IMPLICATIONS OF AN INCREASE IN US-SOVIET TRADE (SNIE 100-8-58)

Created: 10/7/1958

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8 7 October 8

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SPECIAL

NATIONAL INTELLIGENCE ESTIMATE NUMBER 8

IMPLICATIONS OF AN INCREASE IN US-SOVIET TRADE

CIA HISTORICAL REVIFW PROGRAMULL

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DIRECTOR OF CENTRAL INTELUGENCE

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Concurred in by the

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TABLE OF CONTENTS

DISCUSSION

L INTRODUCTION

II. POTENTIAL MAGNITUDE OF US-USSR 4

WITHIN THE BLOC OF INCREASED US-USSR TRADE

S

ON THE NON-COMMUNIST WORLD OK THE IN-

CREASED US-USSR6

IMPLICATIONS OF AN INCREASE IN US-SOVIET TRADE

THE PROBLEM

To estimate the implications within the Bloc and the Free World of an increase in US-USSR trade.

CONCLUSIONS

Soviets probably genuinely desire an increase in US-USSR trade. Thefor expanding this trade arerestricted, however, by the limited range of Soviet goods likely to bein the US, by US administrative and legislative measures in the fields ofpolicy and economic defense, and by the uncertainty of private US business reaction. We believe it reasonable tothat if the US were to modifyadministrative restrictions,export licensing, US export to the USSR might expand over the next few years to0 million annually. While the USSR would probably not be able to balance trade at this level by its ownexport of goods to the US, it could make up the residual amount bytransfers of free exchange, and by selling more gold to Uie Free World. (Paras.,

An increase in imports from the US of the volume and composition postulated in this estimate would have little impact on the Soviet economy. The consumers goods industry could benefit the most if

the Soviet leaders so decided; in some cases, however, the imported machinery and equipment could be used to increase the output of commodities for use in more basic industry. Assuming US control on the export of strategic goods, we believe the postulated increase in trade would have little effect on Soviet militarySoviet trade with underdeveloped -countries or Communist China would not be significantly affected.)

he Soviet leaders probably believe that increased trade with the US would strengthen their line of peacefuldiminish US ability to maintain Western trade controls and astrong anti-Communist position, and create frictions In the West as various countries found themselves Inwith the US for Soviet trade. We do not believe that these developments would occurignificant degree. Most non-Communist countries would favorably view an increase in US-USSR tradeign that world tensions were relaxing. This would not be true of South Korea and Nationalist China, however, or among

some elements in other countries. Japan, as well as many underdeveloped countries, would become less receptive than they are today to US advice againsteconomic relations with the Bloc. (Paras.

n the final analysis the view taken by most countries would depend largely upon the impact which increased US-USSR trade had upon the trade of those It Is possible that -certain coun-

tries would be adversely affected by US competition in the Soviet market or, more probably, by an increase-in Soviet raw material exports to the US. We believe that at the postulated levels of trade such effect would in general be small.substantial increase in USof certain specific commodities from thc USSR might seriously damage thc trade or the foreign exchangeof particular Free World countries.)

DISCUSSION

INTRODUCTION

hc possibilityubstantial increase in US-USSR trade was raised by Khrushchev's letter lo Presidenthrushchev proposed that the USSR would buy non-strategic industrial equipment,for the production of synthetic materials and consumer goods, and would sell to thc US ln return basic commodities, includingand chrome ore, asbestos, lumber, furs, and possibly some machinery and equipment of modern design. To accelerate theof trade, he suggested that the USlong term commercial credits. He also proposed the conclusion of licensingexchange of technical InformaUon. and an Inter-governmental agreement to regulate economic relations between the two countries.

