LIMITATIONS ON TRADE BETWEEN THE US AND THE USSR (S-1073)

Created: 8/20/1963

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Attachoantt aihjBtrt Studyoplea)

Aaalatant DLrector Research and Roporta

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LaawrcoHS on trade wtah tvo; us akd the USSH

Introduction

Thc desirability of US government meaeuree lo facilitate comraercinl

trede betveen the US and the USSR has been considered intermittentlyince the close of World Var II. lhe recent signing of thet ban agreeoent has again raised the question of whether aof trade restrictions eould, at sooe stage, be used to aa In tain the raooentumeduction in cold war tendons. This paper describes

briefly: the principal restrictions on US-USSR trade that exist today; thou* Impediments that night bo modified by executive action; and the posolble impact on trade that might occur following such action. II. Restrictions on US Imports frox the USSR

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The US has neverarge Imjcr cf Soviet goods. Probably tbe Bojor cause of tbe small volume of US imports of Soviet goods Is1 ted variety and quantity of good* that tbe USSH has available for export. Beyond the overriding econonic limitation, however, other conditions restricting sales of Soviet goods in thc US are thc USpecific legislative prohibition against seven Soviet furs, and tho unfavorable public imago of the USSR tu the US, which Inhibits OODSumxr acceptance of such Soviets arc available. Inasmuch as the foreign trade of the USSR Is handled mainly through bilateral trndfl

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iew to balancing imports against exports, thc size

of the market for US goods In thes cloooly related to the amount

of goods the USSR can sell to thc US.

A. Tar if fa and MB

Under the terms of the Trado Expansion Acthe

President oust

"as coon as practicable, suspend, withdraw, or prevent tho application of the reduotion, elimination, or continuance of any existing duty or other import restriction, or the continuance of any existingor excise treatment, proclaimed in carrying out any trade agreement under this title or underf the Tariff ActO, to products, whether imported directly or indirectly, of any country or area dominated or controlled by CaaaunlsD."

While MFH privileges have not been extended by the US to thc USSR since

tfaelr prohibition by tbe Trade Agreements Actbe Act of

not only continues the prohibition, but makes mandatory as well tbe

'withdrawal of MFH treatment from Poland and Yugoslavia "as soon ao

practicable." The effect of thle prohibition on trade with the USSR

Is that imports from that country aro subject to the full extent of US

tariffs. Although tbe Administration has requested an amendment to

thla law pons itting Presidential discretion In the national interest,

tha Congress has not yet acted.

B- Prohibition Againat Soviet Purs

According to thc terms of thc Trade Expan8Ion Act

uevea kinds of furs and skins, either dressed or undressed, cannot be

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into the US froa the USSR nnd Conzounlot China. These ore ermine, fox, kolinsky, marten, mink, rauskrat, and weasel. Before this law was passed, the combined value of these furs Imported Into the US from the USSR was aboutillion annually. C. Coneumer Romlotance to Soviet Goodfl

Another obstacle to increased sales of Soviet goods in the OS la the poor image of the USSR in the public mind. Apart from general dislike of an aggressive dictatorship, the average Acer lean ia unlikely to want to buy items madeountry whoso leader threatens to bury himor to blow him. opart by rocketB set up stealthily butiles away from his chores. Nor has the Soviet Union builteputAtion for craftsmanship or taste such as say Germany or Italy, whose skills were so renown that they tended to counter some of the untagonlsmo generateditlerussolini.

This aotl-ccnanunist, anti-Soviet aversion has been The American Legion hasoycott of Soviet goods, and theonaunist campaign in the larger Labor unions in the US on occasion has ledoycott of Soviet goods by union members acting aa individuals and ln groups. The refusal of longshoremen to handle certain Soviet cargoes is an example of the latter. In Ohio, at least one municipality is reported to require that stores selling goods made behind the iron curtainign stating "Comounist-oade goods sold here." The John Birch Society is alleged to have backed such action.

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Aolde from ouch adverse publicity the Soviets have not proved themselves to be skilled merchandise re. Coninehave not" society, they are alow to understand the competitiveness of selling techniques existinghave" society such as the US. Advertising, packaging, and the concept ofarket for goods where none existed before appears to be an operation beyond the present Soviot abilities.

