PROSPECTS FOR EAST-WEST TRADE IN 1970'S (S-3815)

Created: 9/29/1971

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central intelligence j

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MRHQRAHDUM FOR: David G. Show

eus/rpe

Department of Prospects for East-West Trade Ins

The attached study on Eost-Wcot trade is forwarded In response to your request.

If ve con contribute onythlng further to the ECO MAD discussions on East-West trade to be held In October, please do not hesitate to let us know

Chief

Office of Economic Research

Attachment As ototed

CIA HISTORICAL REVIEW PROGRAM RELEASE AS9

'

Prospects for East-West Trade Ins

Foreword

The discussion of East-West trade below refers to the trade of the USSR and Eastern Europe with tbe Industrial (developed) West- Eastern Europe refers to six East European countries --

^Bulgaria, Chechoslovakia, East Germany (Soviet-occupied zone ofungary, Poland, and Romania. All seven countries oleo sre the members (plus Mongolia) of the Council of Mutual Economic Assistance (CEMA or COMECON). The industrial West is composed of the following countries: Austria, Belgium-Luxembourg, Denmark, Finland, Prance, West Germany (Federal Republic ofceland, Ireland, Italy, Netherlands, Norway, Sweden, Switzerland, United Kingdom, Jnpeo, Canada, United States, Australia, New Zealand and the Republic of South Africa. This grouping excludes the OECD countries of Portugal, Greece, Spain, and Turkey (also Yugoslavia) but Includes tbe non-OSCD countries of Australia,

New Zealand, and the Republic of South Africa.

In dincusslous of Soviet and East European international payments, only trade Involving hard currency is considered. Finland and Iceland are thereby excluded because they conduct trade "with" the USSR and Eastern Europelearing basic.

-MEW

East-Went trade grew at overage annuel rate of more than 1C# ino'b. Ins the rate probably vlU run ato 8^ lover for the USSR tben for the East European countriesroup. The reasons forlower growth in their trade with the West include rising pressures on their supply of agricultural and industrial materials, lack of Westernfor their finished goods, the Increasingly large-volume of debt to the West which will have toserviced,rowing selectivity In machinery and equipment purchases from the West. In addition, the USSR and the East European countries plan to Increase their trade with one another at the expense of trade with the West in conjunction with rencwid efforts to promote economic integration in CUtt.

The upper limit of the ranger. BOB* impact on the volume of East-West trade by the succesi ful conclusionuropean Security Conference. onference night Improve the climate for Western investment end increase Western access to the Soviet end Eact European market, western concessions ore also postulatedeductions in tariffs and quantitative

restrictions and relaxation of Western export controls-

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-fKlMflflCMTH

If the United States should go about as far as West European governments In reloxing restrictions on trade with the USSR and Eastern Europeand in actively encouraging tradehe US share in East-West trade might increase from the current kfi to an much aslthough it is quite unlikely to reach the upper end of the range. Prospects are better for increasing the US shore in trade vith tbe'uSSR than in trade with Eastern ^Europe, particularly in exports of technology-intensive-products. The growth of US imports from both the USSR and the East European countries is likely to lag behind exports; it Is easier for them to sell in European markets. An the scale of their trade with the West increases, they nay find the US market more attractive. But for the next few years at least, these countries probably will incur chronic deficits in trade with the US, and expanded US credits vlll be needed to finance US exports to the USSR and Eastern Europe.

..fiflunncuTUf

trade grewotec. Western trade with the East European countriesfaster than trade with the USSR

0 Western exports to the USSR and Eastern Europe9 billion aud imports were6 billion. The USSR accounts for about kCff, of East-West trade and En stem'Europe, n Appendix show the value of East-West trade during the

estimating the growth of East-West trode in theof Soviet and East European exports to theimports) have been made ' by fitting variousto historical data and by analyzing changes in both supply

and demand for majorend the East-European

countries. Factors considered include plane for Investment and foreign trade, limitations on growth of exportable commodities, and prospective developments in Western markets. Merchandise export earnings ere tho principal means for financing imports,

and the ability of the USSR and Eastern Europe to expand exports has been end will be the principal limitation on the growth of Enut-Weot trade.

Growth rates are.based on Western statistics. Soviet andstatisticsateFast-Wost trade

HJflNffflBffttt

xports

3. Soviet exporto to the Wool increased during theYOate* but the rate of increase Is expected to drop in the next decade. Soviet exports0 vere valued at more3nd estimates0 rangel billion tobillion, implying so average annual locrease6 These estimates reflect projectlona both for traditional exportsoil, lumber, metals, coal, andnd for exports vhlch are being or may be developedesult of Western investments or of agreements such as the natural ges-for-pipe dcaLs. Such exports might include wood and wood products developed Id Siberia, nonferrouc oetals (copper, nickel) from Siberia, etd newly exploited iron ore deposits from tbe Kolapenlnculu.

U. Tte followingabulation of the possible volucs of Soviet exports of major commodities0 compared with uctunl exports

* Basedoviet statistics- Western reportingontern Imports from the USSR,ncrease. Soviet statistics arc used throughout the discussion on Soviet trade with the West. Tables on Soviet trade with the West based on both Soviet and Western reporting ure in Appendix. ** Western reporting7 billion (including transportation and Insurance).

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uTOEtiTttt-

Toble 1

USSR: Exports to the Industrial00

Mil linn ft

and

Products

and Wood

tCoel and coke

He tale

fiber

a/

a/

gfle

and equipment

b/

kjlOO-taOO'

n.

b. Includes food products, ores and concentrates, chemicals, fertilizers, and other producta. More0 million of thin is unspecified, of which about one-third Is nickel. 0 total and0 estimate for base metals is thus understutod.0 estimate for "Other" allows for an increase in exports of nickel, however. -

5' Oil will continue to be the major export commoditywith the West. Exports were valued8 millionup by ptOillion more than

Constraints in supply and increased dciuond in both the USSR and Eastern Europe will place limitations on the quantity of oil available for export to the West. However, because of price rises negotiated between OPEC and the international oil companies, the value of Soviet oil exports will continue to riseprobably at about half the 1C# rate achieved inn spitelower rate of increase in the volume of exports. Exports of wood and wood products should rise steadily, if sufficient investments (including Western) are made to exploit additional forest reoources ond to increase the share of processed goods such as chips, plywood and paper. Japan is the moat likely source or Western investment in thin sector.

6. Coal end coke exports have changed little In recent years olthough higher prices,0 increased the value of such exports. Much or the coal that the USSR exports is not of premium quality ond generally does.not fully satisfy current Western specifications.esult, shipments to industrial Western countries orexpected to grow much in the future. Exports of nonferrous metals (particularly nickel) and platinum group metals hove grown"substantially in recent years although the platinum group has shown great weakness since ferrous

metals exports have remained at about the same levelV

Projections of the fastest growing metal exports are difficult

because of their vulnerability to fluctuations in Free World

market a, Mich of the rise in nickel exportsor example,

was due to depressed Free World 6upply and high prices resulting

from the lengthy strike at the major Western producer. Soviet

exports of nickel as well as platinum group metals apparently

fell off It is believed, however, that over time growing again

demand Artll stimulate Soviet exports of both nooferrous and platinum group metals. Moreover, some form of Western investment in Soviet copper and nickel deposits is expected duringO's and some exports could result by the end of the decade.