6 Khrushchev's proposal, although generally businesslike In tone, was probably in the firstropaganda gesture. Whether or not it was accepted, it would further the Soviet line of "peaceful coexistence" by ap-pcarlng to respond positively lo US proposals that world trade be increased. It asserted that US Industry would be interested in getting ordersn obvious reference to Uie US recession, the impact of which has been overestimated by the Soviets. Moreover. Uie fact that Khrushchev referred to trade In thc "billions" demonstrates the propaganda aspects of the note. He is certainly aware

that the Soviet Union does not have exports sufficiently attractive to the US market to support trade atevel: he must also be aware Uiat there is only thc most remote chance that the US, In present circumstances, would extend large and long term credits to the USSR.

Nevertheless, we believe that tho Soviet Union genuinely desires an increase In Its trade with thc UStrade which7 comprised exports to the USillion and imports from Uie US of5 million. The Soviet effort to strengthen Its IndusUial base and to increase the availability ofgoods would be facilitated by obtaining technologically advanced machinery and equipment from the US.or Uieand plastic industries. The Soviets would thus avoid some of the coals ofand. as Khrushchev pointed out to the Central Committee inould save much time by importing plant from the US, UK, and West Germany. If In addition. Uiey could obtain long term US credits, they could acquire the facilities to increase productioninimum initial drain on their own resources.

The Soviet leaders almost certainly alsothat important poliUcal gains would flowubstantial increase In Soviet trade with Uie US. In their view, it would be likely to strengthen the Moscow line of peaceful

coexistence nnd to weaken thc effectiveness of US efforts totrongposiUon. The Soviet leaders probably believe thatevelopment woulddiminish the US ability to maintain Western trade controls. They may also think increased trade with the US would create divisive frictions in the West as other Western industrial countries observed the USits share of thc Soviet market

II. POTENTIAL MAGNITUDE OF US-USSR TRADE

Soviet desire to expandit is difficult to estimate the extentthis trade might realistically beto increase, and to judge theof such an Increase if it were toprimary factors involved would beof the Soviet Union to makeexport commodities which could be soldUS, thc willingness of the USrelax legal ond administrativeagainst trade with the USSR, andof private US industry to dowith the Soviet Union.

by the Soviet goods which wepotentially available for export toIt ls almosi certain that the Soviethuvc difficulty Ln increasing itsearning capacity. The US nowfrom non-Communist sourcesits imports of the raw materialsKhrushchev. Further, for manganesein particularat one Ume majorexports to the USmany of theto which the US has turned haveby US private andand supplies appear ample.USSR could undercut existing pricesmaterials, it would have to be waryof dumping, which could resultUS restrictions. While thewould probably be willing to sellof machinery in which they havethere would not be enoughitems toignificant return.would be unlikely to make theto market ordinarilyof machinery and equipment InUS importers.

US measures lending totrade alsoormidableto any increase in such trade.enacted laws under which the importand certain furs of Soviet originand most-favored-nationtreatment is specifically denied theUnion, thus depriving It of the tariffnegoUatedhe lack oftreatment wouldostto US imports of manganese orefrom the USSR. Moreit would hinder US Imports ofwhich have not hlstorlcaUy beenUS-USSR trade but which "would probablyto enter the trade toeallyvolume of Soviet purchases here.and other communist countrieshigh symbolic value on MFNand would undoubtedly make it aIn any trade negotiations withUS export controls continue to bethan those recently agreed to byof COCOM. Finally, the BattleActs prohibit governmental andloans to lhe USSR; under presentUS exporters or banksno moreay commercialthe Soviet Union.

if the US government acted totrade with the USSR, the response ofIndustry is uncertain. It woulddepend in thc first Instance onof specificven so.Importers would probably be reluctantfrom established sources ofin view ot their uncertainty aspermanence and reliability of thca source. Many US manufacturersreluctant to give the Soviets accessembodying advancedthat the Russians would choosein third country markets.that tradethc USSR wouldand risky, might be reluctant tothe retooling and plantto meet SovietAmerican private business oftenpublic relations difficulties In tradeUSSR, even though thc transaction may

