American Policy and the Soviet Economic Offensive

IN the early years after the war, the Russians expanded their ideological exports while pursuing a policy of economic isolationism whenever more tangible goods were involved. Wherever they could make themselves heard, they challenged United States concepts of trade and aid as exploitation and imperialism, but they did not compete in substance. Within its own self-imposed limitations, American foreign economic policy was relatively free to engage in trade and aid with the countries not in the Soviet bloc.

The partial oxidation of the Iron Curtain by Bulganin and Khrushchev has not only made possible some degree of controlled artistic, athletic and scientific interchange, but it appears also to have important economic implications. Soviet bloc economic negotiators are busy in both the industrial and the underdeveloped countries. Arrangements are being made for the expanded bartering of commodities, the extension of credit and the provision of technical assistance. At the same time, American policy in this area has become even more hesitant and vacillating, awaiting the results of half a dozen new Administrative reappraisals and Congressional investigations.

The background of the Soviet economic offensive is relatively simple. In 1937, the Soviet Union carried on 96 percent of its limited foreign trade with countries now in the free world.^[i] Taking all the Eastern European countries as a group, their prewar trade with the present free world was more than 85 percent of their total trade.

The postwar period witnessed not only a political convergence of the Soviet Union and her new satellites but also an economic integration. By the end of the postwar decade, the trade pattern was completely altered. After eliminating the effect of changes in price level, the volume of their trade with each other has expanded more than 2.5 times while their trade with the rest of the world was less than half its prewar level. Thus in 1954 only 20 to 30 percent of the trade of most Eastern European countries (21 percent for the U.S.S.R.) was with the rest of the world. Within the Eastern European group, the Soviet Union had emerged as the most important trading partner. Even by 1948, its exports to the other countries in the bloc had multiplied by 25 times and imports by 10 times, compared to the very low prewar levels.

The basis of this new trade pattern was primarily the effort to develop the Soviet bloc as a self-contained economic unit. There were four reasons for this. First was the concentration on military strength and development, an objective which obviously involves reducing economic dependence upon unreliable (foreign) sources of strategic raw materials and finished goods. Second was the iron-curtain policy, with its effort to reduce contacts with the Western world to a minimum in order to insure discipline and acceptance of the régime. Third was the reliance upon economic planning and the consequent effort to eliminate those uncertainties which are introduced by dependence upon transactions with buyers and sellers beyond the control of the planners. Finally, many of the arguments were applied to the bloc as a whole which are now being advanced for a "common market" in Europe. At first the plans were essentially nationalist, but more recently special emphasis has been given to the desirability of organizing to permit large-scale production and specialization, thereby increasing productivity for the group as a whole.

Even had there not been internal reasons for developing this Soviet-bloc autarky, other forces would have contributed to reducing their trade with the free world. Their industrial expansion and lagging agriculture ran counter to the reconstruction of the prewar trade pattern when they exported food and feedstuffs in return for manufactured goods, largely consumer items. Furthermore, the imposition of strategic trade restrictions by Western countries put obstacles in the way of trade in those very items for which presumably these countries had the greatest demand.

For all these reasons, in spite of economic expansion within the Soviet bloc and rapid recovery and growth in the free world, the trade between the two declined from a not very high postwar peak in 1948 to a low point in the first half of 1953. Since then, trade between the bloc and the rest of the world has more than doubled and is still expanding rapidly, although it is not large in volume. Trade with the bloc countries, which was 7.4 percent of the free world's trade in 1938, was only 2.3 percent in 1954 and 2.6 percent in 1955. And it is still true that the countries within the bloc do about 75 percent of their trade with each other.

The increases in trade with the free world since 1953 are not merely random economic variables. They represent a definite shift in policy and emphasis. There has been an even greater increase in the volume of talk by Soviet leaders, broadcasting their desire for increased trade with the free world. This recent development is clearly a part of the new post-Stalin picture. It is consistent with the so-called peace offensive and the call for reduced international tensions. But it seems to be more than an adaptation to the new mood. It looks as though the past occasional and insignificant use of economic means to achieve foreign objectives (i.e. a shipload of wheat to Italy at a critical time) is being replaced by a positive utilization of foreign economic policy as a major instrument in the struggle to win friends and influence people.

On the more strictly economic side, the new structure of trade is suggestive. There is a definite tendency to expand exports of manufactures in exchange for imports of food and raw materials, and this would seem to correspond to the productivity record in the Communist countries. There may therefore be some economic logic behind the expansion of trade as well as its use to further the continuing political objectives of Soviet Communism.

