Foreign Relations of the United States, 1961–1963, Volume V, Soviet Union

98. Paper Prepared in the Department of State⁰

Washington, undated.

US ECONOMIC RELATIONS WITH THE SOVIET BLOC

I. Summary

Statement of the Problem

Can US economic policy with respect to the USSR and the dominated countries of Eastern Europe be modified to serve US interests more effectively? If so, what modifications are desirable and how, when and under what circumstances should they be accomplished? Particular attention should be given to the specific trade controls which might be useful in bargaining for meaningful concessions from the Soviet Bloc. All of these questions should be considered in the broader context of economic relations with the bloc, including credits, relationships with our allies, and effect upon our objectives in the less-developed countries. The adamant and militantly aggressive policies of Communist China and the dominated areas of Asia toward the US, leave little room for maneuver in the economic field. Consequently, this paper does not deal with that area.

A. The Basic Factors in the Current Situation

1. Economic relations and the conflict of systems.

The US and the Free World have entered a new phase in relations with the Soviet Union and the European satellites, in which economic competition looms large and in which our use of economic tools has broad political and psychological consequences throughout the world, as well as in the Bloc. The new phase in East-West relations requires a new look at the principal factors of the current situation and the net effectiveness of our economic policy toward the Soviet Bloc in support of other elements in our foreign policy.

2. The long-term struggle.

Given the military, political and other elements of Free World strength which limit the likelihood of total war, this new look must be in the perspective of conflict over the long-run. In practical terms this long-term struggle will be waged in the constantly changing perspective of short-run improvements in global influence and power.

3. Superior US and Free World economic strength.

Superior Free World strength is a dominant factor at the present time. In order to secure the future, US and Western economic strength at home and in the international sphere must be used with confidence and with some calculated risk, to meet Soviet moves to undermine our economic and social institutions.

4. Bloc objectives and tactics.

The timely growth of economic power at home and its extension abroad are regarded by the Bloc as major political objectives. The Soviet Union tends to use its economic power as a deliberate instrument of political influence and world leadership. Its persistent and varied attacks on the US are also designed to undermine world confidence in our good faith and economic capabilities. It attempts to weaken ties between the less-developed countries and the rest of the Free World, and to work over the long-run for isolation of the US from its allies. The dominated countries have shared these objectives and tactics under Soviet leadership.

At the same time there are weaknesses in the Soviet approach not only in the spotty development of its economy, but also in terms of strains on relations within the Bloc, and its dependence on Western technology for accelerated advancement of its economic power base.

5. US economic policies.

US economic policies have served broad US interests, but the instruments in the hands of the Executive Branch have lacked the flexibility to serve US interests in specific cases, particularly in dealings with the European satellites. These policies have advocated increased trade in peaceful goods within the limitations of that inflexibility and the practical difficulties of trading with the Bloc. In general, US economic policies toward the Bloc have been policies of denial. Actual trade has been insignificant.

(a) Effect on the Bloc. Multilateral controls on critical goods and technology have had some effect in delaying development of certain important areas of the Bloc economic power base. Unilateral US controls (with relatively minor exceptions) have had little direct effect. The denial of US credit and the degree to which industrialized countries have limited credits to the Soviet Bloc, have limited Soviet Bloc imports of capital equipment for economic development.

(b) Effect on the Free World. The principal effect of US restrictions and urging our industrialized allies to adopt them, has been one of resentment. Some of them regard US economic policies toward the Bloc as being unnecessarily defensive and restrictive. Differences of view are an increasing cause of friction, particularly with respect to extension of US controls to American-owned firms in their countries.

Our allies in the less-developed world have generally given tacit support to US policies as an integral part of a common policy of resist-ance to Bloc political and economic incursions.

The effect on uncommitted less-developed countries has been largely psychological in the resentment of US controls which some view as infringements on their sovereignty and in the concern aroused as to the possible contribution of such controls to increased world tension. However, on the material side, some less-developed countries are also concerned about the potential injury to their trade if the US were to increase trade with the Bloc.

