying trade we could promote such a shift, but this is unlikely. Soviet military requirements are relatively absolute and it is not in our interest to encourage belt-tightening in other sectors and consequent internal repression.
Neither of these competing hypotheses can be satisfactorily demonstrated. Thus the presumption in favor of the political and economic benefits of open trade should prevail. A corollary of this position is that the United States should stand ready to guarantee export credits covering such trade on terms that are competitive with other industrial countries so long as the terms are not concessional. At the same time we should retain the ability to modulate our Soviet trade policy in accordance with sharp political changes if that should prove desirable.
Trade with China, Cuba, North Viet-Nam and North Korea is now embargoed. The question is whether to remove some or all of these existing restrictions. That would be a political gesture of the greatest significance. It would signal abroad that we were generally reorienting our policy toward the particular country involved. It is, therefore, important that when such a move is made, we do intend to convey such a signal. On the other hand, if and when we do so intend, a revision of trade policy is an appropriate and discriminating instrument.
It is apparent from this discussion that East-West trade policy contains, and will at best continue to have, a large political component. Liberalization should be carried out in a way that permits prompt and effective adjustment to changing political realities. To this end, the Task Force recommends an East-West Trade Act giving the President power to grant most-favored-nation treatment and to negotiate trade agreements with Communist countries whenever he finds such an agreement to be in the public interest. Such legislation is needed to give the President authority to negotiate agreements of the type described. We have already been constrained by the absence of such authority in the recent past, and the East-West Trade Act should be put forward at the earliest favorable opportunity.
[Here follow the remainder of the Introduction and Summary and Chapter One, “Aid.”]
[Page 469]CHAPTER TWO
TRADE
IV. East-West Trade
A. Where We Are and How We Got There
Until the Stalinist era after World War II, trade with Soviet Russia and other more transitory Communist governments was carried on under the universal and non-discriminatory regime that governed all United States trade.
Restrictions on exports to the USSR and European Communist bloc were imposed with the onset of the Cold War and were tightened and intensified during the Korean War. They have gradually moderated since then, although except for agricultural products, special licenses continue to be required for all exports to most countries. For Poland, Yugoslavia and more recently Rumania, a more extended list of items is on general license. With Communist China’s entry into the Korean War, the United States imposed an embargo on trade with that country which persists to the present. The embargo also covers the other Asian Communist regimes in North Korea and North Vietnam. Similarly, as the Castro government’s formal alignment with Communism became clearer, increasingly tight restrictions were placed on exports to Cuba, culminating in a total embargo on all exports except for food and medicine in 1962.
Import restrictions take two forms. For all Communist nations except Poland and Yugoslavia, most-favored-nation tariff treatment is denied. Thus, Communist countries pay Smoot-Hawley tariff rates on their exports to the United States. This treatment began in the Trade Agreements Extension Act of 1951,2 and at that time Yugoslavia was the only exception. Most-favored-nation treatment was extended to Poland in 1960 under a somewhat strained interpretation of the existing statutory language. The present situation is stabilized by Section 231(b) of the Trade Expansion Act of 1962,3 as amended,4 but Poland and Yugoslavia are the only countries eligible for most-favored-nation treatment under this statute. Imports from the Soviet Union of a few specified items, notably furs, are proscribed. All imports from China, North Korea, North Vietnam, and Cuba are prohibited outright.
Credit terms on sales to Communist countries have also fluctuated with our overall policy on trade with Communist countries. Opinions of [Page 470] the Attorney General take the position that Export-Import Bank guarantees can be given for normal commercial periods without offending either the Johnson Act5 or the Battle Act.6 But these opinions are recent, and, in any event, as a matter of practice, except for certain special items, guarantees of this kind have not been used much.
The United States has sought the cooperation of friends and allies in carrying out these policies. Except during the period of actual hostilities in the Korean War, however, this effort has not been notably successful. Trade between Western Europe and Communist countries has expanded steadily since the mid-50’s. The European countries and Japan have been unwilling to observe an embargo on Communist China. They have exerted a steady pressure against credit limitations on Communist countries, a pressure which currently seems to be showing results. They have refused to cooperate in cutting off trade to Cuba, although they have been somewhat more compliant in the matter of shipping for carriage of Cuban trade. Latin American countries have, for the most part, joined in our effort to eliminate Cuban trade, but the results have been more psychological than practical.
