All Commentary
Monday, October 1, 1973

Who Profits from East-West Trade?

Mr. Guccione, a chemical engineer, is senior editor of Engineering & Mining Journal, and a director of the Committee for Monetary Research and Education.

Before answering the question raised in the title, let’s briefly consider how East-West trade is viewed within the entire US political spectrum. Essentially, there are four major schools of thought:

1. The Peaceful-Coexistence School. Advocates of this school call themselves free-traders and hold to the premise that: (a) trade benefits all parties involved, hence it is the best tool to achieve peace; (b) US trade barriers should be removed, and the quicker the better; and (c) negotiations, cultural exchanges, and political compromise should be used extensively.

Critics of this school say that: (a) Russia — which has a crying need for American technology and capital — would benefit far more from increased trade than the US; (b) Russia confiscated US property and pirated American know-how in the 1920′s and 1930′s, never repaid the $11-billion loan of the 1940′s, stole US atomic secrets, looted Eastern Europe and enslaved it, and provoked the US in Korea, Cuba and elsewhere in the 1950′s and 1960′s — hence, US trade barriers are necessary defenses; (c) negotiations, cultural exchanges, and compromises are useless as long as Russia uses trade as a weapon in its expansionistic foreign policy.

2. The Flexible School. Holders of this position differentiate between Russia and Eastern European countries, saying that Russia should be isolated and contained, whereas the Eastern European countries should receive US trade and help whenever they show signs of growing tired of Russian domination.

Critics say that the Flexible school cannot “contain” Russia because the Soviets would be able to obtain Western technology indirectly through the Eastern satellites — and that the Flexible policy lacks a plan for helping Eastern European countries when they are most sorely in need of help, such as Hungary in 1956 and Czechoslovakia in 1968.

3. The Militant School. Supporters, worried by Marxist theories of the historical inevitability of Communism’s victory, maintain that East-West trade is unthinkable and that Communism must be wiped out.

Critics identify the Militant School as negative because it is against rather than for something, and say that it does not have the power to achieve positive solutions and can lead to disastrous confrontations.

4. The Leave-It-Alone School. Proponents view Communism as a parasite that will die if deprived of its hosts (the West); therefore, it is not necessary to fight it (as the Militants suggest) nor to live with it (as the Peaceful suggest) in order to be rid of it —but merely to “leave it alone” by halting all trade and severing all connections.

Declaimers say that this policy is impractical and would be ineffective as the US could not convince all nations of the Free World to stop trading with Communist nations.

The Libertarian Position

Another position — which, so far, has no influence whatever —is that advanced by the Libertarian School. It rejects all the four major approaches to East‑West trade because it finds them incompatible with the concept of freedom. For example, according to libertarians, the Peaceful-Coexistence school (which today has the greatest influence in Washington) sweeps under the rug the fact that the kind of “free trade” it advocates is in effect a coercive activity because financed via US government guarantees and US Export-Import Bank credits and giveaways — and, as such, is ultimately financed by the US taxpayer whenever Communist nations default on their debts.

Essentially, libertarians are sympathetic to the Leave-It-Alone school — but with an important exception: they would never forbid trade with the Communists or anyone else. Since freedom implies responsibility for one’s own actions, so goes the libertarian argument, anyone should be free to engage in trade with Russia and other Communist nations at his own risk.

For instance, if a US corporation such as the XYZ Chemical Company wants to build a textile plant in Siberia, then the XYZ people should have every right to do so with their own money and resources — but certainly not by soliciting special guarantees from the US government against Communist expropriation, or by helping their Communist client to finance the venture through US Export-Import Bank credits.

I am a libertarian. And I believe that any other approach to East-West trade is doomed: the burden of all the mistakes that occur will ultimately be borne, as it always has, by the US taxpayer. This is not a prediction but a statement of fact based on historical events, the most recent of which is that horror known as the “Soviet grain deal.”

Who Profited from the Grain Deal?

