SUBMISSION OF REPORT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP79-01203A000100100004-0
• Release Decision: RIFPUB
• Original Classification: C
• Document Page Count: 59
• Document Creation Date: December 9, 2016
• Document Release Date: March 22, 2000
• Sequence Number: 4
• Publication Date: October 7, 1954
• Content Type: MEMO

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CONFIDENTIAL
TO.- Mr. Harold E. Stassen
Director., Foreign Operations Administration
THRU o Admiral W. S. DeLany
Deputy Director for MDAC
FROM: Thomas C. Schelling
SUBJECT: Submission of Report
ED/EC D=74
Attachment A
October 7 1954
I submit herewith the final draft of any report on
"Soviet Economic Trends and Their Implications For East-West
Trade a as
This report is "final" only in a preliminary sense:
It contains an hypothesis suggested by the evidence, not a proved
case. Its purpose is to help orient systematic research on the
subject, in the course of which the particular thesis of this
report would be confirmed, modified., or refuted.
The report is not comprehensive in its coverage of
either EastWest trade or economic defense. ( na r al deve ..m
opments~forexanthv ove,) It is confined
dumber of trends that seem to converge into a coherent pic-
ture., but not the whole picture,
I wish to acknowledge the help I have received from
a number of people in several different agencies, who have
given me their time, their interest, and their ideas. Several
of them have given me comments on an earlier draft. Some of
those comments are reflected in this revision, most of the
comments have been concerned with identifying the issues, either
raised by this report or omitted from it, that require organized
and systematic research before a comprehensive and accurate
appraisal of Soviet economic trends and policies can be accomx-
plished. I understand that such a program of research is to be
developed.
DOS & DOC declassification & release instructions on file
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SOVIET ECONOMIC TRENDS AND THEIR IMPLICATIONS FOR EASTWEST TRADE
The purpose of this paper is to bring certain Soviet
economic trends to focus on the future development of trade be-
tween the Soviet bloc and the free world. It is the thesis of
this paper that the Soviet Union is in a rapid transition from
an agricultural economy to a comparatively industrial economy,,
and that significant shifts in the direction and composition of
'East-West trade are likely to occur in the immediate future as
a result of it,
"Predicting" the course of EastWest trade depends on
more than economic analysis,, Both the conscious strategy and
the unconscious bureaucracy of the Soviet Union will have at
least as much to do with East-West trade developments as econ-
omic forces The analysis of economic trends leads therefore
to suggestions not to convictions, and serves mainly the pur-
pose of emphasizing some important possibilities rather than
certainties.
The principal conclusions reached are the following:
1. The Soviet Union can shortly become an exporter
of capital equipment., even though imports of other types of cap-
ital equipment will continue.
2. Soviet imports of agricultural products, especially
foodstuffs, and probably fibers, are likely to expand.
3. Agricultural exports from the Soviet Union or the
satellites are unlikely to reach levels substantially higher than
at present, and will be under pressure to diminish in the future.
, Enlarged trade between the Soviet Union and the
underdeveloped countries of Asia, the Middle East, and Latin
America, is a likely resultant development, and will involve
economic as well as political advantage to the Soviet Union.
5, While Western Europe can continue to trade with the
East at about the present volume, no substantial sustained in-
crease is likely, and the commodity composition of Soviet imports
will continuously shift as investment and industrial expansion
continue in the Soviet Union,
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6. Chinas requirements for machinery and equipment
are capable of being substantially supplied by the Soviet Union
and the satellites., and a substantial part of Chinas exports
will be highly suitable to Soviet needs.
7. The Western countries would contribute more to the
Chinese economy as markets for the remainder of China's exports
than as sources of supply for China's imports; and control mea-
sures deli ned to reduce Western imports from Chic wQ` , g
more g?, festive than ert , controls pin At r ng..China ?.s ::. Stl~?q~?
trial owt This is particularly true--and of significant
quantitative importance--for the United States.
8. The challenge to U. S. economic defense will., more
and more., be the challenge of Russia8s economic initiative in
Asia and other underdeveloped areas., a challenge that cannot
be met except in a very partial degree by measures within a
narrow definition of "economic defense"., but can only be met by
the overall foreign and economic policy of the U. S. and its
allies in those areas.
AGRICULTURE VERSUS INDUSTRY IN THE SOVIET UNION
Economic defense objectives, being centered on the con-
cept of "strategic" retardation of the Russian economy., have fo-
cused attention on Soviet industry rather than agriculture., and
have necessarily been concerned with the weaknesses rather than
the strengths of Soviet industry.
Furthermore., in spite of disputes over the size of the
impact of export controls on the Soviet industrial base, it has
been evident that the Russian economy had ?ortant industrial
deficiencies that could be supplied througast.st trade.
A ricultuue., being of less immediate importance to Soviet war
potential., has not. x? ye'.d 3 e share of ten 4. . in the
economic defense program.
A study of the economic developments in the Soviet
Union must., however., give emphasis to the agricultural side of
the economy. Agriculture has been the most important source of
Soviet exports in the past and of the exports of the U.S.S.R.. and
Eastern European satellites taken together. Agriculture has been
a major source of manpower for Soviet industry over the last 30
years. And agriculture represents a major part of total con-
sumption in economies-with per capita incomes as low as those in
the Soviet bloc.
Comparison between Soviet industry and Soviet agricul'
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ture over the last 30 years is striking. While industrial pro-
duction has approximately quadrupled,, agricultural production is
barely above the level of 1927 or of the late 30~s., and measured
per capita is below the level of the late 30?s and still further
below the level of the early 2O4s. While industrial plant and
equipment have grown enormously in the Soviet Union,, livestock
numbers--even aside from draft animals--are at best where they
were in 1927? Soviet steel production in 1929 was less than that
of Belgium-Luxemburg,, only half that of France or Britain,, and
less than one third that of Germany, at present it exceeds that
of Britain and Germany together,, and may shortly equal that of
Britain,, Germany,, and France combined. Thus Russian industry
is not only relatively large compared with what it was in the 2Oese
it is substantial in an absolute sense and growing rapidly.
There are many reasons for this contrast between in-
dustrial growth and agricultural retardation, It is important,,,
hcw ever, not to explain the difference entirely in terms of the
comparative neglect of agriculture; and it is important not to
assume that,, once the Soviet planners turn their attention to
agriculture$ they can bring that sector of the economy up to the
rate of progress shown in other fields. While agriculture has
suffered at the hands of the Russian planners,, its retardation
cannot be explained in terms of simple neglect. According to
estimates of RAND Russian agriculture has received a proportion
of total Russian investment over the last 30 years approximately
twice as high as the proportion of U. S. agricultural investment
to total U. S. investment- and the Soviet figure for investment
in agriculture has been over 1/6 of total investment and equal
nearly to 1/2 of the value of total investment in Russian industry.
By comparison Tftth the United States,, both industry and agri-
culture received doubled shares of total investment,, the difference
falling on housing, trade,, municipal development, etc. Whatever
the errors in these estimates,, they certainly indicate that there
is no easy explanation for Russian agricultural failure in terms
of neglect at the planning and investment level,
THE RUSSIAN AGRICULTURAL PROBLEM
First,, consider the facts estimates of current agri-
cultural production in the Soviet Union.
Agricultural production as a whole is probably at just
about the prewar level,, and its post-war recovery has been slow.
Bread grains are at just about the level of 19354.0. Wool is
slightly above the pre-war level but well below the level of the
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209s. Cotton. c-, ,somewhat above the level of the late 3O9e9 and
well above the level of the 201s. Meat production is about where
it was in the ]ate 30?s,, and below the level of the 209s0 Sugar
is below the level of the late 30's0 The trend is currently up-
ward in practically all of these commodities; but the recovery
in contrast to industry,, or in contrast to agricultural recovery
in Western Europe,, has been exceedingly slow and the upward trend
in many cases reflects only recovery to pre-war yields0
There is additional evidence of a non-quantitative sort
that a r3cul tural p od cta c?r is ~a. a.. c~ y ...? the Sev e t .Uri ax
14. The attention given by Soviet authorities to agricultural pro-
duction. particularly meat and dairy production,, in the last 18
months indicates serious preoccupation with the problem? This
preoccupation is not confined to the Soviet Union but has been
marked in the satellites of Europe as wello Not only is it pre-
occupation,, but the Soviet planners are apparently willing to pay
a "priced for increased production,, as evidenced by improvement
in the terms on which Russian farmers dispose of their produce
Recent measures to induce greater agricultural production
include tax reduceions,, higher farm procurement prices,, lower forced
delivery quotas.,, and, efforts involving large movements of persUns
to bring now land under cultivation in south-central Russia. In-
creased emphasis has been given in the last twelve months to agri-
cultural. technology,, with apparently large numbers of agronomists
and machine technicians being directed to farms. These increas-
es reflect both the disappointing progress of agricultural pro-
duction and the importance of foodstuffs in any effort to improve
consumption standards.
To some extent the expressed dissatisfaction with agri-
cultural production may be related to the current concern with
consumer goods in general,, which in turn may prove to be transi-
tory. But the concern seems real; and is unquestionably justi-
fied.
The recent composition of Soviet bloc trade with the
West reflects internal difficulties with the production of food,,
especially 91quality$9 foods0 Meat., butter and fish imports have
been recently increased and emphasized,, while grain exports have
been below expectations.. Furthermore., imports from China include
several hundred million dollars of foodstuffs,, principally soy
beans,, peanuts., and their oils., but also meat,, wool, fruits.,etc0
Enid emcee ,w,f.agrcultu a _.dissatisfaction in the 1~as
Furo can satellites h ~ n 1 . 9,. ~ ... . _
p " 'p ~een raumerou mea ead sfi ortagea have re-
cently been conspicuous in Poland and East Germany, Agricultural
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problems 1_n Czechoslovakia are evidenced in the admission at the
recent Party Congress that production increased by only 1/7 from
1949 to 53.9 compared with a planned increase of over 1/3., and that
production remains well below pre-war output. The new Czechoslo-
vakia plan evidently includes the movement of over three hundred
thousand workers back to the farm., and indicates that such a shift
will limit manpower available to industry.
As evidence of governmental concern and policy these
facts may be of transitory significances but they leave little
room for doubt that the facts of agricultural production have been
discouraging both in the satellites and in Russia itself,
All U. S. authorities seem agreed that a ma or obstacle
to Soviet agricultural improvement (both in Russia and 1e--sae]'
liter) is in the-oo a.e of the farmer and his response to the
Soviet sy of incentives and organization. The Soviet econom-
ic system has not yet discovered how to organize the agricultural
economy in order to make farmers work productively. The importance
of the individual farm worker?s reaction is evidenced by the fact
that the severest problems and the strongest recent experiments
and incentives are concentrated in the production of livestock pro-
ducts. This seems to confirm that Soviet "factory" methods are
more conducive to the raising of grain than to the more individ-
ual processes of animal husbandry.
It is possible that the increased concern with., and
improved incentives for., agricultural production in the Soviet
Union will yield favorable results. But nothing in the experience
of the last 30 years suggests much confidence in success. I~uther-
more, even improved agricultural yields obtained in this fashion
will come at a real "cost" to the Soviet authorities., since the
improved incentives for the farmers will represent a higher real
income for them., and depends on both higher prices for what they
produce and upon greater availability of consumption goods. Thus
the "net" contribution of agriculture to industrial growth will
not be increased by as much as gross agricultural output.
While incentives and organization are undoubtedly im-
portant., it is even more impor-tint not to ignore the physical
obstacles to increased ra cultural ou putt in the Soviet r ion.
_TFe_ current preoccupation with Russian policy and problems of
organization tends to keep these physical problems in the back
grounds in the long runs they are bound to prove even more in-
tractable than the Russian peasant.
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PHYSICAL OBSTACLES TO INCREASED AGRICULTURAL PRODUCTION
In spite of the huge area of the UeS.S.Re--approximately
equal to all of North America--the coun',ry is not wealthy in
arable lands In terms of soil and climate,, the agricultural po-
tential of the Soviet Union is substa tially less than that of the
United States,, perhaps no more than 70%. Most of the good soil
in the Soviet Union was fairly intensely cultivated by 1930 While
there is always room for some expansion of acreage (and in fact
there was substantial expansion on marginal land in the 30ss) ex-
pansion in the Soviet Union means the use of lower grade soils.,
the draining of swamps or uprooting of forests,, high transporta-
tion costs,, and a heavy investment in community development. While
the increasing availability of tractors and other machinery have
made some areas usable that would not otherwise have been,, the
general situation remains one of tight limitations on the expansion
of areas under cultivation? Since these are limitations rainfall sunshine and frost ~ ,qg rava ecT by the factor of ,da st nc ..,
they are not conquerable by oli, x?~;ff orms e
A number of dramatic attacks on this problem have been
started. These include irrigation., the planting of forest belts.,
improved crop rotation,, the more extensive application of ferti-
lizer, and improvements in seed and techniques Few of these have
been successful on any but a minor scale; and some of them suffer
from calculable limitations.
Consider irrigations A number of major projects have
been initiated with a good deal of publicity. But even if all
known plans are carried out (and there is evidence that some in
fact may have been dropped or slowed down already) only about
of the total crop area would be irrigated,, half of which was
already irrigated under the Czarist regime., and practically all of
the remainder of which has been in use for non-irrigated crops
already. Complete success of all these projects might add from 3
to 5% to total grain outputs
The projects are furthermore expensive to carry out.