7. Cotton fiber hasainstay of Soviet exports to the industrial West for two decades, but long range export prospects arc cloudy because of increasing substitution of of man-made fibers. Exports have been erratic In recent years, falling from more0 million78 to leas than tyiO million Civen the uncertainties surrounding both agricultural production and the uses for cotton In the future, it is doubtful that cotaon will be an important exportxports of another traditional commodity, furs, have shown no tendency to grow; fur exports have remained at about the same level for the past decade and little, if any, increase is expected during the current decade.

a

8. Cera diamondselatively nev export commodity for the USSR, but exports grew to more0 millionbout six timee the level Sales fell0esult of reduced demand in the West, but Western demand should rise again. O Soviet exports could more than double9 level. The newest export commodity of importance Is natural gas. The value of natural gas exports to Austria only)0illion. Based on contracts signed with Austria, West Germany, Italy, France, and Finlandossible deal with Japan, natural gas exports should0 million

9- Other commodities exported to the West now include chemicals, fertilizer, vegetable oil and oilseeds, wheat, ores and concentrates, fish, and other items- Exports of some of theseave increased*In recent years nnd may continue to rise,bers may decline or level off. All of the above itens, likt the traditional exports, are row materials end ocml-manufacturcs. Because of Soviet unwillingness to tailor exports to Western marketa, manufactured products such as machinery will remain largely uncompetitive in the West for the foreseeable future. Only In sectors in which such efforts arc madeperhaps the manufacture of aircraft such as thend the TU-lWi us well as helicoptersan the USSR make inroads In Western markets. There are no indications that the USSR plans to make serious sale3 efforts for other types of equipment.

awareness of the need to expand exports canin several recent contracts and in other negotiationsIn which the USSR has sought to tie repayment tothe products from the installation built with Westernlncludo the gns-for-pipe doals with Austria, Westand Italy; the Soviet-Japanese wood for equipmentproposed oil and gas-for-plpe deals with Jopan; ond the proposed'

'^Western exploitation of Soviet copper at Udokan. Most'of the arrangements would ultimately Improve earnings, but aside from the gas-for-plpe arrangemonto and the wood for equipment controct concluded with Japan, export earnings would not be affectedignificant way before the end of the decade.

.'- >vlet ,

most of's the USSR bought moresold in trade with hard currency countries. Thefinanced in pert by selling gold, but mainly byby buying on credit.Soviet Indebtedness to the Vest,has grown rapidly In recent years; It was aboutot the end0 and wiU probably reachillionend1 (See. Soviet trade statisticsduring thehe Soviet hard0 million annually. It reached themark Only7 did the USSR hard currency trade surplus. (Seen Appendix)

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Table 2

Estimated Soviet Drawings and Scheduled Repayments on Western Medium-Term and Long-Term Credits

Million US

Year

Drawings

Repayments

Credits

Debt at End of Year

136

u

17

b/

estimates are based largely on data derived fromdelivery and credit terms and on Soviet Imports ofequipment. In general, early) Involvedandinterest. arge number of contractsredit and &f> interest. Repayment periods for thewere usually three to five years following downpayment. 5 have been eight years following delivery of equipment.

MOTE: Soviet outstanding indebtedness calculated by NATO is higher, but NATO estimates overstate the level of debt because they include extensions rather than drawings in its calculations

12. Debt service charges are rising rapidly and vere equivalent tof export earningsIf, as seems likely, Soviet exports slow markedly, the ratio of debt service to exports will soonnd couldefore long. Two possible projections of Soviet Indebtedness to the West are given below, either of vhlch could be well off thebut current trends indicate that drawings will be at least maintained for the next few years.

Table 3

Projections of Soviet Indebtedness to Western Creditors a/

Outstanding

at End

tear DravlnKs b/ Repayments b/ nterest Wet Credit of Year

ontinuation of9 level plus scheduled pipe deliveries on creditall back to9 level ofter the pipe shipments are completed. ssumes other exports on credit will replace pipe. Projections5 would show Increasingly large repayments in excess of drawings.

The following tabulations show the debt service (repayments plus interest) implicit in the two projections, together with projections of exports5 at(the upper limit of export growth estimated).

A

*

B

537

635

in the West Is good, and

over the

one over the use of foreign exchange resources insures that debt obligations can be met. However, the Soviet government probobly washes to avoid the reduction in flexibilityigh debt norvice ratio would produce. For theatio much overprobably would seem excessive.

If exports increaseate much less thanthe ussr would have to make difficult adjustmentn. To hold debt service payments within reasonable bounds, the USSR would have to stop iDcreasing drawings on new credits. Repayments would then soon exceud-drawings, and the net flow on credit account wouldarge surpluseficit. This shift on eredlt account

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HHMEIfflM.

would mean th.it purchasing power over importsmport capacitywould lncreaoc less than exports. These projections depend on many assumptions, any of which could be wrong. Even If the overall projections are correct, those for individual years could be far off the mark. But unless we have grossly underestimated export prospects, it appears that Soviet import capacity will Increase ouch more Glowly In the next few years than It has since the mid

14. If merchandise exports do not grow substantially faster than suggested above, the USSR will have to finance imports by other means or ration its imports more strictly. The USSR has added considerably to its gold re&crve sinceand now produces moreO million annually. If the Soviet leadership feels that it can now part with ot least some of its annual production of gold to pay for imports, this would eniMc the USSR to continue to import more than it exports. Increased net hard currency arnings rrom tourismpossibly0 million annually by theeill also boost ^Soviet Import capacity,l increased net earnings from the Soviet merchant fleet, which muy rise to0 million If the USSR chooses to ration its Imports more strictly, imports of highly prized western equipment and technology will be maintained to the extentut there probably will be greater substitution of technology for equipment. The leoding candidate for pruning is

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^ CONFIDENTIAL

the level of manufactured" consumer goods, which the USSR have been importing from the Wentote of0 million annually The leadership, however, probably feels it has less room for maneuver in this area than- it .did five years ago; It probably will have oven less five years hence.

- Should the leveling off or decline in import capacity oincide with poor grain harvests and the Soviets have to import

large quantities of wheat from tho West, capital goods imports would also be curtailed, ss they were.

16. It is assumed that the USSR will continue to look to the West for equipment and technology to modernize Its economy und wllL import goods in short supply not nvniloble in tho omaunlrtt world. Little information is svnllable on plans for Soviet industrial development beyond general statements on the current five-year plan where cognisance is taken, os usual, of the need to achieve increases in production through Increasing labor productivity, especially by more rapid introduction of the results of. scientific research, modernization of denigu, mechanization and -automation, and standardization and specialization, with attendant economics of scale.

Imports

n electronics, the programogicalthnt in tlio last period. In computers, the main tusk Isscries production of third generation machines.1ms had discussions with come Western companiesassistance In setting up 6uch production.be less in the form of production facilities than of If the USSR is unable to obtain such assistance

proceeds on its own, It will still require Western components, peripherals, and application'techniques. In components the task io to master silicon device technology on an industrial scale ond provide the integrated circuits needed for third generation computers and for miniaturized electronic equipment. The USSR has been looking to tho West for such technology.

18. The USSR Is interested in procuring from tteWest telccomaunlcatIons equipment and the technology to produce euch equipment. The USSRhole rengc of common carriericrowave radiostems, coaxial cable and associated MUX, telephone switching systems, and satellite ground ctatlonn. Data transmission equipment Is also required.

19- Chemicals will continue to be stressed in the current five-yenr plan us for the poet decode. The output of the plastics industry is scheduled to double ond some equipment may be imported from the Vest. The USigh level of technology In the production of some of tho more important row materials,

(jjyftrtticn -

olypropylene, polyethylene, end polystyrene. Synthetic rubber end fibers ore also to be produced in significantly greater quantities. The USSR will also require substantial amounts of processing equipment to convert the raw materials Into finishednjection molding equipment. How much the Vest will provide in the way of equipment for the Soviet chemical industry Is in largeunction of the progrcun of CEMArocess which has moved faster In the chemical industry than in most other sectors. The USSR continues to emphasize the production of fertilizers, but the West probably can expect little in the way of new equipment ordero. eavy carryover of completed but unused fertilizer capacity Indicates that large Increases in output should he possible In at least the early years of the plan period. 5 five large modern anmonla plants ordered In the Westre scheduled to be In operation.*

o meet planned lncrcunea in oil production, the USSR will be seeking substantial amounts of equipment to find, drill fo"r, and transport crude oil. To rind the oil the USSR will need

* Three ammonia plants bought in Japan are valuedillion. They ore based on US technology. W. Kellogg%ho will get less thanillion for the technology.

