INTERNATIONAL ECONOMIC POLICY: EUROPE, NORTH AMERICA, LATIN AMERICA

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP88-01315R000200110001-3
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 100
• Document Creation Date: December 16, 2016
• Document Release Date: September 15, 2004
• Sequence Number: 1
• Publication Date: January 1, 1972
• Content Type: PAPER

International j Papers from The Chicago
I App~Ia104/,.19~131~8-03'N~F212~~q~P~001-3
Conference Relations
Europe,
North America,
Latin America
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Cover: Reproduction of the Silver Joachimsthaler, a Sixteenth
Century Bohemian coin, fbrerunnc'r of the silver dollar.
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International
Economic Policy:
Europe,
North America,
Latin America
Papers from the 1972
Atlantic Conference
at Macuto. Venezuela
November 9-12. 1972
The Chicago Council
on Foreign Relations
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Copyright ?1973
Chicago Council on Foreign Relations
116 South Michigan Avenue
Chicago, Illinois 60603
Printed in the U.S.A.
The objective of the Chicago Council on Foreign Relations is to
promote, by all appropriate educational means, public under-
standing of the foreign policy of the United States and world
affairs to the end that our citizens of all ages may more
effectively perform their duties of citizenship.
The Council is a non-profit, non-partisan organization which
seeks to present a discussion of major foreign policy issues
through publications, speakers, seminars or conferences.
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Introduction 5
by Senator Frank Church and
Senator Charles McG Mathias, Jr.
International Economic Peacekeeping: 9
A Sphere of Influence World or a
Multilateral World
By Harald B. Malmgren
What is the Political and Economic Role 35
of Europe in the Wake of the
Nixon Economic Measures of 1971?
By Gian Paolo Casadio
Latin America and the New 55
Relationships Between the Big Powers
By Rodrigo Botero
The Multinational Corporation 73
Paths, Pitfalls and Politics Ahead
By John Diebold
Conference Participants 97
Acknowledgments 100
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introduction
Senator Frank Church and
Senator Charles McC Mathias
The four papers included in this volume were prepared for and
discussed at the second meeting of the Atlantic Conference which
took place at Macuto, Venezuela from November 9 through 12,
1972. This meeting brought together fifty leaders from Europe,
North America and Latin America for a private, off-the-record
discussion of the subject "International Economic Policy:
Europe, North America and Latin America."
The 1972 meeting of the Atlantic Conference continued the
series initiated in the autumn of 1970, when a group of forty
European, North American and Latin American leaders met at
Dorado Beach, Puerto Rico to discuss the subject of "The Role of
the United States in the World."
The Atlantic Conference meetings focus on the common
problems of the Western World shared by the three continents.
The title of the series Atlantic Conference is designed to
emphasize that these are meetings of leaders from the major
nations of the Western World, not simply the United States and
Europe, or United States and Latin America. The Conference
meets every two years and discusses a specific subject of special
relevance to all three continents. The series is now organized and
administered by the Chicago Council on Foreign Relations in
cooperation with an International Steering Committee.
The site of the meetings alternates between North America,
Europe and Latin America. All discussions at Atlantic Conference
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meetings formal conclusions.
By 1972, international economic issues had become among the
most divisive foreign policy issues in the Western World. The
measures taken by the Nixon administration in August of 1971,
followed by the Smithsonian agreement, focused attention on the
fundamental re-alignment that has taken place in world com-
mercial and financial arrangements. Well before the subsequent
devaluation of the American dollar in February 1973, inter-
national economic policy had moved to the front rank of
American foreign policy issues. As a result, the subject for
discussion at the 1972 Atlantic Conference meeting centered on
three themes:
1 The revision of the international economic system must include
new attitudes of common interest and complementarity among
all nations concerned. In monetary relations, this shift is
heralded by the change from a Group of Ten nations to a Group
of Twenty, including representatives of nine developing countries.
In trade relations, this shift is reflected by increasing sensitivity
that the next round of negotiations must pay far greater attention
than before to the interests of developing nations, and especially
to the need for greater access for developing country products to
the markets of the industrial countries.
2 The growth of the multinational corporation in all its forms is
raising issues of profound significance and much complexity. In
the past, concern about the functions, operations, and control of
these corporations was largely centered in the industrial countries.
Today, however, the role of these corporations in areas like Latin
America is coming increasingly under scrutiny. The conference
participants discussed many alternatives, but in general they
-agreed on the need to reconcile potentially different interests as
between host countries and the multinational corporations
themselves.
3 The pursuit of development by Latin American nations continues
to include major issues and concerns about relations with the out-
side world, including both Europe and the United States. Of the
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selves will define their interests more assertively, as each
one acts to define acceptable beneficial relations with out-
side countries while pursuing its development goals. West
European states, as well as the United States, can and should be
involved, though the means are yet to be developed.
These three themes were pursued in the four conference papers:
I International Economic Peacekeeping: A Sphere of Influence
World or a Multilateral World.
2 What is the Political and Economic Role of Europe in the Wake
of the Nixon Economic Measures of 1971?
3 The Multinational Corporation: Paths, Pitfalls and Politics
Ahead.
4 Latin America and the New Relationships Between the Big
Powers.
Discussions at this Atlantic Conference, as in November of
1970, reflected the fact that the larger Latin American countries
are playing an increasingly greater role as members of the Atlantic
Community. While Europe's role outside of Europe would
continue to be a secondary one, discussions indicated that this
role can still be important. As international economic issues come
to the fore, the question of Europe's relations with Africa also
takes on increasing importance for Latin American countries.
The subject provoking the most spirited discussion at this year's
meeting of the Atlantic Conference was the role of multinational
corporations. In part this was so because a number of Conference
participants will be actively involved in the work of the
newly-established Sub-Committee on the Multinational Corpora-
tion of the U.S. Senate Foreign Relations Committee.
Once again, the Atlantic Conference provided an opportunity
for a completely private and frank discussion of questions relating
to the central issues of American foreign policy. It is clear that
our Latin American and Canadian friends are apprehensive both
about protectionist trends in the United States and about the
possibility that the United States will adopt a policy of aggressive
economic nationalism. There was general sympathy with the U.S.
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but there was also apprehension that American leaders might
yield to the temptation to abandon multilateralism in favor of
making unilateral decisions, irrespective of their consequences in
Europe, Canada and Latin America.
As the attached list of Conference Participants indicates
(appearing at the end of the volume), the meeting in 1972 again
included people of broad experience in both domestic and
international affairs. The elections in France and Germany
reduced participation from those countries this year, but we
continued to include a broad representation of leaders in
government, politics, education, business, finance and the media
from the three continents. For some of this year's participants
this was their first opportunity to meet leaders from other
continents and engage in serious discussions. For others, it
represented on opportunity to continue the discussion begun two
years ago. As Co-Chainnen of the Conference, we are gratified by
the response of busy men of affairs to the Conference. We are
pleased that plans are now firmly established to continue the
Conference on a regular basis under the auspices of the Chicago
Council on Foreign Relations. We are also pleased to make
possible in this volume a broader dissemination of the excellent
papers discussed at the 1972 meeting.
We want to express our thanks to the International Steering
Committee of the Atlantic Conference, to the Chicago Council on
Foreign Relations, to its President, Mr. Richard A. Hoefs. We
want to express our special thanks to the principal organizer of
the Conference, Mr. John E. Rielly, Executive Director of the
Chicago Council on Foreign Relations. Finally we want to thank
the distinguished authors of the papers included in this volume,
and the institutions (listed at the end of the volume) which
contributed financial support for the meeting and for this
publication.
Senator Frank Church
Senator Charles McC. Mathias
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n erna iona conomic
Peacekeeping: A Sphere
of Influence World
or a Multilateral World
Harald B. Malmgren'
Politicians in many countries face every day arguments for greater
national self-reliance, and counterarguments for greater involve-
ment in regional and world markets.
In Europe there are fears of investment and technological
domination by le deft Americain, and fears of imports from Japan
and East Asia. In Canada, the fear of being swallowed up by the
neighbor to the south - culturally as well as financially - is
perhaps even more politically potent. In Japan, policies of
industry and government are conditioned by apprehensions over
the effects of foreign investment on the economic system. In the
United States, there is growing fear of job loss through
investment overseas and through imports which are seen to
displace domestically produced goods. In East and Southeast
Asia, sensitivities are high to the increasing presence of Japan, not
only as primary market but also as investor, producer, manager,
and trader in the region. In Latin America, fears of domination
from the north and too much reliance on world market forces
have existed for decades. And among most of the developing
countries around the world, there is a mood of anxiety induced
by seemingly capricious international market forces and
exploitive practices of traders and investors from the rich,
industrialized countries.
These concerns are amplified by the uncertain evolution of the
composition and balance of political power. On the one hand, the
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Their powers partially neutralized, they find themselves
competing on even terms with lesser military powers in world
technology and markets. On the other hand, less powerful
countries grow ambitious for influence and aggressive in
defending what they perceive to be their national character. The
weakest countries, while struggling for economic survival, are
nonetheless increasingly conscious of their ability to disturb the
power balance locally as it suits them, while the bigger powers
rind themselves less and less able to intervene directly or
indirectly. The penalties and rewards once set by the nations
which provided world political leadership are now often seen to
be vague threats and promises. The incentive to conform to a
particular system of rules and practices laid down by another
nation appears to be weak.
