Created: 4/15/1982

OCR scan of the original document, errors are possible


CRV* contribution to Interagency Paper on OS policy Toward Eastern Europe

ZZZ.E. Differentiation In East-West Economic Relations


This paper addresses only the economic aspects of the

policy of differentiation aa it relates to East-Heatand thus iaartial assessment. Judgedecononic terms, the payoff to the Onlted Statea haa'

Background and History

The history. commercial and financial policy towards Eaatern Europeension between two goala:

encouraging the development of more liberal political, economic and social trends within these countries and fostering their adoption of foreign policies lndependent'of theUSSRi^snd

denying preferential treatment and aasiatance to countries considered tohreat. security interests; In seeking to achieve these. policy has differentiated in favor of Hungary, Poland, and Romania but haa estrictive stance towards the USSR, Bulgaria, Czechoslovakia, and the GDR.

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Tha economic policy tools used to implement differentiation between the treatment accorded the DSSR and Eastern European countries and among the latter include: extension of Host Favored Nation (KFH) tariff treatment ( baaed on reciprocity in tariff concessions^ and mutualxtension of Export-Import Bonk and Commodity Credit Corporation (CCC) credits (terms on such credits may bt more favorable than aarket rates, and government lending ray facilitate private bank lending by raisingoncessional sales of foodstuffs (Poland has received the great preponderance of auchnd modestly leas restrictive application of export controls for some countriea in comparison with treatment accorded the USSR. In general, Poland baa benefitted the aost and over the longest period froa this differentiated approach. Zt galnd KPN treatment0 and has enjoyed considerably more benefits. credits than Hungary and Romania.

In the, the impetus for inproving econoaic relations vith Eastern Europe was associatedarge extent with detente and expanded ties with the DSSR, rather than with differentiation pet ae, although differentiation waa in fact practicad giving Poland and Romania mora favorable treatment than either the OSSR or other Eastern European nations. he US-USSR Trade Agreement promised KPN treatment and

other econonic benefits for Moscow and the Soviets gained access to Export-Import Bank credits. The Jackson-Vanik Amendment to the Trade Actowever, changed the throat. policy bynd official credits for communist countries contingent on the Individual country's performance In ensuring free emigration. Tha USSR haa failed to meet the Jackson-Vanik criteria and thua was denied UTH and,XIM credits.

Romania5 and Hungary8 were certified as eligible for KPN and official credits, and they have cleared the subsequent annual reviews. East Germany, Czechoslovakia, and Bulgaria have not yet begunthe process. In tbeoland drew heavily on ZXIK credits, andmillion ln CCC credit guarantees were crucial to Polandhan commercial credits were not available to finance Warsaw's huge groin imports. Romania also has used EXIM and CCC credits, whileood exporter, has drawnery small amount of CCC credits. With the exception of Poland, the preponderance. lending to Eastern Europe haa been by private commercial banka.

Export control policy also bas differentiated among bloc countries. If slightly. COCOM, the multilateral Western export control body, granted Poland favorable consideration fromntil early this year. . export control

also favored Poland until martial law, and Romania and Hungary galnad aiailar treatment at about tha aaaa tint that tbay vere awarded KPN. The guidelines for both COCOK. controls ara Identical for exports to all bloc countriea, but the favored countriesoaawhat better chance of approval. Costs and Benefits

In enbarkingolicy based on differentlatloo, the United States sought to laprova ralationa with tba countries of Eastern Europeroad range of iaauea aa vail aa to reap substantial economic galna from increased trade. . buslneaamen enviaioned untapped markets in CEMA for grain, capital gooda and technology,and avan conauner goods. Bankers were willing to land to facilitate tha trad* and to cover tho East's temporary inability to expor'. enough to pay for tha imports. Western imports were expected to strengthen tbe Eastern economiea aad incraasa tbalr export potential.

eault of the improved climate for. trade with Eastern Europe climbed dramaticallyery lov. exports to the area increased 2S0 percent2nd importsercent. Poland, Hungary, and Romaniafavored. policyrecorded auch faster growth than did tha other' three, aven before tha legal changaa that liberalized economic relations. Although the trade flowa have alvaya been too aaall to have moraegligible

inpact on our economy, manufacturers of capital equipment and farmers welcomed thc sales to tbe Sasi, and the cost to. government was small and confined largely to direct CCC cradlta at subsidized interest rates. On aconomlc grounds, the benefits of detents and differentiation in tbe first half ofid outvaigh tbe coats aince tbe latter were small.

Beginning in the, the onset of debt and absorption problems ln Eastern Europe began to reduce tbe rate of growth of their trade with tha Hast. The flows of Western capital goods to the East proved ineffective in producing the needed increase in Best European exports. The resulturther increase ln debt and debt service. Trends. trade with Eastern Europe verawith the exceptionontinued boomes of agricultural productsesult of several disappointing crops in Eastern. trade with Romania and Hungary, for example, increasedhort period after they gained MFN and access to Export-import Bank credits.

U.S. trade with Romania rose sharply5ut stagnated last yearesult of payments problems.

U.S. trade with Hungaryodest Increaae after Budapest was granted those trade benefitsut also slowed in recent years. Regardless. policy, until the East European countries are able to improve their export


ptrforunca aad deal affectively with tbalr debt aervicing Ptoblesa, tbe Heat will not enjoy the gain* froa trade anticipated in tbe.

In tbe past year, the coata to. of our peat landing policlaa to Poland hava eacalated aa it bas been unable to aarvlco ita debts. Tba United states bas rescheduled Warsaw's direct official loans and aaauaed tba debts. banka thatovernment guarantee. The revenues foregone and payments made11 million; tbe comparable figure2 could ba aboutBillion. Becauae tho proapacta for repayment of loane originally extended and recently aasumed ara Questionable, the ultimate coata could be much higher. Romania also baa approached the Parle Clubescheduling of official debt, but the United states has not yat agreed to reschedule. Romania'a debt to the united states is not as large aa that of Poland, and the cost to tba government would be correspondingly amaller.

Original document.