B. US Objectives and East-West Economic Policy Changes

1. The basic objective.

The basic objective of US policy and actions in East-West economic relations is to strengthen our posture while using economic relations as tools to cope with growing competition from Soviet Bloc economic power and to contribute to sound relations generally with the Bloc and the Free World. Flexibility is an essential ingredient in the successful application of our economic tools in support of our total foreign policy. Flexibility does not mean mere relaxation of restrictions; it means increasing Executive Branch freedom of maneuver so that we can exploit opportunities in different ways from time to time in furtherance of US and Free World interests. It means a change in policy to one of maneuverability by eliminating the rigidities of some of our present laws and administrative restrictions bearing on East-West economic relations. This flexibility is needed for practical effect in the actual bargaining for meaningful short and long-term concessions from the Bloc.

Our objectives in making most effective use of our economic relations should be:

(a) to contribute to the image of US and Free World initiative, confidence, objectivity and integrity;

(b) to reach substantial agreement with our allies on the nature of the Soviet threat, its techniques and the role of Western economic tools in various fields;

(c) to improve the climate for growth of economic and other institutions in less-developed countries, which strengthen their political freedom and foster economic growth; and

(d) to strengthen US presence in selected dominated countries of Eastern Europe and to provide them with an alternative to dependence upon the Soviet Union.

2. Resume of major recommendations.

(a) Trade. It is recognized that there is a limited potential for bringing allied practice on East-West economic controls into conformity with US desires. The maximum possible reconciliation of US and allied policies is imperative for the achievement of broader objectives and for increasing the effectiveness of the Western response to the over-all Soviet Bloc threat. The contribution which the changes proposed would make in reconciling differences between US policies and those of our Western allies is an important element in improving the effectiveness of US actions. With flexibility in the hands of the Executive, and substantial agreement with our allies, trade could be used as one tool in the total confrontation. The estimates of increased US trade with the Bloc (given the elimination of most restrictions, except for Government credits) indicate that it would not be significant in relation to the total trade of the Bloc, but would be to their net technological advantage.

(1) Export Controls

1. The United Statesʼ embargo list used by the Department of Commerce should be made identical with the international COCOM embargo list. All other goods (except those on the “general license” list) would still be subject to individual export licensing for shipment to the Soviet Bloc with a general rule for approval except in those special cases covering equipment or technology closely related to military items or to the production thereof where denial by the US would effectively prevent Soviet Bloc acquisition from any Free World source of that equipment or technology, or equipment or technology substitutable therefor. For those commodities which do not meet the COCOM strategic criteria but whose export would constitute so significant a contribution to Soviet economic development and to Soviet potential for economic penetration as to be damaging to broad considerations of Western defense planning, the United States might propose that NATO consider such special situations and, if it agrees that multilateral control action is or might be desirable, request COCOM to develop a program for the institution of controls when judged necessary.

2. In discussions of trade with the USSR and the dominated countries of Eastern Europe, the US should be prepared (taking into account the special circumstances involved in the case of each country of the area) to consider the approval of export licenses up to specified annual levels for certain types of goods in which the particular Bloc country is interested. Such commitments could then be included in any agreements which might be concluded with Bloc countries on trade or other economic matters. The US Government would have no obligation to approve exports of items not listed in the agreement or in excess of the quotas, but might do so if it wished.

3. The export of unpublished technical information should be controlled in a manner consistent with export controls over commodities. Thus, if a commodity is permitted to be exported to the Soviet Bloc, the export of the technical information with respect to such commodity should also be permitted to be exported.

(2) Import Restrictions

The Administration should seek an amendment of the Trade Agreements Extension Act of 1951 which would authorize the President to restore MFN treatment to Soviet Bloc countries and to permit the importation of certain furs from the USSR, if the President determines it to be in the national interest to do so.

The Departments of State and Treasury should undertake joint consultation with a view to developing a more realistic and effective method of applying the Antidumping Law in the case of imports from Soviet Bloc countries. It is desirable that a new and more suitable approach be adopted with regard to the administration of the Antidumping Law in the case of imports from Bloc countries lest the administration of the act prevent legitimate imports from Bloc countries and nullify the effect of other recommendations in this paper.

(3) Surplus Agricultural Disposal

The Administration should seek modification of PL 480¹ to provide discretionary authority for the President to waive the “friendly nation” requirement of the Act, with respect to the dominated countries of Eastern Europe, when the President considers such action to be in the national interest. Amendment of the Act should also be sought to permit barter of subsidized agricultural commodities to the USSR.