In many places they run the risk of spoiling the soil by increased
alkalinity (as some has been spoiled under previous irrigation).,
and the water supply is not reliable in all cases.
Irrigation projects will consequently not revolution-
ize Soviet agriculture.
A second., and promising$ possibility is the planting
of shelter belts of forests in the dry., grain growing regions.
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There is apparently little question about the ultimate effective-
ness of this if done properly, and in many large areas output
may be increased by one quarter or more. I.xtensive aforestation
will be very costly, however, and there are technical problems
that have not yet been solved. Most important, trees grow slow-
ly, and the effect within a decade would be negligible (or perhaps
negative, since some tilled areas would have to be devoted to
trees) and the effects at the end of a second decade would still
be only a very few percent added to crop yields. Thirty or forty
years would be required for substantial benefits to be obtained.
With respect to crop rotation, there is room for sig-
nificant improvement but Russian experiments to date have not been
remarkable. Some of the best results may have to await the de-
velopment of forest protection mentioned above. Furthermore,
some of the best results of crop rotation are only available if
a high proportion of output is taken in the form of livestock
rather than grain, and is not therefore readily accessible to an
economy that cannot afford the luxury of substantial meat consump-
tion.
Fertilizers are the most ro m!ng gl.uton `heir us
could advan ageously i crease several fold. Russia furthermore
has very substantial natural deposits of mineral fertilizer. While
it will take many years to develop fertilizer extraction on an
adequate scale, this is an important potential source of improve-
ment.
Improvements in farming technique, livestock, strains,
seed, etc., could be of real importance,, but the Russians have
not shown striking success. Part of the problem is bureaucratic
and organizational, and is inherently soluble.
The conclusion reached is not that agricultural improve-
ment is out of the question, but only that it will be difficult,
expensive, and somewhat uncertain. Agriculture, by comparison
with industry, suffers from serious physical limitations as well
as from organizational and bureaucratic difficulties that seem
much less readily overcome by Soviet planning and discipline.
Especially in view of the growing population of the Soviet Union
(at a rate of at 1e ast 1.5% per year) the problem of food production
is going to remain difficult and perhaps become progressively more
difficult.
It is particularly worth noting that Soviet agriculture
will continue to require large allocations of investment in the
future. Extensions of acreage will require transport and commun-
ity development as well as machinery, storage facilities, etc.
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Development of fertilizer will require installations of trans-
port as well as equipment, And continued application of machin-
ery on existing acreage will presumably become progressively less
productive in terms of output, as highest priority uses become
satisfied.
In judging the prospects for increased output per acre,'
it must be kept in mind that Soviet yields per acre are not strik-
ingly low. What is strikinEly low in the Soviet Union is out-
put per man., rather than output per acre,, Investment in agricul-
tural machinery ism-and apparently has been--highly effective in
reducing the manpower requirements for producing given yields on
existing acreage; it is much more difficult to raise acreage yields
by the application of machinery. There are important exceptions
to this, such as soil conditioning by machines that cannot be
duplicated by hand methods and the availability of machines may
often shorten certain processes to reduce the danger of crop dam-
age., etc.; nevertheless the principle effect of farm mechanization
is to release labor rather than to raise yields per acre. (It
should be borne in mind that agriculture is generally a high in-
vestment type of production. In the U. S. the fixed capital--
including barns., sheds, and other buildings and improvements ex-
clusive of farm residenoUe9 as well as machinery on farms, per
dollar of output, is substantially greater than the fixed capital
per dollar of output in such industries as vehicles, aircraft,
shipbuilding,., etc,,)
This distinction would not matter if agricultural land
were abundant in Russia. In that case., increased mechanization
would make possible an extension of land under cultivation, lead-
ing to higher output with a given, or even reduced,, labor forces
But under the circumstances of limited land area, the difference
is crucial.
It is this df eee.., that .:undoszl ?cly explains the
failure of agr3 cuL investment to raise output durin'fhe
last _ wo ca es, The very substantial inv stme in agr1et1=
eferred to above., had probably had two main effects,,
First, it has offset a large reduction in draft animals (which
should somewhat reflect itself in release of produce equivalent
to the feed of animals replaced by motor power,) Second, it has
permitted the release of labor for work in the industrial sector.
While these have not been the only effects, they help explain the
absorption of machinery without appreciable increase in output,,
We should therefore distinguish two different obJject-
ives in Soviet agriculture for the coming years,, One-is continued
displacement of agricultural labor in favor of the 1!dustrial
labor force; this is achievable by continued mechanization but
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undoubtedly at a slower rate than in the past. The second is
raising agricultural output at least in proportion to population
preferably in much greater proportion; by any standards this would
be a difficult situation, and by comparison with Soviet achiev?
ments in other economic fields it will be extremely difficult.
In the near future, the pressure of population against
food and fiber consumption may be substantially augmented by the
need to increase per capita consumption. The public attention
deliberately given the consumer goods by Soviet authorities in the
last 18 months has to be taken seriously---not as a major change
in philosophy but at least as a public commitment for the short-
run, and a commitment that would hardly have been undertaken
unless it was seriously intended to be followed by tangible re-
sults. Furthermore industrial production of consumer goods is
in fact-undergoing rapid increases and production and imports of
textile machinery suggests increases in textile capacity as well
as replacement of obsolete and worn-out equipment. The official
plan for shoe production in 1955 is l50 million pairs per year
higher than the estimated actual production of 1951, which it-
self was double the peak level reached before the war and four
times the level sustained during the war. The high rate of con-
struction of urban dwellings is good evidence that there are
technical as well as morale reasons for improving the availa-
bility of consumer goods and services. While a few consumer
durables may provide important window dressing, fibers, hides,
and better quality foodstuffs are the things that will really
matter.
Increasingly, the growth of Soviet production will de-
pend on labor productivity rather than recruitment in the indus-
trial labor force or the establishment of basic plant and equip-
ment; and positive incentives in contrast to negative discipline
will become more important to Soviet industrial success. There
is consequently a good basis for supposing that increased living
standards in the Soviet Union are receiving serious attention
rather than just verbal acknowledgment.
It should be kept in mind that Soviet investment is of
sufficient size so that if a determination were made to expand
consumer goods production rapidly, this could be done. Further-
more, if serious attention is really given in the Soviet Union
to raising living standards it may have a strong self-perpetuat-
ing effect. Dramatic successes in certain lines could undoubted-
ly be achieved. Bureaucratic momentum would be established, and
so would popular expectations of further increases. A shift of
power,,, authority, and prestige to those officials whose business
is raising living standards and whose success is measured by the
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output of consumer goods, might not be easy to withdraw or hold
in check.
In summary, while the logic of increased per capita
consumption is by no means compelling, there is a strong possi-
bility that the effort to increase co nsuz pt,on w.,1, press hard
against the outjau.t q, food cottony wool hides., and agricultur-
r~l
as pf?o1io ?of industrial raw mate
THE PROSPECTS FOR EAST WEST TRADE
The natural conclusion to be drawn from the above pie=
ture is that Russia will not--and probably the Soviet bloc will
not--become again a large supplier of food and foodstuffs to the
West. The cost advantages of producing grain and other foods in
exchange for industrial products will be limitedy, and will probab-
ly become progressively more limited. Russia will more easily ex-
pand shipyards than maintain a food surplus in exchange for ships.
If this conclusion is true., a corollary is the following.
East-T^1est trade will remain of no more than marginal significance
for the countries of Western Europe (with the usual allowance for
Tinland., Norwegian fish., etc.) The expectation of a large market
for industrial production., and a long-run source of foods and
agricultural raw materials., is a false ones East-West trade is
not an import.-it key to the viability of Western Europe or to
western prosperity.
While this conclusion is probably a correct one., it is
important not to assume that Russia can not export large amounts
of grain. Russia did it in the early 308s under conditions a good
deal more stringent than are likely to occur in the future; and
Russia has exported grain since World War II at severe costa to
Russia and satellite consumption (particularly consumption of
animal products.) If Russia wants to export grain. it can do so;
and if it wants to export several million tons per year it certain-
ly can do so. We cannot rule out the possibility that they will;
what is ruled out is a good economic mrtive for it.
There ares however, certain advantages to Russia in
continuing some grain exports. First, the markets and market-
ing procedures are a good deal more familiar and certain for grain
than for industrial products that may be newly expanded. Second.,
grain output can be substantially expanded if the Russians are
willing to incur the costs; and expansion of grain production
on marginal land is the kind of agricultural project that yields
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to Soviet organizational technique. If the Russians want reli-
ability rather than economy, they may push ahead with expanded
grain production. Third, present Russian wheat targets suggest
an export surplus even though one might expect them to devote the
resources to L,iternative foods or industrial markets. Fourth,
crop variations due to weather may cause the Russians to take
out some insurance by keeping their average grain production a-
bove normal, opportunisticallys disposing of the frequent surplus-
es abroad. Finally from the point of view of strategic self-
suf.ficiencyg collectivized grain farms are more reliable than meat
and dairy production, being more ameanable to control and less
subject to damage from disorganization.
It is also important not to identify grain with agri-
cultures The Russian agricultural problem may indicate grain ex-
ports and imports of meat, butter, cheese, and other foods that
prove less responsive to Russian governmental techniques. Our
conclusion, therefore,, should be interpreted to refer to net agri-
cultural exports rather than to grain exportse Thus the longer-
term prospects may be more favorable to the Danish butter trade
than to the British and Italian shipyards and engineering indust-
ries. (The dark cloud to Danish butter producers is more likely
margarine produced with Chinese soy beans and peanuts.)
Lumber and timber and their products also seem unlikely
of greatly expanded export in the future. Production is barely
recovered from the war now expanded production would require
heavy investment in transport and other facilities. Furthermore3
construction demand within Russia is large and will stay large
with the growth of urban populationsg and :improvement and expansion
of railroad track mileage will also make heavy demands. Location
in relation to transport will continue to account for some export
of timber products, but no serious enlargement of East-West trade
seems likely on the basis of expensive increases in timber extraction.
Since overall Russian trade with the West is currently
small in relation to Russian production, significant percentage
increases cannot be rule out. Miscellaneous raw materials and
industrial productions as well as some production of agriculture,
could account for several hundred millions of dollars of addition-
al exports in the future. But with the exception of capital goods
to be discussed below the present structure of Russian resources
and Russian production suggests no dramatic increases in trade,
and even if Russia is to emerge eventually as an exporter of in-
dustrial products there is a dry spell ahead for mart' years in which
the economic advantages of greatly enlarged trade will not be
great.
A stable Russian market for machinery and equipment should
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not be expected.. The Bloc will import items of advanced tech-
nalogy, items desired in too small numbers to warrant domestic
production, items needed during an interim in which Russian pro-
duction is expanding, etc.; but it will not for long import such
items as ships, which require resources of the kind becoming com-
paritively more cheap and less scarce in the Soviet Union.
(Incidentally the demand for imports of advanced tech-
nology is only very partly met by information and blue-,Tints
alone. Prototypes are not mainly important for copying,, they are
important for experimental use, testing, adaptation and modification,
design of ancillary equipment,, and further research and develop-
ment. If prototypes are obtained these related processes can pro-
ceed at the same time as production of the new item is being de-
veloped; if only 'blue-prints are available, experience and fur-
ther design has to await completion of the first model. The im-
portance of jet aircraft engines imported by the Soviets several
years ago is probably best understood in these terms. What was
needed was probably not some physical models to copy, but a suf-
ficient number of engines to permit the Russians to proceed with
airframe design and all the other processes that require contin-
uous experiment and testing with live engines, including rede-
sign and modification of the engines themselves. We should con-
sequently expect a continuous demand for items embodying new
technology, even when complete specifications are freely available.)
The Soviet objective of self-sufficiency is frequently
adduced as a continuing limitation on East-West trade, m well
as a limitation of the effects of export controls to weaken the
Soviet economy. The distinction is not generally made between
wartime self-sufficiency as a strategic objective and peace time
self-sufficiency as-a political or bureaucratic objective; pre-
sumably both are'intended0 In projecting these objectives into
the futures several important qualifications should be kept in
mind for East-West trade purposes.
First, strategic self-sufficiency in the sense of maxi-
mum preparedness for isolation or war does not imply a lack of
trade and may even imply the opposite. This point is often rec-
ognized with respect to imports for stockpile or imports of
depletable minerals; but it goes beyond that, War time require-
me:nts differ from cold war or peace time requirements, and war time
ability to use certain goods differs from the peace time abilitye
Preparation for war suggests overbuilding the kinds of industries:,
that otherwise have to expand in case of war, and relying on out-
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side sources for the goods that would not or could not be consumed
in time of ware Thus a posture of complete preparedness would
almost certainly contain a deliberate pattern of permanent trade.
Second, imports are not the same thing as Oreiiance?B
on imports It may, for example, be cheaper to build productive
capacity or extractive capacity for raw materials and hold them
in standby while importing, than to use fully the facilities that
are built for strategic purposes. It is time enough to mine the
low grade ores when war comes, without expensively mining them for
practice during peace time. And it is time enough to go without
consumer goods when they really become unavailable, rather than
practice self-denial for training purposes. More generally,
the ordinary advantages of trade are likely to continue during the
interim as long as plans are laid to minimize the costs of
abrupt conversion and to avoid installing new plant and equipment
that would be idled by cessation of tradee There are,, certainly,
costs and wastes in switching production or converting facilities
quickly; but they may easily be outweighed by the savings that
result from continued trade in the interim--particularly in a
controlled economy in which investment plans can be made to
include allowance for sudden cessation of trade.
