Foreign Relations of the United States, 1961–1963, Volume IX, Foreign Economic Policy

324. Report Prepared by the Policy Planning Council⁰

Washington, July 26, 1963.

U.S. POLICY ON TRADE WITH THE EUROPEAN SOVIET BLOC

I. The Problem

The President has directed an Inter-Agency examination of two questions relating to our trade with the USSR:¹

• "1. Do we now deal with the Soviet Union on the export of technically-advanced machinery and equipment in a manner which adequately protects U.S. interests? Where a national security issue is presented, we of course deny an export license. There are, however, many cases in which no clear security issue arises and yet we know that the Soviets are using American machinery and equipment as a basis for copying our technology. Are we being adequately compensated in these sales?

  ‘Is there any method of organizing these transactions which would secure a better quid pro quo than the present method of leaving it to the individual seller to secure the best price he can in the transaction, in the light of the fact the Soviet Union does not ordinarily respect the patent and copyright arrangements on which we rely in our commercial transactions with other nations?

• "2. Should we reconsider the whole of our trade with the Soviet Union in the light of trade between Western Europe and the Soviet Union and its European satellites? Considering the character and volume of that trade, would a generally less restrictive policy be more in keeping with the interests of the United States? How much possibility is there for a significant broadening of trade that is consistent with our security interests? Would this possibility be such as to justify a general negotiation on trade and commercial matters with the Soviet Union?”

Although phrased in terms of the commercial possibilities and security interests involved in trade with the USSR, these questions are intimately concerned with our over-all political relations with the Bloc. Trade policy toward the European satellites is a necessary element in the examination. For the same reason, our policy on trade with Communist China and Cuba can be excluded, as being greatly subordinated to a separate body of political factors affecting our relations with these areas.

The President’s questions, therefore, pose all the basic issues involved in our controls on trade with the European Communist Bloc. What are these controls achieving and what are they failing to achieve? What are the major stakes we have in this policy? Is this an “expendable” policy from the standpoint of the U.S. and under what circumstances; is it a “saleable” commodity to the USSR, and in what sense?

These are broad issues because the political significance attached to our trade restrictions has been disproportionate to the trade itself. For a number of years now, we have attempted to maintain, virtually in isolation, a posture tantamount to economic warfare. A change in this stance would therefore carry considerable meaning. In essence, the problem comes down to this: how can the U.S. most effectively use trade policy as an instrument in the conduct of its affairs with the USSR and Eastern Europe?

II. Operational Conclusions

1. The major issues in our trade control policy are political—not strategic, economic, or commercial. Neither full access to, nor complete denial of, trade with the U.S. can affect Soviet capabilities to wage war—either hot or cold war. Nor can either trade situation affect in any meaningful sense the performance or potentialities of the Soviet economy. And from the U.S. side, the economic and commercial significance of trade with the USSR, whether free or restricted, is negligible. It is in this context that the President’s questions must be answered.

2. With regard to the narrow question of compensation for U.S. technology, there are no convincing grounds for attaching special significance to the technological components of Soviet imports, or for believing that the U.S. represents a particularly unique source for such imports. Above all, the amount of present U.S.-Soviet trade is so small that there is no practical need to question the assumption that compensation secured by individual sellers in private transactions is adequate to meet the requirements of the national interest.

Beyond this it must be recognized that so long as the U.S. operates within the framework of its existing control system there is no realistic possibility of our finding “any method of organizing these transactions [with the USSR]² which would secure a better quid pro quo than the present.” The USSR would be unresponsive to any U.S. initiative to secure a negotiated arrangement, and would treat unilaterally imposed conditions designed to secure greater compensation for U.S. exports as an extension of the control system. Thus the first question posed in the President’s directive becomes a part of the second.

3. The question of the liberalization of present U.S. trade policy toward the Bloc involves an assessment of what this policy accomplishes—strategically, economically, and politically—weighed against what would be accomplished by a change in policy.

