DETENTE AND US-SOVIET TRADE (S-4208)

Created: 3/1/1972

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Detente and US-Soviet Trade

Long standing hostility and reciprocal barriers have kept the level of US-Soviet tradeow level- 1 two-way trade amounted to0 million, representing onlyf East-West trade turnover- US exports to the USSR have increased almost three-fold8 (seeut2 million, the value of US exports to the USSR1 was well bolow that of the USSR's najor Western trade partnersVest Germany, Japan, Prance and Italy. The expansion of US exports in the last three years apparently is unrelated either to detente or to unilateral US moves to expand such trade. Expansion has occurred largely in goods normally bought in the United Statesgoods that are not normally available elsewhere in the quantity or quality that the US can furnish, such as aluminum oxide, cattle hides, ore mining equipment,

Tlie impact of detente and US unilateral moves made1 will be apparent in trade flows2 and beyond. The United States relaxed licensing restrictions Oil exports of motor vehicle nar.ufacturiiis equipmentrincipally machine toolsin This resulted in Soviet orders approxiriitinc $v0 million for US machine tools. These orders and others fnr oil and tas pipeline equif^'orst, pining equipment, electronics,

and other items totaleduarterillion dollars1ourth of ell Soviet orders for machinery and equipment placed in the West in that year. Of the total, equipnent ond technology for the Kama River Plant accounted for onlyillion. The decision to approve licenses for the Sana River Plant vas made in1 prior to Conaerce Secretary Stans' visit to the Soviet Union. US license approvals for Kama total moreillion. Proa these the United States might0 million in orders.

The United States in1 eliminated the requirement6 of any groin or flour shipments to the USSR, Chine and Eastern Europeve in US riag vessels. In1 the USSR0 million in ordars for US feed grains-Host of this vill move in the first half Following tbe Stans visit ond the reciprocal visit by Soviet officials to Washington inalks will soon be underway to0 million toillion in US feed grains over the next five years.

The recent exchange of visits Oatwaan tho US and the USSR has pointed up the recent progresa in reducing the barriers to expanded trade. The positive Soviet response to US moves reflects, inter alia, tho USSH's need for Western technology and equipment. It has scerainRlyore

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cooperative attitude toward US coeplnints about Outstanding difficulties such as lend-lease. For Its part, the USSBelaxation of US export controls, govermient (Exiobnnx) guaranteed credits, and most-favored-nation (HPa) treatnent on tariffs for Soviet exports. Probably the most crucial factor for any immediate largo increase in this trade is the granting of long-term credits by the US.

If broad agreements ore reached on removing trade barriers, US exports to the USSR could veil increase from1 level of0 million to) Million Such exports would be considerably In excess of imports, and tho USSR would still have atrade duficit just as ot present.S exports to the USSR exceeded imports by0 cilllon. 5 the US surplus would be substantially higher because sx>st Soviet exports would notarxet in the United States for the next Tew years at least.

The bulk of Soviet imports would be in the machinery and equipment category- The USSR hasong list of expensive capital equipment it desires from Uie Wastutomotive manufacturing, deep well drilling, nutomatic oil transfer and storage, oil refining, rolling mill, off-tha road vehicles, cotiputers, instruments, data transmission, and maierically controlled machine toolsnd it considers tbe US equipnent and technology for nsnv of these catenaries superior1

others. Many of these Soviet needs thus Right be purchased from the United States if credit terns can be arranged, although some will be purchased from the US in any case-

The USSR's need for credits to enable it to increase its purchases from the US points up the problem of the lijnits of the already substantial Soviet debt to the West. Any large orders from the US would leadncrease in this indebtedness. Long-terra credit/barter arrangements, such as those calling for the exchange of pipe for gas, and cooperation deals (so-called joint ventures) would litigate the debt problem. The proposals made to other Western countries for oil, gas, copper, and other raw materials development with repayment in products are also being made to the United States, and ccxnc may behe proposed LHG transaction-The LKG deal could involve billions of dollars with repayment of the credit in 1HG shipments to the US.

Developed West and US Trade with the

Million US$ o/

DevelopedUnited States

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to nearest million; based on Western statistics.

except USanada and South Africapoint ofnd Australia-

n. Preliminary estimate.

7 March2

The Soviot Economyactor inoviet Political Relations

Introduction

The state of the USSR economy as viewed by its leaders will be an important factor affecting their negotiating posture during the President's visit. Certainly, the current Soviet leadershipreater preoccupation with the domestic economy than any of its predecessors. And, like any economy, the Soviet economy has both strengths and weaknesses that permit the leadership to pursue certain noneconomic goals and prohibit it from undertaking others.

