292. Paper Prepared in the National Security Council Staff1

U.S. TRADE POLICY TOWARD COMMUNIST COUNTRIES (Excluding China, Cuba and Yugoslavia)

(NSSM 35)

Summary Paper on Major Issues for Decision

There are nine issues on which decisions are needed in the area of East-West trade. The broadest is:

1.

Should expansion of U.S. trade with the Soviet Union and the other countries of Eastern Europe be actively and publicly endorsed by the Administration?

Three are legislative:

2.
Should we favor extension of the Export Control Act in its present form or propose or support amendments that would provide a suitable legislative base for a less restrictive export control policy?
3.
Should we seek authority to extend most-favored-nation tariff treatment to Eastern European countries, including the Soviet Union?
4.

Should we seek removal of the barriers to Export-Import Bank financing for Eastern European countries, including the Soviet Union?2

Two relate to the administration of our own export controls:

5.
Should the U.S. continue to maintain a control list more restrictive than the international COCOM list?
6.

Should the Eastern European countries, including the Soviet Union, continue to be treated differentially in the application of our export controls?

Three relate to specific rules:3

7.
Should we license a U.S. firm to design and install a $26 million system for oil extraction and gathering for the USSR?
8.
Should we license U.S. firms to design and install a $60 million engine foundry to expand a Moscow truck factory?
9.
Should we change our 50-50 shipping requirement to enable U.S. firms to respond affirmatively to a Soviet request to buy U.S. corn?4

The decisions taken on these matters and on other issues in East-West trade policy should be seen as part of the total fabric of Western relationships with the Soviet Union and the other countries of Eastern Europe. Those relationships involve:

  • —Maintenance of Western deterrent military strength relative to that of the Communist countries;
  • —The President’s desire to move from the period of confrontation to a period of negotiation vis-a-vis the Soviet Union and the other Eastern European countries.

While our export control policy has rested on a distinction between strategic and non-strategic goods, we must be aware of the fact that this distinction is difficult to define precisely and concretely. It is meaningful primarily from a short-run point of view. In the longer run, since economic resources can be interchanged over a broad range of uses, the difference between so-called strategic and non-strategic goods fades.

Decisions on U.S. policy hinge on four major questions of fact:

1. What effect an export control policy has on Communist economic and military capabilities.

In order to answer this question, we must assess what would happen in the absence of our export control policy. This is an extremely difficult problem under the best of circumstances, and even more difficult given the ambiguities of data on Communist economies. Moreover, very few detailed studies of the effects of controls have been conducted despite the long period of time over which these controls have been applied.

We can be reasonably confident that export controls, particularly as they apply to the transfer of technology critical to the development of [Page 757]advanced weapons systems, have imposed a heavy cost on the Communist countries in special areas such as computer facilities. We can also be reasonably confident that the strictest and broadest export controls could not be expected to impose more than a moderate effect on the Communist economies as a whole, since those economies do not depend heavily on trade with the non-Communist world. Trade controls have had an adverse impact on the quality of economic growth in Communist countries, however, and the cost of the differential controls unilaterally imposed by the United States has added marginally to this impact. It is difficult to be any more precise than these broad generalizations on the basis of studies so far made.

2. What effect the current export control policy has on relations with our allies.

The export control policies of the United States and fourteen other allied nations are coordinated through COCOM. Our allies have consistently attached less significance to export controls and more importance to expanded commercial relations with Communist countries than we have. This divergence in views stems in large measure from a realization by both parties that the United States must bear the main responsibility for offsetting such improvements in the Communist strategic posture as may result from expanded commercial relations. As a result of frequent reviews in COCOM, the international embargo list is now somewhat less than half what it was fifteen years ago. The separate U.S. list, although also considerably reduced from its former size, substantially exceeds the COCOM list.

The divergence of views between the United States and its COCOM allies on trade controls has generated some friction between U.S. and allied governments, on the one hand, and business firms, on the other hand. It is not clear, however, that friction would be diminished if U.S. and allied firms competed more actively for trade with Communist countries in a regime of generally more relaxed controls although the inter-allied frictions related specifically to the COCOM list would of course diminish.

Trade by the COCOM countries with Eastern Europe, including the Soviet Union, was valued in 1967 at $3.9 billion of exports to the East and $4.2 billion of imports from the East. The United States share of this trade was roughly $200 million each way.