Third, with an appropriate degree of insurance in the
form of stockpiles some risks of unexpected trade disruption may
be justified by the economies of continuing trade. Reliance on
trade as a marginal source of certain commodities can be afforded
as long as imports remain a manageable fraction of total consumption.
These considerations may not have been of concern to
the Russians at a time when they were underbuilt in the industries
most relevant to war. They are now on the threshold of the oppo?
site';tage and their attitude may change accordingly. Further-
more,, the exploitation of satellites may be teaching the Russians
how to take advantage of trade with an augmentation rather than dim-
inution of their interbil economic strength, and teaching them to
think in terms of the gains and savings that an international
division of labor can provide. The fear of reliance on foreign
countries can now--as far as economics is concerned give way to
a desire for tributary sources dependent on the Soviet Union.
What remains may be a doctrinal or bureaucratic prejudice against
trade but not one that is bolstered by strategic, economic, or
political necessity.
Soviet doctrine has not been favorable to the active
use of trade for economic ends., except the ultimate end of in-
dependence of trade.. Is it likely that this traditional and
strongly embedded doctrine will be overcome? The important ques-
tion here is not whether external propaganda will be flexible
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enough to make the Soviets appear as constructive and peaceful
traders, but rather whether continuous external trade will be
viewed in a new light by the Soviet authorities themselves0 Per-
haps even more important is whether a change in the doctrinal
approach to trade will actually work itself into the methodology
of Soviet planning and the bureaucracy of Soviet economic controls,
Two factors in the present situation are likely to ease
the problem of revising traditional doctrine. One is simply the
growth of Russian industrial power, which substantially reduces
the sense of industrial inferiority that must have embarrassed
Soviet authorities since the beginning of the regime. The Rus-
sians have been parading both their technological and their in-
dustrial strength for some years now, The urge to isolation that
was inherent in an`economic inferiority complex is apparently
breaking down, and it is likely that an urge for industrial
prestige is taking its place. Russian participation in recent
trade fairs around the world certainly suggests this.
Second, the economic trend in the Soviet Union will be
toward increased trade with the underdeveloped areas of the world,
where economic "reliance" would at least not involve reliance on
serious potential enemies. This trend is furthermore consistent
with the strategic argument mentioned above?
In any event, a change in doctrinal attitudes is re-
quired, and the change will have to be explicit if it is to work
itself into Soviet economic planning. Indications of changes in
internal doctrine would be more significant than external prop-
aganda in indicating the likely importance of Russian intentions
to make a permanent place for trade in their economic plan.
THE LWNG-TERM IMPORTANCE OF TRADE
Asstming that a prejudice continues against East-West
trade.-except as a political weapon--to what extent will the
Russians progressively eliminate the specific shortages in their own
production that make trade desirable? Recent estimates of the im-
pact of trade controls have stressed the ability of the Russian
economy, in the space of three or four years, to develop the ca-
pacity to produce nearly everything. that they now import and could
not readily do without. This conclusion applied both to rra chinery
and equipment and to metals and most other raw materials,
What those estimates left out of account, and what seems
worthy of considerable research, is the future tendency of the
Russian economy to generate new shortages as it grows in both
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volume and diversity. Today's equipment shortages may well be
filled from indigenous production within a very few years if
they cannot be filled from outside sources; what other kinds
of equipment will be, scarce in the Russian economy that emerges
when Russian industrial growth is projected another half dozen
years ahead? What raw material shortages will occur in the next
half dozen years if Russian industrial production rises by another
?10%9 as the ORR projections show it rising between 1951 and 1957?
The question is not one of the absolute bottlenecks to
develop; there is a presumption that the severest shortages are
manageable with advanced planning. The question is rather one
of how great in magnitude are the potential gains from trades as
distinguished from complete self-sufficiency., as Russiats industrial
momentum; carries it to higher and higher consumption levels of raw
materials and as hitherto neglected industries attempt to expand?
Even a country that is bent on the rapid attainnent of self-suffic-
iency may--if it grows rapidly in sized diversity., and technology
generate new imbalances as rapidly as it eliminates the old oneso
This is an area that seems insufficiently studied.
Perhaps there has been too much tendency to search for an Lchilless
heel which probably does not exist., and too little attention to
trends that may have important implications for Russian commerce
with Asia, Africa, Latin America,, as well as with the industrial
countries of the West.
THE DYNAMICS OF CAPITAL GOODS PRODUCTION
It is one of the paradoxes of capital goods production
that., when a backlog deficiency of equipment is filled, the bigger
the backlog to begin with the greater the excess capacity that
may result at the end of the process. The key to this paradox
is the durability of capital goods; while food production,, for
example, is related to current food consumptions production of
durable equipment is related to the growth of the stock of capital...
When a severe deficiency exists for a particular kind
of equipments it may be essential to double the stock of equip-
ment in a very few years, after which it will grow at a more "nor-
mal" rate. The industry using the equipment will show rapid
increases followed by a slower increase--,the industry producing
the equipment will show an absolute decline in proft.ction once
the backlog is made up.
In generals the drop off to a normal growth rate will be
the 9reater9 the greater the initial backlogs the faster it is made
up., and the more durable the equipment (ieee the lesser the eventual
replacement rate in relation to the total stock). Careful planning
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could prevent the drop off, by stretching the deficiency over a
Tong enough period of time,- this would reduce the facilities re-
quired during the interim,, But this would not be good planning,
if the deficiency is a serious one to the economy,- in that case,
the cost of overbuilding the particular equipment industry would
be justified by the urgency of requirements,
This principle is the same one that gave rise, in the
United States during World War II and the Korean War, to "rapid
amortization" of facilities for tax purposes. When a deficiency
of military equipment is to be made up rspidiy, production levels
must be expanded to a rate that cannot be indefinitely sustained,,
and the resulting excess capacity is justified by the urgency of
demand for short-run output,
This phenomenon is not only related to initial backlog
deficiencies but also to disproportionately high growth rates in
individual industries. If electric power, or petroleum refining.,
or metals production., is to grow at a disproportionately rapid
rate for a temporary period and then proceed in a proportion to
the rest of the industrial sector, the demand for equipment by that
rapidly growing industry may drop off in absolute terms when the
industry itself simply shifts to a lower growth rate. Growth of
electric power output by 15% for several years and 7% thereafter
implies a 50% reduction in the demand for new generating equipments
The principle is seldom clear cut in practice, Replace-
ment of obsolescent equipment can usefully occur when the rate of
expansion falls off. In some industries., continued application of
equipment saves costs and replaces labor, And in most cases, the
facilities producing equipment can be converted to the production
of something else that continues in strong demand. Thus the
4 s not a sharp one of whether completely idle capacity appears
at. a certain date; it is whether producti nom. for export becomes fairly
sudderly economical right after a period of fairly acute domestic
shortage. British experience in the engineering industries during
the lost three years presents an illustration. The question is
whether the Soviet economy is beginning to present., or will shortly
present, a similar picture in important lines of capital goods pro-
duction.
Certainly the conditions are present in Russia under
which one would expect this. Huge backlogs of particular kinds
of durable equipment existed after the war; many industries are
rushing ahead at a disproportionate rate of growth that can ob-
viously not be sustained indefinitely to any advantage. And it
must be stressed that planned economies are not ;,immune to this
phenomenon., since the objective of planning is usually not to
avoid excess capacity but to get equipment in a hurry even at the
expense of overbuilding an equipment industry in relation to
subsequent demands on ito
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EVIDENCE OF EMERGING EXPORTABLE SURPLUSES OF CAPITAL GOODS
There is already evidence that exportable surpluses
are developing in certain lines of Soviet capital goods productions
By "exportable surpluses?" is meant,, of course,, potential output for
export; the likelihood of actual export decisions cannot be deducted
from production estimates alone.
The clearest case of production capacity beyond current
Soviet needs is in the field of railroad equipment,, both locomotive
and railroad cars. This equipment is8 of course, extremely durable;
annual rep]a cement requirements are necessarily small in relation
to the requirements for rapid expansion. Furthermore, limitations
of track and maintenance facilities are limits can the cumulative
demand for locomotives and cars.
The Russians ended the war with a large backlog require-
ment for railroad equipment. Production was virtually absent during
four years of .Far; and traffic requirements are greater at the pre-
sent time than they ever were before the warp, particularly with the
increase in coal and steel production. But as a result of the back-
,log demand and the importance of transportation in the Soviet econn
omy; production of locomotives and freight cars has been exceedingly
high during the last few years, Present production levels could
not usefully be sustained for any length of time in the absence
of a major expansion of track mileageg and no comparable expansion
is taking place.
Russian production of railroad cars in 1951 reached 2/3
of the highest production rate registered in the United States after
the close of World War II (calculated in terms of railroad car capac-
ity; in number of cars it is substantially greater than any U. S.
production of the last 30 years.) This production rate is above the
average U. So production of railroad cars for the last thirty years;
and the U. S. has nearly four times the track mileage of Russia.
Not only is Russian production high in relation to U. S. produc-
tion8 and tremendously high per mile of track compared to U. S.
productions but it look as though it would lead to a storage
problem for unused cars within a matter of years. A. somewhat
similar pictwe seems to be true for locomotives. Traffic actually
carried is estimated for 1951 at 50% above the prewar 1190 peak.
As a matter of fact, there is evidence that production of
railroad cars began an absolute decline in Russia by 19518 indicat-
ing by that time the emergence of some excess capacity. There is
some evidence that locomotive plants were being converted to other
uses during recent years.
It seems therefore beyond question that production capacity
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for locomotives and freight cars currently exists beyond the needs
of the near future. The capacity could of course be converted to other
use, or could be left practically idle and the man power and materials
switched to other uses. Nevertheless there are conversion costs in
switching to alternative production; and a substantial part of pro-
duction costs are already sunk in existing plant and skill; there is
consequently consider-i.ble advantage in continuing production with
part of the output going into export. In value terms, the order of
magnitude involved in exportable surpluses may well. be 100 million
dollars per year.,
There is similar evidence with respect to trucks. A simple
comparison of trucks on hand in the Soviet Union with trucks on hand
in the United States suggests demand in the U.S.S.R. capable of ab-
sorbing several times current production indefinitely. But this
simple comparison ignores the extreme limits imposed on trucks in
the Soviet Union by absence of roads,, the difficulty of develop-
ing roads, the organization of trade, the lesser role of consumer
goods, etc., in the Soviet Union, and the tendency for existing
plants to be served by railroad sidings. The present output of some
four hundred thousand-trucks per year may be the most that Russia
can usefully absorb, even with a high replacement rate due to ad-
verse driving conditions and lack of maintenance facilities.
There is an interesting piece of evidence to support that
view. Compared with an estimated realized 375 thousand trucks in
1951, the present Soviet plan is only to produce 420 thousand in
1955. The implied annual growth in production is only about 217%
per year. Capacity considerations in the vehicle industry could
hardly be a reason for holding production to such a gentle rise.
In the five years previous to 1951 production rose approximately
four fold,, to an output approximately double the pre-war rate
production. The strong suggestion is that (a) production could be
increased substantially beyond the plan as far as any specific
limitations in the vehicle industry are concerned, and (b) domestic
absorption beyond current levels is not strongly desired by Soviet
planners.
In view of the fairly short service life of vehicles in the
Soviet Union, and the fact that road development will probably move for-
ward rather than backward, production for domestic use will surely not
fall off and in fact will continue to grow Nevertheless there seems to
be no specific limitation on the export of vehicles, and the develop-
ment of an export of 50 thousand units per year at a value of over 100
million dollars would seem achievable if the Russians were interested*
It is interesting to notice the same comparison between realized
1951 production and planned 1955 production for tractors. Estimated
production in 1951 was 116 thousand units; planned production in 1955
is 126 thousand units,, an annual increase in the rate of production of
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about 2%. Whatever the accuracy of the production estimate, there is
clearly a trend toward tapering off toward a production plateau after
a rise from zero production during the war years to a level approxi-
mately equal to the peak pre-war production. The coincidence of this
plateau with the pre-war peak might suggest the effect of pre-war
capacity limitations on the production plan. But this seems a doubt-
ful explanation. The original pre-war capacity was all developed
within the space of six years, and investment requirements for ex-
pansion are not large in the truck or tractor industry.
that, though, in the case of tractors would limit useful
absorption by Russian farms? Is there anything analogous to the rail-
road track limitations or the road limitations that prevents indefinite
useful expansion of railroad equipment and trucks?
No such limitations are apparent; all the evidence is that
substantial tractor requirements exist in the Russian countryside with-
out bottlenecks to their use, and that replacement requirements are
heavy as the result of poor care and maintenance. But there are two
possible explanations. One is that the Russians are counting on an
inventory of, say, a million tractors with a life span of eight years
and calculate the present production rates will achieve that pro-
gressively over the next five or six years, and that additional
tractor production now, though shortening that period, would be ex-
cessive to replacement and growth requirements thereafter. The
second is that tractors serve mainly the purpose of displacing farm
labor, and that the ability of the industrial sector of the Russian
economy to absorb additional labor is sufficiently limited to make
such displacement a relatively low priority objective. If the second
condition exists, the plausibility of the first is increased.