Many of these considerations lead to proposals for increased
autonomy and self-reliance, by placing external considerations
very far into the background of national decision-making, or by
pursuing mercantilistic policies aimed at increasing national
power at the expense of other nations. A degree of isolationism
or protectionism is latent in all countries, and is easily brought
out of dormancy and invigorated by such thoughts.
But working against a spread of nationalism and economic
isolationism is another set of forces beyond the control of
national governments. Economists have described these other
forces as the growth of economic interdependence. Trade in
recent years has been growing much faster than the growth in
national incomes. Transportation costs have been reduced and
communication channels drastically improved. The movement of
goods and capital is easier, more rapid, and more responsive to
changes in worldwide opportunities than ever before. Economies
have become interdependent at the level of investment and trade
in specific sectors, as well as at the general level of monetary and
fiscal policies aimed at slowing or accelerating whole economies.
Interdependence is now felt even in areas like consumer standards
or pollution control, where the requirements of one government
can affect the position of sellers in other countries who either
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Perhaps the most visible form of interdependence recently has
been the influence of international capital flows on national
economies. It is no longer a matter of slight disturbances to
domestic monetary policies which nations are likely to suffer.
Now international capital flows can force significant changes in
policy and in the relationship of an economy to the rest of the
world. As suggested in a recent issue of The Economist (Sept. 30,
1972), the story is one of growth from ripple to tidal wave:
In March, 1961, as funds moved out of sterling in order to try to
find the next uprating currency after the first revaluation of the
D-mark, it was possible for a responsible financial observer to
write with horror of the day when `on March 6th alone, $180m
poured into Switzerland.' This sent the world's central bankers
into the huddle that produced the first postwar central bankers
swap arrangements at Basle ... By 1962 $900m flowed out of
Canadian dollars in four days.
By this summer it was possible to see $2.6 billion move out of
sterling in six days (the bulk of it in just three days) and then $6
billion out of dollars in just over 13 days (at least half of the total
moving in one hour on June 23rd and in two days before the
meetings of the EEC finance ministers in London).
These forces of interdependence present a dilemma: On the one
hand, the possibility that action (or inaction) by another
government can create adjustment problems for a politician may
lead him to devise means of insulating his economy from these
uncontrolled external forces. On the other hand, the inter-
dependence effects are becoming so large as to defy the dikes of
protectionist policies, suggesting a need to design policies which
allow the economy to adjust to changing external conditions and
to exploit rather than fight the new forces. What should one do?
Should the political leader orient his country towards greater
self-sufficiency and self-reliance, or towards increased trade and
investment relations with the rest of the world?
Some economists argue that there can only be one answer: The
need to improve economic welfare in each nation dictates policies
which lead to more efficient use of resources. This in turn means
that the international division of labor must be exploited through
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ra a an investment activities. a nation must, in other wor s, -
be outward-looking and export-minded in order to insure that the
benefits of specialization and the pressures of competition are
available to the home economy.
In developing this theme, businessmen as well as economists
sometimes put forward an additional thesis that the benefits of
specialization and competition depend upon economies of scale.
The national markets are often too small, they say, to provide
these benefits, and so nations must find others with which they
may associate in developing regional zones of free (or freer) trade.
This latter thought has become a commonplace, an obvious truth,
in the press as well as in the political rhetoric in some countries.
But is it so obviously true? After all, Japan has grown faster
economically than any other country (about twice as fast as the
other developed countries), and its growth has been sustained at
relatively high levels even when domestic or foreign circumstances
have turned adverse. Japan traded, but it did not join regional
customs unions or free trade areas. Even the degree of penetra-
tion of foreign investment was minimized without damage to its
technological and industrialization drive. Among the developing
countries, some have tied themselves through special trading
arrangements to one or more developed countries, while others
have sought relief from their economic predicament in the
formation of free trade arrangements on a regional, intra-
developing world basis (and even more recently on a non-regional
basis encompassing a large number of developing countries that
are historically or geographically unrelated). Yet those developing
countries which have been most successful in promoting exports
of manufactures and using trade as an engine of growth did not
rely on special arrangements either with developed countries or
other developing countries.
Even among economists there is rarely a consensus. When the
prospect of British entry into the European Community became
close, a large number of prominent British economists signed a
letter to The Times endorsing entry as the only sound economic
solution to Britain's difficulties. This generated an opposite
response from a nearly equal number of other prominent British
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economic s, ea ing outsiders to cone u e t a economic s a
little more than anyone else to contribute to the intricate debate.
The fears and apprehensions, the arguments in favor of
inward-looking or outward-looking policies, are not solely
academic matters or material for the dreams of visionaries.
Nations are taking positions. Some are becoming more pro-
tectionist; some are going beyond this to a kind of neo-
mercantilism. Others are joining together in special trading
arrangements and developing specific economic links in their
decision-making processes.
The most important development, in terms of the scope of its
effects on the rest of the world, has been the emergence and
growth of the European Community and its association with
other countries. The enlarged Community, of what now looks
like nine members will be larger than the United States in
population as well as in trade, and will approach it in GNP. But
this aspect of the Community is only part of its impact on the
world. In addition, the Community has developed special trade
and other economic relationships with the other European
countries (the remaining EFTA countries), with most of the
Mediterranean countries, with most of Africa, and with selected
other countries, including the Caribbean region.
It has been argued by Europeans that the effects of these special
relationships are not as great as they appear. American investment
in Europe dilutes the exclusiveness of the arrangements. The
discriminatory trading arrangements with Africa and the Mediter-
ranean scarcely have an effect on the trade of the United States
and other countries in other parts of the world. Occasionally,
perhaps, harm is done to an export of significance to American
interests, or to the interests of other third countries - as has
happened with citrus. But in these cases, Community officials
chastise American officials for expressing any concern at all over
such minor products, in the face of the broader political and
economic dimensions of these emerging relationships.
These special arrangements gave impetus from the simple fact
that, as one nation gains discriminatory terms of access, other
nations are thereby harmed unless they, too, are given compar-
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geographic region tends to be politically inevitable once particular
agreements have been reached. Until recently, however, the
Community took the position that there was no larger design
behind these trade arrangements, and that they were solely a
response to particular problems of an exceptional character. Now
that the arrangements have become so numerous and far-flung,
new arguments have been put forward about the natural political
relationship of Europe to its Mediterranean flank, and the natural
historical relationship of Europe to its former colonies and
dependencies in Africa. A proposal for a full-blown Mediter-
ranean policy was put forward by the Commission to the EC
Council of Ministers in early October, 1972, acknowledging the
need for harmonization of the variety of special arrangements in
the region with a view to an overall political-economic design.
In some of my other papers and speeches, I have dubbed this
emerging array of groupings and discriminatory arrangements the
"Eurobloc." What are the present and potential effects of the
Eurobloc? One effect is already clear. In the international
institutions, particularly the GA'T'T', most of these countries tend
to go along with, or at least not balk, the wishes of the major EC
member nations. When they are negotiating for special terms of
access, they certainly dare not stand in the way of any of the
member countries on other questions. When they are once in a
special arrangement, they prefer not to take positions inter-
nationally which might throw into question their own arrange-
ments. What this boils down to is that more than fifty countries
tend to position themselves together unless there is a major effort
by other countries to loosen the coalition in particular cases.
Therefore, the political effect of the Eurobloc is already very
large, changing the groundrules for the other great powers as well
as for the smaller countries.
It is not enough to say that there is no political coordination
within the Community itself, much less within the whole of the
Eurobloc. That may be true. But power without recognition of
power is perhaps more dangerous than power that is recognized
and managed. The Eurobloc system operates by its own ever-
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f g ru es and p creating
the world.
What does another nation do? Does it join? Does it step up
investment from within, to exploit the long-term possibilities
within the boundaries of the exclusive club of nations? Does it
attack the elements of discrimination in favor of a more open
worldwide economic relationship, cognizant that this will create
new problems of economic adjustment at home? Does it
withdraw to isolationism and protectionism?
These types of questions arise on a far lesser scale with
groupings of developing countries, such as the Central American
Common Market and the more recent Andean group, the Latin
American Free Trade Association, and the Association of
Southeast Asian Nations. Yet even in these cases a degree of
increased political and economic leverage can be generated by
coordinated efforts not only internally among the countries
concerned but also externally in relations with other countries of
the world.
If we add to all these thoughts the re-emergence of China on the
world scene, the rapid growth of economic relations with the
USSR and Eastern Europe, and shifts in relative positions of
nations like Japan and some of the more economically dynamic
developing countries, the pattern of international relationships
becomes murky. In this ambiguous situation new alignments are
emerging without any clear, underlying pattern to them. Whether
we look at the economic pull of Japan on the Asian-Pacific or the
formal agreements which constitute the Eurobloc, we can
recognize the development of new "spheres of influence." But
the nature of that influence is not easily fixed and defined once
for all time.