entirely legal, and therefore wouldmove cautiously in tho matter,

As to tlic permanence of Soviet desire for expanded trade with the US and othercountries,erforrnancethat thc fearne-shot operaUon, or at least of highly irregular Soviet levels of demand, is well-founded. Khrushchev's offer emphasized thc Soviet desire to buy plant, equipment, and technology rather thanproducts, and it may be that ln many areas thc Soviets would proceed to produce their own and not draw further on the West However, it appears likely that the West will continue toariety of processesto the USSR; imports of Westernwould also,ractical matter, ease the pressure which growing internaland demands from other Bloc countries have placed on Soviet machinery andindustries. Hence, the aggregate ofdemand for machinery and equipment should continue and even growairly steady pace. Moreover, while the Soviets still adhere basicallyoctrine ofthey have in fact attained this goal in virtually all Key sectors of thc economy, in terms of capacity for emergency purposes, and can thus afford toegree ofon the West ln non-criUcal fields. Thus, there mayontinuing growth in Soviet willingness to buy finished products from the West.

in view of these conflicting factors, it is clearly impossible to make any firm prediction of the extent to which US trade with the USSR might realistically be expected lo Increase. For the purposes of this paper, we believe it reasonable to assume that if thc USsuch trade by taking administrativeto liberal^ export licensing policy and to minimize Import discriminations, exports to the USSR might expand to0 million annually over the space of the next few years. This figure reflects an estimate of Soviet requirements for imported machinery in light of their Seven Year Plan, and aof thr possible magnitude of Soviet

exports to thehile the USSR would probably not be able to balance trade at this level by Its own direct export of goods to the US, it could make up the residual amount by reexports, transfers of free exchange, and by selling more gold to the Free World. This assumpUonrade expanded0 million docs not allow for an Increase which might occur if US credits and MFN tariff treatment were made available to the USSRdevelopments which would require legislative rather than merely adnunistrative action.

III. EFFECTS WITHIN THE BLOC OF INCREASED US-USSR TRADE

A. Economic

Should the USSR Import machinery and equipment from thc US In approximately the assumed amounts, it would of course gainadvantages. We cannot, however, give any exact estimate of the size or extent of these advantages. Thc total value of themillionan Insignificant percentage of the total value of Sovietproduction of machineryillion. Moreover, the net gain to thc USSR would bemall proportion of0 million, since the Imports would have to be paid for by exports drawn from lhe Soviet domestic economy. It Is clear, however, lhat the advantages accruing to the USSR would be greater than these figures indicate to the extent that the Soviet Importedplants of advanced design, or types of machinery and equipment they themselves had never produced. Such Imports wouldsavings of development capital and of the time of relaUvely scarce trained personnel. By Importing complete plants, the USSR could reduce the time needed loull production run.

The effects of increased trade in terms of output of specific Industrial categories or of specific commodities would depend wholly on decisions made by the Soviet leaders. Soviet leaders would be able to use thc new equip-

'flee annex. Possible Size and Composition of US-Sovlel Trade.

ment cither to increase output or to reduce lhe cost of production at the existing level. The Soviet leaders would also, ln some cases, have the option of using the importedeither to facilitate an expansion of consumers goods production or to increase output of commodities for use In more basic Industries. Importation of plant for the petrochemical Industry would assist Soviet efforts to shift from agricultural products to petroleum as thc principal source of rawfor the production of synthetic rubber, alcohol, and other chemical products.

ith respect to military production, wc assume US export controls will prevent the movement to the USSR of strategicOn this basis the Increase In trade projected in this estimate would have slight effect on the Soviet military potential.improvements In the chemical andindustries, for example, would make for some additional flexibility in the range ofavailable for military production and might cut the costs of production of these or other items.

ncreased trade with the US. of thelevel and character, would have little effect on Soviet trade with thecountries or with the rest of the Bloc. The bulk of Soviet exports to these countries consists ot arms and military equipment, raw materials, and basic industrial machinery and equipment; it docs not include technologically advanced equipment of the type which thc Soviet Union apparently hopes to obtain from the US.