These figures on trucks and tractors do not, of course,
directly suggest that the Russians are thinking of substantial ex-
ports. What the figures do demonstrate is a certain ease of making
trucks and tractors available for export without serious interference
with Russian plans. The truck and tractor industries are expandable;
trucks and tractors seem from the figures to be accumulating at a
satisfactory rate from the Soviet planning point of views and either
increased production or reduced domestic absorption seems readily
able to make room for exports.
Machine tools should reflect this same phenomenon in the near
future if not already. The production of machinery and equipment is
limited not by the current production of machine tools but by the in-
ventory of machine tools on hand, i.e., by the accumulated total of
machine tools produced in the past. Some allowance must be made, of
course, for replacement needs, for machine tools located in the wrong
places, and for specialized tools that have served some original pur-
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pose and cannot be transferred to other uses, But in general machine
tools are extremely durable, reasonably transferrable, and highly
versatile.
The rapid rise in the Soviet output of machinery and equip-
ment in general was accomplished during the last few years by the use
of machine tools that must have been on hand during those years. With
some allowance for replacement, it could be expected that the same rate
of increase could continue with the machine tools capacity on hand,
For example., according to ORR, machinery and equipment production rose
by approximately 120 index units between 1947 and 1951- (An index unit
refers to 1% of 1948 production,) 1947 production was itself nearly
at the peak level reaohed in the 1930ss~ and the increase over 1947
was nearly 200%. In other words., during that four year period,, machin-
ery and equipment production rose each year by an amount equal to approxi-
mately 25% of 1948 production. The projected increase to 1957 is a
lesser increase per year than was realized during the four years pre-
ceding 1951,
The implications for machine tool demand cannot of course
be derived with any accuracy from such a composite total of machinery
and equipment production- Nevertheless, the following calculation is
of some illustrative value. Assuming that machinery and equipment pro-
duction requires a proportionate inventory of machine tools, the lesser
rate of increase in production of the former prcjected for the period
195157 would mean an absolute decline in machine tool production. In
other words, the decreasing annual increment in the level of production
of machinery and equipment would imply decreasing annual additions to
the stock of machine tools and hence (with allowance for replacement)
decreasing annual production of machine tools. And, incidentally, the
decreasing production of machine tools would tend to be somewhat
greater than implied by the diminishing rate of increase in machinery
and equipment production because of the elimination of demand by
machine tool industries for part of their own output,
Somewhat the same should be true of metal working machinery
in general.
These comparisons are much too crude to prove anything. But
they suggest something important. It is instructive to recall what
happened to the demand for machine tools during the period from 1950
to 1953, All through 1951 and 1952 production of the metal goods
industry in the UQ S. and Western Europe was expanding rapidlyq and
the demand for machine tools caused an immediate severe shortage-
This instantaneous demand for an enlargement in the stock of machine
tools on hand caused order books to be filled for up to 24 months
ahead, But by 1953 distress was being felt in machine tool industries
both here and abroad, and. this distress became substantial in 1954,
The same phenomenon occurred during World War II in this country.
The general history--perfectly consistent with the logic of machine
tool demand--has been one of machine tool shortage whenever metal
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goods productive capacity underwent a disproportionate expansion
relative to the rest of the economy; and machine tools became surplus
when the industries using them leveled off at a higher plateau or a
reduced rate of expansion.
It is interesting now to notice what has happened to esti-
mated machine tool production in the Soviet Union. According to ORR
it rose fairly rapidly until 1949, at which time it was 1/3 higher
than the peak reached in 1939; then it rose slightly less rapidly to
1950; and then strikingly less to 1951. After increasing by 28 in-
dex units in 1947, 19 in 19I8,, and another 19 in 19I.9, it rose by
14 index units from ?49 to 0509 and it only rose by It index units
between 1950 and 195le
A number of explanations for the sudden cessation of rapid
growth of this industry would be possible, of course,, including simple
errors in the estimates. Nev;erthelessq levelling off (or even an
absolute decline) is precisely what one would expect by looking at
those other production Indexes that relate to machine tool require-
ments. (Incidentally,, the substantial continued growth of the machine
tool industry projected by CIA would be contradicted by the conclusion
reached here about the demand for machine tools,, but would not be in
conflict with. the implied capacity for further machine tool production.)
Unquestionably there are many kinds of machine tools whose
production is still unstaisfactory in the Soviet Union and machine
tools are not so homogeneous as to permit reliable analysis based on
an index of the total. But it is hard to escape the conclusion that
a very substantial range of basic machine tools are in reasonably easy
supply in the Soviet Union.
The above examples cover only a part of Soviet capital goods
output. Many kinds of agricultural machinery might fall in a similar
category. But, too much stress need not be placed on this tendency
for a rapidly g'o wing economy to generate specific surplus capacities;
these provide the more dramatic possibilities of export production,,
but perhaps tend too much to imply that surpluses are X condition
for exporting. What is more generally pertinent is the fact that
equipment and machinery output in the U.S.S.R. has been growing at
a rate out of proportion to the growth of the economy as a whole,, that
this disproportion is logical for a limited period,, or perhaps an
extended one,, but that a result of it is a steady increase in the ad-
vantage of hard goods production for export, relative to the effect-
iveness of labor devoted to other kinds of productions Production of
construction and earth-moving equipments, for example,, is unlikely to
become excessive to Russian needs in any absolute sense; but the
rapid expansion of this industry., coupled with the realized rate of
construction in the Soviet Union suggests that recent offerings for
export could be fulfilled without special difficulty to the Soviet
Economy, and also that further increases in production for export. would
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not be difficult to achieve, Obviously the rate of construction can-
not increase at anything like the rate of increase of the construction
equipment industry; and high priority needs for the equipment cannot
last long,
The credibility of the proposition advanced here, and an
assessment of its quantitative importance, requires a much more com-
prehensive survey than has been possible to undertake in connection
with this paper.
Two kinds of analysis must go into any such attempt at a
more comprehensive survey. `first, estimates of production and pre-
sent stocks must be made. These estimates would be neither new nor
peculiar to the present problem, although the orientation of analysis
toward the export question might involve some shifts in emphasis or
attempts at breakdowns that have not been considered warranted so far,
The second kind of analysis is inherently more speculative., related
to the "demand" side of the equation. This kind of analysis probably
requires not only "projection" of various sectors or industries of
the Soviet economy but also comparative studies of other countries
that have displayed similar characteristics on which substantially
better information is available. Study of post-war recovery of cer-
tain Western European countries, particularly West Germany, should be
able to provide not only some indications of the kinds of items whose
supply in the Soviet Union will ease appreciable in the next few years
but also a notion of their quantitative importance, of the ease or
difficulties of converting facilities, etc,
1tdditionally, up-to-date study of the composition of Soviet
bloc trade, both actual trade and what is contemplated in trade agree-
ments, will undoubtedly yield a number of specific indications of
commodities deserving analysis from this point of view.
No amount of analysis will make it possible to forecast the
volume and composition of Soviet trade with any accuracy. That can-
not be done even for a Western country on which we have adequate in-
formation--not even for the 'United States. lihat can be hoped for is
an informed judgement of the magnitudes likely to be involved, and a
sufficient identification of the commodities to permit analysis of
potential trading partners to see the likely extent of the Soviet appeal.
In summary, the most that the present paper has been able
to present is--it is hoped--provocative evidence that"capital shortage"
in the Soviet Union is not necessarily an obstacle to capital goods
exports, and that the latter is a highly promising candidate for
Soviet export activity in the immediate future,
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THE MEANING OF EXPORTABLE SURPLUSES
Whenever an industry?s productive capacity is expanded
beyond current demand for its output, it is tempting to say that an
exportable surplus exists.- And when it appears that an industry
could readily be expanded for export,. it is tempting to say that an
exportable surplus could easily be achieved. The concept of an ex-
portable surplus is deceptively simple.
Excess capacity does nit have to be used, Even if it
exits, say, in the locomotive industry, locomotive production for
exports still require labor, fuel, steel and other materials, elec-
tric power, transportation, and all the other costs that go into
production. Furthermore, a little bit of excess capacity may allow
a margin of economy, permitting less intensive use of plant and
equipment, disuse of the most obsolescent equipment, better mainte-
nance of equipment, etc. Thus the use of excess capacity to produce
for export not only involves all the costs other than overhead costs
but may even be more costly than the average cost of production.
The desirability of producing for export is consequently far from
obvious,
Furthermore, the "demand" for output is not likely to be
sharply defined even in a rigidly planned economya The remaining
demand becomes progressively less urgent if the higher priorities
are met, but there is seldom an abrupt limit to the economy's ability
to absorb further output usefully.
Finally, facilities can be converted. Locomotive factories
can produce tanks or tractors; tractor factories can produce trucks,
etc.
Nevertheless., the relative advantages of exporting sub-
stantially increase as excess capacity begins to appear. Org to put
it negatively, the reluctance to export, which may be strong when re-
quirements are urgent and capacity is strained, may disappear when
production for domestic use begins to slacken off. The desirability
of exporting still depends on comparison of export costs with the
internal value or usefulness of what can be imported with the earn-
ings (plus., of course, any non-economic factors involved in trade
policy); but when production begins to slacken off, there is some pre-
sumption in favor of exporting, since the overhead costs of export
production are largely sunk, sine:. con version of the plant for some
other use involves extra cost, and since there are certain disorgan-
izations and lapses in production involved in either switching the
plant to alternative production or moving some of the labor out and
diverting materials to other uses,
What can be concluded, then, from these emerging trends in
Soviet capital goods production is a strong and suggestive possibility
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of export, Taken together with continuing difficulties in a,gr?i-
cultural production and a possible desire for increased imports of
consumption goods, some of these possibilities become strong probabil-
ities.
STRATEGIC CONSIDERATIONS IN CAPITAL GOODS EXPORTS
It would be to the strategic advantage of the Soviet Union
to develop exports of machinery and equipmen.to Firsts this is the
kind of production that is most relevant to war potential. Balanced
production in relation to the country?s own consumption needs is less
conducive to wartime self=sufficiency than unbalanced production.
The strategic policy for the Soviet Union should be to overbuild the
hard goods industries,, using them for exports and underbuild its pro-
duction potential in those kinds of goods that would not be consumed
anyhow in case of war. If., for example., consumption is to be increased
in the absence of war. the occurrence,3f war would certainly lead to
a cutback in consumption levels. Partly this would reflect the
austerity that goes with ware and partly it would reflect the inability
during war to use certain kinds of consumer goods because of trans-
portation bottlenecks or unavailability of necessary auxiliary goods,,
The exchange of construction equipment for tea,., tobaccos
fruit, meatq and industrial raw materials for consumer goods,, would
be a strategic policy for the Russians to follow, by comparison with
diverting investment resources to enlarged output of quality food-
stuffs or the extra raw materials that would go into enlarged production
of consumer goods,
Second, the prestige and propaganda effect in underdeveloped
countries of capital goods exports from the Soviet Union would be
appreciable. It would strongly suggest that Communism in Russia was
"over the hump" and that Russia had become a mighty industrial nation
capable now of supplying heavy capital goods to other parts of the
world.
Thirdq if Russia is in+?prested in developing close commer-
cial relations with the underdeveloped countries of Asia or the
Middle East or even Latin America., exports of machinery and equip-
ment would find a much better market than most of Russians tradition-
al exports. The relation of these developments to the problems of
China is dealt with below,
LIMITATIONS ON CAPITAL GOODS EXPORTS
The Russians have not been exporters of capital goods and
generally lack experience in selling machinery and equipment abroad,
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It takes more than available supplies to be a successful exporter.
Contacts and confidence must be obtained., quality must be satis-
factory' and design must be suitable. It seems likely that in
most areas the Russians would have to overcome substantial' skepticism
about Russia's ability to fill the orders with quality products and pro-
vide spare parts replacements,, etc.,3 in the future. Furthermore, in
quality terms Russian equipment will probably be substantially less
attractive than American or West European products.
Nevertheless2 the Russians have certain advantages over
their competitors in their trading techniques' The ability to
negotiate imports against exports is one that the Western industrial
countries have been progressively giving up during the last several
years., with steady diminution of economic controls,, trade and pay-
ments discriminations etca FRZrt P7"Dre, the Russians have fewer
administrative3 legal3 or philosophic objections to outright dimpm
ing techniques, tie-in salesp etc.3 and could engage in very effect-
ive price competition if they once decided it were necessar in rder
to establish themselves in export markets.
The Russians must also reach decisions and incorporate
them in their plans,, and in some cases take a risk that their own
needs may rise unexpectedly and compete with their export commit-
ments. There is nothing necessarily difficult about this, and nothing
that seems incapable of being overcome by the granting of appropriate
authority and priorities to the appropriate ministries. Neverthe-
less,, a change in attitude would be required and might be slow and
laborious in taking place.
RUSSIAN TRADE WITH THE NUN-'INDUSTRIAL COUNTRIES
The most important implication of the trends discussed
above is the likelihood for enlarged trade between the Soviet Union
and the underdeveloped or agricultural countries of the world. Several
trends converge on this likelihood.
