ECONOMIC AND POLITICAL FACTORS IN EAST-WEST GERMAN TRADE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001500220006-2
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 17
• Document Creation Date: December 16, 2016
• Document Release Date: December 28, 2004
• Sequence Number: 6
• Publication Date: January 1, 1968
• Content Type: IM

 DIRECTORATE OF
. INTELLIGENCE
Intelligence Memorandum
Economic and Political Factors
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Secret
in East-West German Trade
Secret
Copy No. 43
ER IM 68-5
January 1968
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by la,.%,.
GROUP I
EXCLUDr.O FROM AUTOMATIC
OOIAN(111ADINO AND
D[CLASNIrICATION
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CENTRAL INTELLIGENCE AGENCY
Directorate of Intelligence
10 January 1968
INTELLIGENCE MEMORANDUM
Economic and Political Factors
in East-West German Trade
Summary
Trade between East and West Germany -- or
"interzonal trade" (IZT) -- developed after 1948
in spite of mutual hostility. East Germany col-
laborated-in IZT because it needed the trade; West
Germany, because it wanted a hold on East Germany.
IZT has risen to about $700 million annually. It
represents about one-tenth of East Germany's total
foreign trade and one-half of its trade with the
industrial West.
East Germany has outgrown, however, any dependence
on IZT for "strategic" products such as high-grade
steel and special chemicals, and changes in West
German consumption patterns and tax laws have reduced
East Germany's unique advantages in the West German
market. As a result, the regime has shown less and
less readiness to cooperate with West Germany except
on a "state-to-state" basis -- a basis which the
West German government is not about to accept.
West Germany has tried to placate the East
German regime by dropping the restrictions that
long surrounded IZT. Although IZT no longer gives
Bonn a hold on East Germany, it is a link between
the two Germanies, and West German leaders are
eager to maintain and stimulate trade for this
reason.
Note: This memorandum was produced by CIA. It was
prepared by the Office of Economic Research and
coordinated with the Office of Current Intelligence.
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West Germany probably will be disappointed in
its hopes for expanding IZT. For one thing, it is
becoming harder for East Germany to increase
exports, because of a lack of suitable manufactured
products. Further, the East German regime believes
that a stagnation or decline in IZT will-be an
effective way of bringing pressure on West Germany
to make political concessions leading toward
recognition. On the other hand, the accommodating
policy toward East Germany that was followed in
1967 by the Kiesinger government has made a
favorable impression elsewhere in Eastern Europe
and has helped to isolate East Germany in its
implacable hostility toward Bonn. The Kiesinger
policy is thus an important contribution to the
Ostpolitik urged by Foreign Minister Willy Brandt
and All-German Affairs Minister Herbert Wehner,
aimed at getting the Eastern European countries
to establish closer relations with West Germany.
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The Rationale of Interzonal Trade (IZT)
1. Trade between East and West Germany has
been conducted under arrangements that do not
require West Germany to acknowledge the existence
of an East German state. For West Germany the
trade is not "international" but "interzonal," and
the East Germans themselves long acknowledged this
distinction.* Indeed, the distinction is made in
the basic trade charter -- the Berlin Agreement
of 1951 -- which provides for the conduct of trade
between the two "currency areas" (including West
Berlin in the "currency area" of the West German
Deutsche Mark, or DM). West Germany has been
represented, not by a government official, but by
a "trustee" with offices in West Berlin.
2. The Berlin Agreement also narrowly re-
stricted the conduct of trade. Under its pro-
visions, which were not modified until 1960, only
articles included on annual commodity lists
negotiated by the partners could be exchanged.
Many commodities were subject to quota restrictions,
and licenses were required for all shipments.
Trade was carried out under five subaccounts
(designated, illogically, 5, 6, 7, 8, and A).
The commodities included in each subaccount were
the same for both sides, and each account had to be
balanced separately -- surpluses in one account
could not be used to cover deficits in another.
This rigidity was modified in only one way --
each subaccount had provision for a small "swing" --
the amount of imbalance permitted. If the "swing"
limit was reached in one of the accounts, the
authorities in the creditor area ceased to grant
shipment licenses, and trade in that account was
effectively stopped until the other side could
export enough to bring the account back within the
"swing" limits. Payment was handled through a
complex system of parallel accounts in the state
banks of the respective "currency areas," and there
was no provision for cash transfers between the
'E The East Germans called it "intra-German trade"
(innerdeutscher Handel) until 1961, when they shifted
to "trade with West Germany" and, separately, "trade
with West Berlin. "
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banks. Tae debtor, t.ierefore, could not make
cash payments to cancel "swing" deficits and main-
tain trade.*
3. The East Germans reluctantly accepted these
restrictive arrangements because they needed the
trade. Trade with West Germany had dropped to
almost nothing after World War II, and the USSR
could only in small part replace West German
deliveries.of essential industrial materials, much
less supply spare parts for old German machinery.