What are the consequences? In the postwar world dominated by
the economic and political leadership of the United States, the
international "system" was structured and fairly orderly. The
United States often initiated or promoted actions which im-
proved the operations of the Western economies and which led to
greater interdependence without excessive political cost. There
was, in effect, an economic as well as a political-security
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16 coalition, in which the United States set the groundrules and
stood ready to ease frictions when they occurred. This was
rational from the United States point of view. If there is a
dominant party in a coalition, it must be prepared to act as
provider of benefits to other members of the coalition, especially
the smaller ones, if they in turn are to have an incentive to
continue to be members and work within the framework set by
the dominant party.
The United States leadership was manifested not only in day to
day practices but also in the provisions of the international
economic rules. The postwar institutions - the IMF, the GATT,
the EPU and the OEEC - were more the creatures of American
drafting than of proposals by any other country. Critical to the
whole formal structure was the principle of nondiscrimination. In
the trade field this took the form of the famous principle of Most
Favored Nation (MFN) treatment. Under this principle the most
favorable terms of access provided one country through negotia-
tions were to be made available automatically to all other
countries (or at least all other members of the organization
governed by this principle). This principle was, and is, important
to United States interests. Since the United States has trade,
investment, and other economic interests throughout the world,
it is in its self interest to seek the widest possible conformity to
nondiscriminatory rules. But this by no means is the only reason
for the American attraction to the MFN principle. Taking into
account its political-security interests throughout the world, at
least in the postwar decades, the United States had strong reasons
to insist that smaller nations be given equal access to the benefits
of the economic system, or at least that they did not suffer active
discrimination. This was not simple altruism. Countries which had
equal opportunities were believed to be less likely to go wrong
politically. If they were not discriminated against, they were not
likely to threaten the system or disturb orderly economic
relations within it, and in turn less likely to draw in the United
States in a security role. At home, it was well understood that the
cut and thrust of American politics would lead to discrimination
against many countries which somehow thwarted one or another
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American interest, unless there were a rule o nondiscrimination.
The rule became important in constraining Americans themselves
from doing things which would in the end be harmful politically
as well as economically.
The postwar monetary and trading systems have, as we all
know, fallen into need of repair. The rules are sometimes no
longer relevant; sometimes they are ignored; and sometimes there
is no rule or procedure for detailing with what has become a
disruptive practice. It would appear that international negotiation
for improvement of the monetary system is now under way, and
that comprehensive trade negotiations can begin in the latter half
of 1973. In theory, then, the systems will be modernized or
altered to provide a better framework within which economic
affairs will be conducted.
However, this reform of the system will take time. In the
interim, the rules of the past are seen to be useful only insofar as
adherence to them is convenient for the individual nation. There
is an incentive to act outside the accepted framework if one can
get away with it. Since even the basic principle of MFN treatment
has been eroded by proliferation of discriminatory trading
arrangements among other countries, it can be said candidly that
the chance is small that penalties will be applied to countries
breaching rules which other countries already ignore. Of course,
the rules were not always followed in the past. But they did, even
in those cases, provide an objective towards which national
policies might aim, and a measure of performance which other
countries might employ in nudging a difficult country along a
path of greater international economic cooperation. Now, the
pendulum has swung back and the incentive to act unilaterally is
greater, in the absence of credible penalties for doing so.
Moreover, in the negotiation of reforms nations may find the
job of drafting new rules and procedures to be far more difficult
than in the early 1940's, when the United States and the United
Kingdom did most of the work and solved most of the problems
between them. Now we must face the fact that power is no longer
concentrated politically or economically - or that where it is, it
is not capable of being fully used because of the overall
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18 military -security standoff. There are several economic super-
powers, some already powerful, others becoming so over the next
several years. And even those countries with relatively small
economic strength have the opportunity to influence the balance
of interest by working together to develop common political
positions in international bargaining (such as in the C-20). They
too must now be weighed in judging who has power over whom.
In this new context, the discovery of common rules which suit
the needs of many different kinds of nations will not be easy.
We face then a period of uncertainty. It is a time when disorder
can arise rather easily. One country's actions can disturb another
country's interest even without intention, yet the consequence
may be to initiate a chain reaction among several nations as
countries jockey to neutralize the effects of the first country's
actions, or to build up defenses against future actions of the same
type. Whether a government responds to the international
uncertainties and potential disruptiveness of the specific
countries' policies by turning inward or by becoming aggressively
mercantilistic, the result is adverse. More disturbances and
uncertainties are introduced. If in such a world one of the
superpowers begins to act in an unconstrained manner, the threat
to stability in the system becomes many times as great. The sheer
mass of the superpowers' practices day to day provides a certain
degree of stability and predictability in the system, which
benefits little powers and big powers alike. What this means is
that a superpower cannot take unilateral actions to relieve itself
of particular frustrations without threatening the stability of the
system as a whole, and the welfare of smaller countries.
On the other hand, if the system does not function to facilitate
international commerce and minimize frictions, and if it does not
provide means for smooth adjustment in the face of changing
economic circumstances, sooner or later the more powerful
countries will need to break out of a pattern which prevents them
from adjusting to their own internal economic needs. Indeed, if
the international mechanisms for adjustment are not responsive
and fair, the situation will not be sustainable. It may then take
the shock of large-scale disruption to force governments to
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con-
scious agreement. This was the result of the actions by the United
States in August, 1971. The effect has been salutary in this case,
and the process of negotiating reforms has begun. But the same
type of shock could not be experienced too many times without
destroying what remains of international economic cooperation.
What does a government do in this world of changing
alignments, growing economic interdependence, and resurgent
economic nationalism? Does it draw inward, or become more
involved with other countries in the shaping of economic and
political events? If the latter, is the best route through joining a
limited club or through active participation in a global, multi-
lateral system of rules, procedures, and economic activities?
Even if we can answer such questions from the point of view of
a particular country, we may not come up with the right answers
for the world as a whole. The advantage to a particular nation
may appear to lie in exploitation of the international divisions for
its own purposes. But if all nations act in the same way, the
ensuing policy conflicts can only lead to frustration for all, and
deterioration in world economic activity. Yet we must also be
practical. What is good for the world as a whole may not appear
directly relevant to or even consistent with political imperatives
within each country. Can national interests and aspirations be
reconciled with international needs in a way that is meaningful in
domestic political debate?
These are difficult questions. There are no simple answers.
Governments must do what political circumstances dictate, and
these circumstances will inevitably vary from one nation to
another. Moreover, the economic situation is different in every
country. What is economically sound for one may be unsound for
another.
If we accept this inherent variety in national circumstances and
objectives, we can still make some judgments about what is
needed internationally to minimize fractions between countries,
and to provide the greatest chance for mutual prosperity. In other
words, we can make judgments about the best methods of
managing the international economy, even if our respective views
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on right policies or in ivi ual nations i er.
One way of beginning to rethink the problems is to consider
what it is that governments do. Governments exist to control a
certain number of forces which would otherwise pit man against
man, and to provide a means of coordinating individual effort to
maximize collective gain. In doing these things, governments try
to routinize human and institutional relations to a degree
sufficient to provide regularity and predictability within the area
being governed. In developing its administrative control, a
government becomes jealous of its sovereignty over activities
within its jurisdiction, because it wishes to maintain stability and
control. Even if a government is committed to maximum liberty
for the individual, it must provide some control to ensure that
acts of freedom do not result in internal conflicts.
If external forces seem to disturb internal decisions, govern.
rnents may look for ways to insulate these internal matters from
foreign pressure. If the government finds its economy becoming
significantly dependent on relations with the rest of the world, it
will seek to moderate the potential damages of changes in
international circumstances. It can do this by seeking to negotiate
some agreements with other countries which provide rules of the
game, or it can adopt policies to favor and provide greater
security for those involved domestically in international activity.
This in effect extends government control to external activities.
Whether selectively or generally applied, the objective will be to
reduce uncertainty in decision-making to acceptable levels.
The direction (bilateral, regional, multilateral) and form of
government intervention can and does vary with the nature of the
problem. If the country concerned has a problem resulting from
wide fluctuation in demand for its exports of a particular primary
product, and that product is its sole or main means of earning
foreign exchange, the government will naturally seek to engage
other governments in discussions about the problem of instability
for the commodity in question. Another country may be
unconcerned with this particular primary product, but highly
concerned about pressures for control of its exports of manu-
factures to one or more key markets. It may in this case seek to
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 Aperoved Fog ave e appliied2some 1 nternat onaally agrr88n-9ormula un Qer mulci0001-3
lateral rules, so as to avoid discrimination. Yet it may well fail in
that aim and have to content itself with a bilateral agreement
providing at least some degree of protection for its country's
interests.
Countries with a high proportion of trade, investment, and
financial activity that is.generated externally may choose between
reliance on general multilateral rules or reliance on special
arrangements with other countries most closely tied to them
through economic activity. If there are also historical or cultural
reasons for developing special relationships, the economic reasons
may be conditioned in the direction of a regional free trade
arrangement.
When a government moves in this direction, its thinking will at
least in part be based on the assumption that economic efficiency
will be improved. There will be gains of scale from wider markets
and gains from the new stimulation provided by increased
competition. But note that the new competition is not from
everywhere on everything. It comes, in the case of Europe, from
other countries at a comparable stage of economic development.