(4) Stockpile Surpluses

The US Government should inform the Soviet Bloc countries, at appropriate occasions, that the United States is prepared to consider bids for stockpile surpluses subject to existing controls on certain strategic materials and continued embargo on goods to the Communist countries of Asia.

(5) Underdeveloped Countries

The Administration should seek legislation which would authorize the President to reduce US tariffs or other import restrictions in order to provide alternative opportunities for exports of a Free World country under Communist economic pressure.

Implementation of the recommendations for increasing trade with the Soviet Bloc should give careful consideration to the effect on the less-developed countries, including those whose products might be affected, as well as those who have stood by us in the period of stronger controls and who would look askance at the calculated easing of such controls. We should make clear to the less-developed countries that our extension of credits to certain of the dominated countries of the Soviet Bloc is in the common interest and that we intend to maintain the planned general level of assistance to our friends.

(6) NATO

The United States should support a NATO study of economic relations with the Soviet Bloc and the implications thereof to the Free World, in order that a coordinated program may be developed to protect the interests of the Free World. Special problems posed by Soviet Bloc purchase and sales policies in individual commodities should also be examined, and the US should develop specific policies and programs to guide US participation in those studies (e.g., the current oil study).

The United States should seek to extend the concept of contingency planning with our allies to the use of economic levers in conjunction with our diplomatic and other actions in the event of a crisis such as may occur in Berlin and Iran. Initial bilateral consultations with our key allies would prepare for introduction of the subject into NATO. A formula should be developed to bring Japan into these considerations. The United States should also explore in NATO the principle of coordinated action to provide alternative markets to a country subjected to severe Bloc pressure as a result of a sharp reduction in Bloc purchases.

(7) Trade Practices

From time to time the suggestion has been made that it would be desirable to develop general “ground rules” for the conduct of trade and other economic relations between the Soviet Bloc and the Free World.

There are serious problems which Free World countries face in dealing with the Bloc which might be lessened if certain ground rules could be developed. Some of these problems relate to such matters as disruptive pricing practices, resale of primary commodities, inadequate arbitration, patent and copyright procedures, and lack of reasonable access by businessmen.

At the present time the United States Government is seeking to develop a set of ground rules which would provide an effective and realistic basis for governing trade relations between the Soviet Bloc and Free World countries, but has not yet developed such rules. A study of the problem is now underway. When the United States has developed a sufficiently significant number of such rules, it should discuss them bilaterally with certain key countries such as the United Kingdom, France, Germany, Italy and Japan. If such preliminary soundings warrant proceeding further, they should be discussed in the NATO. Pending the possible adoption of such ground rules, an effort should be made to obtain in such individual understandings or agreements on particular economic problems as may be concluded with the Soviet Bloc such general safeguards or rules as it is possible to devise to ensure fair treatment.

(b) Finance. One of the main concerns of the Soviet Union is its desire for credits to finance its rapid power build-up through technically-advanced imports from the West. At the present time, it receives some European credits repayable over a period of up to five years, and is pressing for an extension of the repayment period on future credits. While the US Government should have flexibility in determining the use of credits for the dominated countries of the Soviet Bloc, at the present time it is not appropriate to consider the extension of government credits to the Soviet Union.

The Administration should seek amendment of the Johnson Act² so as to authorize the President to waive restrictions of the Act on private credits when he finds such action to be in the national interest.

We should continue to press for an independent lend-lease settlement. The lack of such a settlement should not necessarily preclude possible United States action on MFN, furs, credits, etc., which would promote the expansion of peaceful trade. Action which might be taken on any of these matters should be considered in the light of advantages we might gain in other fields and in the light of other factors affecting US relations with the USSR.

The extension of public credits or government guarantees on private credits to the dominated countries of Eastern Europe should be considered on their merit on an individual, case by case, basis in the light of US policy toward the country concerned. While public credits to the USSR would be proscribed, the extension of export-import guarantees of normal, short, and medium-term credits to the USSR should be permissible on a case by case basis when it is clear that the assistance involved is to American firms seeking to do business with the USSR and does not constitute assistance to the USSR as defined under the Battle Act.