B. Political

he postulated expansion of US-USSR trade, by itself, would probably have little or no impact on the attitude of Soviet leaders or of the Soviet public toward thc US. Even If the gains from this increased trade were turned largely toward improving the Soviet standard of living, the USSR's owntorogram would be so large that the US contribution, even if publicly admitted, would be almost completely overshadowed

e do not believe that an increase of trade between the US and thc USSR would have any appreciable political or economic effect upon the European Satellites or upon Communist China. The governments of tlie European Satellites might, if they saw US-USSR trade expanding, seek to increase the trade of their own countries with the US, and they would probably expect neither the US nor thc USSR to pose any Insuperable political objection to such an increase. Some of the people of the European Satellites might be discouraged by evidence of Improving relations between the US and thc USSR; we believe, however, that such an effect would not.be of long-term significance.

IV. EFFECTS ON THE NON-COMMUNIST

WORID OF THE INCREASED US-USSR TRADE

olitical point of view, most non-Communist countries would probably welcome thc prospect of an Increase in trade between the US and the USSR. They would view itign that world tensions were relaxing, and that thc danger of war was lessening. Many of them would consider that the US had come aroundore realistic trade policy. At -the same time, It is virtually certain that some elements in many countries, and theat least of South Korea andChina, would regard the development as signifying another capitulation by the US to the USSR. Thc Japanese government would be highly resentful that the US government had changed its own policy after pressing the Japanese to move cautiously in their trade with the Bloc and to minimize their political and economic relations with Communist China. Many underdeveloped countries would be even less willing than they are today to listen to US warnings concerning the dangers of expanding economic relations with thc Bloc. Reactions would be affected to aextent by the timing and handling of lhe US move and the circumstances of thc International situation. But in the final analysis, thc view taken by most countries would depend largely upon the impact which the increase of US-USSR trade had upon the trade of these countries.

G

Should lhe US export to the USSK the types of goods which we discuss in the Annex to this paper. It would Ond itself inwith Western European andhis competition lededuction of presently existing levels ofEuropean or Japanese exports to the USSR It would certainly become an irritant In US relations with the countries concerned. It Is probable, however, that thc total amount of Soviet imports from the non-Communist world would increase sufficiently to allow not only for Uie projected increase in imports from the US, but for an increase of Imports from other countries as well. Moreover, the US is now in competition with Western European exporters In many third areas without giving rise to serious political problems. We believe,that increased US exports to the USSR would not lead to significant political difficulty with other non-Communist countries.It is possible that Irritations could arise from this cause, especially if the general level of trade In the Free World was low. There might also be certain particular lines of US exports which would displace Uielines of certain other countries.

Finally, the possibility cannot be excluded that the USSR itself would deliberately take US goods and exclude the goods of certain olher countries in order to cause friction In the Western alliance.

s for US imports from the USSR, some countries selling to thc US would be adversely affected by competition of Soviet rawIn the US market. There would be minor reductions in the dollar earnings in some cases, but at the levels of US-Soviet trade we have postulated the effect would ln general be small. It would be necessary toubstanUal increase In USof some specific commodity from Uie USSR might seriously damage the trade or the foreign exchange posiUon of some particular Free World country. For example,US Imports of manganese from the USSR might displace imports of the same commodity from India, and imports of forest products from Uie USSR might displace those from Scandinavia. The degree of suchand Its political and economic effects, could only be judged after study of Uie par-Ucular commodities Involved and of the trade patterns which would be disturbed.