It comes on that range of products which are already produced,
consumed, and traded in Europe. In other words, the gains from
scale and competition would be achieved within a context which
was unlikely to create sharp disruption during the transition to
free trade. Moreover, in Europe's case, a large number of rules of
economic behavior were dumped up to insure orderly change, and
harmonization of national policies. The objective was economic
expansion without loss of stability. The new environment was to
be managed and controlled as well. Note also that where major
issues of national political sovereignty were involved - even in
the economic field, such as monetary and fiscal policy -
sovereign powers were related by the member nations. Change in
these more basic elements of government could only come more
slowly and cautiously, if at all, because national practices differ
so much, and because more fundamental elements of a govern-
ment's control of its own situation are involved.
Conditions were right in another respect. For most of the
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actions are important parts of income. But the trade of these
countries is primarily within Europe. About 80 percent of the
trade of Europe is within Europe. So the idea of further
integration in trade was itself easy to accept. Little that was new
or disruptive would be expected.
Then, too, there were the arguments about developing larger
enterprises able to compete with the American giants, and about
developing new technology and new industries that were truly
European in character - not dominated by American capital and
management. This has of course the implication behind it that
control is lost if a foreigner has a significant "piece of the
action" - even though in theory he is subject to local law and
custom in the countries in which he is operating. In other words,
the foreign-owned enterprise has the potential ability to escape
control by moving its activities from the country at will, or by
distorting the accounts. This created uncertainty about the degree
of control a government thinks it has over the economic destiny
of its own country.
The whole process of economic regionalism can be interpreted
as a process of looking for a better way to manage some of the
international economic forces which affect individual nations.
For a certain number of relationships between countries, and for
certain kinds of transactions between them, a new framework of
common rules is established by agreement. Economic adjustment
and reallocation of resources can then take place, but in a
controlled system reasonably well insulated from major economic
shocks which might come outside (from industries or nations in
quite different circumstances and with different cost structures or
technological characteristics). A controlled, stabilized environ-
ment is created, providing stability of expectation on a larger
scale than the national economy. A government's own internal
consideration can then be weighed within an economic context of
controlled, orderly expansion and orderly adjustment.
In a way, we could make an analogy between the formation of a
regional trade bloc and the formation of large businesses. After
all, if our economies functioned perfectly, under the economists'
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3 condition of perfect competition, i wou e ar t
emergence of integrated business activities spanning a wide range
of processes, products, and markets. In fact, the market operates
between enterprises, but within them is a mixed system based on
administrative controls and plans insulated from short-term
market disturbances. The question why this happens was once
put in a most penetrating manner by a British economist, Sir
Dennis Robertson. Why do we find, he asked, "islands of
conscious power in this ocean of unconscious co-operation like
lumps of butter coagulating in a pail of butter-milk?"2 The
practical answer is that, for a certain range of activities, given a
certain degree of management ability, it is economically efficient
to integrate and manage through a system of coordinated
decisions which are sensitive to, but not significantly disturbed
by, outside market conditions.
I use this analogy to open the reader's mind to reexamination of
the basic logic behind international bloc formation. An important
element of that process is the search for an efficient and stable
decision framework which transcends national boundaries, but
which does not open the nation to completely uncertain,
uncontrolled forces of adjustment. There is international
economic interdependence. It has to be dealt with. The problem
is to manage affairs well enough to obtain some of the benefits
while continuing to insulate one's people from too sharp
adjustment difficulties which that interdependence phenomenon
can cause. It is a question of determining the optimum size of an
administrative system in order for a certain number of activities
to be administered. An economic bloc offers flexibility in
answering the question, because it allows nations to coordinate
and jointly administer some activities, but keep others to
themselves. Over time, the scope of what is retained by the
individual member for autonomous action can grow smaller,
and the scope of authority of the bloc's administrative system can
grow larger, providing in this cautious shift of functions a
controlled, stabilized change in the administrative system and in
the matters governed by it.
All this may sound a bit abstract, but it seems to me necessary
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0 ,
o un ers an me t t
l
a
e Fu k , econormc, an a mtnostrattve
logic which is at work behind events. We can then ask ourselves
more intelligently the question raised throughout this paper:
"Should a nation turn inward to self-reliance, outward to blocs,
or outward to an open multilateral system? Where will it rind the
most sophisticated, most useful answer?" The common answer
one gets - that bloc arrangements are based on historical and
political imperatives coupled with the need to obtain economies
of scale - is simply inadequate.
Practically speaking, in trying to answer that question we also
have to recognize that there is already a great deal of economic,
political, and institutional interpenetration among nations. Multi-
national corporations are an obvious case, but there are many
other forms of international activity which transcend national
controls and decisions. Some of these are regional, some are
global. The organized institutional activities which go beyond
national boundaries make up another set of forces which have to
be added to the list of the world's characteristics as I laid out
early in this paper.
So it may be necessary to emphasize what has already been
suggested, that economic bloc formation is a matter of bringing
together selected types of activities or transactions between
nations -- but not all activities.
There are several problems generated by this selective approach
based on a selected group of countries. One is that it tends to
discriminate against other countries, and if successful, can
become a significant source of disturbance to their interests in the
world, and even to their own internal economies. If the grouping
operates in a way which results in economic nationalism or
mercantilism on a larger scale, then all outsiders are in trouble.
This is all too easy an outcome. The process of adjustment within
the bloc becomes a pre-occupation, and external considerations
are given little or no thought. Internal bargaining over concessions
to one another, and over the distribution of common benefits, is
an arduous process. Once agreed, the internal decisions cannot
easily be reopened to take into account complaints from other
countries. Conversely, it is soon discovered that the costs of
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regiona iza ion, o res ructar o c
be at least partially passed on to the rest of the world. (The
European Common Agricultural Policy - CAP - can only be
interpreted as a device for forcing consumers to pay part of the
bill, and forcing other outside nations to pay the rest, keeping
internal government costs to a minimum.)
Thus the economic effects of a bloc can be a source of
disturbance to other nations, and result in discrimination against
them for at least some products with some parts of the world.
This is less a problem in the case of a few developing nations
associating with each other. Since developing-country trade with
one another is small anyway, improvement of business among a
few of them does not affect export interests of other developing
nations very much.
The logic of such developing country groupings is more related
to economic potential over the long run than to concrete
short-run gains from mutual tariff and quota concessions. The
gains are more likely to be significant through coordinated
planning of new investments. This, however, requires significant
political flexibility, for each government to yield potential areas
of activity to other nations without knowing whether long-term
relations will remain secure and friendly. It also raises the
difficult question of how weaker members can prevent exploita-
tion by the stronger ones. Such problems are at the heart of
regional developing country schemes, and have so far been great
enough to stand in the way of meaningful results in most cases.
More thought to such schemes may be warranted, however,
particularly if the developed countries could be persuaded to
provide development assistance designed to promote such
regional integration efforts. Since the quality standards, techno-
logical needs, and commodity composition of demand may be
relatively among them, promotion of larger-scale production and
trade between such developing countries could in the long run
turn out to be easier and less costly than promoting exports of
high quality manufactures from them to developed country
markets.
There remains the question of blocs which encompass countries
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ra-
tions with Africa and the Mediterranean. Here the logical
imperative is not quite the same, but there are some clear
similarities. Governments do seek to stabilize their economic
relations through special, negotiated trade and aid arrangements.
For the developing country concerned, uncertainty about export
markets is substantially reduced. The flow of aid is put on a
planned, agreed basis. Certain other side benefits are provided.
The upshot for a relatively less developed country is that normal
uncertainties of international markets and the normal political
sensitivities and consequent uncertainties of aid relations are
substantially reduced. There is created a stability of expectation
within which the government of the developing country can, in
theory at least, better plan its nation's development.
The problem here is that conditions of access for exports of
other developing countries are left unimproved. Consequently,
there is discrimination against their exports. If we add to this
problem the particular ties to aid flows and technical assistance,
one can only conclude that the long-run economic relationship
will become channeled, through investment patterns, in an
exclusive, bilateral mode. Added on top of these relationships,
unfortunately, are the so-called reverse preferences.
These special arrangements do, of course, ensure a secure source
of raw materials for the developed countries concerned. In that
regard the logic of stabilization and administrative control which
has already been put to work within the mother bloc is extended
selectively to cover certain types of products from the preferred
countries -- but definitely not all the potential export products of
those countries.
However, it is probably not useful to repeat here the old
arguments about discrimination. Instead, we could try to draw
some general conclusions about what is happening in the world,
and what can be done to ensure that these developments generate
some benefits for the world as a whole, or at least do not harm
third countries and create serious new sources of international
disturbance of disruption.
First of all, forms of interpenetration vary from selective,
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government-to-government agreements to large-scale, integration
schemes. There may also be private, institutional relationships at
work at various levels. All of these special relationships are
different from what would exist with a completely open, free
market situation worldwide. They are designed to solve particular
problems by insulating certain activities from other, external
forces, or by controlling these activities within a selectively
negotiated framework of rules or principles.
If such activities are carried out in a framework which
discriminates, as inherently happens, if the solutions are selective
among countries, frictions with other countries are likely to be
generated. If they are carried out intensively so that internal
decisions become complex and difficult to negotiate, there will be
a tendency to ignore external interests, or to exact from external
suppliers whatever prices have to be paid for adjustment, rather
than to face endless internal quarrels over high budgetary
expenditures consequent upon integration.