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-eONflOEHTlAt

advanced oeismic systems Including computer ploy-bock centers and digital field equipment; drill pipe, veil-head equipment, remote-control outomotic gatherlng-storage-transfer systems, and possibly off-shore drilling platforms. Other requirements Include pipe, valves, nnd compressors for both gas and oil. Much of this equipment will be for use in cold climates, making it many times more costly than conventional equipment. The USSR also may beInterested in acquiring some advanced refining equipment.

The Soviet machine tool industry has been Incapable of satisfying the expanded needs of the automotive industry. In the past the USSR has purchased substantialof specialised Western machine tools to produce coaponento for cars and trucks. The Kama River plant, the major object cf new investment in truck production inrrent. plan-period, vill need machine tools from the West oo well es various other types of equipment. Equipment will also bo needed for expanoing and modernizing othor motor vehicle plants.

To meet planned Increases In labor productivity in the coal industry, the USSR Intends to'increase extraction by the stripping method. Consequently more heavy off-road hauling equipment will be required. Some imports of wood processing and food processing equipment olso will be needed from the West.

23- Soviet Imports of Western machinery and equipaent have increased subntnntiallyrowingevel0 million to more1 billion Hew orders for Western plant end equipment fell off9lthough some of this decline reflects the hiatus between the end of one plan period and tho beginning of the next. esult, wehat imports of plant ond equipaent will dropIt is doubtful, however, that there willontinued drop In such Imports for the balance of the plan period. New orders1 are already higher in value than9 On bolnnce it is estimated that Imports of plant and equipment vlU exceedillion annually throughout the current plan period. This figure includes both the more sophisticated variety .available only In the West as well as other, more standard equipment which the USSR or its CEMA partners cannot supply in sufficient quantities to meet Soviet plan requirements.

2k. In commodities other than equipment It -is assumed that the USSR will continue to Import much the same items It has been importing, with quantities dependent largely on ovullsbillties in the Communist world. These goods include steel, chemicals (especiallyood pulp, textile row materials, intermediates, finished products, and manufactured consumer goods.

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-CONFJDENTM

25- Imports may grow at roughly the some rate as exportsto ti>. Projecting from0 figureO0 would be illion. This compares withof exportsillion. Implying deficitstrade. Such deficits arc expected from time to time,is far from certain that the USSR will be willing todeficits as often as in the

Exports

26. As with the USSR East European exports to tbe Industrial West ere expected to grow more slowly than ins. ate of roughlynnually lo predicted forith exports rising9 billion*0 to more thanillion

This comparesrowthore.

27- As an example of what night bedemand-pull" formulation for projecting East European exportsecent UN study on Intro-European trade Includes prospects for East European exports to Western Europe bused upon least squares estimates

* Western rather than East European statistics are useC throughout the discussion of East European trade with the West. onsistent set of data /is not available for all six East European countries-baaed on East European sources

BO

COHnDENTUl

of total Imports of eleven Industrialized Vest Europeanlthough these figures are intended only "to illustrate the consequences of extrapolations into the future of certain current tendencies and growthhey nevertheless serveseful starting point in estimating export trends.

* Supplement to Analytical Report on the State of Intra-Europeandd. In -this study, the Soviet Union is Included as part of Eastern Europe, and several non-European members of the industrial West are excluded.

Under one assumption, -the seven "East European" countries (including the USSR) would retainarket shares ,for each of five commodity classes in each of eleven West European countries. Export growth0 woulder annum, as compared. An alternative assumption postulatesontinuation of the changes in Eastern Europe's market share for five major commodity group in Western Europe at the same rates as observed The resulting growth rate for exports, about as fast as In the earlier period. Neither assumption is intended to reflect anticipated changes in East-West trade patterns, although there will undoubtedly be elements of both stability and change where East European market shares are concerned.

29- In projecting growth In Eastern Europe's exports to the West fors, trends ofo'o ore not necessarily Indicative of things to case. Certain trends in trading patterns, for instance, havo been rather short-lived and have beenarticularly for agricultural and raw materials exports to Western Europe. Furthermore, Eastern Europe will run into serious

1

problems In attempting to broaden Western markets foranufactures; thus, the declining growth of ogrl cultural and industrial row materiols exports probably will not be offset by export growth from any other product group.

manufactures. Eastern Europe willconstraints, sharply rising hard currency costsovercoming product inferiority, and achievingof packaging, marketing, end service. Thesetho reduced dynamism of food and raw materials exportswork to hold down East European exports to aboutelow tho growth rate ofs.

sales willajor source of European hard currency earnings, but es in the past few years, they

will gradually decline in importance in favor of the faster growing exports of semifinished goods and consumer manufactures and,esser extent, chemicals and machinery. Exports of crude materials and fuels, although readily salable, probably will also continue to declinehore of the total boeunse they are in short supply in Eastern Europe.

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-MENffit

-bUKI IUUMIHI

general outlook for East European agriculturaltlio next few years is unfuvorable, quite apart fromdisturbances. West European import quotas on theagricultural Imports from Eastern Europe ore likelyIn view of probable future domestic surpluses ofsugar, soft wheat and other products in the West.

East European needs for meat and other higher grade foodstuffs fc*r0 1'ikely to reduce the growth of available agricultural products for export and. In view of theiots, the East European leaders are likely to take greater pains to meet those needs.

he largest hard currency earnings forshould come from exports of intermediatethose at the lower end of the processing scaleprimary and semifinished steel products and nonferrous metals

. end bulk textiles. Eastern Europe also should do well in sales of selected consumer mauufactureBparticularly Czechoslovakia and East Germany, which produce the most acceptable clothing, footwesr, travel goods, and other items.

3*. Exportoide range of chemicalsood potential. Large East European purchases of Western chemical plant andin recent years have provided capacity exceeding even future domestic requirements- Eastern Europe, therefore, can be expected to try to export to the West more basic chemicals, petrochemical components, and pharmaceuticals.

2J

. MMFIOEML

35- Machinery sales vill continue to grow, but will remainvery snail share of total exports to the industrial Vest. The Eastern Europeans still will be selling in what tohin, uncertain Western market, and they will be selling at substantial price discounts for most machinery products, particularly those at the more sophisticated end of the scale. Much of the increase in equipment exports probably will continue to be accounted for by the more standardized machine tools, textile machinery, and printing and binding equipment, although the East Europeans have hopes of selling such items as office machines, chips, and electronic equipment in incrcosed amounts.

36. The long-run capability of Eastern Europe to expand exports of industrial products other than semimanufactures will dependonsiderable degree upon how well Eastern Europe con make use of advanced Western technology. The positive effects of Eastern Rirope's Imports of large amounts of Western investment goods .have bean Inhibited by various East Europeanlow rate of technological assimilation tends to maintain the differences in quality of Western versus Eastern products, and it thus continues to be very difficult for the East Europeans to upgrade their export mix byarger share of finished goods.

East European Indebtedness

37- Hard currency indebtedness, particularly the debt structure, is on important determinant of Eastern Europe's ability to import. The debt structure Is reflected In the size of repayment obligations. Unfortunately these are not known for all the East European countries and, becausehe variety of loan types and maturities, repayments ere difficult to project. b, the expansion of medium- and long-term Weetern creditajor rise in East European spending, especially for capital goods. esult. East European indebtedness come to aboutillion by the end Because the credit was drawn in rather lumpy fashion, repayments ore equallyesulting in balance of payments difficulties for some countries. Bulgaria and Romania have had the most difficulty In this respect. It is posolble that both countries owing3 billion between themhave required Western assistance (and perhaps Soviet aid in the case of Bulgaria) to meet maturing obligations over the past two years.