The development of capital goods exports clearly aims in
the direction of the underdeveloped countries.
The industrial countries of the world are unlikely to
provide satisfactory markets for machinery and equipment for a number
of reasons,, including the quality- and design disadvantages that
would attach to Russian products. While some prejudice exists in the
underdeveloped countries in favor of latest models of equipment,,
the technological advantages of modern improvements are of compara-
tively less importance in those areas where labor is cheap, comfort
and safety are of less value,, and complexity of design causes main-
tenance problems. Furthermore., many underdeveloped countries have
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a sufficient prejudice against colonial dependence on the traditional
exporters of capital goods to make an alternative source of supply
rather welcome. And in those areas the Russians could follow a
pricing policy of a highly competitive sort without incurring pro-
tectionist opposition.
On the import side these are the are the areas where ma foodstuffs
and industrial raw materials (fibers, hides, vegetable oils,, etc.) are
to be obtained If consumption levels are to be allowed to rise in the
Soviet Union, one of the most effective and economical ways for the
government to bring this about is to permit enlarged consumption of
tea, tobacco, cocoa, frui?ts9 and other tropical and semitropical
foodstuffs that can be grown in the Soviet Union only with difficulty
if at all--unless they are considered dangerously "habit forming" by
Soviet authorities. Even more important will be imports of meat, fats,
and oils. These are the kinds of items in which Russian consumption is
most deficient; and livestock products have been least amenable to Soviet
production efforts. Furthermore, expansion of tdxtile production would
necessarily constitute a major part of any increased production of
consumer goods, and if it occurred in the near future would almost
certainly outstrip wool and cotton availabilities in the Soviet Union.
(Incidentally, if Russia were to raise consumption of tea, coffee, cocoa.,
spices, fruits, etc., to the levels of the poorest Western European countries--
Greece and Portugal, or Italy and Austria--literall hunderds of millions
of dollars of additional imports would be required,)
In this connection the recent Soviet-Argentine trade agree-
ment seems particularly significant. Argentina imports substantial
quantities of capital goods and can export substantial quantities of
meats, wool, hides, and vegetable oils. It practices sufficient
control of its trade to permit conclusion of long-term agreements
Even if only for bargaining purposes, it undoubtedly would like to
develop trade with a competitor of the British. Finally, in spite
of apparent ideological differences, the development of close
commercial ties with an important Western Hemisphere country would
be of political advantage to the Soviet UnionQ
The provision in that agreement for Soviet financing of
30 million dollars worth of capital goods on credit looks like the
first in a series of logical steps by the Russians to capture a part
of world markets for machinery and equipment. The credit device is
a familiar competitive one among non-Soviet capital goods exporters.
While there is a lack of any evidence yet that this line of credit
is being successfully used, skepticism on the Russian willingness to
make machinery and equipment available seems premature. On the
contrary, the Soviet-Argentine trade agreement may signal the entry
of Russia into a new phase of world trade.
Most recently, the financial agreement signed a few weeks
ago by the USSR and Uruguay is reported to contemplate $20 million
per year of Soviet import of meat, hides, and wool, with Soviet
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exports including machinery, and equipment as well as othea industrial
goods and fuels,
Aside from the degree of complementarity that may exist
between Russia and the less developed countries in relation to external
trade, there would be strong political advantages to Russia in en-
larged commercial relations with countries like Egypt, Ind.ias Argentina,
etc. Trade is ordinarily a vehicle for closer political relations;
negotiated trade including long-term commodity arrangement and Russian
determination to make the most of commercial relations may be even more
potent. The development of a routine pattern of trade consultation,
the exchange of trade missions, the development of vested interests in
the countries depending on either import or export trade with Russia,
the opportunity and excuse for greater propaganda activities., etc.,
all seem to be attractive to Russian foreign policy. In fact, a
strong effort to provide capital goods, a willingness to sign some
long-term import agreements, and perhaps a technical assistance program
of modest cost, might serve to transfer a good deal of economic initiative
in those areas away from the United States and Britain toward Russia.
Russian willingness to sign longterm import contracts for raw materials,
such as rubber, cotton, jute, etc.s may be a key to preferential treat-
merit for Russian exports of hard goods.
From an economic warfare point of views the danger is not
that Russia will damage its trading partners. The danger is exactly
the opposite, that Russia will establish trade relationships that
are quite satisfactory to the trading partners that reduce or
partially replace, or at least offset, the commercial and other ties
between those countries and the major western countries. (Whether
such a development deserves to be called a "danger" is discussed below.)
A "trade offensive" of this sort may not be the most ex-
peditious way for Russia to bring underdeveloped countries into the
Soviet bloc; but it is a highly effective way of keeping them
neutralized, of "normalizing" relations with them, of increasing the
basis for political and propaganda activity, and developing some
economically advantageous trade at the same timed
No single one of these arguments by itself is very con-
clusive. It is far from sure that the Russians will want to
develop capital exports. It is not certain that higher, consumption
levels in Russia will include the kinds of foodstuffs and other raw
materials that Asias the Middle East, and Latin America produce,
even though that is what the Russian consumer might want most badly.
And Russian plans for the conquest or neutralization of Asia, the
Middle East., and Latin America, may envisage nothing so patient and
civilized as the progressive development of trade. But together these
factors seem to point toward a strategy which must consequently be
judged highly probablee
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IMPLICATIONS FOR CHINESE TRADE AND DEVEIOFMENT
The above analysis implies two conclusions about the position
of China in relation to the Soviet bloc and to the West,, The first is
that a substantial degree of complementarity exists between the Chinese
and the Russian economies, with wide scope for mutually advantageous
trade between them. The second is that China will probably depend on
the West more for markets in which to sell Chinese exports than for
the supply of capital goods needed in Chinese industrial development',
Chinese industrial development will require large amounts
of.macIinery and equipment from outside China. Aside from the possi-
bility of grant assistance from the Soviet Union, which does not
seem to be forthcoming on an effective scale, China must mobilize
an export surplus, largely of agricultural origin, in order to import
machinery and equipment, China thus presents an analogy to the Russian
position during the last three decades,, in which machinery and equip-
ment were acquired by the export of grains, timber, and raw materials?
But this analogy falsely suggests that China and Russia continue to
have similar problems, and that Russia would be unable to sell capital
goods, having difficulty itself in obtaining them from the Western
world. What the above analysis suggests is tht.it Russia, though con-
tinuing to find imports of machinery and equipment advantageous, will
find exports of certain kinds of machinery and equipment relatively
easy and economically desirable. It seems likely-.=and the railroad
equi:inent, trucks, tractors, etc. mentioned above partially confirm
this-that Chinas present requirements are largely for the types of
capital goods which have moved or are about to move into easy supply
if not excess capacity in the Soviet Unions There would undoubtedly
be important exceptions; but the considerations discussed above sug-
gest the possibility of at least substantial trade, in capital goods
against foodstuffs, with mutual advantage to Russia and China, even
if a significant portion of Chinese requirements fall outside this
category,,
Not only will China have substantial requirements for the
kinds of capital goods that will be available in Russia, but a large
portion of Chinese exports appear highly suitable to Russian import
needs. In 1936-38 substantially more than half of China?s exports
were agricultural; nearly fifty percent were foodstuffs Exports
now to other bloc countries are thought to be very largely agricul-
tural, with a heavy emphasis on oil bearing seeds, beans, and nuts,
The relevant question is not whether the Russians are walling
to trade capital goods for an improvement in diet, The question-
answered affirmatively by the above analysis-is whether Russian re-
quirements for such foodstuffs can be more readily met by producing
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tractors, railroad equipment, machinery, etc., than by allocating man-
power and investment to livestock and dairy production at home? (There
is also the question whether Russia would consider an overbuilt hard
goods industry and a deficit in domestic production of luxury food-
stuffs to represent a superior situation of fself.sufficiency" then
a production structure in better balance with peacetime domestic
consumption.)
Furthermore, the development of heavy Russian industry in
Eastern Siberia and the enlargement of population in that area en-
hances the value of trade with China. Eastern Siberia will be a food
deficit area in spite of any expensive efforts to develop local supply.
And transport from China can take advantage of the tendency for rail-
road cars to return empty from East to West.
There is substantial scope for North-South traffic between
China and the east coast of Siberia, as illustrated by shipments of
coal anf iron ore that have already taken place. China could be an
important source of raw materials for the Far Eastern area of Russia.
Whether both China and Russia will wish to exploit these
possibilities to the maximum cannot be answered on economic grounds;
but the possibility of such continuing enlarged trade should seem
attractive.
This complementarity should not be pushed too far as a basis
for predicting the profitability of trade between Russia and China; the
main point contained in it is the ease with which Russia could make
available much of China's capital goods requirements, and the probable
gain to Russia of accepting agricultural production in exchange. The
magnitude of nonmilitary hard goods that the Chinese might manage to
import with their export earnings has been estimated by OIR at about
4400 million per year; this overall magnitude hardly seems unmanageable
for the Soviet Union to supply. So far, it must be admitted, there is
evidence of Chinese dissatisfaction with the supply of capital goods
from the Soviet Union.
Meanwhile, there remains a substantial part of Chinese exports
that cannot usefully be absorbed by the Soviet bloc. Many of them are
byd-products and therefore not readily converted to other goods. Unless
much of their value is to be lost to China., these must be sold to the
lest. The fraction is difficult to predict because of inadequate.
knowledge of China Bloc trade (which accounts for 70% of 75% of China's
trade today) and because China is in a rapid transition which began
from a situation that had not been normal for 15 years. But a number
of industrial raw materials of which bristles and tung oil are the most
familiar examples could hardly find bloc markets comparable to those
formerly enjoyed in the West.
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But exports to the West and imports from the West should
not be too closely identified,, The foreign exchange received by
China would be highly useful to the rest of the Soviet bloc,, Failure
of China to acquire needed goods from the West could lead to Chinese
purchases from the rest of the Bloc, the latter acquiring foreign
exchange to procure additional goods for themselves.
The problem of denying China access to capital goods,
metals, and other raw materials is therefore not just a problem
of denying China access to. Western supplies but also denying China
access to supplies from Russia, Czechoslovakia, etc. This can only
be accomplished by denying China useful foreign exchange to spend in
the Bloc, i.e., by action against imports from China (including, of course,
imports transiting other countries., as distinct from action against
exports to China?
The point may be illustrated by an artificial example.
Suppose China were incorporated into the Soviet Union. If the Russians
obtained several hundred million dollars of foreign exchange annually
from exports grown or extracted in China, and if their plan called
for installing an equivalent amount of capital goods in China, would
they provide the capital goods from Soviet production and use the
foreign exchange for their own requirements, or would they procure
abroad the particular capital goods to be installed in China? The
thesis of this paper is that they would largely do the former.
China is not, of course, incorporated into the Soviet Union
and there are strategic, political, and bureaucratic reasons why the
actual outcome will be substantially different. Nevertheless the
hypotetical example indicates the economic pressures that will be
operating.
Import controls against Chinese goods would be unnecessary
if export controls against both China and the rest of the Bloc were
sufficiently rigorous to take mo9t of the value out of foreign exchange
earnings. But as long as the controls allow either China or the rest
of the Bloc substantial access to useful goods, it would be hard to
keep the Chinese from acquiring the capital goods they need.
The political difficulty with import controls is that they
are inherently unselective and must be based on a desire to suppress
trade in. general and not trade in particular commodities. But import
controls do have at least three advantages when the political circum-
stances permit their consideration. First, they would be easier to
enforce because of the distinctive nature of Chinese exports and
because the policing of imports rests on the historical fact of origin
rather than future intentions..
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Second, by being inherently and all-or-none-measure,
they involve a degree of determination and finality that leaves
no question as to intentions,, They avoid argument over what goods
are strategic and just how strategic they are. They avoid the
administrative and political difficulties of selection.
Third, import controls against China represent about the
only case in East-test trade in which unilateral U.S. action wcu ld
be of some effectiveness,, The U.S. as a source of supply for China
is readily replaced by other countries; the U.S. as a market for 100
million dollars or more of goods is far more important,, (For. certain
commodities, the current import restrictions may already have developed
"infant industriesB"' in the U.S. that permanently spoil the market for
China. Tung oil seems to be an examples
An import embargo is aimed, of course, at the whole Chinese
economy and not at just a "strategic" portion of it. Whatever the
validity of distinguishing strategic .from non-strategic trade with
the Soviet Union, that distinction has little value with respect to
China. In the short rqA Chinese war potential depends on Russia,,
In the longer run, it depends on China?s solution of its economic
problem and the development of its entire economy. There is little
sense in aiming at any target in China smaller than the whole economy.
The foregoing thesis can be summed up as follows?
1. A comparison of industry and agriculture in the Soviet
Union, and a study of the limits on agricultural expansion, suggests
that Russia is rapidly leaving or has left the status of an agricultural
economy and that its future potential is in the industrial field, and
that this potential is being rapidly realized The still low per capita
level of total production, and the still primitive nature of many aspects
of the Russian economy, do not contradict the relative dominance that
.dustry is acquiring over agriculture in that country.
Enlargement of the area to include the European satellites
does not alter this general conclusion.