3. What prospects there are for expanded trade if U.S. trade restrictions were relaxed.

A relaxation of the restrictions can be expected to have only a moderate effect on expanding trade. This is largely because most Eastern European countries will insist on expanding their sales to us pari passu with expanding their purchases from U.S., and they have very few [Page 758]products which we are likely to buy in large quantity. Trade estimates prepared for this study indicate that, under various optimal conditions including significant relaxation of export controls, extension of MFN, competitive credit arrangements and substantial multilateralization of Eastern European trade with the Free World, but excluding elimination of the 50-50 shipping requirement on grain sales, U.S. exports to European Communist countries might expand from the level of about $200 million in 1967 to around $500-$700 million in 1975. The expanded exports would come in part from an overall increase in trade and in part from trade now conducted with Eastern Europe by our allies. Such anticipated increase in trade would be much more dependent upon removal of the present MFN and credit restrictions than upon further relaxation of export controls.

4. What effect our trade policy has on East-West political relations.

There are no simple cause-and-effect relations between the level of our trade with Communist countries and the state of our political relations with them. Under some conditions, expanded U.S. trade could strengthen the power of existing ruling groups; under other conditions, it might gradually weaken that power. Expanded U.S. trade with the countries of Eastern Europe but not with the USSR could encourage their desires for greater independence, but, as a result, could increase U.S.-Soviet tensions and even induce increased Soviet efforts to control the others. The probable effects of relaxed trade restrictions can be assessed only with careful regard to the specific political situation of the time within the relevant Communist countries.

ALTERNATIVE POLICY APPROACHES

The following are five policy approaches and related patterns of action with respect to trade with the European Communist countries.

PACKAGE 1: Continue present policy

There would be no modification in our approach in COCOM; export controls and licensing policies would be continued with progressive relaxation as at present; Export Control Act would be renewed without change; there would be no initiative on tariff legislation or removal of Export-Import Bank Act financing limitations; and encouragement of trade with Eastern Europe would remain, but at low key.

Pro

Would keep all liberalization options open until the direction of Soviet policy and of Vietnam peace talks are clearer; would avoid raising additional opposition from those parts of Congress and the public that are opposed to East-West trade; would tend to maintain present level of COCOM control over strategic goods.

Con

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Within the short-term context, the only flexibility in trade policy available to the President derives from discretionary implementation of export controls; the current level of friction with other COCOM countries would remain; some potential expansion in exports would be denied U.S. business.

PACKAGE 2: Adopt more liberalized attitudes without major legislative changes

We would develop standby proposals for reducing COCOM lists and procedural frictions; export controls would be reduced as rapidly as feasible under existing ground rules with active steps to encourage East-West trade and with modification of the Export Control Act to provide at least a sense of Congress favoring expansion of non-strategic exports to the USSR and Eastern Europe; no initiative on tariff legislation or Export-Import Bank Act except to support desirable Congressional initiatives.

Pro

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Administration would be in a position to take advantage of possible favorable developments in relations with the USSR or individual Eastern European countries; would be prepared to move toward a scaling down of COCOM effort if desirable. Such steps by the Administration, including amendment of the Export Control Act, would give guidance to American exporters now unsure of future U.S. policy.

Con

The President would forego the possibility of using accelerated reduction of our controls and active encouragement of non-strategic trade as instruments for political bargaining with the Soviet Union as per Package 5. In addition, the timing of further initiatives towards Eastern Europe and the Soviet Union on tariffs and export financing would be left in the hands of Congress.

PACKAGE 3: Adopt more liberalized attitudes and when feasible seek major legislative changes

We would develop standby proposals for reducing COCOM lists and procedural friction; reduce the level of unilateral U.S. export controls as rapidly as feasible to those goods and technical data of strategic importance likely to be susceptible of effective U.S. unilateral control; modify Export Control Act to encourage permitted East-West trade, to remove the “economic” impact criterion for denial from the Act; undertake initiative on tariff negotiating legislation and Export-Import Bank Act as soon as Congressional acceptance appears likely and in interim support desirable Congressional initiatives in these fields.