Host of Eastern Europe's debt is currently owed to West -European NATO trading partners,ubstantial amountperhapsis owed to non-NATO partners, principally Austria, Switzerland, Sweden, and Japan. Before thes much of Eastern Europe's indebtedness could be traced to imbalances with specific trading partners; it was generally "bilateral" In nature.

or rolling over existing debt, none of which is linked to particular trade imbalances with or specific purchases from industrial Western countries- As an extreme example, Hungary recentlyillion worth of Eurodollar bonds-

k All the East European countries will be trying in the next "few years to avoid lumpy debt repayments which can.cause hard currency crises. They will be bargaining for longer-term credit and tie-in deals for purchases of plant and equipment to keep annual bard currency outlaysinimum. It is unlikely that any East European countries will try to reduce its debt in absolute terms; Indeed, short ofreeze on imports from the West it would be impossible to_doather Eastern Europe will be looking to develop oroderately flexible posture regarding debt service obligations relative to export earnings. To some extent. East European indebtedness has become institutionalized, and debt servicing is looked uponecessary evil. So long as East-West trade goes on growing, the debt is likely toeast as fast as trade-

kO. otal East European indebtedness to developed Western countries could amount to as much asillion. This projection is based upon estimated growth in trade, estimated

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debt servicing, ond repayment of debts and other transections. East Germany and Hungary are expected to Increase their debt the moatollowed by Pomania, Poland, Czechoslovakia, and finally Bulgaria, which Is probably least able to Increase export earnings In the Vest. Projections of each country'sor the last half ofs.have not been made, but it could nun much higher.

. More than-half of Bast German Indebtedness to'the West

5 million Is made up of its swing balance with West Germany and other debts to West Germany. This portion of the debt is handled differently frcci other East European Indebtedness to the West, because of the unique relationship in trade and other matters between East and West Germany. The swing credits are Interest free and, apparently, Indefinite in maturity. By the same token t is not possible to project this 1ZT swing debt because of uncertelnitles in East and West German relations. East German indebtedness to other industrial Western countries le0 million. Along with increased Imports, East Germany received increased credit linesubstantial amountrobably not all of which has been drawn. It Is expected that debts growing out of non-TZT trade will grow considerablys that tradearger share of total East German trade with the industrial West. The value of the debt could0 million, roughly equal to the level of non-IZT exports expected In that year.

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-CGNFIBENTItt

42. Czechoslovakia does notarticularly large debt in relation to its exports, but the debt structure ieignificant increase In Czechoslovak sales to Western Europe

9 relieved debt repayment pressures somewhat, but0 such exports grew by only aboutwhile imports increased byAlso, in the first half1 imports have grown considerably Caster than exporto. Czechoslovak hard currency debt repayments

ere achodulcd at0 million. Much of thia amount has probably been rolled over, by both buying current imports on credit and simply putting off debt reduction, and by refinancing maturing notes. Itxpected that Czechoslovak medium- and long-term indebtedness, nag5ill amount to0 million5 and will be equal to no more than two-thirds-of-the-Talus *of "exports"to the'industrial West.

Aside from Bulgaria, Hungary probably owes less money to Western creditors than any other East European country. Since thes, Hungary has apparently undertaken to Increase indebtedness at roughly the expected annual rate of increase in its exports to the industrialonservative policy by East European standards. Hungarian indebtedness is on the order5 million. Hungary has recently made use of substantial untied medium-term Eurodollar credits in the form of Western consortium loans loosely linked to the development, modernization, or expansion of entire industries. Hungarian indebtedness is

28

7

expected to Increase substantially nnd may even doubleased on plans to modernise the textile Industry, develop pharmaceuticals and expand aluminum processing capacity, all of which will require substantial capital goods Imports from the West.

44. Romania's debt position at the end0 was the ^east favorable In Eastern Europe. Romania owes more to the ^West tliun any other East Europeanlthough the government has recently cut back significantly on purchooas of Western machinery and equipment, the failure to attain planned bard currency export targets, partly because of agricultural failures, left Romania in a tight hard currency position An1 groin harvest promicca to strengthen its export potential in the months to come, however. The Romanian credit position is buoyed by substantial gold reserves, but resort to sales of gold to meet obligations probably would odvcrnely affect Romania's only "fair" current credit rating. Of ell the East European countries, Romania Is least willing to seek or receive the backing of the USSRender of last resort. Romania's Indebtedness could Increase to as much4 billion The structure of its debt should be more favorable,arger share of long-termears) credits. The Romanian debt picture may improve somewhat if Romania achieves the estimated llji annual increase in its exports

29

to the developed Vest. Although the Romanians probably villizeable trade deficit vith the West, it will be Cor smaller than In the preceding five years.

*5' Poland, like tho other major agricultural exporters in Eastern Europe, benefitedubstantial expansion of sales to Western Europe9 and again Exports rose by about gO* and imports by If indebtedness to the Unitedn PL-WlO is excluded, Poland had the most favorable debt/export ratio In Eastern Europe by the endoland's debt waa equal to Just about one-half of theillion in exports to the Industrial West. With its high volume of exports and relatively stable sales prospects in the next few years, Poland is probably In the strongest financial positionis the Vest of any of the East Europeanrojected"export growthannuaiiy" would ennble Poland to Increase Imports from the West at tho projected rateer year, while reducing its ratio of debt to exports. At these rates, Poland's debt .could0 million5

*6. By the endulgaria owed0 million in the Vest, about ko* greater than its exports to theeemingly manageable level of Indebtedness even If poorly structured. Maintenance of this ratio5 would raise indebtedness to0 million androwth in Bulgarian imports from the industrial West of onlyer year, probably the minimum import

30

.

growth the Bulgarians might accept. Bulgaria might be tempted to ruioe indebtedness somewhat beyond the projected level if its need for Western Imports is great enough and if it could arrange Western financingand Soviet permission. -laporta

kj. Indebtedness notwithstanding, Eh at European Imports from the industrial West are expected to grow somewhatapidly than exportsperhaps^evel ofillion. The present outlook for East European imports from the West is considerably different from what it was in theost of the countries are becoming more selective in machinery purchases; most have builtairly .steady dependence on Western rev and semifinished materials; and most arc beginning the decade with greater willingness to incrcoae imports of higher quality food products and consumer goods in order to meet popular demand.

48. The East Europeans are looking twice at the largo purchases of machinery that dominated their imports from the West ins. These purchases have resulted in large bard currency debts for all of these countries, and all of them have found it difficult and costly to assimilate Western technology because of construction bottlenecks, shortages of skilled labor, and the low quality of domestic material inputs. They ore beginning to suspect that they lock the resources and experience needed to keep output competitive in the new fields they have bought into.

If9. Moreover, East European plansall for raising the share, already large, of imports of machinery and equipment bought within CEMA. This policy reflects the concern of some countries over the balance of payments but, more importantly,

it is indicative of increased East European realism about what imports of Western capital goods con and cannot do. Eastern Europe still wants Western technology, but East European countries hove come to the realisation that they cannot gain appreciably on Western economic development simply by buying Western plant, equipment and licensestraight commercial basis. Attempts are being made to acquire Western know-how through Joint ventures, preferably deals that encompass the full range of research, production, and marketing. Such ventures will not come fast enough or in large enough doses toronounced effect on exports or efficiency in, but theyay for Eastern Europe gradually to acquire advanced technology without substantially adding to indebtedness.

50. These factors should tend to hold down the growth of machinery imports from the West for the next few years. From what is known of East European plans, purchases of Western machinery should rise on the average ofear- At this rate purchases would run aboutillionProjections, however, are very rough, especially

HfflNflflENM J

Machinery imports tend to be lumpyew larg? purchases

could be concentrated in one or two years. Moreover for the years5 estimates of Investment requirements and of the

progress of CEMA Integration become less reliable.