B. General Considerations Affecting East-West Trade Policy
This sketchy history shows that United States trade policy towards Communist governments is largely a reflection of political attitudes rather than a matter of economic policy.
Experience and economic analysis has shown that we, and even the West as a whole, have little capacity to affect the viability of Communist regimes by a policy of trade denial. The economies of Russia and China, the two largest Communist countries, are relatively little dependent upon outside trade. Although other Communist countries of Eastern Europe show a larger traditional reliance on trade, the Bloc as a whole has been able to satisfy their requirements, at least to the extent required to prevent defection, under economic conditions and public attitudes to date.
On the other hand, it is generally accepted that the markets available on Communist countries for American exports are relatively limited. This premise has been challenged. Western European trade with European Communist countries excluding East Germany amounts to something over $1 billion annually. Most of this is in capital goods of the kind in which the United States enjoys a relative high comparative advantage. It is said that if we could get our “natural share” of this volume, it would mean substantial returns for American business. A re-examination of the [Page 471] figures suggests that under very favorable circumstances, United States trade with the European Communist countries might reach as much as $500–$700 million by 1970, though there is a question how this would be financed given present export patterns and trade practices in the Communist Bloc. If the Eastern Bloc should enter upon a process of growth like that of Western Europe in the past decade, the potential market would be very much greater.
These amounts are substantial, but the assumptions on which they are based are optimistic. The remainder of this paper proceeds on the assumption that economic gains cannot yet be shown to be substantial enough to outweigh political considerations when they point in the opposite direction.
C. Soviet Russia and the East European Bloc
Assuming no fundamental change in the political situation, our policy on trade with Soviet Russia and Eastern Europe should continue to prohibit exports of items and technology which make a direct and significant contribution to the Communist military potential. This is roughly the range covered by the Battle Act strategic list and the COCOM list. With this exception, we should actively encourage trade in both directions.
As far as the Eastern European countries other than Soviet Russia are concerned, this represents more or less our present policy. We have recognized that opportunities exist for the judicious use of trade policy to encourage tendencies toward independence and autonomy in individual countries and to turn them increasingly toward the West in their external dealings and perhaps even in their internal political systems. Considerable evidence can be adduced to support the existence of such trends in the Eastern European countries. At least in the case of Yugoslavia, the capacity to maintain a line of policy independent of Moscow over the past decade and a half is the result, in large part, of economic, military and moral support from the Western countries, particularly the United States. Poland’s trade with the United States has expanded in parallel with the cautious growth of its policy independence from Moscow. Elsewhere, the United States has seemed rather slow, in practice, to seize the opportunities for the use of trade as an instrument of policy in Eastern Europe.
It may be argued that trade with Russia stands on a different footing. We are not significantly concerned with the military power of the Communist nations in Eastern Europe. In the USSR, however, we are interested in a shift of resources away from military uses. Such a shift, if it could be secured, would bear real relation to our own security. By denying trade, and particularly trade on favorable credit terms, it is argued, we could encourage such a shift. The reverse arrangement is equally plausible; Russia’s military requirements tend to be relatively absolute [Page 472] and other sectors will be sacrificed to meet those requirements. Any necessary belt-tightening and attendant measures of civilian discipline will be imposed by the regime so far as possible. It is not in our interest to encourage a return to such internal policies in Russia.
It is probable that neither of these competing hypotheses can be satisfactorily demonstrated. Under those circumstances and absent a showing of some real political gain to be achieved by continuing the present restrictive trade policies, the normal presumption in favor of the political and economic benefits of open trade should prevail. This would mean much-expanded trade with Russia as with the rest of the Eastern Bloc. The wheat deal, in effect, symbolizes an existing readiness for this. We should retain the ability to modulate trade policy in accordance with sharp political changes, if that is desirable.
It is said that the USSR has reached the limit of its ability to finance increased imports to current payments from reserves or by short term credit—up to, say, five years. If this proves to be the case, expanded U.S. exports to the USSR will require an easing of present limits on credit. There seems to be no case for extending truly concessionary credit terms such as those given to developing countries. However, if we are willing to let trade proceed, and while Export-Import Bank guarantee authority remains available in present amounts there is no reason why we should not guarantee export credits on terms that are necessary to meet the competition of other industrial countries and that bear some relation to the useful life of the exported item.