Pro

Administration would be in a position to take greater (than in Package 2) advantage of possible favorable developments in relations with the Soviet Union or individual Eastern European countries; would be prepared to move toward a scaling down of COCOM effort if desirable. Amendment of the Export Control Act would give guidance to American exporters and support promotion efforts. By eliminating “economic” criterion, amendment would remove point of criticism of the export control program. Prior decision as described on tariff and Export-Import Bank legislation would enable Administration to move quickly to take advantage of favorable Congressional attitudes.

Con

The President would forego a broader (than in Package 2) set of instruments for political bargaining per Package 5. The further reduction of U.S. controls would elicit stronger reaction from opponents of relaxation. If the sought legislation changes were rebuffed, it would be a major setback to improvement in trade relations and trade levels and subsequent initiatives by the President might lose credibility in the eyes of the Communist countries.

PACKAGE 4: Seek broad authority to expand trade

We would agree to a maximum defensible reduction in COCOM controls towards the USSR and Eastern Europe; we would reduce the export control list as closely as possible to the COCOM list, support further amendment of the Export Control Act to incorporate a narrow definition of “strategic” and authorize a strong promotional effort on permitted trade, and take a strong stand to this effect; press now for broad tariff negotiation authority and the removal of the ban in the Export-Import Bank Act on financing during the Vietnam war.

Pro

The President’s negotiating position would be strengthened by the new authority. We would be in the best possible position to increase exports and to reduce friction with our allies over export controls, though the actual commercial effect would be uncertain. We would gain support of those segments of Congress and the public favoring the expansion of East-West trade relations.

Con

The President would relinquish virtually all the leverage for political bargaining which comes from relaxation and requesting new trade authority. This course could lead to charges of Western weakness. There would be an inevitable strategic cost difficult to measure, but particularly detrimental if East-West relations deteriorated. Moving now in present Congressional climate to obtain tariff and Export-Import [Page 761]Bank credit authority may jeopardize the entire trade program. Seeking such extensive modification of the Export Control Act now could cause a Congressional reaction tightening rather than relaxing.

PACKAGE 5: Couple liberalization with negotiation for compensating benefits

Any of the liberalizing packages discussed above might be carried out in the context of a quid pro quo negotiating approach to the USSR or other East European countries. There are three separate issues: 1) extension of most-favored-nation tariff treatment to the USSR or other Eastern European countries; 2) elimination of the present restrictions on Export-Import Bank financing to these countries; 3) reduction in U.S. export controls. There are also several kinds of bargaining concepts: 1) seeking specific trade concession counterparts; 2) settling specific problems in our relations with a particular country outside the trade field (e.g., settlement of financial claims); 3) as part of a larger understanding on non-trade issues. If the negotiating course were followed, a fallback policy should be prepared for the contingency that negotiations were to prove fruitless.

Pro

This approach provides an opportunity to implement an era of negotiation in an area not heavily affected by critical strategic problems. In the case of most-favored-nation tariff treatment, the negotiation of equivalent benefits would be involved, although differences in trading systems create difficulties. In case of export controls, to the extent that reduction reaches into the strategic “gray area,” return concessions would help offset the strategic cost to the United States of the relaxation. Moreover, this approach might assist in obtaining Congressional and public support for legislative changes. Relaxation in export control and licensing of many consumer goods might not be considered a valuable concession by the Soviet Union or Eastern Europe, but an effort to negotiate on this basis is the only effective way to find out.

Con

The principal difficulty of this approach is that refusal by the USSR or another Eastern European country to grant the necessary concessions might place the U.S. in an awkward position to take unilateral action if that seemed desirable. (This problem does not arise on the issue on MFN treatment, where we would always insist on reciprocity.) To the extent that export control relaxation relates to goods and technology that the USSR and Eastern European countries do not want or that are available to them from other sources at the same or lower cost, these countries would regard such relaxation as being solely of benefit to U.S. exporters. The degree of U. S. success could be affected by lack of cooperation [Page 762]by our allies, who could (if they do not already) match or exceed our liberalized policies, hence diluting their economic value to the Eastern Europeans and presumably reducing their willingness to make concessions in return.

THREE PENDING EXPORT SALES

Three pending export opportunities are of such magnitude and hence political sensitivity as to merit NSC attention. They illustrate problems likely to be involved in moving toward increased trade with the USSR. And they are important because the actions taken on them may be construed by business firms, the public and the Congress as signals of the Administration’s policy on East-West trade.