Association between developed countries and small developing
nations is likely to pit strong partners against weak ones, without
the checks and balances of alternative competition. This is a
formula for exploitation. It can lead to political resentment
eventually.
But there are also clear economic benefits from integration in
some cases. These should not be ruled out. The problem is how to
reconcile formation of blocs, or the negotiation of selective
solutions, with a reasonably stable, liberal world economic
system.
How do we reconcile diversity of approach? If selective action
tends to work in the direction of pushing adjustment costs onto
other countries, of "bumping" other countries, then how can we
constrain that bumping effect?
There are no simple answers, but in general it ought to be clear
that there is need for more general rules applying to all countries
and groups of countries, and selective agreements among
countries. Such general rules should provide a framework for
keeping economic peace in the presence of a shifting pattern of
economic relations and consequent political realignments. As in
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ou
of global nondiscrimination, applicable as widely as possible
among the various groupings. But it should also be a system
which helps solve specific problems quickly as they arise, and
which provides a stable global economic environment. The
uncertainty of world markets should be reduced, insofar as that
uncertainty is generated by nationalistic or regionally mercan-
tilstic policies.
Doing this will require at least two things. It will require
negotiation of freer trade conditions throughout the world as a
whole, cutting the potential margin for discrimination. It will
require negotiation of improved multilateral procedures for
handling national decisions which have the effect of disturbing
the economies or trading opportunities of other countries. In a
fluid situation of the type we now face, this will require better
mechanisms for international consultation, and a more or less
continuous negotiating process which changes the international
rules in an evolutionary, but responsive way. The process of
negotiation is itself as important as the end results in whatever
liberalization is achieved.
The problem right now is to get this larger, global process of
negotiating going, and to convince the various countries that it is
essential for the long-term security of their world markets that
they take part.
If a better multilateral system of rules and procedures can be
put into operation - one which reduces the bumping of one
nation by another - several problems will be solved. In particular,
the government of a smaller, less developed nation will face a
more stable or more predictable market situation on which to
base judgments about its internal economic policies and its
import and export policies. The more stable the environment, the
less need there is for that smaller, weaker nation to be defensive
and to seek self-reliance, and the easier it will become for that
nation to exploit the benefits of an international division of labor
without fear of external influences or domination.
As for the biggest bloc, the European Community, an external
framework that actually sets boundaries to its own actions would
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To develop a better international system through negotiation
will require a greater sense of collective responsibility on the part
of all countries. That may be the hardest requirement of all.
But in the absence of a sound, benign multilateral framework,
intensified competition based on self-reliance and protectionism,
or on exclusive bloc formation, can be the only alternatives.
Those routes do offer, for a limited range of activities over a
defined area, a controlled environment for planning investment,
technological change, and the elements of national welfare.
Governments cannot ignore the problem of controlling the
economic environment sufficiently to promote the welfare of
their peoples.
It could be argued against the "internationalist" approach that
sound industrial or agricultural policy in a country or in a
geographic region cannot be effective if there is any openness to
the rest of the world. It is sometimes said that as governments
become increasingly responsible for employment levels, inflation
rates, and income distribution, that the international system must
be considered a threat to effective management of local interests.
Such an argument cannot any longer be realistically made in
that simplistic form. As noted earlier, economic interdependence
has already become far too great; reversing it would itself cause
economic disruption to the countries attempting it. The problem
is to balance the solution of domestic problems through domestic
actions against the reactions each possible solution might en-
gender externally.
If there were a framework of rules and procedures that worked,
and a sense of collective responsibility for keeping economic
peace, then this would not be so very difficult. In fact, if the
international monetary and trade systems both worked well,
there would be even greater freedom to take appropriate
domestic actions. If for example the British economy had not
been hostage to the ups and downs of the British balance of
payments for so long, internal development might have taken a
much more favorable, consistent course. As it was, British
governments were constrained by the absence of a really effective
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stresses. As differences develop in the rate of growth, inflation,
and unemployment among countries, and governments undertake
differing policies to deal with their particular circumstances,
tensions and policy conflicts inevitably arise. A sound adjustment
system should automatically deal with these stresses, whether
through exchange rate adjustments, financial or reserve arrange-
ments, or through a variety of measures of a more selective
character affecting the internal economy or certain parts of the
balance of payments structure. In the context of an effective
adjustment system, national interests could be pursued more
"safely," in terms of the external situation. Collective responsi-
bility does not rule out greater freedom of action for
governments.
In other words, freedom to develop along certain lines
internally, whether nationally or within the scope of an economic
region, requires limitations on that action, so that the system as a
whole may provide a stable basis on which free action may take
place. National decisions, and the decisions of blocs, have to be
channeled. The bumping of one nation by another's decisions
must be subject to clearly perceived restraints. There have to be
international rules of the road and procedures for consultation to
avoid periodic collisions.
This requirement for a system of perceptible, effective restraints
would benefit the major powers and ease the political-economic
stresses generated between them. But it would be even more
valuable to the less strong nations. They have far less leverage in
protecting their own interests. Their high dependence on
external forces, including the growth of incomes in the rich
countries, makes them especially vulnerable to the transfer of
economic shocks generated by the great powers. Conversely, if
the international system allowed, and even encouraged, efficient
adjustment of economies one to another, and efficient adjust-
ment of resource allocation and utilization, the poorer countries
could only be better off in the long run. Among their major
problems are the resistance to adjustment in particular sectors of
the markets of the rich countries to make way for the exports of
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 Approved
Fo devveloping 2004/) 0/JP d'
countries to make larger amounts of financial assistance available
because of balance of payments constraints.
Over the longer run all countries will be adjusting structurally,
in relation to population, resources, technology, national income
aspiration, and social objectives. The international mechanisms
should facilitate desired change, not impede it. And as they
adjust and grow economically, nations will extend their
spheres of governmental influence to include formalized relation-
ships with other nations, in order to stabilize relationships that
result from changing forms of interdependence. The system must
allow this too. We cannot judge now whether such selective
international relationships are bad for the countries concerned.
On the contrary, such extension of relationships on a formalized
basis may well lead to more sensible, less nationalistic policies
among them. Diversity of approach is an inherent characteristic
of a changing world of different kinds of economies and relative
differences in political and economic power.
A sphere of influence world is already with us. Some of the
influence is formal, some informal; some of it is selective, some of
it more general. It is not a matter of choice between what exists
and pure multilateralism, but rather of building a multilateral
system which permits peaceful and productive relations among
the diverse approaches and instruments used around the world.
Today we are faced with a world in which the patterns of
international relations are shifting and ambiguous, and the
international rules and institutions are ineffective. System and
order can no longer be imposed by a dominant power, because
there is no single dominant power now. When countries deal with
these difficulties by regional arrangements, they tend to forget
that more general arrangements may have to be developed within
which the regional solutions can function.
The Eurobloc phenomenon is now the most critical factor in
the balance. Ranging from Ireland to Israel and Egypt; from
Denmark to Mauritius; from Germany to Jamaica; it has become
a superbloc. That gives it both political and economic influence
far in excess of what the governments of Western Europe
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 Approved
But since that bloc can now dominate international institutions,
its leadership should accept responsibility for establishing more
effective global rules and procedures. Otherwise it will acci-
dentally ruin even that remaining degree of cooperation and
harmony that exists.
The European Community often argues that it is now very
outward-looking with its extensive trade concessions and develop-
ment assistance relations with selected developing countries. This
definition of the term "outward-looking" is nearly opposite of
what is meant by the term in American usage. "Outward-looking"
means to a United States official being cognizant of effects of
national or regional actions on other countries around the world,
both developed and developing. It means taking global actions
into which regional actions can be fitted; it means neutralizing
the effect of discrimination wherever they may harm the present
or potential position of another country. Thus, the European
Community tends to solve its external problems bilaterally,
through selective measures, without at the same time tending to
the consequences for the multilateral system. It must now do so,
or risk destroying the few remaining incentives for multilateral
cooperation which exist under present rules and international
procedures.
The United States, for its part, continues to have a strong interest
in a fair, effective adjustment system based upon non-
discrimination, for the same reasons as those which have prevailed
in years past and which were enumerated earlier in this paper.
The economic viability of all nations is important to American
security as well as economic interests, lest the United States be
drawn in again and again to pockets of instability and local
conflict. But there are even more reasons today why the United
States must look to the concerns of the countries which are less
politically strong. The United States needs a reformed monetary
system and an improved trading system. Its natural allies in this
pursuit should be the developing countries and the developed
countries of the Pacific, for they are the countries most in need
of a better system and most likely to suffer some damage from
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 App3roved
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e
countries have much to gain from a better world economic
system which can provide for them stability of expectation for
their own development plans.
Thus there is a happy coincidence of interest between the
United States and many developing countries at this moment in
international economic history. Exploitation of this opportunity
could lead to mutual benefit as well as to a better multilateral
system. It would help avoid North-South dominance by one or a
few developed countries which leads to the kinds of frictions
which have characterized Latin American relations with the
United States or the kinds of sensitivities which exist between
developing countries of the Asian-Pacific and Japan. Bilateral
solutions are now only disruptive to international economic
relations; they can also be corrosive of the political relations
which exist between the bilateral partners, at least when the
parties are of unequal strength and one is liable to be exploited
by the other.