4. In assessing the strategic and economic consequences, there are two governing considerations: (a) the European Communist Bloc comes close to being a self-sufficient, closed economy; and (b) the Bloc’s trade with the industrial West takes place with our allies and not with the U.S., and for this reason is largely beyond our power to affect.

5. Even under conditions of a maximum interdiction of East-West trade, the USSR would have the capability (a) to maintain and probably to improve in its own favor the present balance of world power, (b) to preserve its internal social and political order, and (c) to continue relatively rapid economic growth.

The most that can be said for trade with the industrial West as a whole is that it provides a useful element of flexibility to Bloc planning and perhaps adds a lubricating quality to the complicated process of innovation and technical change in Bloc industry. But this trade cannot exercise a determining influence on the Bloc’s economic performance or prospects.

In these terms U.S. trade alone, which is all that is relevant to this review, takes on negligible strategic and economic significance. Present U.S. trade with the Bloc is small enough to be completely disregarded.

If the U.S. removed restrictions and traded with the Bloc on the same basis as does Western Europe the trade would expand. Payments difficulties, however, would set sharp limits on this expansion. At maximum projected levels, the USSR would obtain moderate and marginal advantages from this trade. For the U.S., the whole affair would continue to be of very minor economic significance.

6. The U.S. controls system has political and psychological significance disproportionate to the trade itself.

a. From the standpoint of the U.S., the system has become intricately interwoven into our over-all strategic thinking about the cold war and in our over-all cold war posture. Trade denial is looked upon as an effective weapon of cold war, regardless of how large or how small the quantities of goods involved may be, on the simple assumption that since the U.S. is richer than the USSR any trade between the two must necessarily help the USSR more than the U.S. and hence must improve the relative power position of the USSR. Trade denial has also come to be an important symbol of our cold war resolve and purpose and of our moral disapproval of the USSR. The trade controls issue has an important place in our continuing efforts to arouse the free world to common action and policies against the Communist threat. We have sought to induce non-communist states to hold trade to a minimum, not only on grounds of denying help to the Communists to build their power, but on the grounds that increased trade would carry real and immediate dangers to free world participants in that trade.

b. From the standpoint of the USSR, the political significance of U.S. restrictive policies have been out of all proportion to their impact on the Soviet economy or strategic position. The principal reason for this is that they serve as a symbol of U.S. unwillingness to grant the USSR full respectability as an equal in the post-war world order, a symbol that the U.S. dares to discriminate against the USSR under contemporary conditions. Less important but nevertheless real reasons for Soviet dissatisfaction can be found in: the Soviet belief that without U.S. restrictive policies, large-scale trade based upon credit financing and highly beneficial to USSR could be developed; in the Soviet desire to be sure of “the best” in its technological imports; and in Soviet faith that the expansion of trade would give it important leverage, through the American business community, over U.S. policies.

c. From the standpoint of the European satellites, the U.S. controls policy symbolizes their economic, and hence political, dependence on the USSR. In practical terms, denial of trade with the U.S. is of even less economic importance than in the case of the USSR. Yet the regimes see U.S. controls as an obstacle to creating new alternatives to total economic reliance on the USSR. This is of particular importance at the present time when the USSR is making strenuous efforts to impose supranational planning and “division of labor” arrangements on the satellites, the result of which would be an even greater subordination of their economies and national identities.

7. The political role played by the U.S. control policy under static cold war conditions is so significant that the policy would be difficult to do without, or even to modify, as long as those conditions continue. In a situation of unyielding confrontation between the U.S. and the USSR, there can be no question of giving quarter, psychological or otherwise, to the enemy. A change in the policy in such circumstances would constitute an important shift in the over-all U.S. political stance, and would impair U.S. effectiveness in holding up its end of the cold war. Moreover a change under static conditions would be difficult to justify to the American public and to the Congress.

8. The usefulness of the restrictive policy is, however, solely the product of a static situation in the cold war. All the criteria that underlie and justify the policy are the criteria of warfare in the traditional sense. These criteria presuppose that for the time being at least we cannot protect ourselves or promote our interests by normal methods, that we are in a position where we have no choice but to resort to “the continuation of politics by other means.”