So far as Western Europe and the United States are concerned, the main expression of trade policy toward the bloc in recent years has been the operation of the so-called strategic controls. While American economic foreign policy in general has sought to lower trade barriers and encourage trade expansion, trade with the bloc countries has been restricted with respect to items which might contribute to Communist military strength. Furthermore, so far as the United States is concerned, the reductions in tariffs negotiated under the Trade Agreements Act, usually generalized to other countries in accordance with most-favored-nation commitments, have not been extended to countries in the Soviet bloc. Nevertheless, there is a considerable area for trade in so-called "peaceful trade" items not covered in the restrictive trade program. However, although a wide network of trade agreements has been negotiated, the volume of trade actually achieved has been relatively small.

Strategic controls originated at the time when it became apparent that we were engaged in an arms race with a dangerous adversary. We had demobilized while the Russians had not, and our immediate defense lay in the atomic bomb, obviously a temporary advantage. Military strength is relative, and it was important to gain time by delaying Russian progress. Thus the policy was adopted of restricting trade in goods which might contribute to Soviet military strength. In general, the other industrial countries joined in the program, although its specific application was a constant source of friction. That it was incorporated as a condition for the receipt of United States assistance made it an even greater irritant. Nevertheless, it undoubtedly created some delays in the Russian military program and helped hold the line until the NATO defenses could be developed.

Assuming that there will continue to be an embargo on actual military items, additional restrictions no longer can be said to have much importance for our security. Whatever bottlenecks were created by the original policy have undoubtedly been broken by this time. In fact, it was clear at the beginning that one of the results of the restrictive policy would be to force the Soviet bloc to develop its own production of the prohibited items. With such a primary position in planning given to the military, it is hard to conceive that the Soviet bloc has left itself in any way dependent upon foreign trade to meet its military requirements.

If the significance of the strategic controls in terms of military requirements is reduced to a minimum, there still remains the possibility of using controls to hamper the general economic progress of the countries in the bloc. However, this cuts both ways. From the economic point of view, it is impossible to conclude that trade in one direction is more valuable than trade in the other. How can one say that fuel and raw materials flowing out of Eastern Europe are more or less valuable than wheat and tobacco flowing in, or than small ships, or even than electric motors?

The changing pattern of trade is clearly relevant to this argument for continuing controls. In 1954, the increase in bloc imports was largely in consumer goods--food, tobacco, textiles and paper. In 1955, imports of consumer goods held level and the chief increases were in ships, iron and steel, and nonferrous metals. The imports of machinery, which had been declining in earlier years, did not increase in 1955 even though there was some relaxation of the strategic controls by the Western countries in August 1954.

The largest export items from the bloc were coal (although in 1955 United States shipments of coal to Western Europe were larger than those from Eastern Europe by two and a half times), petroleum and petroleum products, and timber, but iron and steel products and machinery exports are increasing rapidly. In 1955, for the first time, Eastern European exports of manufactured products to Western Europe exceeded food exports. However, the two categories together were less than fuel and raw material exports. The new pattern which is developing, particularly in relation to overseas trade, is the export by the bloc of manufactured goods and the import of foodstuffs and raw materials.

In the light of the present situation, it seems more appropriate that efforts should be made by Western Europe and the United States to increase their trade with the bloc, particularly with the satellite countries. This can have much more than economic importance. When Jugoslavia pulled out from under Soviet domination, its most difficult problem was created by the trade embargo immediately placed upon it by the Soviet bloc. In 1948, 50.7 percent of its exports and 45.6 percent of its imports came from Eastern Europe. From then until 1954, its trade with the bloc was zero. The success of its effort to throw off the Moscow yoke depended in large part upon how quickly its trade could be reoriented toward the free world. This was no easy matter, and it was only because the United States, the United Kingdom and France gave special assistance that "Titoism" was possible. Similar assistance may be used again to encourage satellite independence, but this can be only a temporary substitute for the development of trade channels.

The Soviet Union clearly recognizes the importance of binding the satellites to itself and to each other by strong economic ties. Drew Middleton reported in The New York Times, shortly after the political developments in Poland, that the Soviet Union had offered to buy the Polish coal now going to the West. Clearly, this is an effort to strengthen the economic interdependence of Poland and the U.S.S.R. Furthermore, in the Soviet Union's policy statement of October 30, 1956, on relations with other Communist nations, the subject is raised but not resolved, by the statement that "the Soviet Government is ready to discuss, together with the governments of other Socialist states, measures insuring the further development of economic ties between Socialist countries."

