321. Memorandum From Secretary of Defense Laird to President Nixon 1

SUBJECT

  • Improving Trade Relations with Communist Countries

In response to a request by your staff, I am submitting my views on the proposals by Secretaries Rogers and Stans to liberalize East-West trade.2

Discussion

The issue of whether to propose legislation authorizing the President to extend most-favored-nation treatment and Export-Import Bank credits and guarantees to individual Communist countries has already arisen in connection with NSDM 15 (May 28, 1969),3 the Export Expansion Act of 1969, and the Export Administration Act of 1970 [1969].

In NSDM 15 you decided that “present legislation provides an adequate basis for US trade policy toward the USSR and the Communist countries of Eastern Europe at this time, in view of the status of our overall relations with them,” and that “we should be prepared to move generously to liberalize our trade policy toward the Soviet Union and other Eastern European countries whenever there is sufficient improvement in our overall relations with them.”

I recognize that this important issue should be reexamined periodically. However, the first question to reexamine is whether there has been a real improvement in our overall relations with the Soviet Union and specific countries in Eastern Europe.

Similarly, the concept of “equivalent benefits” to the US is the key to defining overall US objectives. Equivalent benefits need to be related to our political and national security objectives and to Soviet and Eastern European moves to liberalize their trade arrangements with us, if authority is to be requested from Congress to liberalize our trade arrangements with them.

Again, to achieve “equivalent benefits” and to convince Congress that a request for discretionary authority should be granted, we need a [Page 829]plan that states explicitly what is to be expected of the Soviet Union and specific countries in Eastern Europe. This plan should be in the form of potential negotiating packages that link our, and their, interests and objectives with practical moves on both sides.

The preconditions of negotiating should include some non-economic quid pro quos, such as a move by the Soviet Union to urge Hanoi to move toward release of US prisoners of war. The trade package itself should require the Soviet Union and Eastern Europe to reduce such barriers to East-West trade as import quotas, bilateral trading arrangements, unrealistic exchange rates, inconvertible currencies, and preferential pricing.

The Communist countries of Eastern Europe should move toward membership in GATT and the IMF, as some of them are already doing. They should be required to accord nondiscriminatory treatment to our exporters and the same exchange rates that we provide to Communist countries.

Above all, we should take no actions that will strengthen the bilateral state-trading system of Communist countries. Rather, we should use the opportunity to negotiate new kinds of multilateral, more direct, and flexible trading arrangements acceptable to both sides.

A summary of the rationale for my views on the potential effect of the State and Commerce proposals on total exports and exports of strategic commodities and technology is attached (Tab A).

Recommendation

I recommend that:

a.
In accord with NSDM 15, we first determine those cases in which there is sufficient improvement in our overall relations to warrant further liberalizations of our trade policy.
b.
We take no steps to request discretionary authority from Congress until we have developed a broader plan and specific negotiating packages that spell out how we propose to use it.

Mel Laird
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Tab A

IMPROVING TRADE RELATIONS WITH COMMUNIST COUNTRIES

Overall Trade

It is an illusion to believe that extending most-favored-nation (MFN) tariff treatment and Export-Import Bank credits and guarantees to individual Communist countries would lead to greatly expanded trade with the US, even if potential “equivalent benefits” are extended to the US. The Communist economies, as presently organized, simply do not produce the types of commodities that will be bought in large quantity in the US.

“Equivalent benefits” to the US would include a reduction of Communist barriers to trade with the US as well as nondiscriminatory treatment. They would also include a substantial modification of the rigid bilateral state-trading arrangements and convertibility of Communist currencies. The great problem is to identify specific equivalent benefits to the US and to specify what kind of new trading arrangements might be acceptable to both sides. Discrimination is the very heart of Communist trading practice, and separate terms are set not only for different countries but also for each individual transaction.

An overall plan and potential negotiating packages need to be developed before discretionary authority is sought from Congress. Such a plan does not yet exist, even in the case of Romania. A request for broad authority would make sense and have a better chance for a favorable response in Congress if the aims and conditions under which it will be exercised were spelled out in advance.

There are special problems involved in removing restrictions on Export-Import Bank financing. There is a firmly established policy, enacted into various laws, of prohibiting the US Government from lending or guaranteeing loans to countries with a record of (a) default of debts, (b) confiscation of property without due compensation, and (c) provision of supplies to countries engaged in hostilities with the US. Before this policy is altered, the grounds for doing so should be clearly established.

Strategic Trade

US general export policy toward Communist countries is to restrict trade in those goods and technologies that would significantly contribute to their military capabilities, while allowing maximum freedom of trade in peaceful goods. This policy is difficult to implement in the case of goods that can be used for both purposes.

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The problem in expanding trade is to find an appropriate balance of diplomatic, military, and economic interests and objectives.

The quantum of exports to Communist countries (including Yugoslavia) by both the US and its allies has been rising, in part in response to Western economic growth. Japan and Western Europe are much more heavily dependent on external trade than the US, and Communist countries are their natural trading partners in many areas of commerce.

As the volume of trade has expanded, controls over the export of technology have been substantially relaxed. As a consequence, the level of advanced Western technology made available to Communist countries has risen significantly.

Communist countries can find much to buy in the US under the modest trade controls now in force. Their problem is to find things to sell us in exchange. The only way to achieve a rapid and sizable expansion of US exports is for us to sell on credit. In the absence of fundamental economic reforms in hostile Communist countries, we have no reason to believe that such a temporary spurt in US exports financed by loans would develop into long-term growth in genuine two-way trade.

If such a policy were applied to Communist countries whose relations with us have shown few signs of improvement, the benefit would seem to accrue overwhelmingly to them. By financing some of their needed imports, we would help the present governments cope with pressing domestic economic problems and close more quickly the technological gap with the US. We could gain only if improved economic conditions in those countries caused them to improve their political relations with us.

I find little in history to support the view that short-term relief of internal economic problems will lead hostile Communist powers to modify their international relations in our favor. On the contrary, it seems to me that relaxation of East-West tensions depends on liberalization of the political and economic orders of those hard-core Communist powers. Such liberalization is more likely to come from the existence of internal economic pressures than from their elimination.

Whether or not additional credits are used to expand US trade with the Communist countries, the minimum requirement for national security is that effective strategic trade controls must continue to be maintained. Similarly, any request for discretionary authority from Congress to extend credits to Communist countries should identify the “equivalent benefits” to be achieved by the US.

  1. Source: National Archives, Nixon Presidential Materials, NSC Files, Subject Files, Box 401, Trade General, Volume II 4/70-12/70. Confidential.
  2. See Documents 314 316.
  3. Document 299.