51- For Romania and Hungary, whose investment programs

hove been the most dependent on Western machinery, the rate of growth of machinery purchases Is likely to fall offhese countries have decided that their imports of Westernhave been too large to assimilate. Hungary has found that buying machinery toolicy of import substitution does not pay off. Romania atlllacklog of importedthat it la trying to get into operation. esult, both countries hive become more selective. Bulgaria, which depends for leas on imports from the West,-ncverthelcss-hasimilar cose of indigestion and is most unlikely to repeat the big splurge in purchases mode. Poland also does not rely heavily-on Western machinery, but it is embarkingodernization program that may sustain tho rapid rote of growth of recent purchases, averagingear-

52. The most advanced 'countries, Czechoslovakia and East Germany, hare been less forthcoming in discussing their Intentions, partly because of continued policy disputes. They ore probably best able to assimilate Western technology, but have been strongly tempted to try to develop their own, through increased integration

33

1 rirr iiti *i

- cunrtDuiVilflt

vlth the USSR end intra-CEMa specialization. Major purchases of machinery arc most likely to he made in connection vith integrationand for that reason purchases from the West in the next five years are likely to rise more slowly than in thes. Both countries also have short-term balance of payments problems to solve. ond large orders may be put off until later-

East European purchases of raw and semifinished materials

now account for nearlyof imports from the West. Theso purchases in part fill gaps in supply as, for example, in .'fertilizers, nonferrous metals, and high protein food supplies; in part they reflect the need for higher quality inputsespecially chemicals ond serai finished steel.for the new machinery bought from the Woot in the lost decade. The East Europeans Increasingly will - -meet their own needs for sone of these products but on the whole will become more dependent on Western materials and spare parts to maintain the Imported machinery.

54- The pattern of Imports of Western industrial materials probably will not change much inb. Purchases of chemicals and metallurgical products, which covered over three-fifths of ouch Importsill continue to be the largest items. Some or these countries, however, may substantially increase imports of light industrial materials, such as textiles. East European investment plansndicate some shift nvny

wwiiutjl hal

from heavy industry, except for Bulgaria. The Hungarians in particular intend to overhaul their textile industry during the next rive years in order to emulate new Western fashions, and they will need to Import not only materials but also- new equipment.

55- Purchases of Western agricultural products should

to depend primarily on the upo and downs of East European weather

find output. One other factor, however, may add some stabilityto the trend: the East Europeans ore now more concerned with upgrading the quality and stabilising the supplies of bo'th fodder andfoodstufrB. This development should mean more imports or feed grains, protein supplements, and high grade food products Ins.

>6. The East Europeans also will try to expand Imports ofanufacturesjlurlags. Purchases of light Industrial productsike clothing, leather goods, and small appliancesstill will not accountignificant share of total imports from the West. Moot countries have maintained these purchases atof imports. Except for automobiles, imports of consumer durablesrefigerafcors, washing machines, stoveshave been insignificant. Host of these countries now are planning large increases in domestic output of automobiles, largely from facilities already in operation, which could help to balance supply and demand for consumer goods and to case the need for imported consumer items, except when agricultural shortages occur.

35

57- The US has not shored in the growth of Best-Vestthe post two decades and0 accounted forrade turnover (exports, and. US exports38 million toillion to Eastern Europe and US Importsillion from the USSRillion from_ "

58. The US has not shared in the growth of this tradebecause of the United States' restrictionsisond Eastern Europe. The most important restrictionshave.

q. More stringent export controls than those of our NATO allies ond Japan.

on government credits and-

of HFH troatment (except to Poland).

hipping requirement on grains.

embargoypes of Soviet furs.

59- Other factors Instrumental in holding down US trade

Include

with the USSR ond Eastern Europe/public hostility to Communist

goods and tbe aloofness of US businessmen to selling in the Communist

US statistics are used in the discussion of US trade with the USSR ond Eastern Europe.

-MIDBffiAL-

market. There ore also scow economiche limited US market for Soviet and East European goodsainly row materialshich are sold widely in Westernnd distance, which limits US participation in the growing trade in semimanufactures such as rolled 6tecl ond basic chemicals and in tho expansion of imports of seasonal fruits and vegetables. Moreover, there are numerous small joint production, subcontracting, custom processing and switch deals which ure common in East-West European trade but are less attractive to US business.

some of the US restrictions have beeneliminated. There hasteady decontrol ofexports of goods and technicalormerly denied

arceingools for truck manufacturing plants in thehipping requirement has been dropped and tho President recently has been given discretionary authority to approve Exicbank guaranteed loans to Communist countries.

projecting US trade with the USSR andb it is assumed that the remaining major USbe dropped, that is, MKW treatment will be restored tound Pastern Europe ond US export controls will beor less to the COCOM level. It is assumed, moreover,cliiaate in the US for expanded economic relations withand Eastern Europe will continue to improve-

States merchandise exports to the USSRillion0 and have Increased aboutoldan average annual rate of aore. Host of this

growth, however, occurredith US exports 'increasingillion6 million. The upsurge in US exports to the USSR9 was led by machinery and transport equipment,

'^especially metolworking equipment for the Flat plant. -

commodity composition of US exports to thediffers substantially from that of most othercountries. Industrial Western exports to the USSRby manufactured goods, including machinery. equipment typically account forf total exportsUSSR, manufactured consumer goods, and US exports of machinery and equipment, on thonormally account for only about one-fourth of9han it was Crude hides, wood pulp) and chemicals usually mokearge

part of the remaining share of tbe total.

6k. US exports have previously experienced sharp increases and subsequent5 million increase* (wheat)ecline in the next year0 million. Similarly the commodity cotrposition of US exports to the USSR has exhibited frequent and often abruptoybeans, insecticides,

38

steel, textile machinery, and other items. US exports to the

USSR (or, rather Soviet Imports from the US) tend to alter quickly

with changes in Soviet domestic production, availabilities In other Western countries, shifting priorities, and the state of Soviet technology. Con sequent ly, any projection of US exports based on past trends in US exports to the USSR is subject to considerable error. Projections based on the US snare of Industrial'

exports to.the USSR might be closer to the mark." The implicit values of Western exports to the USSR0 based on theoncrease noted earlier arc5 billion. If the US share of this trade0 increases, the value of US exports would0 million.

65. US exports would change la composition,reater share for machinery ond equipment perhapshalf: Some of the machinery and equipment exports might include automotive manufacturing equipment, deep well drilling equipment, automatic oil transfer and storage systems, oil refining equipment, rolling mill equipment, off-the-road vehicles, electronics (computer

'equipment, semiconductor manufacturing equipment, testingnstruments, dote transmission equipment, ond numerically controlled machine tools. These arc items which the USSR has expressed interest in obtaining from the West. Because of superior US technology in some of the above lines of equipment and technology, the US might obtain orders from the USSR. The US

probably will continue to export oUicr Ueras not currently affected, by restrictions. Including raw hides, wood pulp, various chemicals, end other items. If the growing concern of the Soviet leadership for consumer welfare in translated into, increased Imports of consumer goods from the Vest, the US may share in such imports.

66. 00 US imports from the USSR grew at on average BlUUMl rate-illionignificant part.of this increase took place- however, when imports roseillion. US Imports (Soviet exports) ure virtually all in the row material and semimanufactured categories. Some changes In composition have taken place over time, with chrome ore, residual fuel oil, platinum group metalo, and gera diamonds having become more important in recent years.