The State of tho Economy

The USSR is the second largest economy in the world. The basis of Soviet economic strength lies in its great natural wealth, providing self-sufficiency in nearly all important raw materials,abor force .that is about half again as large as the US. Deployed under strong central direction, these resources have permitted rates of economic growth that are high by internationalilitary complex about equal to that of the US, and

a steadily rising standard of living.

During the Eighth Five-Year Plan, Soviet GNP grew at an annual rate ofercent. By comparison the rate postedasercent and for the decade ofercent. Because of the wide fluctuation in agricultural production, however, year-to-year growth in GNP has varied considerably in recent yearsowercent9ighercent All of the increase in the growth rate of GNP5 can be attributed to an improved performance in agriculture and construction. Industry, the largest contributing sector to GNP, grew at about the same pace as in the first half of the decade. The rate of growth of Soviet GNP for the past five years was less than half that of Japan, roughly the same as that of France and Italy, but substantially above that of the United States, West Germany, and Great Britain.

Preliminary results'1 suggest that, contrary to.-planners'hopes, the new Soviet five-year plan got offlow start. Gross national product grew by onlyercent. ecline-in agricultural output from the record level0 was largely responsible, but the pace of industrial growth also sagged, especially in the.

last six months of the year. The failure to meet the goals for labor productivity and for putting new plant and equipment into use suggests that some of the key goals of the five-year plan are threatened.

In the new fivo-year plan endinghe main objectives of Soviet economic policy remain roughly thes in recent years. The average annual rates of increase planned for GNP and industry are somewhat above the average annual growth achieved. No major shifts are apparent in the allocation of resources among the principal claimantsdefense, investment, and As before, investment is to growlightly highor annualhan CNP, and consumptionower rate The directives place unusual emphasis on bettering the lot of the consumer, but the figures given imply that the rate of progress planned for the standard of living is somewhat lower than that achieved. Although the available data do not permit preciseof defense outlays, it appears that the plan would allow expenditures for military and space programs to rise at least as rapidly as GNP.

Host Western (and many Soviet) observers believe that the economy of the USSRumber of serious economic challenges including: eclining rates of growth, iscontent among consumers, low efficiency caused partlyarked gap between Soviet and Western technology,n agricultural sector that remains the Achilles* heel of the Soviet economy, absorbing vast resources and retarding overall growth. Although it has been argued that these problemstrong inducement to the Soviets toALT agreement and to increase trade with the US, Soviet leaders rightfully view such agreements with the West as no panacea for domestic economic problems.

Economic ImplicationsALT Agreement

The short-run economic benefitsALT agreement are limited and insufficient to make an agreementfor the USSR. The USSR has achieved parity with the US in important military areas, and continued economic growth will permit maintenance of the parity without adding to the share of resources devoted to military programs, Moreover, the amount of resources likely to be released under the kind of agreement being discussed does not bulk large in relation to the scale of economic activity, if, for example, the rubles that might be

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saved in the next few yearsurb on strategic programs could be transfcred entirely to investment projects, the effect on the growth of fixed capital would be too small to raise the rate of economic growth appreciably. Moreover, whereas swords may be beaten into plowshares, the transferability of the resources of the missile programs ands limited in the short run and problematical in the longer run.

Potential long term economic benefits mayore persuasive factor for enteringALT-type agreement. Having achieved military parity, the Soviets probably believe that the US will spend enough to prevent Soviet superiority, soew round spending to arrive at the same "relation of forces" would onlyaste. Moreover, knowing US capabilities, especially, they cannot be sure they could keep pace if military spending spirals.

The Effect on the Soviet economy of Expanded Trade with

the US

ent toward self-sufficiency, the USSR has traded with Western nations when there were clearin doing so. Usually, the USSR has used its limited foreign exchange to import Western technology.

The technological gap, however, remains, and productivity" is low. The relatively low standard of livingto Soviet workers explains some of the differences between productivity in the USSR and in the West. To improve incentives and dampen consumer discontentthe lesson of0 riots in Poland has not been lost on Soviet leadersagricultural products and consumer goods have been purchased abroad in increasing amounts. Indeed, the rush to spend hard curency on feed grains in the past few months after two good harvests seems explicable onlyetermination that the plans to increase meat consumption shall not fail.

The USSR can buy most industrial and agricultural products in other western countries, but some kinds of machinery, some licenses, and some agricultural products (feed grains and concentrates in the quantities desired) can be purchased only from the US. To this extent, at least, the Soviet leadership has reason to promote trade with the US. Nevertheless, the volume of such trade will be limited, and its contribution to the economy will be small, except perhaps in agriculture.

Original document.

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