Moreover, although the Berlin Agreement restricted
trade with West Germany, it did allow East German
products to enter the Nest German market without
crossing tariff barriers. In the case of brown
coal and synthetic fuels, which long accounted for
about one-third of East German deliveries, IZT
extended the benefit of West German domestic
subsidies.
4. In spite of the economic benefits that
would accrue to East Germany, the West German
government was prepared to facilitate trade for
two reasons. First, the West Germans hoped that
a flourishing trade would serve to reestablish
some degree of economic interdependence between
East and West Germany, thus easing eventual re-
unification and preventing complete absorption of
the'East German economy into the Soviet Bloc.
Second, trade was expected to help assure West
German access to West Berlin. From the beginning
of negotiations, the ,,lest Germans asserted that
trade depended on access. Although the East
Germans refused to accept such a connection, IZT
had in fact been suspended during
the
early
1950's
in cases of serious interference
access.
with
Berlin
5. Thus both Germanies, for different reasons,
favored the rapid growth of trade between them.
Although IZT dropped from $177 million in 1950 to
$68 million in 1951 as a result of renewed
difficulties over access to Berlin, it rose rapidly
* In 1958 a special account `S" was established
to permit East German purchases outside of the
subaccount system against payment in West German
DM.
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thereafter, reaching $496 million by 1960. It
then represented about 50 percent of East Germany's
trade with developed countries in Western Europe
and overseas and about 10 percent of its total
trade. Even so, it represented only about 2 per-
cent of West Germany's foreign trade.
The Supplementary Agreement of 1960
6. In 1960 the West Germans eased those
specific restrictions in the Berlin Agreement
that the East Germans had most vigorously attacked.
A supplementary agreement, signed in August 1960,
made IZT much more advantageous for the East
Germans. The five subaccounts were consolidated
into three. Subaccount I, the so-called "strategic"
account, contained industrial raw materials,
including the hard coal and iron and steel on
which the East German economy was so dependent,
and machinery and equipment. Also included in
this account, however, were East Germany's most
important deliveries at that time, brown coal
and synthetic fuels (fuels made from brown coal
by the Fischer-Tropf hydrogenation process). This
new arrangement permitted East Germany to pay for
a much larger volume of imports of key commodities
than the more restricted account system had allowed.
The "swing" limit for the "strategic" account was
also raised, to $25 million. Subaccount II was
made up largely of consumer goods and agricultural
products, most with no value limits. These were
regarded as "nonstrategic" commodities, not
essential to the operation of the East German
economy. Subaccount III was for services. The
combined "swing" for Subaccounts II and III was
set at $25 million.
7. The supplementary agreement also retained
special subaccount "S" (set up in 1958) under which
the East Germans could make cash purchases outside
the regular quotas. In addition, the East Germans
obtained a commitment that the Bonn government would
not cease issuing delivery permits when the "swing"
limits were reached. In exchange for this concession
the East Germans made their only counterconcession --
agreement to the establishment of an annual cash
settlement of the outstanding "swing" balances
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SECRET
within a month after 30 June. Finally, the
validity of the current commodity lists was
extended indefinitely and contracts extending
over one year were allowed for the first time,
so that IZT would fit more easily into the East
German system of long-term planning. These mod-
ifications did not, of course, satisfy the basic
East German objection to the West German treatment
of IZT as "interzonal" rather than foreign.
West German Threat to Cancel IZT
8. Before the supplementary agreement could
produce the expected rise in IZT, a sudden polit-
ical conflict resulted instead in a cutback in
trade and in a reduction of East Germany's
dependence on West German deliveries. On 30 Sep-
tember 1960, in retaliation for new East German
restrictions on travel between West Germany and
West Berlin, the West German government announced
its intention not to renew the IZT agreement in
1961. The West German government thus reasserted
in the most dramatic way that IZT depended on
undisturbed access to Berlin.