9. In a situation of cold war movement, the governing considerations would be completely different. All of the peculiar values that attach to the control policy, except in-so-far as it affects items of direct strategic importance, would fall away. At the same time, the control policy would be particularly useful, and almost uniquely so, as a means of furthering the movement process.

• —Controls could be given up without affecting the existing power balance. There would be no increase in Soviet strength nor loss in U.S. strength.
• —Controls would be an enticing inducement for the USSR. In them the U.S. has one of the few commodities which it can afford to give up that the USSR would be interested in buying.
• —Unless the U.S. should be willing to give up controls, the movement process would necessarily be of short duration. The Soviet leaders have made clear they equate “peaceful relations” with “trade relations;” they would insist on consideration of controls in any serious negotiations; and they would consider U.S. attitudes on this issue as a decisive test of U.S. intentions.
• —The “concession” made by the U.S. through lifting its controls, unlike other concessions, would be revokable at will. At the same time, once a new start had been made on trade, the U.S. for the first time since the war’s end would be able to employ on a continuing basis the potentialities of trade as an instrument for political bargaining and for meaningful communication with the USSR.
• —Lifting controls under conditions of cold war movement would increase the effectiveness of the Western alliance. It would eliminate irritants and frictions that have arisen between the U.S. and major allies over the controls and would enable the U.S. to employ the capital previously expended to hold the trade line on more constructive undertakings to strengthen the alliance.

10. The exact circumstances under which the U.S. should be willing to negotiate an end to its control system cannot and should not be spelled out in advance. It must be a matter of political judgment based on both objective and subjective considerations. On the one hand, there would need to be concrete evidence of Soviet interest in generally improved relations with the U.S. and of Soviet willingness to take, on the basis of mutual concessions, the specific steps necessary to effect this improvement. On the other hand, the situation should be such as to indicate that discussion of the trade issue would be a logical and fruitful, perhaps necessary, means of adding significant momentum to the forward movement that had been gotten underway. As a rule of thumb, it can be said that the U.S. should wait for the USSR to raise in the course of serious negotiations the trade question. If at that time the USSR had already agreed to the settlement of one or more of the dead-center issues between us, and showed at the same time a genuine desire to proceed with a serious and fruitful discussion of other matters, including those that most closely press in on immediate U.S. security interests, the U.S. should agree to a mutual review of “obstacles to improved trade and general intercourse” between the two nations. Final modification of the system, which could only be effected after necessary discretionary authority had been granted the President, would be left to a later and more decisive stage in the negotiation process.

11. Should the U.S. negotiate an end to its control system, it would need do so not in terms of a simple abandonment of the system but in terms of replacing it with another. Despite the likely absence of any large volume of trade between the U.S. and the Bloc, even under relaxed conditions, it would not be in either our commercial or political interests to allow transactions to fall again under the exclusive control of U.S. private traders, on the one hand, and Soviet state traders, on the other. We would need to cover trade with a government-to-government arrangement that would (a) reserve the right of the U.S. to deny items of direct strategic importance (i.e., items on the COCOM list); (b) insure maximum protection for such U.S. commercial interests as patent rights and copyrights, (c) provide safeguards against Soviet abuses like dumping, and (d) permit the U.S. to change the volume and condition of trade as political considerations made desirable.

The principal advantage the U.S. would gain from a change in its trade policy would be the one-shot impetus that would be given to a movement of the USSR toward policies and conduct more compatible with U.S. interests. However, assuming no early renewal of cold war conditions, the U.S. might find that it had exchanged a limited and wasting asset for a still limited but growing asset. The main hope for such a fortuitous turn would lie in the possibility that even as a minor trade partner of the several Bloc countries the U.S. would be better able to influence the course of events and the evolution of policies.

The prospects for influencing Soviet policies, at least for the nearer term, would be modest at best; but they could be of very considerable significance in the case of the Satellites. We have good reason to believe that the forces now making for unrest and change in Eastern Europe will mount. The ability to use trade flexibly and actively in Eastern Europe would add greatly to the presently limited capacity of the U.S. to shape the course of these events. In any case, from the point of view of dealing with either the USSR or the Satellites, we would surely be in a stronger position if trade were active (and thus subject to change) than if it were virtually stagnant (and played in only one key).