Ut. Restrictions on US Exports to the USSR

The principal restrictions on US exports to the USSR consist of the US program of export .controls (frequently referred to as the US program of economiche ban against private US credit being made available to tho USSR, and the enormous conceptual anddifferences between the market economy of the US and the planned economy of tho USSR. Both the export controls of the US and thc limited availability of crodit to the USSR have been criticized frequently and lengthily by all of the Soviet hierarchy. Although these two limitations can be altered significantly- by US executive action, tho differences between the two economies would persist and continue to have limiting Influences on US-USSR trade. A. Export Controls of the US

The basic legislation restricting US export6 to the USSR is thc Export Control Act9 and its subsequent acendsonts. The lav vas passed originally as an emergency measure, prompted In part by

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dcmer-tlc shortageis and threats of Inflation created by aboon&al foreign demand. It also plainly recognised the Important relationship between exports end our foreign policy and national security. The Act conferred on the President very broad general powers to restrict and control export trade and permitted him to delegate this authority. Since its passage, delegation has been made to the Secretary of Commerce.

Under tho Export Control Act, the Department of Commerce bao developed en extensive system for licensing exports from the US, both of commodities and technical data, for the purpose of denying direct and indirect shipments of strategic commodities to Conrjuniot countries. All commercial exports from the US, except to Canada, are prohibited unless the Department hasgeneral license" or hasvalidated license" permitting such shipments.

A general licenseroad authorization issued by the Department of Commerce permitting thc export of ooroo commodities under Specified conditions without requiring thc filing of anhy an exporter. The bulk of USof total US exports) novea to friendly countries under gcnorol licenseB4

A validated licenseormal doc true tit issued to an exporter

by the Department- It authorizes the export of commodities within thc

specific limitations of the document and is basedetailed

application submitted by the exporter. Validated licenses must be

obtained to export items carried on the "Positiveo any country

* The Positive List is maintained by thc Department of Commerce, In collaboration with several other agencicn, including CIA. tems arc presently on this list.

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except Canada, most items on this list are considered strategic or critical in some- vay to the military industrial mobilization base of the Soviet Bloc. The remainder are items in short supply ln the US which if exported would contribute to inflationary pressures in the US.

Validated licenses ore also required to export any item to the Soviet Bloc (excludingmail Dumber of Items Identified on the OLSA list (General License* within the general license category. Items on tho GLSA list are considered to have no strategic significance and ore not in short supply in the US. Therefore, there are no limitations on their export to the USSR or Eastern Europe. Although there are no licensing or otherrestrictions on tbe sale and shipment of those items, the USSR and its European Satellites have shown little interest in buying them in large quantities. On the other hand, the goods that tho Bloc has "shown the greatest interest in buying are not on either the OLSA list or on tbe Positive List. Before such items can be exported to the Soviet Bloc,alidated license must be issued by the Secretary of Commerce. In deciding whether to issue such licensee, ha determinesusually after inter-ogency reviewvbether the item falls under tho control criteria of the Export Control Act ofand its subsequent nnendaents, which provide that:

"The Congress hereby declares that it Is the policy of thc United States to use export controls to the extent necessary (a) to protect the domestic oconomy from the

*elates to the nations of the Soviet Bloc.

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exceeatve drain of scarce materials and to reduce the inflationary Impact of abnormal foreign demand; (b) to further the foreign policy of the United States and to aid In fulfilling Its International responsibilities; and (c) to exercise the necessary vigilance over exports from the standpoint of their significance to the national security of tbe United States."

3 Congress added the following sentence (known more widely as the

economic

uch rules and regulations shall provide for denial of any request or application for authority to export articles, materials, or supplies, including technical data, from the United States, its Territories andto any nation or combination of nations threatening the national security of the United States if the President shall determine that ouch exportignificant contribution to the military or economic potential of such nation or nations which would prove detrimental to the national security and welfare of the United States."

Thus although2 criteria are more restrictive than those previously applied, the legislation seems to permit thc Secretary of Commerce latitude within which he could moderate somewhat its restrictive effects. For example, the Secretary could add more items to the GLSA list, and he could interpret more liberally the control criteria. Ae far as arelaxation of controls is concerned, however, tho concensus is that Congressional action would be required.

Part of the US legislative program of export controls Is the Battle Act, which requires countries that ore recipients of US aid to support our policies regarding the export of strategic goods to tho USSR and its satellites. Under the terms of tbis act, only munitions.

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atomic energy materials, and such non-wilitairy Items that have direct strategic significance and might affect the security of the OS are involved. ractical matter the Battle Act covers fever items than the US Positive List. Therefore, the OLSA Ust could be expandedelude all of the Items available for export except those on the Positive List without Interfering with Battle Act regulations. B. Credit Restrictions

Under the terms of the Johnson Actb, loons by private persons to countries that have defaulted on repayments of loans made by the OS are prohibited. Because the USSR has refused to recognize tho loon the US made principally to the Korenaky Government, which amountedon ln principal and on vhlch0 million in interest hoc accumulated, tho Johnson Act is said to restrict US loans to the USSR.