D. Communist China, Cuba, North Vietnam and Korea In this group of countries, where an embargo is now in effect, the problem is different.
If the issue were whether to impose trade restraints now as an initial proposition, a good case could be made against such a course. Besides denying ourselves markets, a policy of trade restraints seems to have little impact on the Communist regimes in these places, cuts channels of communication by which one might hope to influence policy there, and causes endless friction with our allies. But, the question is not whether to impose trade restraints, but whether to take off an embargo already in effect. Such a move would be a foreign policy gesture of great significance. It would signal abroad that we were reorienting our general attitude toward the particular country involved. Other nations all over the world would adjust their own policies accordingly. We should recognize when we take such action that its principal short term significance is as a signal. If we wish to convey such a signal, modulation of trade policy can be an extremely useful and sensitively discriminating instrument in the process of readjusting relations.
[Page 473]E. Legislation
It is apparent from the foregoing discussion that any change in East-West trade policy should not take the form of a general resort in the non-discriminatory and multilateral basis on which we trade with non-Communist countries. Since East-West trade policy contains, and will at best continue to have, a large political component, any liberalization should be carried out in such a way as to permit prompt and effective adjustment to any changing political realities. This suggests that trade should be carried out under a series of bilateral, relatively short-term agreements. The bilateral character would permit us to discriminate from country to country as political circumstances warrant; the short-term aspect would permit us to review relations with a particular country to take account of political changes over time. The bilateral framework has the additional virtues of being familiar to the Communist countries and of permitting a staged impact on domestic interests. It has the disadvantage of reinforcing an existing tendency toward bilateralism in Communist trade which helps insulate Communist economics from world market forces. Other instruments, however, may be available for encouraging contrary tendencies. We recommend an East-West Trade Act designed to provide for a program of bilateral agreements with Communist countries, conditioned on specific findings of the President in each case that the particular agreement undertaken will be in the national interest. The essence of each agreement would be an undertaking by the United States to grant export licenses on products covered by the agreement up to an agreed annual maximum amount, in return for the promise of the other country to import a stipulated minimum of these products. In addition, the United States would grant most-favored-nation treatment to a stated quantity of specified products to be imported from the other party.
A further question is whether the Act should contain a provision modifying the standards now embodied in Export Control Act.7 The Act provides for the denial of a license where “the President shall determine that such export makes a significant contribution of the military or economic potential of such nation or nations which would prove detrimental of the national security and welfare of the United States.” The Administration of this provision has been rather restrictive, particularly with respect to technology associated with advanced capital goods exports. Such technology has been thought to run afoul of the language prohibiting exports which promote the “economic potential” of the Bloc countries, even where substantially similar technology is available in Western Europe. The language permits the exercise of judgment and, in [Page 474] the final analysis, the President could, in any particular case, make a judgment that the standards of the Act are met and the license should issue. On the other hand, the language and its legislative history make for a restrictive policy, both within the Executive Branch and Congress. It would be desirable to have broader language. The question resolves itself into a political judgment whether such language can be enacted at an acceptable cost.
[Here follows Chapter III, “Money.”]
- Source: Department of State, S/P Files: Lot 70 D 199, Economic Policy—1964. Secret. The source text comprises pp. 22–24 of the Introduction and Summary and pp. 19–26 of Chapter Two, Trade. The full report was transmitted to President Johnson under cover of a November 25 letter from Carl Kaysen, Chairman of the Task Force. Kaysen’s letter, pages 1–5 of the Introduction and Summary, and Chapter Three, “Money,” are printed in vol. VIII, Document 18. For text of Chapter One, “Aid,” see Document 20.↩
- P.L. 82–50, approved June 16, 1951. (65 Stat. 72)↩
- P.L. 87–794, approved October 11, 1962. (76 Stat. 872)↩
- Section 231(b) was added to the Foreign Assistance Act of 1963, P.L. 88–205, approved December 16, 1963. (77 Stat. 390)↩
- P.L. 73–151, approved April 13, 1934. (48 Stat. 574)↩
- Formally known as the Mutual Defense Assistance Control Act of 1951, P.L. 82–213, approved October 26, 1951. (65 Stat. 644)↩
- Export Control Act of 1949, as amended. (50 USC App. 2021, 2024)↩