Each case would, in principle, be approvable under the current interpretation of existing policy guidelines. However, the U.S. has not heretofore approved transactions of the nature and magnitude of the oil field and truck factory cases. The corn sale transaction cannot be completed as a practical matter without waiving or repealing an executive requirement for 50 percent shipment in American bottoms.

Oil Field Gathering System to the USSR

The USSR is negotiating for a U.S. firm to design and install a system for oil extraction and gathering that would give the Soviets for the first time a modern, semi-automated oil field. Almost all the project’s $26 million cost would go to either U.S. domestic firms or their foreign subsidiaries. U.S. government agencies have concluded that this transaction would not aid the Soviets militarily or economically in a way detrimental to our interests. Approval of export licenses would, however, constitute the first U.S. government decision to provide the USSR with significant equipment and technology in the petroleum field.

Engine Foundry and Gear Cutting Machines for Soviet Truck Factory

The USSR is negotiating with U.S. firms to design and install a $60 million engine foundry and to supply $4.5 million of gear-cutting machines to expand and modernize the ZIL truck factory. This is one of the two Soviet plants producing civilian and military heavy duty motor vehicles. (Although U.S. domestic firms may obtain the entire $60 million of business for this foundry, they could end up obtaining only $2.5 million for technology with the equipment sales going to Western Europe because of financing.) U.S. Government agencies have concluded that neither the foundry nor the gear cutters are specially designed nor likely to be used principally, in peacetime, for military purposes, although a significant share of the foundry’s output (probably 25-35 percent) would go to the military.

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The Soviets can purchase both elsewhere with some delay and added costs. This could be our largest single transaction with any East European country since the late 1940’s except the 1963 wheat deal with the USSR. U.S. export participation in the Fiat small passenger car deal with the Soviets aroused great controversy even though less potentially controversial than this one, which involves a Soviet plant producing trucks for military or civilian use. Because of this sensitivity and the size of the sale, consultation with appropriate Congressional leaders may be politically advisable, following the precedent established on the Fiat and wheat deals.

Corn Sales to the USSR

The USSR wants to buy about $15 million of corn at world market prices with possible continuing purchases in the future. Substantively, the export of bulk corn offers no export control problems. However, present shipping restrictions require at least 50 percent of such grain to be carried on U.S. ships—compliance with which would price us out of the deal both economically and politically.

The present regulations were adopted at the time of the Soviet wheat deal at the urging of the U.S. maritime unions and ship owners. The completion of the proposed transaction would require either a waiver or repeal of the current 50-50 shipping regulations. Commercial advantages must be weighed against the prospect that the maritime unions may still oppose waiver or repeal and may, in any event, refuse to load grain for the USSR. Approaches to the Longshore and Maritime Unions would involve a major Administration effort with no guarantee of success, especially in the light of recent developments in Czechoslovakia.

  1. Source: National Archives, RG 59, S/S Files: Lot 71 D 175, 5/2969 NSC Meeting. Confidential. Distributed under cover of a May 12 memorandum from Davis reporting that the paper was a revision of one circulated on May 9, pursuant to an informal meeting of the Review Group that day, and requesting agency comments. The NSC Review Group had met on May 7 to discuss a 35-page NSSM 35 Response paper and a draft of the paper printed here. Briefing materials for Kissinger’s use at that meeting are in National Security Council, Secretariat, Box 90, 5/7/69 Review Group Meeting. NSSM 35 is Document 288.
  2. On April 10 Export-Import Bank President Kearns sent Samuels a memorandum explaining that the Export-Import Bank Act of 1945, as amended March 1968, prohibited the Bank from providing its products to a Communist country unless the President determined it was in the national interest. Kearns noted that President Johnson had notified Congress of a national interest determination for Yugoslavia on May 7, 1968, and President Kennedy had made a similar determination. Kearns informed Samuels that the Bank Board had decided the new President should notify his own determination and was prepared to consider some of Yugoslavia’s pending applications if the President determined that export financing for Yugoslavia was in the national interest. (National Archives, RG 59, Central Files 1967-69, FN 6 XMB)
  3. These three issues, plus Export License Controls for East Germany, had been flagged in a Specific Issues paper Davis circulated on May 6 for the May 7 Review Group meeting. (Ibid., S/S Files: Lot 80 D 212, NSSM 35)
  4. On April 22 Kissinger circulated a more detailed paper, prepared by the NSC Staff, on the corn sale issue. (Ibid.)