The Johnson Act also is Involved in the dispute between the US and thc USSR over the ooountB owed the US for certain lend-lease goods received by the USSR. There are three aspects of these lend-lease obligations: (l) the "pipe-lino" purchasesettlement for civilian-type lend-lease goods on hand In tha USSR

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ay that would bo useful during peacetime;isposition of lend-lease nerchant ships and other latere raft still in Soviet custody.

The first derives from tho fact that the USSR agreed to pay tho US for Lend-lease goods shipped to the USSR from tbe USay

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an asxtuntinnstallments. Toe USSR has been making

only partial payments on this account, and the accounting records of the

US show nn arearage of nearly #t7 million aa

Tne second aspect of the lend-lease settlement relates to the

". .illion worth of lend-lease assistance /furnished byo the Soviet Union upay. Inettlement of this lend-lease account of the Soviet Government, the United States had followed the basic principles and policies, previously described, which governed lend-lease settlement* with other governments- The Soviet Government has been asked to pay the reasonable value of civilian-type lend-lease actldes on hand in the Soviet Unionay which would be useful in peacetime. Since. did not provide an inventory-of such articles, the United States prepared one which showed the valuo6 billion-

"During the initial negotiations the United Stotosequested. to3 billion as the firat step ln the negotiating process. The SovietIiad offered to0 million. During subsequent negotiations, thc United States figure was reduced0 million. In tho interest ofrompt settlement, the United States Indicated Its readiness to reduce this sua further provided the Soviet Government increased its offer, which at the timet0 million,um more nearly reflecting the value of the articles In the peacetime economy of the Soviet Union. . increased its offer0 million. Tbe United States did not consider this sua adequate and rejected the offer

"At the request of the United States, negotiations were resumed on January The United Stateson the understanding that the negotiations were to deal solelyend-lease settlement. When thobegan, however, tho Soviet Oovernaent Insisted thatend-lease settlement could not be consideredeparate and independent problem. It took the position that any settlement of lend-lease would have to beby the simultaneous conclusionrade agreement

giving coat-fnwared-hation treatment to the Soviet Union, and the granting by thc United States of long-term credits on terms acceptable to tho Soviet Union.

"Curing the negotiations the United States explained why it is notosition to negotiate onilateral trade agreement or the extension of long-term credits. It was pointed out that existing law prevents the granting of Bost-favored-natlon treatment to the Soviet Union and that other lavs and policies have an effect upon Soviet-United States trade. On the quest ion of credits the United States took tho position that legal and policy considerations made it impossible for tbe United States to discuss this matter in the lend-lease negotiations. She Soviet position remained unchanged.

"Under these circumstances there was no agreement on the terms of reference of the negotiations and there appeared to be no .common ground for continuing theat that time. The last meeting was held on The United States informed the Soviet Government that it is prepared to resuce negotiations for an over-all lend-lease settlement at any time the Soviet Government Is ready to negotiate on thiseparate and independent issue."*

The third aspect of the problem relates to the disposition to be' made ofend-lease merchant shipsiscellaneous army and navy watcrcraft still in Soviet custody. The foregoing sums do not include settlement for any ships, since these were to be dealt vitheparate part of the over-all negotiations on the lend-lease material. As of this date no settlement offer for these ships has been received by the US from the USSR. Because an agreement has not been reached on the sIm of the Soviot indebtedness vith respect to tlie

* Deportment of State, RD, Washington, D. C,

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civilian goodn aod the ahlps, these are coca lde red by the USto bc "nccounta" rather than defaulted obligations.

While tbe Johnson Act prohibits US private loans to countries in default on their debts to theuling of the Justice Department allows normal conaercial credit, the time limit for which ls considered to be six months. Despite this ruling, however, it is clear that as long as the Soviets ore considered in default on their obligations, the Johnson Act will serverohibition against the five-year credits that ore being extended to the Soviets by Western European countries and Japan. Moreover, it is questionable, even If the Johnson Act no longer applied, whether substantial credit from private sources could be found for the USSR and Eaotern Kuropo unleoe such credit wore guaranteed in seme way by the US Government. Guarantees of this kind have been worked out by the governments of some Western European countries and Japan, but the establishment of similar arrangements by the US would be likely to encounter formidable Congressional opposition unices therearked and tangible improvement in US-Soviet re latloos.

