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December 20, 2016
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May 29, 2007
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Approved For Release'2&77 Impact of Trade Embargo with USSR on U.S. Economy Background The balance of trade with USSR is heavily in the U.S. favor -- with exports at least 3-4 times greater than imports consistently over the last four years. United States exports to the USSR (which are dominated by agricultural products) declined sharply in 1980 due to the sanctions imposed by the Carter Administration following the Soviet invasion of Afghanistan. In 1981, exports rose sharply, mainly as a result of the lifting of the grain embargo. In the absence of USG restraints, it is expected that exports (particularly grains) would expand further, by a large amount in 1982. In the manufacturing sector, exports are concentrated in a few product categories (e.g. tractors, phosphate fertilizer, pressure sensitive tape), and a few U.S. companies (e.g. Occidential, International Harvester, Caterpillar). The patterns of U.S. exports to the USSR contrasts sharply with those of our major western allies -- for whom. steel and machinery are the major export items. Thus, our allies are a much more important source of manufactures for the USSR and their manufacturing sectors have a much larger stake in the Soviet market. United States imports from the USSR have been primarily minerals and metals, although in recent years ammonia and refined petroleum products have accounted for a substantially larger share. Imports have dropped significantly in volume in 1980 and 1981 largely due to a decline in gold purchases. The attached tables provide data on recent U.S. trade with the USSR. Impact of Total Embargo The impact of an embargo on trade with the USSR is summarized by sector on the attached chart. ~ Jot referred to USDA. \/ l i ?er plies. SERET Approved For Release 2007/05/29: CIA-RDP84B00049R000601460027-1 Approved For Release 2tgt 000498000601460027-1 In total, we estimate that about $10 billion in export sales would be lost in 1982-83, with an accompanying loss of about 160,000 jobs. The impact on certain companies (e.g. Occidental and International Harvester) would be quite substantial. Federal budget outlays for existing agricultural programs would increase by at least $6-8 billion and there would be pressure for additional or enhanced programs. Federal budget outlays and revenues would also be adversely affected by higher levels of unemployment. The Export-Import Bank would probably suffer a $180 million loss due to default on the Occidential contract. Over the longer term, an embargo would cause loss of significant potential sales to the Soviet Union and to other countries and would encourage the spread of long term supply agreements in agricultural trade. The attached paper by USDA describes the effects of an embargo in agriculture in detail. Approved For Release 2007/05/29: CIA-RDP84B00049R000601460027-1 U.S. EXPORTS TO USSR (Million dollars) First Half 1978 1979 1980 1981 Agricultural Yellow corn 1,053 1,402 602 387 Unmilled wheat 356 812 336 334 Inedible tallow 19 58 28 40 Soybeans 200 489 45 NA Shelled almonds NA 8 17 15 Sugar beets or cane NA NA NA 11 Hops NA 5 10 10 Subtotal of above 1,628 2,774 1,038 797 (as % of total) 72% 77% 69% 75% Alumina NA NA NA 8 Molybdenum ore 26 41 NA 8 Petroelum coke, calcined 18 14 20 21 Tracklaying tractors & parts NA 43 90 58 Other tractor parts NA 2 10 15 Phosphoric acid NA 93 17 14 Pressure sensitive tape 37 50 42 Parts for oil/gas drilling 28 28 NA Metal working machines, gear Belting & belts for machines NA NA NA 2 NA 13 Subtotal of above 65 218 172 116 (as % of total) 3% 6% 11% 11% Total Exports 2,249 3,604 1,510 1 066 (above items as % of total) 77% 85% 81% , 89% Approved For Release 2007/05/29: CIA-RDP84B00049R000601460027-1 Approved For Release 2007/05/29: CIA-RDP84B00049R000601460027-1 U.S. IMPORTS FROM USSR (Million dollars) First Half 1978 1979 1980 1981 Agricultural Sable furskins 8 9 6 Vodka Minerals/Metals NA NA NA Gold 286 548 86 18 Nickel 16 29 21 34 Palladium 28 62 54 18 Platinum metals 3 16 6 1 Chrome ore 7 11 4 2 Rhodium 8 9 6 2 Aluminum scrap 30 9 2 2 Metal coins 6 25 18 NA Subtotal of above 384 709 197 77 (as % of total) 72% 81% 46% 35% Ammonia 27 56 95 40 Light fuel oils NA NA NA 50 Napthas NA -- 5 17 Total Imports 530 873 430 (above items as % of total) 79% 89% 70% Approved For Release 2007/05/29: CIA-RDP84BOO049ROO0601460027-1 SUMMARY OF IMPACT OF USSR TRTPF EMBARGO ON U.S. ECONOMY AGRICULTURE 1/ Eastern Europe a 1/ Assumes embargo ould apply to add several bill on dollars in budget outlays). rFl1 ..l }Ct~..,_ IMPACT IN 1982-1983 1 - Loss of $7 billion in export sales. 