The United States should continue, bilaterally and in NATO, its efforts to persuade our allies, including Japan, of the need to limit medium and long-term credits to the Soviet Bloc, and to the USSR in particular, bearing in mind the limited total availabilities of Free World development credits for the less-developed countries.

(c) International Economic Forums. International economic forums constitute an area where the Bloc has been increasingly active, presumably for politico-psychological reasons. Despite their efforts, the Bloc has not achieved any significant results. We should make clear our willingness to meet Bloc demands for selected and appropriate representation, when they provide qualified personnel, but resist Bloc pressures for additional key positions or replacement of Western nationals under vicious personal attack from the Soviet Bloc. While we should plan positive initiatives to the extent possible, we should not attempt to counter every Bloc move nor, conversely, fear to take a strongly negative line in opposing Soviet initiatives. The budget for US participation in international forums should be increased to permit more adequate US delegations. The US should actively seek recruitable US and other friendly officials to fill secretariat positions, even to the extent, when necessary, of providing added inducements to attract key personnel.

(d) Civil Aviation. Civil aviation is a major economic element in the day-to-day conflict of systems. Bloc civil air activities assign high priority to the supply of craft, development of airlines, and related facilities as a part of its program of economic penetration and erosion of US and Western strength.

The United States should continue to seek an air transport agreement with theUSSR on the basis of reciprocal rights with appropriate safeguards and emphasis on international standards and principles. The United States should continue to encourage our allies throughout the world to follow the same pattern in insistence upon reciprocity and adherence to international standards.

The United States should also promote assistance to, and participation in, national civil air enterprises in less-developed countries by American enterprises and, where appropriate, to assist in the development of regional airlines.

(e) Aid Projects to Less-Developed Countries. The United States should, in developing its own aid program, take into account Soviet aid programs and their competitive objectives. In some cases it may be advisable to give aid in order to compete with Bloc activities. As a general rule US programs should give maximum weight to sound economic development as a guiding principle. However, the political objectives which are a part of broad US objectives should be weighed into the balance especially when through its aid program the United States can prevent the Soviets from achieving a dominant position in a recipient country; or when the success of US efforts can be jeopardized by Soviet influence in key sectors or with key people in a recipient country.

Under present circumstances, the United States should not in general propose joint sponsorship of aid projects with the Bloc. US aid which may relate to Bloc projects should be considered on a case-by-case basis.

(f) International Commodity Problems. The US should in general favor participation by Bloc countries in international study groups and agreements. However, each situation should be considered on its merits and less formal association on the pattern of the Soviet understanding with the International Tin Council, should also be considered.

3. Implementation and timing of recommendations.

Consultation should be undertaken in the near future with key NATO countries in order to obtain greater harmony of policy on economic relations between the Free World and the Bloc.

At the appropriate time, the Executive Branch should begin consultation with the Congress to obtain support for greater flexibility. The foundation should be laid for early request for Congressional action on the key legislative recommendations mentioned in this paper. The manner of presentation of legislative changes should be determined after consultation with Congressional leaders.

Without requiring Congressional approval, certain actions might be taken, should it be determined that they would contribute to our political objectives in respect of the USSR and the dominated countries of Eastern Europe, taking into account the special circumstances of the individual countries to which the actions could apply. Among such possible actions are the development of more flexible procedures with regard to certain Foreign Assets control regulations, and announcement of US readiness to accept bids from the Soviet Bloc for stockpile purchases.

Following is an appendix³ which provides a more complete discussion of specific policy changes and actions.

0. Source: Department of State, Central Files, 611.614/6-1961. Secret. The source text bears no drafting or clearance information, but is attached to a June 19 memorandum from Ball to Rusk, which states that it had the concurrence of EUR, E,S/P, L,INR, and H. At the Secretaryʼs staff meeting on June 9 Rusk had requested a review of the entire subject of negotiations with the Soviet Union in light of the summit meeting. (Ibid., Secretaryʼs Staff Meetings: Lot 66 D 147) Ballʼs memorandum stated that this paper should be regarded in the light of that request. A cover sheet and table of contents are not printed.
1. For text of the Agricultural Trade Development and Assistance Act, July 10, 1954, see 68 Stat. 454.
2. For text of the Johnson Debt Default Act, April 13, 1934, as amended on July 31, 1945, see 59 Stat. 516.
3. Not found.