6?- The prospects for the growth for US imports (Soviet exports) are more bearish than for US exports. If KKW treatment were restored to the USSR ond other import restrictions were the fur embargo, there probably would be some growth In Soviet exports, but the commodities on which the USSR depends to enrn hard currencies ore in the main unlikely candidates for export expansion In the US. These include oil (except residual fuelotton, softwood lumber, and cool and coke. These major Soviet export corrrooditics probably would not be exported to the US because of quota restrictions, lack of demand, supply constraints in the USSR, or inability to compete in price without

-CMENM-

evoking charges of dumping. The most likely candidates for expansion arc Soviet diamonds, wood productsish products, nickel,ew other items such as manganese ore, nydrofoilG, carpets, and plate glass. Low sulfur residual oil may also be sold In increasing quantities-

68. esult, the growth of US imports from the USSR would leg significantly behind that of US exports. How muchlag night be cannot, .be estimated, but annual deficits could be considerable and probably would have to be offset at least in part by US credit. If the US accountedf projected western imports (Soviet exports) US Imports would range00 million. The lower end of the ranee is more likely.

Eastern Europe

69- US exports to Eastern Europe have been erratic. The value of US exports0, for example were higher than These ups and downs have beenunction of East European demand for US agricultural products. Exports0 were valued5 million, upillion from9 level. Almost half of US exports consist of agriculturalarge part of which are feed grainsther animal feedstuffs- Machinery and equipment accountrudc materials, coal and steel, and chemicals tire also important exports-

.

(0. The growth of US exports to Eastern Europe.inO's willreat deal upon East European demand for US agricultural products, particularly oilseeds and feed groins; Eoat European need for certain primary products, ouch as coal ond coke, ond East European desire for US technology and equipment.

71- The broad commodity composition of US exports to Eastern Europe probably will ohlft somewhat toward machinery end other industrial products, but agricultural products will still account toubstantial share. At present, US exports of nonagrlcultural

products arearginal nature and the commodity mix Is rather fluid. Additional market should develop during this decade.ales of machinery and intermediate manufactures shouldominant role In US exports to Eastern Europe.

72. If the US accountsof projected Western exports to the USSR ond Eastern Europe0illion, US exports would be in the range5 billionn annual rate of Increase. The value of US exports ore more likely to be closer to the lower share postulated, possibly even somewhat less thanillion.

S imports from Eastern Europe have been rising slowlyhare of the industrial West's imports from the area. They wore valued4 million0 but the US shore still stood at Hardly any products from the area have an established

US market. East Europeans tend to sell at very low prices in tlic US, as they do in Western Europe. Imports of Polish canned hums and shouldersho conspicuous exception and in value they amount tof all US imports from Eastern Europe., US lmporta alsoariety of manufactured goods such as textiles, glassware, steel, metal manufactures, footwear, clothing, and some machinery.

7*. Recent trends in the composition of US Imports from Eastern Europe are likely to continue in thea. Imports of canned pork products (largely fromow almost one-third of the total value, will probably rise slowly because of slackening demand and lack of East European interest In expanding coles by lowering prices. The urgent need to increase domestic sales of better grade processed pork products also is likely to limit the available supply for export. Other Imports of food products will not expand substantially. East European efforts to expend food exports are concentrated on beef and beef cattle, especially in the northern countries ond Hungary and on fruits and vegetables, especially In the southern countries. Western Europe offers the best markets for these products and pays competitive prices.

75- Prospect* for: US imports of fuels and chemicals from Eastern Europe ore not bright; the growing surplus that theor export Is readily sold in nearby countries at fairly

good prices. Romanian low sulfur fuel oilossible exception,

though US imports have declined recently.

76. US machinery Imports from the area, now quite small,

have little future, even from Czechoslovakia and East Germany.

The East Europeans offer machinery at low prices, but price is

not the main consideration for machinery Imports in the US, and

East European products ore not otherwise competitive. They help

at most toev specialized needs.

n the other hand, US Imports of iron and steel products

ow level of processing, together with Imports of metal

arge share .from Polandhould continue

to rice substantially. Adequate East European capacity-is

available, quality is acceptable, and priceey factor

for these products in the US.

78. Finally, imports of consumer-related products, from

crude materialn through finished goods, might increase rapidly

with especially large increases from Czechoslovakia and East

Germany. Most instances of rapid continuous growth in US imports

throughs have been of this kind. Only Inertia stands

in the way of large increases in US purchases of glar.svarc and

other glassostume Jewelry, ornaments, and novelties;

wooden furniture; Inexpensive footwear; and knitwear of various

gradeso mention tho more interesting possibilities. Textile

* Including nails, bolts, screws, and the like; hand tools; and domestic utensils.

Imports arc less likely to grow rapidly, given quality and style

dirfercnces, n supply, and actual or potential quota restraints.

79- Poland, which still accounts for two-thirds of US purchases from Eastern Europe, will continue-to have the dominant position, although the Polish share will decline, perhaps considerably. Czechoslovakia's share of the market is likely to remain. All other countries are likely to increase their shares, especially East .Germany, whichairly wide range Of salable products and is looking for alternative markets to West Germuny.

80. Because of the small base, total US imports from the area are expected to rise somewliat faster than West Europeon imports. 1S imports' arcetter than even chance of growing at least at the rate ofhichbout as strong anas can be hazarded, given the small scale and marginal nature of almost all sales to the US from the area. ood chance evidently remains that the rate of growth will be significantly higher or lower, though hardly as low as Ji* or as high. US Imports from Eastern Europe0 probably will be in the range0 million0 million or 't* tof Western imports from'

* Either of these possibilities is given lesshance.

Eastern Europe. As with the USSR, the lower level of projected US Imports than of exports in trade vith Eastern Europe implies Chronic East European deficits.

Constraints on US Trade with the USSR and Eastern Europe

special US restrictions have ployed ahold down tho level of US trade with East Europe, abasic economic constraints would hold the US share below that

'tfcof Western Europe even if US trade with the East were put on an equal footing with Western European trade with that area.

most important constraints on US trade with theEastern Europe affect US imports. The USell endowed

in agricultural and mineral resourcce; unlike Western Europe it does not normallyarket for Soviet or East European graluo, lumber, coal, crude petroleum or natural gas, and Itelatively poor market for moot other mineral products. In the longew Soviet raw material reseves, such as copper, may be developed with Western assistance, and the USarket for such commodities if access to Free World supplies becomes more difficult. nother obstacle; In particular it limits US participation in the rapidly growing exchange of semimanufactured goods, such as rolled steel and basic chemicals, with the West, end in the expansion of isrports of seasonal fruit and* vegetables. hird limiting factor is the lack of deep historical ties between the US and Eastern Europe. Millions of people in Central Europe on both sides of the Iron Curtain

have similar tasteside range of consumer goods andultural affinity that facilitates business contracts. Including Joint production and

8j- Another major obstacleurther rapid grovth of US imports from the area is the inertia of Soviet and East European producers and trade organizations. They find it to their advantage to stick to markets that offer the most security. Usually theyard enough time to meet commitments In these markets in the face of chronic shortages that oeco unavoidable in command economies. For the aame reason, their customers, foreign ao well as domestic,onstant battle to obtain delivery of goods on time and as specified. The West European importers who deal with Eastern Europe put upot of trouble for Uiu tutku of the extremely low prices at which they are able to buy in the area. Conversoly, of course, the prices are so low in part bect-use so much trouble Is involved for importers. The undependabllity of East European deliveries has made importing from the area as muchpecialized business as exporting to the area. Moreover, tie-in arrangements, processing contracts, and switch deals are common and necessary. The commercial Interests and practices of smaller countries deeply involved in foreign trade seem to be better adapted to this way of doing business than are those of the United States.

*7.

related difficulty for US imports is that fevmanufacturers actually produce for the Weaterngoods sold in Western Europe are among the highestof Eastern Europe, hut they hove rarely beenmeet specific Western needs and preferences. They oregenerol sold more easily in Western Europe, where changes

ciu demand have been loos sweeping than in the US. Moreover, the quantities available are often small and ore thus of less Interest to US than to Western European importers.

continued growth of East-West trade, however,lower the barriers to Eastern Europe's trade with Tho area's enterprises and trade- organizations areadopt in dealing with the Western market. SpecializedEastern Europe (not In the USSR) primarily for export tois likely to develop, whether or not basic changes are

made in East European economic Institutions ond policies. US importers should therefore find it easier and more attractive to do business with Eastern Europe ins. This proccso will nevertheless be slow, and it will hardlyramatic effect on US imports The abrupt changes from year to year in US imports from Eastern Europe that ore visible in detailed trade statistics should, however, become less marked. The stabilizing of the trade is an important condition for further growth.