9. In East Germany the threat to cancel the
IZT agreement produced frantic attempts to line up
alternative supplies for the essential imports
involved. These efforts made clear to the East
Germans their vulnerability to West German
pressure. Realizing the weakness of their position,
the East Germans entered into negotiations,
determined to prevent the collapse of IZT at the
end of 1960 and to reinstate the supplementary
agreement necrotiated in August. The West Germans,
literally at the eleventh hour, 29 December 1960,
agreed to allow the August agreement to come into
force on 1 January 1961 as planned, thus preventin
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10. In March of 1961 the West German government
also introduced an internal system of revocable
delivery permits, which -- as stated in the permits
themselves -- could be canceled in case of East
German interference with Berlin access. This device,
although bitterly resented by the East Germans,
apparently was introduced to provide a legal basis
for insurance guarantees to West German shippers in
-case trade was interrupted, rather than to bring
pressure on the East Germans.
Reduction of East German Dependence on IZT
11. The West German government was well satisfied
with the results it got by threatening to cancel the
IZT agreement. But it was a hollow victory. The
East Germans, humiliated, proceeded to accelerate
their already planned attempts to end their economic
dependence on West Germany. East Germany had been
strengthened enormously since the mid-1950's by Soviet
economic and political support. The regime was in a
position to reduce greatly its vulnerability to a
cutoff of IZT by building up inventories and by
assuring alternative sources for high-grade steels
and a number of specialized chemicals. Although the
first step, a crash program to reduce the use of
West German products, was not successful, the measures
taken to increase imports of steel and chemical
products from other countries began to bear fruit in
1961-63.
12. The effects of the East German campaign to
attain economic independence from West Germany became
visible in a drop in IZT in 1961-62, and, still more
significantly, in a shift in the commodity structure
of West German deliveries. The volume of trade,
which had reached $496 million in 1960, dropped to
$442 million in 1962* and did not regain the 1960
level until 1964. Steel and machinery and equipment
(which had constituted about one-third of deliveries
in the late 1950's) fell as a share of West German
deliveries, while foodstuffs and agricultural products
The decline in IZT from 1960 to 1962 is somewhat
understated by the use of dollar values. The dollar
value of the West German mark (DM) was raised by 5
percent in 1962 (as of 6 March), with little or no
effect on prices in IZT.
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rose. In 1964, when total West German deliveries
again began to rise sharply, East German orders for
foodstuffs continued to expand (with some chancres
in composition). Imports of chemical fertilizer
and machinery and equipment also increased, but
orders for high-grade steel continued to decline.
As a result of these structural changes and the
increases in LGzi- German production and in imports
from'other sources, West Germany provided a greatly
reduced share of the total East German supply of
key commodities, especially high-grade steel,*
that are essential to maintain current industrial
production.
13. At the same time that East Germany was
deliberately reducing its dependence on IZT, changes
in the West German market were making the trade
less advantageous to East Germany. A large share
in the late 1950's, about one-third -- of East
German earnings in IZT had been obtained by deliveries
of brown coal briquettes and of gasoline and diesel
fuel, all valued at the high subsidized prices of
the [-Jest German domestic market. East Germany
earned more than twice as much from these deliveries
as it would have earned from exports to other Western
European markets. In the 1960's, however, deliveries
of brown coal briquettes -- used mainly for domestic
heating -?- began falling as a result of a shift from
coal to oil and gas in West Germany. Although the
demand for East German gasoline and diesel oil re-
mained strong, earnings dropped sharply in 1964,
when West Germany , in accordance with Common Market
agreements, eliminated subsidies for synthetic fuel
production, from which East German deliveries had
benefited. For one year, in 1964, West Germany made
oo cial compensation to East Germany for the
elimination of the subsidies, but in 1965 the West
Germans refused to extend the compensatory payiaents.
In 1967, East Germany finally cut off deliveries of
gasoline and diesel fuel.
14. With its need for and gains from T. ZT having
been reduced, the East German recrime was reaLiv Lv
1965 to refuse to conduct any trade negotiations
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with West Germany except on a political level. The
regime was not eager to sacrifice the trade itself,
so long as continuation of the trade did not require
new formal agreements through the old channels.
But, as became clear, no economic concessions that
West Germany could offer would buy any sort of
political quid pro quo from the East German regime.
West German Moves to Stimulate IZT
15. The West German position on IZT has also
evolved in the 1960's in response both to East
German policy and to changes in domestic politics
and the international situation. Wishing to pre-
serve this vestige cf a united Germany, the West
Germans have become increasingly concerned over
the future of IZT and more willing to make major
unilateral concessions in the hope of stimulating
the trade. As a result of the deliberate East
German cutback in IZT in 1961-62 and the accompa-
nying rise in East German imports both from the
USSR and from various Western European countries,
both business and political circles in West Germany
began to fear the loss of their special position
in the East German market. The continued drop in
East German imports of high-grade steels and special
chemicals even in 1963-64, when IZT once again began
to grow, gradually convinced most West Germans that
IZT was no longer a weapon of much value in assuring
access to Berlin. Moreover, there was increasing
popular and official desire to insure the growth
and importance of the trade as one of the few
remaining links between the two parts of the divided
Germany.