2 - Loss of over 100,000 jobs (and associated increased costs and revenue loss in federal budget). 3 - Increase in U.S. agricultural budget outlays by $6-8 billion. 4 - Higher costs for ammonia fertilizer, lower for phosphates. 5 - Depressed commodity price levels (to or below loan levels). 1 - Loss of $3 billion in export sales and 60,000 jobs (and associated increased costs and revenue loss in federal budget). 2 - May well cause International Harvester to go bank- rupt. 3 - Caterpillar would lose $200 million in sales and 1,000 jobs. 4 - Occidental would lose 1,600 jobs in phosphate indus try and write off of possibly $60 million. 5 - Cut off of imports of mineral would cause increased costs_to_consuming industries (e.g. auto, specialty steel) seeking alternative supplies. 6 - Positive impact on U.S. ammonia industry. 7 - Loss to Export-Import Bank of $180 million (Occidental deal). 1 - Loss of $50-80 million in revenues to shippers. 2 - Potential adverse effect of U.S. banks holding credits to Soviets. 1 - Spread of long term trade arrangements. 2 - Foreign buyers will diversify away from U.S. sources due to loss of credibility of U.S. as supplier. - Loss of substantial potential business (e.( ers. la i y pe p 2 - Loss of reliability of U.S. as supplier would discourage other purchasers. 3 - Loss of $400 million/year for remaining 15 years of Occidental market. ent programs to aid farmers (which could nd USSR and no new govern Approved For Release 2~7i /1 : R P84B00049R000601460027-1 Summary SOVIET/EASTERN BLOC EMBARGO - ISSUES AND IMPACTS The potential gains to be deriver; from a trade embargo with the Soviet Union and the Eastern Bloc countries appear small relative to the costs the United States would suffer. Such efforts in the past have not influenced Soviet foreign policy, but have hurt our agricultural trade, disrupted commodity markets, depressed commodity prices, and cost the Treasury large sums. A trade embargo with the Soviet/Bloc countries should not even be considered without first imposing a full embargo on credit from the West. While in years of poor harvests the Soviets account for a large share of the world's wheat and coarse grain imports (nearly a fifth in 1981/82), their overall imports (nonagricultural and agricultural) make up only 3.3 percent of their GNP. Because half the Soviet's overall imports come from the Eastern European countries, any trade embargo action taken by the United States and its allies would have to also include Eastern Europe to prevent transshipment. Such an action would depress prices for farm commodities in this country because over 70 percent of our exports to the Soviet Union and Eas tern Europe are agricultural products. Our agricultural export sales to the USSR and Eastern Europe are projected to total about $4.8 billion in 1981/82. If the action were imposed immediately and across the board, agricultural export earnings would fall by over $2 billion in fiscal 1982, further aggravating the U.S. trade deficit and the position of the dollar internationally. We estimate it would cost the federal government $2-3 billion for 1981/82 to absorb the commodities that would otherwise have been exported. The reduction in exports would also mean the loss of over 100,000 jobs throughout the economy. In addition to making commodity loans to farmers, we would have to subsidize their storage and interest costs. Thus, the export-based underpinning of American farm income would be seriously weakened by an embargo. To compensate, it would cost the U.S. government more in price support and related outlays than the value of the exports lost due to the embargo. The whole structure of farm prices-including agricultural commodities not now exported to the Soviet Union and the Eastern Bloc--would shift downward. The impact of continuing an embargo into 1982/83 is even more damaging to agriculture and related industries. We project agricultural exports would decline by over $5 billion in 1982/83. Commodity prices would fall at or below loan levels, increasing deficiency payments for grains and raising loan and reserve outlays sharply. Budget outlays for grains alone in 1982/83 would total $4-5 billion above levels expected in the absence of an embargo. To limit taxpayer sacrifices in continuing to absorb the surpluses, the U.S. government would be forced into massive and costly acreage reduction programs. These programs would disrupt markets and impact on nearly all sectors of the U.S. economy: employment in industries supplying farm inputs