2. If it were not for Soviet strategy, ideology, and
bureaucracy, we should conclude that the country would soon emerge
as an exporter of industrial goods and an importer of agricultural
raw materials and foodstuffs, evert though continuing to import
particular kinds of machines and industrial products especially for
temporary periods. But self-sufficiency considerations engrained
in Russian planning make this development appear doubtful.
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3. The persistence, however, of the self-sufficiency objective
should be questioned, since strategic self-sufficiency implies taking
advantage of any export possibilities for hard goods and impart possi-
bilities for goods that would be dispensable in time of war.
4. The disproportionate growth of certain capital goods
industries since the war, stimulated by backlog requirements and gaps
in production, as well as by the continued policy of rapid industriali-
zation, points to the likely emergence of production levels in many
types of capital goods excessive or at least adequate to the priority
needs of the economy. There is evidence that this already occurring
in certain lines. In those lines, any specific reluctance to export
based on acute scarcity will soon have disappeared, and these goods
will become comparatively soft commodities whose export in return for
other goods would be profitable.
5. These trends point to enlarged Soviet trade with the non-
industrial or underdeveloped countries. Any Soviet desire for political
reasons to establish strong commercial ties with those countries would
be compatible with, and reinforced by, economic developments within the
Soviet bloc.
6. Recent developments in trade and payments are consis&e nt
with this analysis. They cannot be said at this time to constitute
strong evidence, but they are certainly suggestive. Failure of the,
Russians to make capital goods available during the last few years
throws some doubt on the thesis; on the otherhand, a fairly rapid
change in hard goods availabilities is what the analysis would lead
us to expect.
7, With respect to China, the analysis points to sub-
stantial room for mutually profitable trade between that country
and the rest of the Bloc, with China receiving capital goods in
exchange for agricultural produce. Furthermore, the analysis indicates
that China may be much more dependent on the West as a market in which
to earn foreign exchange than as a source of supply. Export controls
alone could be partly offset by triangular trade involving a Chinese
import surplus from Ruwsia, while an import embargo would directly
reduce China?s ability to procure in this fashion from the U.S.S.R.
Incidentally, unilateral import embargo by the U.S. would be much
more effective than unilateral export controls in respect to China.
(This is not, of course, an argument against having both.)
There are three questions to ask about the above conclusions.
First, are they valid? Second, if so, are they important? Third, if
so, what should the U.S. do about it?
As to validity, the economic trends are much more convincing
than the trade conclusions. The development of enlarged trade between
the Soviet bloc and the underieveloped areas requires Soviet policy
decisions and required overcoming bureaucratic obstacles. The economic
pressures may not be so strong as to force a "natural" development
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along the lines discussed above,, The implied trade pattern may run
sufficiently counter to the methods and prejudices of the Soviet
bureaucracy, to make it depend on a decision that such trade is
desirable on political grounds. Perhaps the best way to characterize
the conclusion is the followings
If Russia were to consider the development' of significant
trade with the underleveloped countries important, and were in-
terested in developing formal comrncrcial relations including commodity
arrangement, etc,, with them, the economics of Russian development
are not a constraint but an inducement. Even if the political ad-
vantages of such a commercial.. development are not great or perfectly
clear, the effort required would probably not be costly but rather
economical. The obstacles are bureaucratic rather than economic.
An effort would be required, and the Soviet Union would certainly
have-to accommodate itself to the demands of its trading partners
with some pain or expense; nevertheless, the principal cost of
such a trade development would be overcoming bureaucratic inflexi-
bility. (To some extent these developments may occur gradually .
without an explicit decision. Again using the Argentine example,
it is either a good example of a policy decision or an excellent
example of a natural development.
Nevertheless, it must be admitted that the foregoing
analysis is overdrawn in favor of the general thesis, and con-
sequently serves more to point out a strong possibility than to
prove a case,,
On the timing of this development, there is no clear basis
for considering it to be immediate; on the other hand, there is no
reason why it should not be. The ability and willingness of Russia
to sell equipment, rather than just advertise it, is something that
will probably come quickly when it comes.
As to the importance of this development, in terms of
the implied volume of trade and the extent to which it would yield
strategic advantages to the Bloc, it must be admitted that the effect
will be more qualitative than quantitative,, The threat of lost
markets to the Western industrial countries in the medium term future
is,probably trivial in quantitative terms, as is any corollary danger
of lost sources of raw materials (referring 6f course, to loss by
competition, not by conquest or subversion,,It is similarly un-
likely that the Soviet Union will become a dominant trading partner
of many of such countries. Finally, the development of such trade
is.not something that will occur over night; a persistent sales
and negotiations effort will be required by the Soviet bloc,,
The source of concern to the West seems two-fold. First,
if the Russians wish to select certain countries for the develop-
ment of-very substantial trade, they might succeed in becoming a
major dominant trading partner. The political advantages to
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Russia, for example, of being the market for more than half of Egypt?s
cotton would be a case in point.
Second, the difference between no trade and some trade, or
between negligible trade and substantial trade, may provide political
advantages out of proportion to the economic magnitudes. It presents
the Russians an opportunity to be in constant daily contact with,
government officials; it helps put inter-governmental relations on
a "snormal" basis; it puts the Russians in contact with a number of
citizens having a vested interest in "normal" relations with the Soviet
Union; and it provides an enlarged basis for indigenous propaganda in
their favor as well as subversive activities. While it would be alarmist
to propose that many countries would develop an active favorable attitude
toward Russia as a result of such trade, such commercial relations do
help to allay unfavorable attitudes and can reduce the awareness of the
Russian threat in such countries. In this respect it probably parallels
one of the greatest advantages to the Soviet Union in developing "normal"
trade and "formal" trade relationships with the countries of Western
Europe; that is, it makes it easier for those countries to forget that
a cold war exists.
In its purely economic effects, enlarged trade between the
Soviet bloc and the underdeveloped countries could, be substantially
beneficial to the latter. It would improve their terms of trade and
probably add a measure of stability to their foreign markets. Assuming
that such trade would not reach proportions that would put great
leverage in Russian hands, we must ask ourselves whether the Russians
really are likely to undertake such a "constructive" step in furtherance
of their foreign policy.
It is generally assumed that economic instability represents
a threat to democratic forms of government and association with the
Western allies, and that Communist influence is aimed at increasing
such instability in order to exploit it. Is the U.S.S.R. likely to
reverse itself and follow trade policies that promote economic stability
instead; and, if so, wherein lies the danger to the West involved in
Soviet success in this endeavor?
A comprehensive answer to this question would require in-
dividual analysis of each country that is a potential trading partners
But, in general, enlarged trade of 'he kind under discussion here is
alternative to, rather than consisle nt with, the objective of early
conquest or subversion. There is some degree of compatability between
them; trade missions, a ales and purchasing agents, etc., can provide
a cloak for propaganda or subversive activities. Mainly, however,
the political advantages to the Soviets of expanded trade would be
relevant to countries in which the prospects for more violent ac-
quisition of influence were poor,
If, for example, the Soviet government believed conquest
through subversion or uprising a practicable possibility in Indonesia
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within the next few years, it might abst&an from any economic activity
in that country that would tend to provid.. markets or otherwise contribute
to economic progress. If on the contrary there is, in the Soviet judge-
ment, little liklihood of early success along those lines, there remains
the objective of developing the most favorable attitude on the part of
the existing government toward the Soviet bloc and its activities. In
that case the beneficial effects to the country concerned of any such
expanded trade could benefit Soviet policy. It would be unduly alarmist
to propose that trade alone would make Indonesia an ally of the Soviet
bloc; it is not unreasonable to expect expanded trade to reduce suspicion
and fear. A more precise estimate of the value that this modest ob-
jective would have for the Soviet Union in various different countries
can only be determined by thorough political-economic evaluation of
those countries. The potential advantages of such a policy, especially
outside of the most inflammable areas, is sufficient to warrant thorough
study, at least of particularly relevant or important countries. Egypt,
Indonesia, and Argentina would provide useful case studies,
Finally, what can the United States do about it? Supposing
the enlargement of trade between the Soviet Bloc and the non-industrial
countries to be likely, and assuming it would carry political advantages
to the Soviet Union, what policies are indicated for the United States?
Whatever the complete answer to this question, one thing seems
fairly clear. the answer does not lie mainly in the field of 'economic
defense, except under the broadest definition of that term. Trade
developments of the sort pictured above will not be countered by measures
in kind. They will not be countered by measures aimed at the Soviet
Union, but by measures aimed at the areas and countries concerned. The
principal. orientation of our policy should not be to prevent such a
development of trade, but to assure that it does not achieve disproportionate
psychological and political results.
Thus the main policy question raised is not what new control
devices are needed but whether our policies altogether are adequate for
those areas. In Asia, the most critical area immediately concerned,, the
question may best be posed as follows, In the race between Communist
development of China and non-Communist development of India, the Soviet
Bloc will be the main provider of capital equipment and the principal
market for China; will Russia succeed in exploiting the promise of
becoming the same for the rest of L.sia?
II IPLICATIONS FOR FURTHER RESEARCH
Several specific research objectives are suggested by this
paper. Additionally, general research beyond what lies behind this
paper would be required in order to document it convincingly and
thereby confirm it, or alternatively to contradict it with any finality.
The specific lines of reasearch that seem desirable are the followings
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1. Particular attention to the analysis of trade and trade
agreements between the Soviet Union and the underdeveloped areas.
Beyond that, an attempt should be made to identify those countries
that, on political grounds, will be of most concern, in order that a
particular watch be kept of trade developments there and some analysis
of potential trade developments can be undertaken in antitipatioA of
any actual development of serious trade with the Bloc. In general,
what is implied is giving more attention to Soviet trade and trade
prospects with the underdeveloped countries than might otherwise,be
warranted on ordinary economic defense grounds.
2. According to this taper, the degree of economic integration
that is possible between China and the rest of the Bloc is somewhat
greater than is generally assumed, and is possibly more triangular than
is generally recognized. Analysis of the Chinese economy should be
more closely tied in. to analysis of the Soviet bloc economies.
3a The development of exportable surpluses of hard goods
by the Soviet Union has rested in this paper on a sampling of evidence,
and is based on research materials that have not been oriented toward
this particular possibility,. A more systematic and comprehensive re-
view of this possibility should be undertaken.
4. A related line of inquiry would be a projection of the
raw materials and other requirements of the Soviet economy if it
continues to grow at present rates. Pre-occupation with the operating
requirements of the export denial program has perhaps discouraged analysis
of the,longer?run costs to the Soviets of continued limitations on trade
between East and West. The NIE?s concerned with the immediate impact
of trade controls are deficient in this respect, in their concentration
on Soviet adjustment to existing shortages and inattention to Soviet
development of new shortages in the future
5. The agricultural limitations of the Soviet Union, and
their implications for the future of East-West trade, deserve more
complete analysis to serve as the basis for discussion with Western
European countries. To some extent the current n--)ular belief in
Europe., in the importance of East-West trade to the tong-run viability
of Western Europe, could be dampened by education of the governments
concerned to the insubstantial contribution that the Soviet bloc can
make to the viability of Western Europe. Furthermore, substantiation
and documentation of the thesis brought forth in this paper would
indicate that Russian interest in such Western commodities as cargo
ships and tankers and heavy capital goods generally is doomed to short
life. Soviet bloc imports of machinery and equipment from the West
will continue to be of substantial importance to the Soviet bloc but
seem sure to be limited in overall volume; a persuasive presentation
of this 13ke7.ihood to the members of COCOM might lead to a somewhat more
sober European attitude toward Eastern European markets.
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ED/EC D-74
Attachment B
A DRAFT FRA.? ORK OF RESEARCH AND ANALYSIS ON
SOVIET BLOC AND FREE WORLD ECONOMIC DEVELO:PM NTS AND
THEIR IMPLICATIONS FOR ECONOMIC DEFENSE
INTRODUCTION
to The attached draft outline is being disseminated for your infor-
mation and in order to elicit specific comments and suggestions which
will assist in the development of a program of research projects.
2. It constitutes a framework identifying the longterm requirements
for research and analysis necessary to the current and future development
of a Uo S. economic policy vis-a-vis the Soviet bloc. It consists of a
checklist of major topics together with illustrative questions through
which these topics should be developed. The topics are suggested as pre-
requisites to specific economic defense questions and not as weighted
requirements. The illustrative questions, though incomplete, are i ntended to
be suggestive,
3, This draft framework represents a basis for a series of continuing
programs and projects within both the intelligence community and the EDAC
structure. In its present form it does not constitute a request to the
intelligence community and specifically is not a request for a National
Intelligence Estimate. After it is revised, appropriate requests for projects
and estimates may be developed,
/,.. Much of the economic research currently underway could be iden-
tified within this framework. The purposes of this research outline are:
a. to draw attention to and indirectly insure comprehensive
coverage of Soviet economic research and analysis, essential
to economic defense problems.
be To encourage focus of economic research in this field in
terms of economic defense problems.
c. To make explicit the intelligence requirements necessary
as a basis for evaluation of the thesis offered by
Mr. Schelling.