16. The changing political climate in West
Germany, against a background of apparent detente
in the cold war, turned these sentiments into
official policy after 1965. The process began while
Ludwig Erhard was Chancellor and has accelerated
since the Social Democrats finally took office as
members of the "grand coalition." Under the
prodding of Willy Brandt, Minister for Foreign
Affairs, and Herbert Wehner, Minister for All-German
Affairs, the Kiesinger government has gradually
moved to eliminate most of the specific provisions
in IZT arrangements to which the East Germans have
so long objected. Bonn has shown a growing readiness
even to deal with East. Germany through responsible
West German government officials.
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17. Most of the West German concessions have
come since 1965. The only earlier concession of
significance was the decision of the Bonn govern-
ment not to enforce the cash settlement provision
of the August 1960 agreement and the postponement
of the 30 June settlement date in every year excot
1963 (when the balance was less than $1 in favor
of East Germany).
18. The first major concession came in June 1965,
when $12.5 million was transferred from the East
German surplus balance in Subaccount II to cover
part of the East German deficit in Subaccount I.
Similar transfers were made in January and February
of 1966. In this way the East Germans were allowed
to use their expanded deliveries of consumer goods
(largely clothing and textiles) and agricultural
products (sold at the high West German domestic
prices) to offset increased purchases of hard goods,
particularly machinery and equipment. The logical
extension of this practice was simply to abolish the
sub-accounts altogether, as 'lest Germany did in 1967,
thus removing a major limitation on the value of the
trade to East Germany.
19. Another step taken by West Germany to
encourage IZT was the development of special machinery
for extending medium- and long-term credits to East
Germany, through the so-called Financing Company for
Industrial Facilities.* This move was more welcome
to West German businessmen than to the East German
regime, which in general rejects special features
distinguishing IZT from other trade. West German
banks have been hesitant to finance capital exports
to East Germany, and the :Vr,st German e..port guarantee
organization -- Hermes Kreditversicherungs A.G. --
is not authorized to guarantee credits to a state
still unrecognized by ;Vest Germany. In the absence
of these facilities, West German businessmen have to
a considerable extent been financing their own
exports to East Germany, and by the beginning of
1967 private unguaranteed credits in IZT were
estimated at more than $75 million. The West
Germans have also established provisions for the
* Gesellschaft zur Finanzierung von Indus trieanlagen
mbH., or GEFI.
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German Audit and Trust Company* to guarantee loans
granted to East German purchasers by West German
suppliers, acting in the same manner as Hermes.
20. Other West German measures taken to encourage
IZT have been (1) to drop the "revocab'_?ity"clause
in export and import licenses and (2) to expand the
quotas for East German deliveries of hard goods
directly competitive with West German products -?
including iron and steel, vehicles, machinery, and
electrical and technical equipment. The West German
government has also ruled that the "value added" tax
applicable in internal trade will be remitted in the
case of East-West German trade.
Prognosis for IZT
22. The West German attempts to liberalize IZT
are intended above all to increase trade. Their
effect depends in part on the ability of the East
Germans to expand their exports but even more on how
much the regime wants to increase trade.
23. It is unlikely that East German exports to
West Germany can increase rapidly in the next few
years. The East Germans have been largely unable
to adjust the production of machinery and equipment,
the items that they are most anxious to export, to the
needs of the West German market. The technology of
most East German machinery is obsolescent by Western
European standards, quality is frequently poor, and
sales and servicing facilities, although improving,
are still inadequate.
24. Although East German deliveries of consumer
goods have risen by about 8 percent a year since 1960,
this growth probably will not continue. Supplies
The--Deutsche Revisions and Treuhand A.G., whose
main function is to audit government accounts.
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available for export are limited by increasing
domestic demand and by the demands of the Soviet
Union and East Germany's other Eastern European
trading partners. Also, the market for these goods
in West Germany tends to be erratic, the East German
distribution and sales system is not well developed,
and most sales must be made at prices averaging about
20 percent below the prices for comparable West
German goods.