would fall; rural communities would suffer as the volume of U.S. farm output declined; and gross farm income would fall. The longer the embargo were to continue, the more severe would become the dislocations. U.S. agriculture's ability to produce would also be impaired by a total trade embargo. The Soviet Union and Eastern Europe account for 30 percent of SECRET Approved For Release 2007/05/29: CIA=RDPM000049R000601460027-1 the world's nitrogen fertilizer production capacity. In 1980/81, the Soviet Union alone supplied the United States with half of its imported ammonia. Coverage If an embargo of only agricultural products were imposed, the Agriculture and Food Act of 1981 would require that the Secretary take steps to assure farmers of 100 percent of parity. It is important to note that in addition to grains, the U.S. also exports oilseeds, tallow, sugar, cattle hides, meats, animals, tobacco, etc. to the USSR and Bloc countries. Hence, there would be tremendous economic disruptions. Implementation In order to minimize disruptions to farm commodity markets, we recommend that exporters be allowed to deliver on contracts already written for shipment in 1981/82. Thus, about half of the grain and other agricultural products projected to be exported to the USSR and EE would still move. This would still imply about a 10-15 percent reduction in total U.S. grain exports for 1981/82. Impacts on Agriculture and the Budget With farm prices and incomes already depressed, an embargo would have a devastating effect in agriculture and related industries. The reduction in exports would mean the loss of over 100,000 jobs throughout the economy. The embargo would eliminate any opportunity for price strengthening in 1981/82 and would lead to a tremendous increase in loan and inventory outlays as well as a significant buildup in reserves. Unless offsetting actions were taken, corn prices would drop and average for the season near loan rate levels, about 10-15 cents per bushel below earlier expectations. Wheat prices would also be pushed near loan rate levels, about 50 to 60 cents per bushel below earlier projections. This would result in large additional movements of grain under government loan and into the farmer-owned reserve with additional budget outlays around $2 billion for these commodities. alone. A continuation of the embargo into 1982/83 would mean a reduction of nearly 25 percent in grain exports, with farm prices for grain averaging at or below the reserve loan rates. Soybean exports and prices would be similarly affected. Movement of this volume of grain into loan and reserve programs would result in twice as much grain in the reserve than earlier expected and budget outlays of about $4 to $5 billion. These increased outlays do not include the costs of any additional offsetting actions, such as contract purchases, direct grain purchases, paid land diversion programs, or higher support rates designed to minimize impacts on the sector as a whole. Effectiveness of an Embargo It is very difficult to get exporters to cooperate in a trade embargo. It would be particularly difficult in this case because of the linkage between Western Europe and the Eastern Bloc countries. West Germany is a major supplier, particularly of credit, to the Bloc. Moreover, our experience in managing embargoes has not been good. Mechanisms do not exist for making such actions effective. Reports by GAO and USDA's Inspector General conclude that the 1980 embargo with the USSR was virtually ineffective. SECRET Approved For Releas 'Longer Term Impacts The longer an embargo is allowed to stay in effect, the greater the problems that would emerge. Pressure for the government to take compensating actions on agricultural commodity prices would rise. Even then, any further actions to help farmers would have to be coordinated with the other supplying nations. The longer the embargo remains in effect, the more the exporters would be tempted to circumvent the embargo and thereby undermine the intent of the action. Irrespective of the duration of the embargo, the United States would find its foreign markets seriously eroded. Other suppliers and the Soviets would attempt to write bilateral agreements in order to tie up future trade to their advantage. Other importing countries, including our major trading partners, would also try to tie up and diversify the sources of their future requirements in formal agreements. Following the 1980 embargo, roughly 30 percent of the world's grain trade was estimated to he locked up by other exporting countries in the form of bilateral agreements, a sharp increase from the pre-embargo level. SECRET