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d, To encourage the preparation of analyses of Soviet economic
policies and developments in a form available to the EDAC
community as a preliminary to studies within this community
of the implications of developing Soviet economies and
policies,
e. Ultimately, to encourage the preparation of analyses of
worldwide economic policies and developments which have
a bearing on economic relations between the free world and
the Soviet bloce
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MASTER OUTLINE
I. SOVIET 3LOC ECONOMY
Introduction
A. Components
1. Industry,
?_. Agriculture
3. Transportation
B. Structure and Administration
C, Integration and Complementarity of Major Areas
D. Development
II. SOVIET BLOC ECON()IMIC RELATIONS WITH FREE WORLD COUNTRIES
A. Basic Trade Data
B. International Mechanisms and Facilities of Trade
C. Government Foreign Economic Structure and Policy
D. Operations and Tactics
E. Trade and Its Developments
III. FREE TIORLD ECONOMIC DEVELOPMENTS SIGNIFItCA:NTLY AFFECTING FAST WEST
TRADE
A. Free World Supply Position in Key Commodities (exports and imports,
including shipping and services)
B. Balance of Payments and Currency Problems
C, Terms of Trade
D. Government Policies
E. Problems of Reliance and Susceptibilities to Pressures
(Countries - e.g., Finland, Austria, Afghanistan, etc, and
special nxvblems3 e,g.g marketing of ships, etc,)
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The accompanying report,, "Soviet Bloc Economic Trends and Their
Implications for East-West Trade,," presents a number of tentative conclu-
sions on the nature of the economic development of the USSR and its satel-
lites which have major implications for East-West trade. Its main conclusion
is that "the Soviet Union is in a rapid transition from an agricultural
economy to a comparatively industrial economy,, and that significant shifts
in the direction and composition of East-West trade are likely to occur in
the immediate future as a result of it." The conclusions and the assumptions,
both explicit and implicit,, upon which they rest have been arrived at on the
basis of.a rather cursory examination of the most readily available evidence,,
The following outline has been developed to indicate the research
that would appear to be necessary in order to examine both the assumptions
and the conclusions contained in the paper. In general,, the outline is
designed to elicit answers to such questions as;
Do "exportable surpluses" currently exist or are they likely to
appear in the near future in any of the major sectors of industry in the
Soviet bloc? What is the probable magnitude and direction of Soviet bloc
trade with the free world in industrial raw materials and end products?
What are the probable short and longterm limits on the expansion of agri-
cultural production in the 'USSR,, the European satellites' China, and the
Soviet bloc as a whole? 'What import requirements for agricultural products
are likely to develop in the.Soviet bloc as these limits are reached? 14hat
is the `foreseeable magnitude and direction of the trade potential in agri-
cultural commodities between the Soviet bloc and the free world and what
are the factors within the Soviet bloc affecting this potential?
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I a SOVIET BLOC ECONOMY
A. OONPONEN ZS
1, INDUS JRY
In subsections a through e below for each major sector of industry
(such as metalworking machinery, textile products, electrical generating
equipment, construction equipment, motor vehicles, agricultural machinery,
etc,) in each Soviet bloc country and for the bloc as a whole, examine
the following;
a, Basic Production and Consumption Data
(i)
What is the output of the industry, current and past?
Compare with similar industries in other bloc and free
world areas.
(ii) Add as necessary to the production estimates qualitative
estimates (e,,g,,, take into account situations such as that
present in the vehicles industry, in which service life of
the vehicle in the USSR is eetremely short in comparison
with that in other countries- also marketability abroad)
('iii) What is the rate of growth of the industry, current and past?
(iv) How does this compare with the rate of growth of industry
as a whole? With the rate of growth of the particular indus-
try in other bloc and free world areas?
Qv) What are the input requirements of the industry, including
specifically raw materials,, labor, electric power, etc?
Compare with similar industries elsewhere in selected bloc
and free world countries,
(vi) How is the input mix related to output?
(vii) Estimate present stocks of the industryes production, their
location and availability,
(viii) What is the "capacity' of the industry viewedin terms of
potential output if fixed plant and equipment on hand were
utilized to the maximum extent practicable (assuming adequate
quired)? `lb what extent are the industry?s-current-and past
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? 2 -
b.
input requirements satisfied by domestic production, produc-
tion in other bloc countries, and by imports from non-bloc
countries?
(ix) What are the major limitations on the expansion of the indus-
try (plant., skilled manpower, doctrinal emphasis, technique,
geographic location, transport, etc?)? To what extent are the
limitations attributable to production limitations of other
industries, to organizational limitations, etc,?
(x) If the industry is not producing at capacity, is this.attrim
butable to input bottlenecks or to slack demand for t ie product?
(xi) What is the consumption pattern of the industry? s product(s)?
(xii) Are there any indications that the industry is producing
beyond the current or prospective capacity of the user indus-
try to absorb production, or expanding at a rate dispropor-
tionate to the rest of the economy (e,ge production of rail-
road locomotives exceeding "needy" in terms of track and main-
tenance facilities)?
(i)
(ii) 'hat proportion of total industrial investment does this
represent?
(iii) What is the annual rate of investment in the industry (current
and past rates)?
(iv) How does this compare to the annual rate of investment in
industry as a whole and similar industries in other areas
at the various stages of development?
(v) How does the rate of growth of the industry compare to the
rate of investment? How does this compare to industry as a
whole?
(vi) What is the rate of change of investment and how does this
compare with similar data for industry as a whole?
(vii) Are investment bottlenecks identifiable? (Specify,)
What is current investment in plant and equipment in the
industry? Are there indications of prospective heavy invest-
went requirements (e.g,,,, to replace obsolescent equipment)?
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o3m
c, Government Policies
(i) Assess government policies as reflected in or affecting a
and b above,, (.Eog,9 how is the announced "intention" to-
increase production of consumers goods reflected in invest-
ment policies, allocation of raw materials9 etc?)
(ii) What pricing and allocations policies are followed in the
particular industry or components industry? How do these..
compare with those followed in other industries? What indi-
cation do these policies offer of the significance and status
of the industry9 its demands and development?
d. Development and Trends in Specific Industries
(i)
What is the projected output of the industry.,?
(ii) What is the projected rate of growth of the industry and
how does this compare with data in a (iii) above?
(iii) Based on d9 ('i) above9 what are the projected input require
ments of the industry?
(iv) To what extent will the industry?s projected input require-
ments be satisfied by domestic p1roduction9 production in -
other bloc countries9 and imports from non-bloc countries?
What are the projected rates of investment and rates of
change of investment in the industry, and how do these data
compare with the projected growth data for the industry., as
well as with comparable data for industry as a whole and for
similar industries in other bloc and free world countries?
e. Comment on the Deficiencies-and-Gaps in Data Relating to Each Industry
f, Inter-Industry Development and Trends
From the data above9 assess the status and development of the
various industries of specific countries and the bloc as a whole,
attempting to answer such questions as;
(i) Where are the emphases placed by governmental policies?
('ii) Describe the past9 present and prospective heavy-light
industry roles,
(iii) Identify areas in which competing demands or incompatibility
of growth might create limitations on production or temporary
unplanned "excess production."
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(iv) On the basis of the foregoing analyses, assess the current
and projected raw material requirements.
(v) Assess the current or potential problems and costs associated
with conversion of resources or production emphasis from one
specific industry to another. Identify areas of greatest
convertibility or rigidity,
(vi) What lines of industrial development affect war potential
most directly?
(vii) What are the indications that the USSR, the satellites and/or
the bloc as a whole are attaining adequate production, in
industries most relevant to war?
(viii) Are there indications that the USSR the satellites and/or
the bloc as a whole are underbuilt or overbuilt) in indus-
tries most relevant to war?
g, Trade Potential for Each Soviet Country, European Bloc and Bloc as a
Ti-hole
(i)
Identify industries and components of industries which are
relatively "high cost"' because of demands for skilled labor,
lack of plant facilities, etc,,, in which imports would be
particularly advantageous.
(ii) On the basis of a ? f, identify indications of the extent to
which the past am r r?renfi `"oir et orior .t,=r , -,tention{ to impor-
tatJ..on, of production goods will be maintained or modified,
(iii) Assess the importance of the raw material imports in terms of
their role as industrial inputs and identify any indications
of alterations in this pattern?
(iv) From data in a, b, c, and. d above, identify industries or
items for which. there appear to exist or may develop an
"exportable surplus"" by reason of (a) anticipated, planned
production or (b) unplanned, incompatible rates of develop-
ment among industries,
(a) What is the likely magnitude and duration of these avail-
abilities in relation to total bloc and country produc-
tion and specific free world requirements?
(b) What is the potential direction (include indications of
quid pro quo) for trade in industrial products of this
sort?
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2, AGRICULTURE
For each major sector of agriculture of current or probable
East-West trade interest (such as bread grains, feed grains, dairy
products, etc.) in each Soviet bloc country m? and for the bloc as
a whole m? examine the following!
a, Basic Production and Consumption Data
(i) 'ghat are the current and past production figures?' Give
totals, per acre yields (where applicable), and labor
productivity. Compare with similar data for other bloc
and free world countries.
(ii) How are the input requirements., including land, labor,
machinery, fertilizer, fuel, etc., related to the above
production data?
(iii) What proportion of overall agricultural output is
accounted for by the production of this commodity (or
group of commodities)?
(iv) What is the pattern of consumption, current and past?
(I.e., is it all consumed domestically? What is the
per capita consumption? If production exceeds domestic
consumption, what happens to the surplus?`)
(i)
What are the current and past rates, changes in rate,
and character of investment in the production of this
commodity (or group of commodities)? Relate investment
data to production data.
(ii) What is the proportion of long-term to short-term
investment?'
(iii) What proportion of the total investment in agriculture
is represented by the investment in the production of
this commodity (or group of commodities)?
How effective has investment in agriculture been in re-
ducing manpower requirements for producing given yields
on given acreages?
(v) Are investment bottlenecks identifiable.! Specify,
c, Government Policies
(i) Identify the major objectives of Soviet and satellite
agricultural policies,
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(ii) How are government policies reflected in a and b above?'
(E.g., rural-urban labor force shifts', morale as it
affects production, etc.).
(iii) Evaluate government policies dealing with the problem
of increasing the incentives of agricultural labor.
d. Comments on the Deficiencies and Gaps in Data
e. Development and Trends in Agricultural Sectors
(i)
What are the projected production data?
(ii) What are the related input requirement projections?' Are
input limitations identifiable?
(iii) To what extent will the industry's projected input re-
quirements be satisfied by domestic production, production
in other bloc countries, and imports from non-bloc countries?
(iv) What are the projected consumption data? Present compara-
tive analysis based on varying hypotheses with regard to
per capita consumption and population growth - e..g.,
assuming no change in per capita consumption, in view of
assumed population growth, what will consumption be in
2, 3, It, S years hence? How will these figures vary if
per capita consumption is increased by 5^, 10%? Relate
these f ig;ures to production data,
(v) What are the projected. investment data, including rate,
changes in rate, character, proportion of short to long-term
investment? How do these data compare with similar data
for agriculture as a whole and for other bloc and free world
countries?
(vi) What are the strengths and limitations of agricultural
production and expansion as indicated by an over-all
appraisal of the trends in production, consumption, and
investment? The analysis should take cognizance of the
physical problems (such as arable land availability,
irrigation potential, fertilizer availability, etc..) as
well as the bureaucratic problems such as morale, etc,
f Development and, Trends in Agriculture as a r.'holo
For agriculture in genera~i.l, in each i:loc country, as
well as the bloc as a whole, assess agricultural dovelopnlont in
terms of over-all i..nves tment, output versus
Compare with s im,:i_lar da'&a 4 .' _ Ot
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g. Trade Potential
(i)
What is the extent of intra-bloc trade in various
agricultural commodities? How can this be expected
to change as a result of the projections developed
in c above?
(ii) What is the magnitude and direction of the potential
East-West trade in various agricultural commodities?
(iii) From data in a,, b and c above,, identify agricultural
sectors or products for which there appear to exist
or may develop an "exportable surplus",
a) What is the probable magnitude and duration of
these availabilities in relation to total bloc
and country production and specific free world
requirements.
What is the potential direction (include indi-
cations of quid pro quo) for trade in agricultural
products of this sort?
Are import requirements from non-bloc countries for
particular agricultural commodities likely to develop?
Consider supply position of other bloc countries and
bloc as a whole.
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3, TRANSPORTATION
For each form of transportation -- rail, highway, inland waterway,
pipeline, ocean shipping, ?? examine the following for each Soviet bloc
country and also for the b:oc as a whole.
a. Basic Transportation Performance Data
(i)
What is the traffic handled by each of the forms of trans-
)ortation? (Ton kilometers per year, current and past
erformance data)
(ii) What are the key input requirements for maintaining service
at present levels? (E.g., labor, coal, locomotives, freight
cars, trucks, petroleum products, etc.)
(iii) To what extent are the industryes input requirements (plant
stocks and maintenance) satisfied by domestic production,
production in other bloc countries, and by imports from non -
bL_oc countries? (Include shipping charters.)
(iv) What is the rate of growth of each sector of the industry
(as measured by traffic data)?
(v) How does this compare with the rate of growth of industry
as a whole?
(vi) Are the various forms of transportation changing in relative
importance to any appreciable extent?
(vii) Are traffic bottlenecks or unutilized capacity identifiable?
(Specify.)
(viii) If traffic bottlenecks (i.e., situations in which the demand
for service exceeds the capabilities of the transportation
facilities to provide the service, resulting in prolonged
delays in shipment arrivals) exist, to what are they attri-
butable?