Even a cursory look at the Soviet grain deal will go a long way in demolishing the view —widely shared by many American bankers, businessmen and government officials — that a great increase in East-West trade paves the road to increased understanding between the two superpowers, to relaxation of tensions, to enormous economic benefits, growing cooperation in international affairs, peaceful coexistence, and a litany of other alleged benefits.

Briefly, here’s a synopsis of the grain deal:

During the trade talks in early 1972, the major objective of US government officials was to obtain a Soviet commitment to purchase “surplus” American grain. To help finance the $750-million purchase, our government went to the extent of providing the Russians with a $500-million credit through the Commodity Credit Corporation.

In late May or early June 1972, the Kremlin found out that the Russian grain harvest would be disastrous. Immediately, Soviet buyers crept into the US and secretly bought at low prices all the American grain they could. Throughout the entire 1972 summer, US government officials, unaware of the extent of Russian purchases, blissfully encouraged the sale of “surplus” grain by maintaining grain prices artificially low through payment of some $300 million of subsidies to exporters.

It was after these Soviet purchases were consummated that the grain shortage suddenly appeared and wheat prices jumped by more than 50 per cent.

To trace just one of the consequences, let’s see the effect on meat prices.

US livestock and chicken raisers were now faced with an unprecedented increase in feed costs. Not surprisingly, meat prices went up. (There were other factors involved, however.) As consumers screamed to high heaven, the government extended price controls on meat. With the exception of sundry politicians and pseudo-economists, every thinking person knows that fixing prices below the market level will cause shortages and that price controls immeasurably worsen the supply situation: marginal producers will go out of business. No one can make a living selling below cost — and that includes chicken raisers.

“I don’t mind hard work, but I hate paying for the privilege,” is the comment of a farmer who had to slaughter his chicks to avoid bankruptcy.

The US-Soviet grain deal was “… a colossal American grain giveaway to the Soviet Union, the inflationary effects of which have already cost this country hundreds of millions and perhaps even billions of dollars.” This is a quote from the July 26, 1973, lead editorial in The New York Times.

The Brezhnev Overture

Thanks to several decades of increasing governmental meddling in the economy — a meddling recently quickened by “jawboning,” “voluntary guidelines,” “monetary fine-tuning,” “progressive fiscal policies,” “freezes” and “phases,” not to mention all the impediments and obstacles that government bureaucrats and armies of environmentalists and ecologists have imposed on mineral exploration and development — Americans are now beginning to feel the pinch of raw material and fuel shortages.

The Russians, on the other hand, for the first time in their history, are claiming their self-sufficiency and speak of exploiting their natural resources for the export market.

Though probably exaggerated for propaganda purposes, the natural resources of the Soviet Union are enormous. But they are virtually untapped. The reason: the Soviets do not possess either sufficient development capital or the technology needed to convert their natural resources into values.

On June 24 this year, Leonid Brezhnev appeared on American TV and made the same pitch that every Russian leader — from Peter the Great and Catherine, to Lenin and Khrushchev — has been making for centuries:

Give us your know how and investment capital in exchange for our raw materials, and we’ll both prosper.

Generously sprinkled with pleas for peaceful coexistence, the Brezhnev overture sounded irresistible for many reasons, some of which are more important than others. I will mention what I think is the most crucial one: our need for fuel.

The Soviets’ Bait Is Oil and Gas

The US energy crisis is getting worse. We import every day 6 million barrels of oil which costs us some $7 billion per year. Unless the US develops its domestic resources, we will have to import some 20 million barrels of oil per day by 1985 at an annual cost of $29 billion. And that is just to keep things as they are, never mind growth or progress. The estimate, moreover, is based on the optimistic assumption that the dollar will retain its current value in 1985. Unfortunately, the dollar, after 60 years of regulation by the Federal Reserve System, is just another fiat currency, i.e., inconvertible, and quickly depreciating in the world monetary markets.

Earlier this year, I edited a book, Mineral Resources and the Economy of the USSR (McGraw-Hill), authored by Alexander Sutulov, professor of metallurgy at the University of Utah. In his book, Sutulov notes that current oil and gas developments in western Siberia are indeed impressive. Although development work began only a few years ago, Siberian oil production reached the 85-millionton level last year. And by 1975, oil and natural gas production will reach 125 million tons, fully one-half the present output of Saudi Arabia, says Sutulov.