C. Inhibitions to Trade Resulting from Institutional Differences Although thc USSR prefers to conduct foroign trade under terms specified in trade agreements, the US does not usually sign the classic type of bl Lateral trade agreement In which lists of commodities to be exchanged are specified.. The US prefers to sign multilateral treaties

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orof friendship, commerce and navigation dealing through: GAIT of vhich the USSR isember. Under the broad powers granted to him by the Constitution, the President of the United States

is believed to have thc authority to negotiate an agreement with the Soviet Union to promote trade without referral to Congress. Treaties, however, must be referred to that body. Ir*hic agreement, the President may not, of course, violate any laws'Jof the land. He could not, therefore. Incorporate MFP treatment or the like to any communist country which is forbidden byf tho Trade Expansion Act

The agreement thus entered could, however, stipulate conditions of trade and payment arrangements. It could alsoommodity list or lists'* The latter in effect wouldindhunting license" which would enable the Soviets to look for buyers and sellers ln tbe US with assurance that US Federal Lavs would not impinge on execution of the deals. The greatest value woulduarantee that export licenses would be made available for certain questionable areas

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on-the export side.

At the present time, the Office of Export Supply ln the

Department of Commerce, advises prospective exportersrovisional basis only as to whether oricense can be issuedending export to Iron Curtain destinations. irm ruling lo given only on

the filingormal application which callselatively firm

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order having neon received. There have been casesonsiderable period of tine has elapsedecision haa been reached by the economic defense community on some borderline cases, the appeals extending as high as the Export Control Review Board and the President himself. Meantime thc business may have been lost to foreign competitors. The elimination of thla uncertainty would be welcomed by the US exporters as veil as by the Soviot purchasers.

Although executive action could be taken to mitigate the effects of the several existing restrictions on US-USSR trade, tho response of US industry le uncertain* Exports to the USSR would depend in the first instance on the profitability of specific deals. Even so, many US raanufacturoro would be reluctant to give the USSR access toembodying ndvancod technology, fearing that the Soviets would choose to compete in third country markets. Others, discovering that US trade with the USSR has been sporadic and risky, might be reluctant to undertake the retooling and plant modification necessary to meet Soviet specifications. Finally, there is the vexing problem of how private companies deal with elate trading monopolies. rivate foroign firm necking to market its products ln the USSR cannot make direct contact with domestic consumers, producers, or distributors. Ror can it advertise, supervise the servicing of ltr. products, or establish any of the local facilities conducive to the continuation of normal trade relatione. These are conditions that will continue

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to retard the development of US-USSR tre.de and arc ixmune'.fromby the US executive. IV. Shipping Restrictions

Pursuant to tho Shipping Act0 no foreign country canS ship without approval froo thc Maritime Commission. At present, the CommiGClon'e policy is to disapprove charters to the USSR. recourse to Congress, the Maritime Commission could change ltl policy and approve charters to the USSR, if they vere applied fori Inasmuch as such countries as Greece, Norway, and the UK can operate their ships at lower costs .than thc US can, US rates arc not competitive. Under these conditions there is no reason to expect any Sovietfor the chartering of US vessels. T. Conclusions

There appear toumber of steps that could be taken by the administration to improve US-Govlot trade relations:

on the export of goods and technical dataUSSR could be eased.

liberal settlement terms of tho various partalend-lease debt and the kereneky obligation could be granted.

c- US Government approval of more extensive trade between the US and the USSR could be made more explicit.

d. Ship charters to the USSR could be approved.

believe that changes In Uie ndintnlGtratlcn of existing US legislation could be offered the USSR as oneeries of movesynamic negotiating situation for which the USSR would. In turn, be willing to grant certain concessions. hange that would evolve toward Important or major Soviet concessions would almost certainly at aame stage require fundamental modification ofUS trade legislation. The Soviet government is anxious to eliminate its own segregation within the international commercial community and to bo Integrated on the basis of equal treatment. It has had much experience at the bargaining table and would understand that the US administration could not request legislation from the Congress permitting MFN treatment to be accorded to the USSR until after partial trade liberalization had been acknowledged by the USSR as worthyuid pro quo.

We do not believe that these actions by the US Government would result in any substantial increase in US-Soviet trade. If the adminl stmt ion and the Congress were to take all of thene actions, andrade agreement including MKH provisions were concluded, we can conceive of US exports to the/USSR rising onlyevel00 mUlion annually over tho next few years. Tbe USSR particularly could be expected to expand its purchases of technologically advanced machinery and equipment. While the Soviet Union may not be abla to

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