ANNEX

POSSIBLE LEVEL AND COMPOSITION OF FUTURE US-SOVIET TRADE

Level of Trade

In recent years Soviet Imports of machinery and equipment have probably averaged six to seven percent of the domestic producUon of these goods. (Sec Assuming that the raUo remains roughly the same, Soviet Imports of machinery and equipment2 from other Bloc countries as well as from the Free World would amount toillion dollars, more than twice their present volume. However, in part because of increasingand underdeveloped areas demand lor European Satellite machinery exports, the USSR in the future will probablyigher proportion of Its machinery and equip-

ment imports from the Free World. In these circumstances, It ls not unlikely that2 Soviet imports of machinery and equipment from the Free World could increase to aboutercent of the total import of such goods or0 million, as compared to aboutercentSee Tablef estimated total Imports from Ihe Free Worldt is assumed that not more thanercent,aximum0 million, would come from the United Statesthis would amount to an increase in the relativeof Soviel Imports of machinery and equipment purchased in the US fromercent of total Imports of such goods from the Free World,

TABLE I

SOVIET INVESTMENT, PRODUCTION AND IMPORTS OF MACHINERY .IND2 (Billions5 dollars)

:

a percent

ProducUon

Investment

p

*

preliminary 'esUmate

TABLE II

SOVIET IMPORTS OF MACHINERY AND EQUIPMENT (In million US dollars snd percent of total)

Value Percent Value Percent

Sino-Soviet Bloc 4 4

Free World fi > Q

Total O

The decrcaslne share of thc Satellites In total Soviet Imports ofy Kf,nomlC

B. Composition ol Trade

Percent of total

Although Khrushchev made only thc most general comments concerning the commodity composition of an expanded trade, we believe that on thc basis of known Soviet priorities during the forthcoming Seven Year Plan the following wouldeasonableof the major categories of goodsin thc trade.

oviet Imports from the US

Iron ore processing and steel rolling mill plants and equipment: The USSR has need for such equipment to relieve the strain on the already overburdened machine buildingand it ls generally conceded that US has technologiesin iron ore processing.

Chemical processing plants and equipment: The low technological level of thc Soviet petrochemicaland plans for Its substantial development byssures ahigh priority to auch imports.

Refrigeration and food processing equipment: Thc use of refrigeration equipment for the chemical and food industries (both of which are scheduled fornd US superiority in this field rank such equipment high on Soviet shopping lists in the US.

Equipment for production offiber and for the production of yarn, fabric, and clothing from natural and synthetic fiber: Soviet interest in such equipment ismotivated by desire toSoviet standard of living.orders for such equipment would more likely be placed InEurope, the USSR has already exhibited an interest in purchasing US textile plants.

Metal cutting and forming machine tools; mining and constructiontimber, pulp and paper

producing plants and equipment; miscellaneous consumer goods,including foods tufts

oviet Exports to the% Ferroalloys, ferroalloy ores, andThe United States has traditionallyajor Importer of Soviet ferroalloy ores andIn the pre-war period, for example, more thanercent of total Soviet manganese exports were purchased by the US.Soviet exports ofand chrome ores could again be expanded to meet any Increased US demand However, because of Uie hiatus in Soviet-American trade duringeriod, any^re-sumpUon of large US purchases wouldhift from now well-established sources of supplyprimarily in underdeveloped areas.

oal tar chemicals and petroleum products: Benzene has accounted for approximatelyercent ofexports to the US In recent years. However, because benzene is consumed In the production of syn-UieUc organic chemicals, producUon of which will rise rapidly In the USSRt is expected that total Soviet benzene exports will tend to level off. If not decline,etroleum and petroleum products, however, will continue to be the most readily available of all Soviet potential exports.

urs and forestarge item in Soviet exports to the US, in recent years furhave fluctuatedercent of the total, andamount to aboutillion. It is estimated that exports in this group could amount to aboutercent of the total0 toillion).

recious Metals (other thanotton Ilnters and) andlatinum and platinum grouplike cotton Unters and waste, have each averaged approximatelyf total US imports from the USSR. There Is little likelihood that given the absolute increases provided in an expanding US-USSR

trade, their relative shares in such trade would measurably increase.

oviet net importfrom the TJS could be settled by means of gold sales, sales ln the US of commodities purchased from third countries, or credits. Soviet gold resources are estimated to be adequate toesidual on this order of magnitude.

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