It will not be an easy matter to make any substantial break in the volume of intra-bloc trade. The more recent East-West trade agreements, negotiated, to be sure, before the unrest broke out in the satellites, all provide for increases in trade, and the early months of 1956 show both imports and exports up by about 15 percent above early 1955. While there have been talks of very large increases (the Russian tourist-team talked in London of a fivefold increase in five years), it is difficult to envisage what the bloc might supply in such a case. Since this trade is such a small proportion of free Europe's trade, it probably could easily be supplied on the Western side, but the necessary reverse flow is more difficult to envisage. Foodstuffs are out of the picture, but increases in petroleum and coal may be possible, as well as the kind of diversified trade with which countries such as Czechoslovakia are familiar. In short, there seems to be little possibility for any spectacular developments in trade between Western and Eastern Europe, but such increases as are possible should now be encouraged as at least one step in the process of liberation.

Two fears which have often been expressed are that the Soviet bloc might use any significant trade position to disturb and disrupt markets, and that expanded trade might create dependence upon it by countries that are now free. So far as market disturbance is concerned, such leverage is largely on the selling side of the market and is a matter of magnitudes and alternatives. When Soviet manganese was withdrawn from the world market, it did create a shortage and there was a delay before other sources such as India were able to fill the gap. On the other hand, the Western purchasers of Polish coal have always known that American coal was readily available if the bargaining became too difficult. Russian and Rumanian petroleum are also easily replaceable, assuming normal channels are open. To be sure, sudden dumping on a market can cause short-run confusion, but this might raise a serious problem only if it took the form of dumping large quantities of precious metals. A large gold flow, not a likely development, might conceivably lead to inflation in countries with weak monetary controls.

There are a few countries for whose products the Soviet bloc provides an important market, notably Iceland and Finland. These are both special cases and the free world has perhaps been somewhat negligent in permitting them to slip so far into the Soviet economic orbit. In 1953, after desperate efforts to find other markets, Iceland began to sell its fish products in quantity to the Soviet bloc, and the volume and percentage of its exports to the bloc have increased each year since then. Finland's trade was directed to the Soviet bloc in large part by its reparations commitments. Although its exports to the bloc were larger in 1955 than ever before, the proportion of its trade which this volume represented has declined somewhat since the peak in 1953.

There are two other countries in the free world where one can expect that trade with Eastern Europe may soon reach the 20 percent mark, Austria and Jugoslavia. The signing of the Austrian State Treaty in May 1955 was followed by a payments agreement relating to former German assets and by a series of trade agreements. As a matter of fact, it may well be that most of any apparent statistical increase in Austrian exports to the bloc will be merely the explicit recognition of unrecorded exports during the Soviet occupation. However, of all the Western European countries, Austria had the greatest Eastern European trade before the war and is still far below those earlier percentages.

In the case of Jugoslavia, after a period of orientation toward the Soviet bloc, trade relations were completely severed in late 1948. Trade was resumed in 1954 and increased rapidly in 1955. Larger quotas plus substantial Soviet credits augur a further substantial increase in 1956. Some of Jugoslavia's traditional exports, such as fruit, vegetables and tobacco, were never easily marketed in Western European markets and her trade with the West has had to be supported by grants and credits.

For Western Europe as a whole, trade with Eastern Europe (excluding trade between Western and Eastern Germany) is still exceedingly small--3.4 percent of its imports and 3.2 percent of its exports, less than half the prewar figures.

In the special cases described above, the problem for the free world is one of providing alternatives--not necessarily alternatives which need to be used but options which are there as a protection against increasing dependence and the threat of coercion. And the same considerations, directed at the satellites, would argue for the effort to increase their trade with the free world.

II

The new economic policy has been much more spectacular in relation to the underdeveloped countries. Although the expansion of trade with countries supplying food and raw material is explained by some analysts in terms of economic advantage, the fact that this new interest in trade is not solely an economic matter was made clear by Mr. Khrushchev in speaking to a group of visiting United States Senators: "We value trade least for economic reasons and most for political purposes as a means of promoting better relations between our countries." Although he was talking about United States-Soviet relations, this pronouncement takes on even greater significance when related to the underdeveloped countries, where the Communists have their greatest hope for further accessions to their ranks. With this in mind, a whole series of new policies has been put into practice by the Soviet bloc.