25. East German shipments of agricultural products,
particularly grain, have risen sharply in 1966 they
amounted to 27 percent of total East German deliveries,
compared with 10 percent in 1960), but are likely to
level off. The East Germans may still be in a position
to increase these exports substantially, but a con-
tinued rapid rise in West German imports of agri-
cultural commodities would almost surely bring
protests from the other members of the European
Economic Community (EEC), which have already
expressed some concern that IZT is being used as a
means of evading the common external tariff.
26. With the successive removal of specific East
German objections to the IZT Agreement, the East
Germans have shifted their ground to new, more openly
political issues. In pressing their claims for com-
pensation for the elimination of petroleum subsidies
in 1964 and for payment of postal and other service
charges, claims which the West Germans have already
accepted in principle, they have attempted to upgrade
the political level of negotiations. Thus East
Germany has refused West German offers of com-
pensation for the petroleum subsidies because the
offers were made within the existing IZT framework --
the "currency area" formula. East Germany also has
insisted on bypassing the special IZT "trustee's"
office in the negotiations over the amount of future
service payments. The West German Ministries of
Post and Telecommunications and Transport have
already addressed unprecedented communications to
their East German opposite numbers proposing technical-
level discussions on the service payments issue.
The East Germans have rejected these communications,
implying that the discussions must be at the minis-
terial level. Since even partial payment of these
compensation claims would eliminate or substantially
reduce East Germany's current IZT deficit -- a major
obstacle to further increases in trade -- the West
Germans probably will accede to the East German
demands.
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27. The ultimate aim of East German IZT policy
is to transform tile special relationship embodied
in the current institution of East-Hest German trade
into normal foreign trade and if possible to replace
the Berlin Agreement with a true government-to-
government trade agreement. For this political gain
they would have to pay a price, because such an
agreement would entail significant economic losses
for East Germany. Since IZT is treated as internal
trade by West Germany, East German goods enjoy
tariff-free treatment, making them more competitive
on the West German market than elsewiiexre . A govern-
ment-to-government agreement would transform East-
West German trade into ordinary foreign trade, and
the tariffs that apply to West German imports from
other markets would have to be imposed on imports
from East Germany. West Germany's other trading
partners, particularly those in the EEC, clearly
would be unwilling to continue Line special exemptions
for IZT that were included in the General Agreement
on Tarifis and Trade (GATT) and the Treaty of Rome.
If IZT were to be conducted under the same competitive
conditions as West German trade with the rest of the
world, East Germany's current difficulties in expanding
exports in competition with West Germany's other
trading partners, particularly with those in the Free
World, would be substantially increased. Under these
circumstances it would be difficult for the East
Germans to maintain even their current level of
exports, and IZT might even fall. Clearly, the
East Germans consider a decline in IZT a small
price to pay for the recognition inherent in a
government-to-government agreement; such a decline,
however, is precisely what tiie West Germans are
attempting to prevent.
28. It is unlikely that tile Berlin Agreement
will be replaced in the near future by a government-
to-government agreement. Although All-German Affairs
Minister Weisner and possibly Foreign Minister Brandt
may personally favor an agreement of that sort,
Chancellor Kiesinger and the CDU (Christian Democratic
Union) generally would probably. be unwilling to
accept such a degree of recognition for East Germany
at this time. Tile East Germans, however, will
continue to press for a government-to-government
agreement that would amount to de facto recognition.
They are perfectly willing to allow IZT to stagnate
if, they feel that standing pat will bring them
closer to their goal. Not unless they are convinced
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that no further political gains in IZT are possible
will they attempt to maximize the economic gains
to be had from increased trade with West Germany.
29. The significance of recent developments in
IZT must be evaluated in the broader context of West
Germany's policies toward Eastern Europe as a whole,
as well as in terms of East-West German contacts.
Extending de facto recognition to East Germany in
the economic sphere would undoubtedly assist the
efforts of the Bonn government to improve relations,
and trade, with the rest of Eastern Europe. West
German trade with Eastern Europe (excluding IZT) has
risen at an annual rate of more than 10 percent since
1960, and Eastern Europe is still regarded by most
West German businessmen as an untapped market. Ilost
of these countries have clearly indicated their
interest in increased contacts with West Germany,
and only strenuous Soviet and East German political
pressure has prevented Czechoslovakia, ilungary, and
Bulgaria from following the Rumanian example and
establishing full diplomatic relations with 3onn.
De facto recognition of East Germany in trade
relations with West Germany would reduce the political
pressure that the Ulbriciit regime could bring to bear
on its Warsaw Pact allies, and mig,it trigger tile
long-sought breakthrough in ;Vest German Os trio Zi t zk .
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