III. Policy Recommendations

1. The U.S. should be prepared to treat its trade control policy as a useful and uniquely appropriate negotiating instrument in discussions with the USSR directed toward resolving outstanding issues. We should view the policy as expendable in circumstances that promise a break in the cold war stalemate. Specifically, we should be willing to take all necessary steps to remove obstacles to trade except trade in items of direct strategic importance (COCOM items), if such action would contribute to constructive moves on the part of the USSR.

2. Pending such circumstances or negotiations, the U.S should not substantially modify its policies toward trade with the USSR. These policies permit considerable latitude in licensing decisions; we should use this latitude to serve our political purposes and in a manner appropriate to the prevailing state of relations with the USSR. We should, in particular, avoid individual licensing decisions that would in effect amount to a tightening or relaxation of licensing standards unrelated to concrete changes in Soviet conduct. We should also avoid pressing our allies to extend the scope of multilateral controls, except in response to a new Soviet-initiated crisis situation.

3. Apart from the question of trade policy toward the USSR, the US should use trade more actively as a means of influencing events in Eastern Europe, recognizing that such trade can symbolize for a Satellite country another avenue for achieving greater national identity and independence. Specifically, we should use the discretionary authority provided in export licensing and other legislation to respond effectively to overtures from any of the Satellite governments with which we have relations. We should also continue to press for new legislation to increase the existing discretionary authority. Should we reach a basic agreement on trade with the USSR, we should be prepared to negotiate at least as liberal an arrangement with the Satellite governments.

4. If we change our control policy, we should plan to conduct trade with individual Bloc countries on the basis of bilateral agreements. Through such agreements we should seek maximum political advantage from trade and the development of better safeguards for U.S. commercial interests.

5. Should it develop to our advantage to negotiate trade arrangements with the USSR, the Administration should be prepared to secure Congressional enactment of a new East-West Trade Act. Such legislation should be based on a full and frank examination with the Congress of all the relevant issues and would presuppose the existence of evidence that the USSR was in process of significant movement toward ending the dangers and strains of the cold war. Such legislation should provide the President with all the administrative authority he needs to use trade as an effective political instrument for dealing with the USSR and its Satellites.

6. The U.S. should in this circumstance also undertake, through advance consultation, to prepare the ground with our allies for a change in U.S. policy. In these consultations, we should discuss any implications that a change in U.S. policy would have on the multilateral system of controls and any changes that might be required to maintain collective surveillance and control of strategic commodities as multilaterally defined. In keeping with the objective of using trade more effectively for political purposes, we should seek a closer understanding with our Allies whereby we would collectively restrict or cut-off trade as a means of response to Soviet-initiated crises.

[Here follows the remainder of the report.]

0. Source: Department of State, S/P Files: Lot 70 D 199, Economic Policy, 1963. Secret. A July 29 covering memorandum from Walt Rostow to Rusk reads as follows: “Although you had a chance to read and hear discussion on an earlier draft of this paper, you may wish to have this latest version at hand which incorporates suggestions made at your planning session on July 18, 1963.” A July 29 cover letter from Rostow to Ambassador Kohler in Moscow states that the paper was prepared in the Policy Planning Council in response to a request by the President for a review of present U.S. policies. The paper was based on views developed in discussion of an informal group drawn from the interested geographic bureaus and the Bureaus of Economic Affairs and Intelligence and Research. “It has gone through a fairly extensive review process in the Department, including a session of the Secretary’s Policy Planning meeting, and appears to have general support.” Kohler’s comments and his endorsement of the recommendations in Part III of this paper are contained in telegram 474 from Moscow, August 7. (Ibid., Central Files, STR 7) A handwritten note on the title page of the report reads: “Basis for Draft Report to President—See WR memo to Secy. 8/9/63.” That memorandum has not been found.
1. See Document 322.
2. Brackets in the source text.