So one can conclude that whatever is done logically or
regionally, there is a greater and more pressing task now - to
develop a common approach to the management of the inter-
national economic system as a whole.
The Honorable Harald B. Malmgren is
Deputy Special Representative for Trade
Negotiations, Executive Office of the
President in Washington, D. C
'The views in this paper are personal, and should not be
interpreted as necessarily representing the official views of the
United States Government or any of its agencies.
2 D. H. Robertson, The Control of Industry, London, 1928.
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 Approved For Relea
t is . 2 004/ YO .CIA RDP88-01315R000200110001-3
and Economic Role of
Europe in the Wake
of the Nixon Economic
Measures of 1971?
The Goal of a Better System for World Economic Integration
The crisis set off by President Nixon's economic actions of
August 15, 1971, constitutes a turning point in international
economic relations. It compels Europe to free itself from an
assisted-country status and to assume its responsibilities in the
world. In particular, the global redistribution of economic power
now in progress - characterized by the emergence of the
European Community and Japan as great trading powers -
induces Europe to pursue the goal of a better system for world
economic integration. This should be a system in which the
future does not lie in exclusive relationships with the United
States, but rather in the development of multiple systems of
relationships with the United States, Japan, the Eastern countries,
China, Latin America and the other emerging nations. A further
opportunity for Europe to play a major role in international
affairs is offered by British membership of the Community,
taking place on January 1, 1973. Indeed, the enlarged Com-
munity will be the world's largest trading unit. It will bring
together the principal manufacturing countries of continental
Europe with a growing number of developing countries which, to
a greater or lesser degree, regard the Community as the principal
market for their commodities.
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Community
The emergence of a trading bloc of unprecedented size will have
profound consequences for the flow of trade, especially in
agricultural products. In particular, with the exception of some
products which will continue to enter into the enlarged Com-
munity free of duty, (oilseeds, soybeans, oilcakes) the extension
of the variable levies to the United Kingdom and the alignment of
the high agricultural common prices may risk altering certain
flows of trade. It is significant that criticisms of this development
come not only from the United States, but also from Canada,
Australia, South Africa, Japan, the Eastern countries and Latin
America. Even the Mediterranean countries, which already receive
preferential treatment in the Common Market, will have in several
cases to face an increased number of obstacles to entering the
markets of the new member countries in the Community.
The creation of an enlarged Community therefore increases the
need to revise the Common Agricultural Policy (CAP). It is true
that the CAP has acted as the motor of the European integration
process (opening the way to the working of other common
policies). And it has established a real common budget. From
1975 onwards, all levies, all revenues of the common external
tariff, and a fraction of the value added tax will be assigned
automatically to the Community budget. Nonetheless, we must
stress frankly that the common agricultural mechanisms have
largely failed. In fact, the CAP has become very costly without
being able to stimulate deficit production, as proved today by the
dramatic crisis in beef. According to our estimates, in 1970 the
six member countries spent more than 14 billion dollars in direct
and indirect costs to sustain the agricultural markets. This is a
colossal amount, equal to more than half the value of the
Community's agricultural production at domestic prices. On
balance, the impact of this situation on world trade has been
damaging, because the Community market is isolated (through
the variable levies) and surpluses are exported through restitu-
tions granted by the European Agricultural Fund.
The agreements concluded on March 24, 1972, should con-
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satisfactory. The aims of these agreements are rather modest
(especially with regard to the Mansholt Plan forecasts of
December, 1968). And they are being realized with considerable
slowness. Even more, they have also increased the prices of wheat
and milk again - and these are the sectors where supplies outstrip
demand! The risk, therefore, is to consolidate a situation of crisis
and of ultra-conservatism, when it is more and more essential to
have a real revision of the CAP (by regulating the market with
relatively low prices, deficiency payments and structural re-
forms). Europe cannot at one and the same time have an autarkic
policy in the agricultural sector, and a policy of free trade in
sectors where it is competitive. Furthermore, the agricultural
protectionism of a large European bloc would be anachronistic at
a time when the European business community is inclined to
work in terms of the world market.
It may be that a deep revision of the CAP can be envisaged only
in the framework of new multilateral negotiations in the GATT
(in cooperation with OECD and FAO), in order to achieve a
general adjustment of the agricultural policies of all industrialized
countries, all of which are notoriously protectionist. Nonetheless,
the enlarged Community should urgently adopt measures aimed
at reducing international tensions in this field. In particular, the
EEC should make the variable levy system less rigid. It should not
be invoked when imports from third countries are justified by the
lack of supplies from the member countries. The Community
should be less rigid about restitutions granted by the European
Agricultural Fund. It should intervene only to make seasonal
adjustments, not to offset short-term fluctuations of the world
market. Instead, the Community should set up mechanisms to
control quantity of production (not intervening beyond certain
limits) and its quality (applying, for example, a selective price
policy and granting aids according to the quality of the products).
It should make direct payments to certain categories of farmers,
not to promote production but rather to integrate families'
revenues. Such an orientation on the part of the enlarged
Community could be favored by the United States if the latter
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give up by g
reducing quantitative restrictions still in force, especially on dairy
products.
A Global Approach Towards Aird Countries
The enlargement of the EEC also sharpens the problem of the
preferential agreements. Of course, the total trade of the enlarged
Community (trade with more than fifty countries, many of which
are important) will represent about 50% of total world trade. And
as a result, fears expressed by third countries concerning the
Community's African and Mediterranean policy will pale by
comparison with the great problems in general that will face all
non-Community countries. Nevertheless, international tension
over the preferential agreements could be reduced by the
Community's given priority to a series of measures aimed at
giving the CAP a certain flexibility. For example, in addition to
the measures already mentioned, the Community could reduce
the rigidity of the rules regarding the import of processed
agricultural products, since many Latin American nations as well
as others do rely considerably on those products to promote their
own industrialization. The necessity of such action is proved by
the fact that the preferential agreements concluded so far refer
mainly to agricultural trade. However, these measures would not
be sufficient by themselves. The Community would also have to
adopt new instruments to overcome the limited horizon of the
preferential agreements, agreements which have often been
applied in a chaotic way. In fact, with regard to countries such as
Israel, Egypt and Spain, the Community has only regulated trade
matters, while it has concluded association treaties with countries
like Greece and Turkey, and countries like Tunisia, Morocco and
Malta are on the verge of association.
By contrast, the attempt to reconcile the opposing interests of
European and Mediterranean farmers for several competing
products (such as citrus fruit and wine) by limiting the concession
on tariff preferences to the offer of a minimum price on the
Community market and by applying a safeguard clause, did not
give good results. Not only have the protests decreased, but it is
more and more evident that the policy based on preferential
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requirements and the interests of nations such as those in Latin
America. The EEC should therefore transform its traditional
commercial policy into an external economic policy by defining a
global approach towards third countries, and particularly towards
the emerging nations. In fact, Europe needs growing quantities of
raw materials, while the emerging nations need a large variety of
industrial products in order to modernize and industrialize. In
particular, Europe and the emerging nations should conclude
medium-term "contractual policies" to last not less than five
years. These should guarantee stable prices and guaranteed
markets, especially in the fields of oil and gas supplies, as well as
in the fields of agricultural and industrial supplies.
These agreements should be defined in specific conferences,
attended by the producer and consumer countries, in order to
plan the production and consumption of competitive products. In
the fruit and vegetable sector particularly - which is threatened
by growing surpluses - it is urgent to define a regulation dealing
with production in order to prevent serious trade wars. Even in
the industrial sector, the Community should go beyond carrying
out specific projects of industrial policy as, for example, in
textiles. It should also favor the creation of free trade areas and
customs unions in conformity with GATT rules. At the same
time, the EEC should extend the activity of the successful
European Development Fund (now applied to the Associated
African States and Malagasy (AASM) countries) to other
emerging nations, in order to favor both the modernization of the
agricultural sector and the starting of specific industrialization
projects. Moreover, the European Investment Bank should favor
the beginning of a systematic investment policy to create small
and medium size factories.
In addition to providing technical assistance, the Community
should improve the scheme of generalized preferences now in
force, and should end the dispute on "reverse preferences" by
granting African countries larger economic aid as with oil-
producing crops and for some products financial aid to integrate
the price.
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Community membership - but wish to conclude commercial
treaties with it - the enlarged Community should let commercial
agreements be considered a first step toward full membership, or
should conclude non-preferential commercial agreements with
provisions for (1) cooperation among the parties (for example,
the insertion of the so-called "benevolence clause" in case of lack
of certain products); and (2) exchange of information and
consultations on principal international problems.
Such a program may appear too ambitious. Indeed, at first it
will interest mainly countries of the Mediterranean area, where it
is urgent to attenuate the dangerous tensions in the Middle East.