(i) What is the current investment in plant and equipment in
each part of the industry and for the transportation in-
dustry as a whole?
(ii) TrJhat proportion of total industrial investment does this
represent?'
(iii) What is the annual rate of investment in the industry
(current and past rates)?'
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(v)
How does this compare to the annual rate of investment
in industry as a whole?
How does the current equipment inventory of each sector
(locomotives, freight cars, etc.) compare with the cur-
rent output of the supplying industry (locomotive and
car building industry, etc.)? Compare with stocks in
other bloc and free world countries.
Flow does the rate of growth of the industry compare with
the rate of investment? How do these data compare with
similar data for industry as a whole?
(vii) What is the rate of change of investment and how does
this compare with similar data for industry as a whole?
(viii) Are investment bottlenecks identifiable? (Specify.)
c. Government Policies
(i) Government policies as reflected in a and b above?
d. Development and Trends
(i) What are the projected performances rates in each sector
of the industry?
(ii) What are the projected rates of growth of each sector of
the industry and how do these data compare with the data
in a, (iv) above?
(iii) Based on d, (ii) above, what are the projected input re-
quirements of each sector of the industry'?'
(iv) To what extent will the sectorvs projected input require-
ments be satisfied by domestic production, production in
the bloc countries, and by imports from non-bloc countries?
(v) What are the projected rates of investment and rates of
change of investment in each sector of the industry, and
how do these data compare with the projected growth data
for the industry, as well as with comparable data for
industry as a whole?
e. Comments on Deficiencies and Gaps in Data
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f. Strengths and Limitations of Bloc Transport
(i)
Identify if possible and assess over-all government
plans and projects for development of transport within
each bloc country, and in the bloc as a whole.
(ii) What indications of integration and standardization of
bloc transport? In what areas?
(iii) Assess adequacies and. inadequacies of transport facilities
in terms of current and programmed demands, internal dis-
tribution, and internal bloc trade requirements (in
illustrative terms if over-all appraisal unavailable).
Do any pressures for East-West trade derive from in-s
adequacies of intra-bloc transport? Specify.
(iv) What persistent limitations., bottlenecks, etc., are
identifiable in terms of both facilities and areas?
Relate to specific industrial or agricultural sectors
of the economy?
(v)
Assess any information concerning governmental attention
to eliminate these bottlenecks.
(vi) Appraise the adequacy of current and projected levels of
transport facilities to handle demands for service under
levels of industrial and agricultural activity examined
in A?l?d, A-l-f, A-2-d and A-2-f.
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1, Structure of Each Bloc Country Economy
a,C.at are the main structural features?
b. How do these compare with pre-Soviet status?
C. How do these compare with announced objectives for the economy?
2. Administrative and Planning Policies
a, How are planning policies reflected in administrative arrangements?
b. How are pricing policies used as a mechanism of control?
c. What features of structure, administration and control constitute
conflicting or stimulating forces as between sectors of the economy
in relation to the development of the economy?
c, Internal Trade and Distribution
a, Describe and appr..,ise the mechanisms and procedures for internal
trade and distribution.
b. Assess government policies relating to a,
c. Identify the extent to which these mechanisms, procedures and
policies limit or facilitate the implementation of various aspects
of the agricultural and industrial developments described in I-A,.
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C. INTEGRATION AND COMPL :MENTARITY
1. Administrative Economic Integration
a. Describe and assess the nature and extent of present economic
integration or coordinate management in the development of
economic policies and economic plans, their implementation, e.g.
specifically-,
Assess the extent of exchange of financial and technical
assistance, integration of plant production, standardi-
zation and coordination of transport facilities.
(ii) Evaluate the mechanisms employed the CEMA,e Soviet
missions, local Moscow-trained Communist apparatus,
trade agreements, etc.
(iii) Differentiate the roles of the USSR on the one hand and
the individual satellites on the other, describing the
extent and effect of inter-satellite councils for
economic cooperation?
be What are the evidences as to the direction and timing of future
integration?
(i)
What is the evidence to support or reject the prediction
that the bloc or the satellites will be operating under
a single economic framework plan by 1955 or 1956?
(ii) What effect does or will such planning unity have on
Soviet bloc foreign trade position?
What special techniques characterize Soviet bloc trade; ie.
the extent to which the USSR or satellites act as middlemen in
intra-bloc and free world trade?
d. To what extent and in what way do the present status or trends
of this integration operate as a counter and modifying force in
relation to what would be the economic development of the USSR
or individual satellites as anticipated from economic develop-
ment trends?
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2. Economic Compllementarity
a. To what extent do the economic plans and trade agreements (and
other evidence) indicate a division of labor between the USSR
and satellites or amone satellites which would be in consonance
with or contrary to a rapid evolvement of the USSR from the status
of an agricultural to an industrial complex - ? the timing?
b. What are the easily identified areas of complementarity within
the European Soviet bloc? The bloc as a whole?
c. Describe and appraise the current extent and nature of intra-
bloc trade. (Its past development and its trends.)
d. Assess this trade in terms of the development of bloc economic
integration, division of labor, and evolving complementarity
of regions and in terms of the evolvement of the USSR from the
status of a predominantly agricultural to a predominantly
industrial economy
To what extend and in what specific ways does the
pattern of Soviet economic development appear to be
reliant upon satellite production =m differentiate
planned and intentional dependence from emergency
reliance.
In what functional areas could specific satellite pro-
duction or facilities assist Soviet development? To
what extent are these exploited?
(iii) To what extent and specifically in what instances can
new alterations in the production plans or trends of the
USSR be explained by current or anticipated reliance on
bloc supplies or markets?
After summarizing from A-lmd. A?2-g9 and Am3-d the
extent to which current and projected USSR economic
requirements are likely to be supplied from abroad --
assess the relation of these requirements to the past,
present and probable future of the trade of the USSR
with the satellites.
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D. DEVELOPMENT
1. Identify the major factors, in each Soviet bloc country and in
the bloc as a whole, which determine the scope, direction and
rate of economic development (e.g., doctrine, bureaucratic control
mechanism, etc.).
2. Assess government objectives, policies and plans, for each Soviet
bloc country and for the bloc as a whole, in relation to the following:
e.g., identify and assess the"war economy policy" of the USSR and
the satellites, (role of heavy industry, balanced economy, etc.).
(In particular, continually reassess the nature, significance, probable
duration and prospects of the New Course consumer goods program.
For example, what is the probable effect of this program on
availabilities of agricultural products and industrial raw materials?)
3. Assess the role and importance of each major economic sector (of
agriculture, industry and transportation - e.g., livestock, electrical
generating equipment) for
a) each Soviet bloc country and
b) the bloc as a whole,
in relation to overall country and bloc economic structure and
activities (including GNP, existence and utilization of resources,
etc.) and in relation to other economic sectors, in terms of its
potential development and its part in the transition from a
predominantly agricultural to an industrial economy.
It. Compare the assessments made in (1) above with equivalent economic
sectors in the USA and other free world countries.
5. Assess the economic role and importance of each Soviet bloc country
in relation to overall bloc economic structure and activities, and
in relation to other Soviet bloc countries, in terms of its potential
? development and its stage in the transition from a predominantly
agricultural to an industrial country.
6. Identify (a) critical shortages and (b) major exportable surpluses
which can be expected to develop in the Soviet bloc economies, as they
grow in volume and diversity stating assumptions as to rates and directions
of economic growth.
NOTE: The analysis described above will presuppose a study of the data
developed in sections A,B,and C of this outline.
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WIZ F E WMi 60"TU J t?
INTRODUCTORY NOTE?! Since much of the past and current research in the
field of trade relations has already been closely
tied to the needs of the economic defense program,
Part II is presented in skeleton form with sample
references to existing programs.
Commerce, State and CIA have continuing programs to provide a great
deal of these data Detailed outlines of 1AC requirements are found in
the following documents
a. Proposed Economic Defense Staffing Program for CIR/State, FY 1954-55
C-ED/E.C D?6O/1, September 17, 1954)e
be MAC Requirements for OIR Economic Defense Staff Research and
.Analysis, in terms of functional responsibilities, June 1954,
c. Guide Requirements for OIR Trade Agreements Unit, January 1954
d. Memoranda outlining requirements for statistical compilation of
trade data. by Department of Commerce, January 1954
These programs are designed to provide detailed data (in terms of
bilateral relationships, and specific commodities of strategic or economic
significance to either side, the free world or the Soviet bloc) covering
the following-
1. Reported Trade - commodity and country detail,
2. Commitments m commodity detail on past and current commitments
under bilateral trade agreementse
3. Trade agreement and contract fulfillment comparisons.
4 Terms of the trade ? negotiating positions, quid pro quo arrange-
ments, tie-in sales, and .)ricing policies in terms of bilateral
country and selected commodities.
5. Unreported trade.
1. Trade agreements as a mechanism.
2. Trade missions.
3? Mechanisms of illegal procurement.
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Transportation facilities and arrangements?
5. Financial arrangements;
a. Payments agreements.
b. Use of gold..
c. Use of foreign exchange.
d. Credits.
e. Multilateral payments arrangements.
f. Participation of private financing companies or brokers in
East-West trade.
C. GOVERNMENT FOREIGN ECONOMIC STRUCTURE AND POLICY
1. Bloc Mechanisms for Foreign Trade
a. How do Soviet monopolies serve as instruments of Soviet trade policy?
b. Examine the Soviet (USSR and satellite) systems of pricing in
foreign trade, including examples from data obtained in Part I
above.
c. Assess the system of long-term. economic foreign trade planning
as an element of strength and weakness and as an operational tool
in trade with the free world.
2. 'Fundamental Bloc Policies and Objectives
a. Examine and identify trade objectives in the context of total
economic (national and Communist) policy, including the role of
trade and economic penetration in Soviet world expansion.
b. Assess the nature and implications of the announced Soviet goal
of ultimate self-sufficiency and appraise it as (e.g.) (a) a
realistic strategic concept or (b) an isolationist doctrine of
prejudice against trade.
c. Describe and appraise the manner in which Soviet trade is governed
by strategic considerati ns - e.g., USSR priority in trade, tie-in
demands, etc?
de Review past and present examples of the policy of "forced exporta-
tion" (especially in China).
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D, OPERATIONS AND TACTICS
On the basis of data provided in IA above (especially that on the
terms of the trade and the details of bilateral trade negotiations and
activities) identify and analyze Soviet operational and tactical patterns
such asp price manioulati_on; commercial practices, arbitration., etc.,
financial operations; propaganda; etc?
Note-.
Detailed outline provided in various documents., such as
a, IWG Working Paper No. 8, January 20, 1954. "Subgroup on
External Financial Operations of the Soviet bloc,,"
b. MAC ED/HC D-59/2. soviet Trade Trends and Tactics
C. Program for Economic Defense Support in OIR
E. TRADE AND ITS DJET,OPMT
1. From current and comparative analysis of data in Part IIA above,
identify commodities deserving analysis from point of view of Soviet
bloc economic developments.
2. On the basis of the detailed analysis above (especially ImAl-f and g;
I-A~~2-f and g; I-B; and II-A) determine areas in which the structure
of Soviet bloc resources and production indicates increases or decreases
in trade,
3a
On the basis of II-A above, identify recent expansion or contraction
of imports or import commitments in agricultural products.
On the basis of IA-1, 2, and 3, assess the East-West trade implications
of the potential imbalances of the economies of bloc countries and of the
bloc as a whole.
5. Clarify the meaning of "exportable surplus''" in a Soviet-type economy.
(Including features of planning, non-consumer orientation., etc.)
6. On the basis of data in Part I-A-1 (Agriculture), II-A (Basic Trade
Data), and II-B (Government policies) above., assess the likelihood that
agricultural exports from the USSR or satellites will exceed current
levels? What items are likely to be most important?
7. Is the USSR (or satellites) likely to be a lon-amrun source of agri-
cultural raw materials? What is the probable timing?' What factors in
internal economic development militate against this role? (Reference:
Part I, A, C, and D)
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?.What indications are there of new or developing geographic patterns
of trade (e,gm, with underdeveloped areas)?
9. Identify and evaluate any indications (Part I-A-2) that the Soviet
Union or the satellites will become exporters of capital equipment.
In what period?' to what extent? to what areas?`
10. What are the limitations on Soviet bloc exports of capital equipment
~n terms of marketing skill as well as availability)? What advantages
would the `Soviets derive from such exports?
11. In what areas is there evidence of '"'forced exportation"?
12. What evidence is there of special Soviet and satellite attention to
production specially designed (in terms of quality, packaging., etc,)
for export`? What indications do these afford of long-term market pro-
motion?
13. Identify the instabilities of Soviet exports (e.g., exports which seem
inconsistent with Soviet bloc economic pressures),
l)1@ Assess the past., current., and potential role of trade in the in,
bloc economies and the bloc economy in relation to the economic develop-
ment described in Part I-A?l, 2, and. 1 m in qualitative as well as
quantitative terms,
15, Does the analysis in I and II above support the contention that "*capital goods
shortages4'in the Soviet bloc economies is not necessarily an obstacle
to selected capital goods exports?
16. What economic and political advantages would accrue to the USSR and
satellites from increased trade with underdeveloped areas?
17. Weigh any evidence that significant shifts in the direction or compom
sition of East-West trade are likely to occur in the immediate future.
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