86. The prospects for US exports to the USSR and Eastern Europe appear better than those for imports, although some of the constraints on importssuch as greater distancealso affect exports- Eastern demand for technologically advanced products is considerable and the US competitive position for many of these products is strong. Thia suggests the possibilityubstantial US trade surplus with tho USSR and Eastern Europe. Such a. surplus could be financed in largo part by US export credits, but onlyew years. In the long run, repayments would tend to catch up with credit drawings. The USSR and Eastern Europe would then have either to balance their trade with the US or use surpluses in trade with other hard currency countries to finance deflcitn in trade with the US-

Effects of Removal of US Restrictions on Trade with Eastern Of all the US restrictions on trade with Eastern Europe and the USSR, only three have enough long-run significance to affect the volume of US trode with the USSR and Eastern Europe:restrictions, export controls, and HFN. The most important legal restriction concerning commercial credit which has significantly limited US exports to Eastern Europe ond the Soviet Unionthe Export-Import Dank Extension Act8as prohibited grunting of Export-"import Bank guarantees ond insurance on loans end credits to those countries. The Export-Import Bank regulations

Soviet gold sales ere also

are currently balng liberalized to include, at the discretion of the President, medium-term credit guarantees and insurance to Eastern Europe and the USSR- This move could lead to growth in US sales, particularly of machinery and equipment, in the next few years. With Presidential approval, the mobilization of domestic credit facilities probably would be limited only by the need of US firms to use such credit.

88. Some US firms have limited accaos to European credit facilities through West European subsidiaries, and East Europeancan finance purchases of goods directly from the US through use of Eurodollar credit as well- In several instances, usually at the initiative of the Kest European importer, financing of imports of US copital equipment has come from Western European sources. The limit to this source of funds rests on the nature of each particular deal/money market conditions, and, most important, the overall credit rating of the East European Importing country. An expanded volume of US equipment sales probably could be financed by this method.

89- At the present time, US firms can secure machinery orders from Eastern Europe and the USSR in cases where there is clear technological superiority and where lead-time minimizationactor. Otherwise, Western European (ond Japanese) firms can undersell US bidders on the basis of cheaper credit, lower transport costs, and more favorable credit terms. Where US firms have

50

WIHUtKliAL

subsidiaries or affiliates in Western Europe which can provide

appropriate equipment to fill East EuropeanS "parent" fira frequently vill sell the licensing and technology rights directly, and allow the European subsidiary or licensee to.supply needed equipment- If US firms hope toent in the European Coomunlst machinery import market Ins, US credit terms must approximate those available In Western Europe-US exporters oust be prepared toearyear credit at competitive Interest rates, covering single orders for plant and equipment ranging from aboutillion up. Reduction of Export Controls

Decontrol of commodities or. the US commodity control list has been progressing over the last few years, and the passage of the Export Administration Act In9 has accelerated the pace of decontrol. Moreover, there hasendency toward more leniency in approving Items requiring validated licenses (with some exceptions). Thus, in spite of tho fact thatist has been trimmed, the gap between USontrols has narrowed.

The effect of tbe reduction of US controls toevel on US exports to the USSR and Eastern Europe probably would be twofold. First, there would be some increase in the value of US exports to the USSR and Eastern Europe of item* in

iixii

which the US has technologicalomputer mainframes und peripherals, oomicoaductor manufacturing equipment, testing equipment such as oscilloscopes, and data transmission equipment. The conclusion ofew large contracts couldubstantial increase in US exports over the currently low level of US exports to the USSR and Easternbut

i

if an important share of such orders were filled by US subsidiaries ands they often have been in thencrease would be XseB. In other words, increased access to US technology and know-how would not necessarily leadoncomitant increase in the export of US equipment embodying this technology.

econd effect of the relaxation of controls wouldhange in the commodity composition of US exports to the USSR and Eastern Europe. Currently machinery and transport

equipment account-forf -US exports to these countries-.

0 million increase0 in US exports to the USSR and Eastern Europeargely agriculturalrowth

and crude materials and agricultural products account forf the total. esulteduction of US controls some increase in the 6hare of machinery nod equipment is to be expected, although It is uncertain what other category or categories would diminish. The category of machinery and equipment itself would alsohange.

wnrwEftfttf.

If MEW vcro eranted

93- The granting of MFN to the USSR and Eastern Europe probably would notignificant effect either on the value of US imports from these countries or the commodity composition.* Since the revocation of MFN treatment, US imports from the USSR have been either duty-free or, if dutiable, the rates have been generally low or not significantly different from MFN rates. Duty-free goods such as chrome orelatinum group metals"entering the US from the USSR currently account forf the total. If MFN were restored to the USSR, it Is assumed that goods now subject to US tariff discrimination, but which are currently sold In other Industrial Western countries, would be candidates for export to the United States. Major Soviet exports to the industrial West, as noted earlier, would not be exported to the United States, however, because of quota restrictions, lack of demand, supply constraints in the USSR, or inability to compete in price without evoking dumping charges.

94. Roughly two-thirds of US imports from Eastern Europe originate in Poland, which already enjoys MFH status. This leavesillion in imports from other East European

Abstracting from politically Inspired increases in imports.

53

IOFHflM

countries. Of this total, Czechoslovakia accounts for roughly-half. Czechoslovakia is more discriminated against by the US tariff rates than any other East European country. or example, the average tariff duties levied on dutiable goods imported from Czechoslovakia. For Hungary It;;; and the USSR, East European exports to the United States are mostly manufactured goodsfc textiles, clothing, glassware, pottery, shoes, furniture, and prepared goodsnd carry higher rates thuo raw materials.

95- Restoration of MFH would significantly reduce the price to US importers for many of these goods, but whether this would result in significantly Increased imports is another matter. Whatever Increase there is would be delayed because of the preplanned trade patterns of Eastern Europe and the USSR. Eventually,-the Eastern-European countries could gain more than tbe USSR if they actively pursued this advantage. However, these countries regard Western Europe as their main market and tbe USemote and marginal one. umber of Western European countries haveesire to remove3 nearly all of their quantitative restrictions on import from the USSR and Eastern Europe, thereby raking the US market less attractive. Given tbe relatively low value of goods that

* Poland joid on average of 7*

the US in ports froa the USSR and Eastern Europe at discriminatory

rates and other factors noted above, the restoration of MFH to these countries would not result in significant increases in trade*

96. US trade vith the USSR and Eastern Europe probaTbly would be cone what larger5 with the above restrictions abolished. How much Largerunction of tbe timing of the possible removal of these restrictions, but more important.

1 it wouldunction of tho purely economic limitations on the development of such trade- The removal of US trade restrictions should help to' stimulate US participation in East-West trade, but only as the economic, or commercial, interest on both sides becomes stronger.. As the scale of East-West trade increases end both sides gain experience, the interest of US businessmen will rise, along with Soviet-East European capabilities end desire to enter the US market. These concessions would probably begin paying off in tradeignificant way only by thes, even if they wore put into effect today-

. Trade with the USSR and Eastern Europe could eventually represent as much asf US trade, if all special US restrictions were lifted. This level of trude, however, could only be achieved after many years. In the interim, US trade

with the USSH and Eastern Europe would undoubtedly be for below this chare whatever say be done with regard to restrictions. It took several years for Poland, for example, to take full advantage of MFN treatment for its exports- It would also take cone years for the scale of imports to rise to the point-that major US traders might become seriously interested in marketing Soviet and East European products in the US- The likelihood that the US will-continue to Impose some"what tighter restrictions than does Western Europe on trade with the East for at least several years, and the lags in the response of tradeowering of barriers, lead to tho conclusion that US trade with the USSR and Eastern Europe is unlikely to be more thanf US trade

Possible Future Develoraent*

98. low-down in the growth of East-West trade is postulated fors because of changed circumstontance. Substantial Soviet purchases of machinery and equipment on credit ins haveizeable debt to "the West,nd because the outlook for export expulsion is bearish, Soviet import capacity probably will be limited. For tho East European countries, the principal Torces .leading to the rapid growth of trade instho desire for Western equipment and technology, expanded Western credit and East European exports of agricultural and industrial raw materialsuve weakened.