We must realize, however, that we depend in very large part on
the imports of raw materials from third countries. Without such
imports as iron ore, non-ferrous ores, oil and wood, European
industry cannot function. In addition, a Community which
assumes world responsibilities must respond to demands for the
development and prosperity of all the Southern hemisphere, to
which we are bound by historical ties. Moreover, the cost of such
an operation would be more than returned in the form of
increased security for supplies we need (in a world where
competition for raw materials is bound to intensify), and by a
reduction of the amount actually spent to preserve the Common
Agricultural Policy. A European approach, having a worldwide
impact, would allow the Community to go beyond the limits of
"regionalism" in order to undertake action in neglected areas.
This is the case in Asia, but even more in Latin America. Only
recently, with the conclusion of non-preferential commercial
agreements with Argentina and Uruguay, and with the beginning
of negotiations with Brazil, has the Community started to take an
interest in Latin America.
The characteristics of many industrial and agricultural sectors of
Latin America could in fact favor the involvement of the
Community in an area which is one of the richest sources of raw
materials in the world. And this involvement can take place
without creating damage or difficulties for North American
investments. In the primary products sector, for example, there
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are agricu u a r in s
special quality and availability in seasons different from ours,
should constitute the basis of a European commercial policy
based on the principle of complementarity. The same is true for
the secondary products sector, where an improvement of
industrial productivity can be aided by European collaboration.
Because of their degree of development, some companies in
several Latin American countries are in fact quite similar to the
average level of European industries and therefore have to face
the same problems. In these cases, European production
techniques are more appropriate than those imported from the
United States, a country which has highly automatized industries.
The European Community Should Diversify Its Trade
External policies of the enlarged European Community will also
help orient Europe towards diversification of trade with the
Eastern countries -- China, Japan, Australia, Canada, New Zea-
land and India. In fact, the concentration of trade among highly
industrialized countries, while greatly improving the welfare of
the Western nations, has also given rise to increased inbalances. In
addition to delaying the development of poor countries, these
inbalances today favor neoprotectionism, especially in less-
competitive and less-advanced sectors of production. Therefore, it
is fortunate that by January 1, 1973, a common commercial
policy towards the Communist bloc will come into force.
Furthermore, economic cooperation between Western Europe
and the Eastern countries is receiving an impetus from the
admission of several state-trading countries to the GATT system,
from increased industrial collaboration and from the early
preparation of the Conference on European Security and Co-
operation, which will also deal with economic problems of
East-West trade.
The trend towards greater diversification in the flow of trade
also relates to Community relations with China. Even though the
Chinese economy is only now emerging (particularly in the
industrial field), in fact it is growing at a satisfactory rate. Within
ten to twenty years it will absorb relatively large quantities of
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 Approved
in European trade with Japan. Today only 6% of Community
trade is with Japan and only 7% of Japanese trade is with the
EEC. However, improvement of economic relations with Japan is
feared by European businessmen who worry about the diversion
of Japanese products from the American to the European market.
European businessmen also seem reluctant to penetrate the
Japanese market.
These fears are exaggerated, however. For example, Brussels
wants to include a safeguard clause for market disruption in case
of necessity. Actually, some form of cooperation with Japan is
unavoidable in international markets, especially in the field of
textiles and steel products where the Europeans and the Japanese
compete for exports to the American and other markets.
Besides, the Japanese market offers excellent opportunities for
the sale of a large number of technologically-advanced products,
while the few European enterprises which have succeeded in
entering that market have realized high profits and increased
expansion.
FoI'o 1 QQ s 4.lj1 E r Pi ~ i 5 2 P9i~A001-3
More Trade and More Tensions Across the Atlantic
The United States has benefitted greatly from the creation of the
European Community. U.S.-EEC trade more than trebled in the
period 1958-1971 (from $4.5 to $16.7 billion), and its con-
tinuous growth has been faster than the average increase in world
trade. Thus in its trade balance with the Community, the U.S. has
an important surplus, almost always over one billion dollars
annually ($1.7 billion in 1971). Moreover, the United States has
been greatly favored by European integration in the sector of
direct investments. In fact, nowhere else in the world have
American direct investments increased so astonishingly. Between
1958-1971, U.S. direct investments in the six member countries
of the Community increased five fold reaching $11.7 billion in
1971, compared with $8 billion in the United Kingdom. And this
does not take into account investments in Switzerland or
elsewhere.
In this way, U.S. enterprises - whose sales equal four times the
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position in many important key sectors of European industry,
such as automobiles, titanium dioxide, synthetic rubber and
computers. It is such a first-class position that, according to
European Commission estimates, about 7% of Western European
GNP derives from American direct investments.
Through contracts, investments in the United States by the
"Six" plus the United Kingdom increased remarkably in the last
few years, in 1969 exceeding the total value of long-term
American investments that year in Europe. But these European
investments are mainly in the form of bonds. Less than $3.5
billion in 1970 is in the form of direct interests in production and
sales enterprises.
The enlargement of the EC should bring about new advantages
for the United States. In fact, British customs duties will conform
to the lower tariffs of the common external tariff of the EEC.
Thus American enterprises will be able to count on a larger and
more homogeneous consumer market than the one at present, a
market where they will be in a position to exploit their
technological superiority. Moreover, the effects of economic
development deriving from an enlarged Community will sooner or
later favor the purchase of more goods from the United States, as
was the case after the creation of the Common Market limited to
six countries. This will be all the more true since British adhesion
to the Community should reinforce an "open" common com-
mercial policy. In this respect, it is significant that besides the
sugar agreement (favoring Mauritius and Caribbean Islands), and
the butter agreement (favoring New Zealand), a new agreement
has been reached permitting special entry to the Community for
twelve products, such as paper pulp, aluminium and zinc, mainly
from Canada and Australia. Also, free trade area agreements
covering industrial products from the non-Community EFTA
countries (Austria, Switzerland, Portugal, Sweden, Norway and
Finland) comply with the terms established by GATT.
Finally, we must remember that the European Community has
already granted a few concessions to the United States (e.g.,
reduction on citrus fruit customs duties and wheat-ensiling
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 Ap loved
some increase it customs dudes, on products exported to the new
member-countr. es, will benefit from the reduction of other
customs duties n the GATT.
Notwithstanding these facts, in the United States today the
EEC is thought of as an "inward-looking" body. This opinion is
not correct. In the industrial sectors, Community tariffs are the
lowest among industrialized countries. In the post-Kennedy
Round era, only 13.1% of Community tariffs exceed 10%
(compared to 18.3% of U.S. tariffs), and only 2.4% of Com-
munity tariffs eKceed 15%(compared to 23.7%of U.S. tariffs). In
addition. in tin agricultural field American preoccupations may
appear to be juthfied, as we have underlined. But we should also
not forget: (a) that the European Community is always the most
important marl et for American exports; and (b) that in spite of
certain difficulties for some products, during the period of
1964-1971 U.S. exports to the Community increased from $1.2
to $1.7 billio-r and that 40% of U.S. exports enter the
Community du' y-free (in particular, in 1971, imports of soybeans
reached $800 million). Actually, it is not the United States which
has sustained t ie damages of the CAP, but rather the emerging
nations and sore other third countries, such as Denmark, which
almost lost the Lerman market.
Concerning non-tariff barriers (NTB), it is true that Europe has
several restrictions regarding public procurement policies and
road taxes on vehicles with high horsepower. But the United
States is also rot an "open market." In fact, according to the
estimates of Fred Bergsten, NTBs effect a yearly consumption
reaching not le;s than $100 billion in the United States. One-fifth
of U.S. industrial imports are subject to quotas (compared with
only 4.3% of European Community industrial imports), while the
so-called "voluntary" agreements imposed by the United States
(regarding important products such as textiles and steel) have
proliferated it the last few years. With regard to customs
evaluation practices and methods, the United States, in addition
to maintaining the American Selling Price for valuing benzonoids,
continues to value hundreds of items of the so-called "Final List"
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Besides the American Administration imposes more and more
anti-dumping duties, giving priority to its own legislation enacted
in 1921, instead of aligning itself with the international code
concluded in 1967 in the Kennedy Round. And it imposes
countervailing duties automatically. Then there is a large variety
of further NTBs - for example, the "Buy American Act" of
1933, which allows the federal government to give priority to the
purchase of American products. There are administrative controls
which impede or at any rate make it difficult to export on the
American market. These include the requirement that foreign
ships cannot carry goods between two American ports. And with
the Law of December 1971, the U.S. Congress has put into effect
the Domestic International Sales Corporation (DISC) - the only
measure of August 15, 1972, still in force. By delaying the
payment of taxes on 50% of the profits obtained by U.S.
enterprises operating in international trade, DISC artificially
favors American exports.
The Need for Better Mutual Understanding
The solution to the problem of economic contracts as between
the two sides of the Atlantic does not lie in a direct confronta-
tion. Such a policy - started with President Nixon's measures of
August 15, 1971 - could have the merit of inducing Europe and
Japan to be conscious of the new economic and political realities
of the seventies. But, it would present serious dangers for the
Western world. If a "tough" U.S. attitude towards Europe should
consolidate - and, on this, the position taken by Wilbur Mills in a
recent statement to. "Der Spiegel" is alarming - the result would
be the creation of economic blocs, whose opposed interests
would mean political and economic disaster for the Western
world. The problem, on the contrary, is to avoid fragmentation of
the world economy. It is therefore essential to replace the policy
of confrontation with a policy of cooperation, to start and open a
concrete dialogue between Europe and the United States that will
inspire a reciprocal spirit of responsibility.