During the 1972 trade talks, Peter G. Peterson, then US Secretary of commerce, stressed that American-Soviet joint ventures in fossil fuels were “potentially the single most important product” of the negotiations. Generally, Soviet proposals envisioned first the contribution of American investment capital — made available through government-guaranteed US loans — with which the Russians would buy American equipment and know-how; then, during the time that the Kremlin would settle its debts with Uncle Sam, the participating American firms would receive as payment for their contributions a commensurate portion of the mineral commodities and fuels produced at the newly built Soviet facilities. Thereafter, the Soviets would entertain entering long-term supply contracts with the US.

At present two major deals are under discussion involving Siberian natural gas: El Paso Natural Gas is considering the construction of cryogenic plants in the Far Eastern Soviet ports to liquefy natural gas for import to the US West Coast; and Tenneco, Texas Eastern Transmission, and Brown and Root are negotiating a similar deal for gas export to the East Coast. Earlier this year, incidentally, the Soviet government and Occidental Petroleum completed a $10-billion deal involving the supply of chemical plants (by Occidental) in exchange for fertilizers and natural gas exports from Russia.

It is by making many more deals of this sort, according to Morgan Guaranty Trust, one of the largest US banks, that “… the US could reap considerable economic benefits. Over the first few years. US exports to the Soviet Union seem likely to grow much more rapidly than imports. This would be a plus both in terms of creating more jobs and helping the balance of payments. In the longer run, drawing on Soviet energy and raw material resources could alleviate some of this country’s supply problems.” (from The Morgan Guaranty Survey, Sept.’72, p. 11).

Such cheerful optimism is fueled by the desire of various US businessmen who want their “fair share” of the COMECON market’s foreign trade. (COMECON is the acronym for the Council of Mutual Economic Aid, whose members are: the Soviet Union, Poland, East Germany, Czechoslovakia, Romania and Bulgaria.) COMECON’s 1971 aggregate Gross National Product was about $725 billion, and its world trade about $19 billion — of which more than $12 billion was conducted with eight non-Communist nations of Western Europe. By contrast, the US share was a mere $384 million in exports and $233 million in imports — totaling less than 1 per cent of all US world trade.

Will there be a boom in East-West trade? The answer, according to all the business executives and economists I have talked with, is unmistakably negative. Let’s see why.

Geography Is a Negative Factor

“When those lair-sharing’ US businessmen say there’s a market in COMECON, they should ask themselves: a market for what and for whom? Our potential participation in that market isn’t going to be as fantastic as the piein-the-sky predictions of vociferous East-West trade supporters,” notes Raymond J. Kenard, former president of Power Gas Corporation of America and now a chemical consultant in international trade. “Let’s forget about Russia for the moment,” says Kenard. “Eastern and Western Europe are contiguous geographic land-areas, and this facilitates deliveries enormously. It’s not so when you have to make a transoceanic shipment from the US. The freight situation alone would be ruinous.”

Philosophical Differences Do Matter

“Even if Congress were to repeal all the tariff barriers to Russian goods, as Brezhnev would like, and even if the Kremlin were to settle the Soviet Jew emigration issue to our full satisfaction, I don’t think there will be any appreciable increase in trade between the US and Russia,” says Norman A. Bailey, president of Bailey, Tondu, Warwich and Company, a New York investment banking house.

Bailey, who is also professor of political science at the City University of New York, explains that should American exporters be finally freed of all controls, they would still have difficulties in selling unless US imports increased. But Eastern European goods would have to be competitive in price and quality to succeed in the US. To do that, Eastern Europe would have to become consumer-oriented and be free to move in response to market needs. In effect, this would result in the establishment of a free market, i.e., some form of capitalism,” and I wouldn’t hold my breath waiting for the Russians to let that happen,” concludes Bailey.

Thus, to the dismay of pragmatists, even when viewed from a strictly commercial context, the subject of East-West trade ultimately bogs down in ideology and philosophy.