One technique has been to provide a market for goods which are proving difficult to sell in the free world. The purchase of fish from Iceland, rice from Burma and cotton from Egypt are all illustrations of this approach. In 1955, the Sino-Soviet bloc purchased more than 10 percent of the exports of nine countries: Iceland (27.8 percent), Egypt (26.7), Finland (25.8), Turkey (21.8), Iran (15.2), Jugoslavia (13.8), Burma (12.0), Austria (10.2) and Afghanistan (estimated at 50 percent). Only five countries purchased as much as 10 percent from the bloc: Finland (27.0), Hong Kong (24.2), Iceland (22.2), Turkey (18.3) and Afghanistan (exact percent not known). These are important percentages, many of which are still rising, but they still do not indicate that dominance over any considerable area is being achieved through trade.

The Soviet effort to expand economic relations with the underdeveloped countries has involved not only trade but also credits, technical assistance, trade fairs, technical exchange, trade missions and propaganda. The most common trade pattern is the exchange of primary products for manufactured goods on an intergovernmental basis. In addition, credits have been extended on an expanding scale. Credit agreements concluded during 1955 amounted to nearly $600 millions, most of which went to Jugoslavia, Egypt, Afghanistan and India. These credits involved low interest rates, long periods of repayment and sometimes arrangements for compensation in kind, as in the case of Egyptian cotton. In addition to credit, substantial technical assistance has been made available, ranging from aid in oil exploration (India) to the setting up of a technical institute in Rangoon and a 100-bed hospital in Kabul.

These new programs are not to be regarded lightly. To be sure, the members of the Soviet bloc would probably be embarrassed if all their offers were accepted but they do have the capacity to carry out substantial programs. In fact, they could probably equal our present levels of non-defense-support aid to the underdeveloped countries if they should determine to do so. Of course, the extension of substantial credits in any one year cannot be compared with an actual flow of trade, since the credit usually relates to shipments to be made over a period of several years. The Soviet bloc is starting from a very low level of trade with most underdeveloped countries. However, its emphasis is on support of economic development and this is undoubtedly the area of greatest political impact.

The political values are clearly uppermost. The economic effects are decidedly marginal. By expanding trade, they may even improve the position of their own consumers by obtaining rice for a product such as cement. By exporting capital, they may slow down their own rate of expansion a little or even delay the rate at which their growth is reflected in the standard of living, but neither of these will clearly appear to their citizens as a calculated and explicit burden. For various reasons, they can easily send more technicians abroad than can we under our present procedures. Furthermore, their programs often have more appeal than ours, even if they may be less sensible in terms of the allocation of resources. They may do the more conspicuous or symbolic project, such as paving the streets in Kabul, or the more impressive, such as building a steel mill in India. And always there is the steady beat of propaganda asserting that Soviet programs are disinterested without strings, while Western programs are militaristic, imperialistic and set about with conditions.

What is the basis for this new Soviet activity? One can of course find many self-serving declarations by the Russian leaders. Marx originally predicted the revolution as the result of the explosion of misery and clearly the present-day Communists are not acting on that basis, for assistance interferes with Marx's economic determinism. Nor can they be operating upon the American thesis that improvement will deter the embrace of Communism. There is very little evidence that the Slavic temperament or the Soviet rulers have ever relied on gratitude as an important source of motivation. But they always have placed great weight on economic factors. Perhaps this new policy is simply a combination of a desire to demonstrate the economic strength of the Communist bloc and an effort to establish closer economic ties as a basis for political rapprochement. From our point of view, it would appear to imply a recognition that the American programs, which took their shape in the first five years after the War, were sufficiently effective and successful to require some counteraction.

The problems already mentioned with respect to Iceland and Finland appear also among the underdeveloped countries. In several instances, the Soviet bloc has been able to inject itself by purchasing commodities not easily marketed in the free world. In the cases of cotton, rubber and rice, American developments contributed to the marketing difficulties of the underdeveloped countries, and Egypt, Ceylon and Burma found outlets in the Soviet bloc. All these arrangements were more or less barter deals and they obtained manufactured goods which they wanted in exchange for their own surpluses. In strictly economic terms, such arrangements cannot be automatically censured. The bartering of commodities for which there is no market in the free world can be a definite economic gain providing useful commodities are obtained in exchange. Furthermore, assistance presently available to the underdeveloped countries is not at the limit of their absorptive capacity. Such aid and assistance as can come from the Soviet bloc (and it is likely to prove disappointing over time) will add to the resources available for economic development.