99- For the USSR there continued totrong demand for Wcotern equipment und technology and its imports of these items should remainigh level. For Eastern Europe, there will probablylow-down in the grovth of imports of WoBtem machinery and equipment, not only because of increasing indebtedness, but also because some of them have found it difficult und costly to assimilate Western technology. Acquisition of Western technology and equipaent withoutevel of indebtedness Bight come about through joint ventures. Thus far East-West industrial cooperation has been in the form of small, limited types of ventures involving joint production or subcontracting, which haveeager volume of trade and marginal benefits to East and West. Romania and Hungary passed lavs recently permitting minority foreign ownership and this may encourage Western investment- Peals that encompass the full rage of research, production, and marketing would enable East European countries to obtain Western know-how and would presumably give the Westernirect interest in stimulating East European technology and exports. It is doubtful, however, that imjor Joint ventures will come fast enough or in large enough doses toronounced effect on overall East European exports or efficiency ins.

la little likelihood that the USSR wouldforeign ownership in the Soviet Union, minority orof the outcome of the Security Conference-umber of opportunities for Western cooperation withhowever, which would Involve an exchange of Westernentrepreneurship for Soviet raw materials. Possibletha exploitation of Soviet raw materials such as

( copper, nickel, gas, oil, and timber and the building'% pipeline from the_Tyumnn oil fields to Nukhodka. Western

equipment and know-how would be provided on credit and repaid with the commodities exploited. The potential is considerable, but large injections of Western capital would be necessary and the pay-off would be slow in coming.

important reason for the projected slow-down

in the growth of East-West trade is related tos there ia expected to be greater coordinationeconomic plana In CEKA and intra-CEMA tradeto grow mora rapidly at the expense of trade

other areas. Ail CEMA countries plan not only to increase the share of their trade with other CKMA countries, but also to raise the share of imports of machinery and equipment bought within CEMA. The plans for greater intra-CEMA trade are in keeping with renewed efforts or moat members to promote CEMA

58

-(MIBEMIAL__

j

Integration, and chances for achieving progress appear to be better now than they have been in the entire history of the organization.

Possible Communist Concessions

Central planning and the concomitant planning of" foreign trade will continue to be features of Communist economies regardless of the outcome of the conference- An important aspect of these centrally planned economies Is tbe "foreign trade ^monopoly." Foreign trade organizationsureaucratic layer between Eastern and Western consumers and producers. There have been some deviations from this arrangement, as for example. In Hungary, but these have done little so far to minimize bureaucratic delays In foreign trade decision making and In concluding transactions-

oncession to the West, the CEMA countries might permit more direct access by Western firms to Communist producers and consumers This has been done in the pastimited scale- Even the USSR in recent years has permitted greater Western access to officials of Soviet enterprises and industrial ministries,but the foreign trade transactions still must be handled by tbe foreign trade ministry. Greatly Incrcuncd access

* This has been chiefly at the behest of the USSR State Committee for Science and Technology rather than the Ministry of Foreign Trade which has been stubbornly resisting in the name of the sanctity of the foreign trade monopoly.

59

HJfMEfffiAt

itt

wlll facilitate negotiations and tend to ameliorate the aggravations caused by having to deal with superfluousf bureaucracy. This In itself nay encourage more Western businessmen to seek markets and goods in the USSR and Eastern Europe.

concession might be tbe establishmentquotas for Western goods. Tbe Soviet Union andEuropean countries could guarantee markets forprobably for specific categories of goods. Suchcould be offered In exchange for Increased accessmarkets (reduction of quotas or tariffs). Thethe Individual CEMA countries to guarantee marketsand the impact or such arrangements cannot Such quotas, however, would be consistent withof Communist countries"to minimize the share of unplannedtrade.

Possible Western Concessions

export controls administeredight

bo further reduced consistent with Western security considerations. How muchoncession this would be is difficult to judge, however. COCOH Internationalconsisting of items with both civil and military end use) has been reduced regularly in recent ye^rs and la about to be reduced further ot the List

CONnDDffMl -

Review scheduled to begin in Paris in October. Presumably many sophisticated electronic items will remain on tho list following the review, including high powered computers. Given the demand for such computers in the USSR and Eastern Europe and the apparent inability of these countries to produce third generation machinesarge scale, further decontrol of computers mightonsiderable volume of business with the Communists.

Another major concession by the West would bo .the reduction of quantitative restrictions (QR's) la Western Europe (as well as tariffs In the US). In roccnt years, QR'sis the USSR and Eastern Europe have been reduced but the impact appears to have been minimal. In many instances the relaxations were for goods which arc not important Soviet

and East European exports. Moreover, liberalization of

for the Soviet and Eastern Europe goods tipparontly has been less than for OECD countries. Some West European countries have expressed an Intention to remove most of their QH'n on imports from the USSR and Eastern Europe If liberalization is aimed largely at Important Soviet and East European exports commodities, some rise in such exports probably would take place.

6l

With the probable expansion of EEC toountries in the next year or so. It is difficult to assess what impact the EEC Common Agricultural Policy would have on agricultural exports of the USSR and Eastern Europe. Some concessions to the USSR and Eastern Europe might have to be made because agricultural goods are important foreign exchange earners for Eastern Europe-

It Is highly unlikely that the growth of East-West trade will substantially exceed tho growth rotes postulated above. Indeed, the upper end of the range estimated0 assumes that the East will have made soon meaningful concessions to stimulate Western Investment and that the West vill have significantly reduced quota and tariff restrictions and relaxed export controls. Given the Tact that Western economic Integration is moving ahead rapidly and that Integration of the CliMft countries now shows greater promise thanramatic increase In East-West trade would be likely only if concessions are made that now appear to be beyond the limitations imposed by the Eastern and Western economic and political groupings.

CIA/0ER

1

Tabic 4

USSR: Trade with the Industrial

HIon &is

Statistics

statistics

3

4

9 lyiO

Imports a/

Exports b/

Imports a/ >

uj

b. Westernxcept USanada and Republic

of South Africanland-point ofnd

.

ClA/OER

-CflSaOIHTUL

Table 5

stern Europe: Trade with the Industrial

0

East European Statistics

Exports

.

Isports a/

S.A.

Million &US

Western Statistics Exports b/ Imports c/

Bulgaria, Czechoslovakia, East Germany andomania, unknown but probably

xcept USSouth Africanland point of

.

Canada and Republicnd Australia

cia/0er

1

fl[.

Table 6

ussr: Hard Currency?

Million $us

Xear

icfc

-3

a

gs

95

wo

cia/oeh

Table 7

Selected Soviet Commodities in Trade with the Industrial0 a/

Total

Crude-Oil" and Petroleum Products

Coal and Coke

Wood and Wood Products

Cotton fiber

Base metals

Pood

Furs and Pelts Other

Unspecified b/

5

Iisp_orts

Machinery and Equipment Base metals Chemicals Wheat and Flour

Manufactured consumer goods Other

Unspecified

b.

on Soviet statistics and classifications, largely platinum group metals, gem diamonds and nickel.

1

GMENM

rcpeaahe/

ft

b

k

b983

1

Original document.

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