Charity Begins at Home

“If any major investment has to be made for mineral exploration and development, it should be done right here, starting with the oil and gas fields of Alaska, and the coal deposits of Wyoming, Utah and other Western states,” says Felix E. Wormser, a mining consultant, formerly Assistant Secretary of the Interior under President Eisenhower.

“It’s true that we have an energy crisis, but the cause of that crisis is neither geological nor technological. For instance, we have more than 3,000 billion tons of coal reserves. That’s enough to last for the next 2,000 years at our current consumption rate,” notes Wormser, pointing out that we know how much of our fuel resources are recoverable and at what cost. “But we don’t have that type of information about Russian coal or any of their other resources — which, at present, are no more than a geological potential that must still be realized.”

According to Wormser, the cause of the US energy crisis is political: “Our oil and gas reserves have been dwindling because for years we haven’t had either the capital or the incentive to do the kind of domestic exploration and development work that we once did and that today, thanks to inflexible government regulations and the demands of environmentalists, we are prevented from doing.”

In the considered editorial opinion of The New York Times, Americans would be well-advised to respond with “a ruthless skepticism about all Soviet business proposals… Documentation of Moscow’s grain coup must stand as warning to the American taxpayer against the commission of similar errors by American businessmen and the Government officials now being asked by the Kremlin to pay for Siberia’s future development.”

Formidable Financial Obstacles

Financially, no trade is possible without a stable and acceptable medium of exchange. Unfortunately, the dollar now lacks stability, and the ruble lacks convertibility. Even if the US could restore equilibrium in its balance of payments, and thus stabilize the dollar, “… the de-facto inconvertibility of the Russian ruble in terms of Western currencies and the Russian lack of liquidity pose other formidable obstacles to trade,” says economist Patrick M. Boarman, director of research at the Center for International Business, Los Angeles.

Pointing out that the United States is now suffering the worst inflation in its history, Boarman notes that “…inflation isn’t cured by expanding and extending credit to the Russians or anyone else,” and that the largesse of the US Export-Import Bank and various private US banks borders on “mindlessness and irresponsibility.”

There is no benefit, either short‑term or long-term, in our trade with Russia, says Boarman. “Any payoff in raw material imports is very iffy because it will take years before Russian resources can be developed for the export market. As to the short-term payoff, it would actually be negative: since the Russians need our money to buy our technology, all we’d be getting from them are nonnegotiable Soviet IOU’s that, as such, will not improve one iota our balance-of-payment situation but will instead add more fuel to our already acute inflation.”

What the Record Shows

In retrospect, the historical pattern of trade with the Soviet Union shows that “Bolshevik-planned industry feeds on the industrial freedom of the rest of the world. It would long ago have died a natural death, had it not been for the repeated injections of lifeblood that are still being pumped into it,” says German historian Werner Keller.

For instance, “In 1920, Lenin averted economic collapse by dangling the bait of ‘concessions’ (that is, legalized monopolies) to Western capitalists in exchange for development capital and technical know-how,” reports Norman Bailey, the New York banker. “Throughout the 1920′s American and European firms played an enormous — although unacknowledged and, as it turned out, largely unpaid — role in the construction of Russian basic industries.”

Russia went into a self-imposed isolation during the 1930′s. “And the Soviets steered their economy into such a mess that, when Hitler invaded Russia, the Soviets came back to us again for help,” observes Patrick Boarman, referring to the $11-billion Lend-Lease agreement of 1941. The settlement of the Lend-Lease, incidentally, is very illuminating: although the US wrote off the bulk of that Soviet debt after World War II and asked only for a $2.5 billion settlement to pay for civilian supplies, the Soviet Union finally offered to settle all debts for $300 million in 1960, when negotiations broke down. Last year, the US resumed negotiations — and, this time, asked only for $800 million. The Russians balked: they are willing to repay $300 million — at 2 per cent interest over 30 years.

Today, more than ever, Russia needs Western technology and capital, says Boarman, “and we, more than ever need reliable sources of fuel and raw materials. But we shouldn’t be satisfied with mere promises before we rescue again the Russian economy from the consequences of Soviet mismanagement.”