This having been said, there appears to be no justification for adopting a nonchalant view of the new Soviet offensive. The great danger, of course, is that some countries may get into the position where economic pressure can be applied as a method of obtaining political concessions. As in the case of countries in Western Europe, the amount of leverage which can be obtained from economic ties is related in large part to the degree to which alternatives are readily available. If economic opportunities and assistance are readily available from the West, then the danger is less one of coercion and is reduced to the level of contact and persuasion.

This new situation has a real bearing upon our own policy of economic assistance. We may well find ourselves in the difficult position of competing against a fairly secretive competitor, and be dependent upon the beneficiary for our information or misinformation about the score (as in the case of Egypt and the Aswan Dam). We can of course withdraw from the scene or make it an all-or-none issue, but neither course is likely to improve our international relations. In the last analysis, the consequence of the new Soviet offensive should be to improve the performance of the competitors. So long as we were the main source of economic aid, we could function with a kind of positive and magisterial assurance. But now, even more than before, we must review our methods and procedures to see whether or not we can do a better job of it.

We still have substantial assets in our hands. We can outbid the Soviet bloc with economic goods and services whenever we wish to do so. In one area, that of foodstuffs, we have surpluses where they are hard pressed. In fact, our recent programs for agricultural disposal have indicated one promising way of contributing to economic development. Unfortunately, the fact that our internal political discussion of this problem has been in terms of getting rid of surpluses rather than contributing to economic development has created the notion in the beneficiary countries that they are performing a service for us rather than receiving assistance. And the fact that the citizens in the recipient country pay for the products in their local currency conceals the fact that our action is creating a fund for economic development which would otherwise not be available to the government. Perhaps this is merely a matter of public education, both at home and abroad. Since our own reports are in terms of how much surplus we have managed to dispose of, how can we expect the program to be put in its proper perspective? The agricultural disposal program suggests that the weakness in our assistance programs is less in what they are than in how they are done and what they are believed to be.

The centralized character of Soviet operation gives it certain advantages in developing the assistance aspect of foreign policy. There is no public debate involving the antecedents, present performance and future prospects of the prospective beneficiary. There is no framework fixed by legislation within which each operating act must fit. There is no limitation with respect to the period of time to be covered by a commitment. And people and goods can be coöpted without due process of law. To be sure, we are convinced that the development of individualism, the review of public policy by the people and their representatives, and the operation of government within a process of checks and balances are all essential to democracy. That this may lead to delays, unfortunate publicity and inflexibility is a price we have always been willing to pay in dealing with domestic problems. But it does raise difficulties for the detailed operation of foreign policy, and we should be ingenious enough to find ways and means of reducing the obstacles which we continually place in our own way.

It does not now appear that the new programs will place the Soviet Union in a position within the next few years to take over political control through economic domination, except possibly in the case of Afghanistan. Yet it is still quite likely that the new policies may strengthen its political position and possibly weaken that of the Western countries. However, this is clearly the objective of the new total policy and not merely of the new "aid through trade" programs.

In the ideological competition, Soviet policy now looks toward a great expansion in contacts. Trade and technical assistance will contribute added opportunities for Communist enthusiasts to spread their ideas. That more Communist propaganda will be loose in the world adds to the danger. However, the important impact of the new economic programs may be less in terms of the personnel which goes along with them than in the encouragement that these programs will give to those already in the country with a tendency to lean toward the left.

If our basic concern is to make it possible for the underdeveloped countries to maintain their independence, giving them freedom to design their own future in so far as any nation is ever able to do so, we must be concerned not only about political ties but also about economic independence. This involves two considerations--enough economic progress so that internal pressures do not force them to turn to a dictatorship of the extreme right or left, and sufficient economic alternatives so that they do not become exposed to economic coercion. These are not negative goals, but essential bases for the development of free nations. Perhaps the most important objective for American policy must be to convince the underdeveloped countries that our interest is not in using them as pawns in the cold war, but rather in supporting their freedom and assisting in their own development.

^[i] The chief sources of material for this article were the Seventh and Eighth Report to Congress by the International Coöperation Administration on operations under the Mutual Defense Assistance Control Act of 1951; the United Nations, World Economic Survey 1955; and the United Nations, Economic Bulletin for Europe, August 1956.