In order to bring about this new approach, it is important to
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created tension and a spirit of distrust on both sides of the
Atlantic. In par-icular, Europe should get used to the ideas of
revising its agri--ultural policy and of overcoming the limited
horizon of its preferential agreements. It should also consider the
dollar as convertible not into gold but into goods, services and
shares of American companies. The United States should abolish
the American Selling Price (which in Europe is the symbol of
American prote:tionism), and, while waiting for reform of the
international monetary system should adopt measures aimed at
insuring Europe against any loss deriving from a further devalua-
tion of the dolla . But it should also get used to the idea of having
a deficit trade balance, more and more compensated for by direct
investments abroad. In 1971, in fact, U.S. repatriated profits
reached almost $10 billion, compared to $3.56 billion in the
1964-67 period. In 1975 this amount is expected to reach $17
billion.
The United States cannot expect to obtain, at the same time,
both a trade surplus and substantial advantages from its direct
investments, wl ose value in 1970 represented over $78 billion
compared to $33 billion in 1960. Capital exported by the United
States, which .hould continue but in a better equilibrated
framework, stirzulates production abroad which obviously re-
places potential American exports. Besides, it is quite likely that,
before the end of this decade, Europe and Japan will transfer a
growing part of heir production to the emerging nations and thus
will also have a deficit trade balance, compensated by the profits
of direct investments abroad.
Nor should w: continue to discuss unreal problems. Thus, the
United States si ould recognize that the value added tax (VAT) is
not an NTB, but rather an indirect tax like sales taxes existing
today in 46 of the 50 American States. In conformity with the
internationally accepted principle, the VAT hits products where
they are consu ned, so that neither the local product nor the
imported one enjoys any fiscal advantage. Similarly, Mr. William
Eberle, the Special Representative of President Nixon for Trade
Negotiations, recently stated that, "agriculture is a sector as any
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constructive development in beginning new international negotia-
tions. It is well known that in agriculture, the economic theory of
international division of labor based on compared benefits cannot
be applied without necessary and considerable correctives. In
particular, as stated before the U.S. Congress by Roger Savary,
Secretary-General of the International Federation of Agricultural
Producers (FIPA):
The orientation towards a moderate protectionism in the agri-
cultural sector would represent enormous progress in comparison
to the present chaotic situation of world agricultural markets,
when the industrialized countries have no intention of aban-
doning the agricultural policies which they have followed for the
last 50-80 years.
For their part, the Europeans should follow the advice of Fritz
Machlup and "should get rid of the idea that everything can
change (productions, wages, etc.) while exchange parities remain
firm at any rate, even using insane measures such as those of the
double market value." Actually, with flexible exchange rates,
every country is compelled to handle its own inflation. Yet if the
European countries insist on rigidly maintaining their own
monetary parities, instead of modifying their exchange rates
rapidly and frequently in periods of trade deficit or surplus, they
should be resigned to facing the consequences of recurrent
monetary crisis and the consolidation of restrictive practices in
international trade, especially in the form of more widespread
"voluntary" agreements.
Finally, it is evident that all parties have an interest in starting
new negotiations on monetary and trade matters as soon as
possible, instead of insisting on the priority of a global or parallel
negotiation.
The World is Waiting for Europe to Play its Role
The interests and functions of the United States and Europe do
not have to be necessarily identical. In fact, the world needs a
Europe that through a clear and far-sighted policy takes the
initiative in playing a moderating, original and incomparable role
as intermediary. In particular, Europe should take the op-
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extending an igricultural policy which is a failure, but rather to
suggesting a r ew pattern of society, to answer the desire for
development expressed by the whole Southern hemisphere and
the imagination of the young. This new pattern of society would
be different 'rom the American affluent society, which has
fascinated us Gar a long time, but which today shows its limits.
In regard ti economic matters, specifically, Europe should
expedite the coming into operation of the economic and
monetary unicn, thereby to favoring an industrial policy which
allows the growth of industries with a high technological content
and the promction of multinational enterprises in the forms and
limits which a-e necessary to protect the legitimate interests of
each country. The economic and monetary union would also
favor a policy for sources of energy, a transportation policy, a
social policy, z n harmonic regional and urban development and
an adequate protection of the environment.
The need to unite Europe does not aim at undermining the deep
solidarity with America. "A European monetary zone," Rinaldo
Ossola has dec:ared, "has never had the intention of becoming a
bloc opposed to other monetary areas. Our aim remains a world
system." "The working of a European policy," Richard Gardner
said, "could simplify the putting into effect of a large program of
cooperation to liberalize trade in the interest of the international
economic equilibrium." And the fact that a stronger Europe
would be in a letter position than in the past to bargain with the
United States over world rules of commerce, investment, and
money - rules less geared to American specifications - should
not excessivel% worry our partners on the other side of the
Atlantic. After all, the forces and stimuli of a fair competition
constitute the basis on which the Western world is built. Better
Atlantic cooperation in the economic, technological, social, and
strategic sector, will more than offset wounded interests, while it
could become a stabilizing factor for the whole international
system. In addition, Europe's initiative appears indispensable if
we consider that today the United States, after the failure of its
Vietnamese policy, does not have the necessary political strength
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to make a basic revision of its national priorities.
Of course we agree with the United States about the danger in
Europe's not having solid and coherent bases on which to build
its political will. In fact, even if the enlargement of the European
Community brings with it the factors which could unify Europe,
we do not yet see those elements which could really induce the
European countries to speak with only one voice. Thus, for
example, we do not see how it would be possible to think of rigid
exchange rates within the EEC, or even of a common currency -
as part of the important problem of the monetary union - when
there is no supranational authority able to impose coherent
guidelines. It is also significant that Europe has rejected the view
of a managed and flexible European monetary policy, supported
by former German Finance Minister Karl Schiller. This perspec-
tive would have considerably accelerated the European process of
unification. Thus, while enlargement makes Europe economically
more powerful and more conscious of its political role, it does
not have the essential instruments to enforce its will.
Today, disintegrating factors - such as the awakening of
nationalism in every European country - are joining with a
retreat towards the intra-governmental type of cooperation
actually to weaken the European process of unification.
To overcome these dangerous trends, and get through the
delicate organizational phase of the enlargement operation, the
European political class should be conscious of the absolute need
to create common centers of decision making. The European
political class should also be reinvigorated through the inclusion
of younger and better prepared people. Such centers should be
based on democratic principles, giving vitality and imagination to
European policy, in order to meet the wishes for international
solidarity held by new generations to whom Europe appears
today as a too-centralized and too-bureaucratic construction.
In developing such an effort, Europe needs more than ever to
have the political support of the United States. In renewing its
policy of consultation and cooperation. The United States could
join in rebuilding the Atlantic partnership while taking into
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relations and tae new political problems of defense posed by the
envisaged reduction of American troops and the evolution of
East-West det=ante. During the next few years of European
unification, th ; United States should encourage Europe to give
higher priority to external economic relations. For the U.S. to
follow a different approach would mean a further deterioration
of Atlantic relations to a point of crisis for Western unity.
Decisive effects would now from an American attitude of
indifference and neglect or, even worse, either unilateral im-
position of new measures - such as those of August 1971 - or an
attempt to di. solve the process of European unification in an
Atlantic free -rade area. Particularly under the impulse of the
Soviet diplomatic offensive which will materialize in the Con-
ference on European Security and Cooperation, and in trade
negotiations be tween the European Community and COMECON,
Western Europe could move to a neutralist position such as
Finland's.
Renewing the j ractiees and Institutions of Atlantic Partnership
The United States and an enlarged EEC should therefore begin as
soon as possib e a large scale and pragmatic effort to improve the
workings of a renewed Atlantic partnership in all its aspects. This
would provide a broader context for a resolution of differences
between the tv o continents.
With this aim in mind, and in order to avoid misunderstanding,
it would be necessary to organize the dialogue between the two
continents by creating a mixed party committee between the
American govt rnment and the European Community countries,
the latter speaking through the unique voice of the European
Commission. 1.uch a committee should have the task of dealing
with daily problems of trade, investment and monetary matters
facing the go%ernments, in order to prevent conflicts, to avoid
discrimination. and to suggest constructive solutions. These
consultations :hould take place on a continuous basis, i.e., in all
economic situations, not just at moments of acute difficulty.
They should therefore be undertaken within an institutional
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political problems which have occurred between America and
Europe in the past few years have seldom been openly and
specifically discussed on a multilateral basis.
In order to return to habits and practices of close consultations
within the Atlantic world, it appears necessary to agree on the
desirability of concerting on the preparation of new trade
negotiations within the GATT framework. The aim of such
preparations would be to make negotiating procedures easier.
(The U.S. administration will have to ask the mandate of the
Congress and the European Commission will have to obtain it
from the Council.) Their aim would also be to place the
negotiations with a larger context. In the new round of GATT
negotiations, it will be necessary to deal with the further
reduction of tariffs, the harmonization of NTBs, and the
organization of world agricultural markets as well as with the
determination of a code of behavior toward state-trading
countries that will permit them to be integrated in the world
economy. There must also be new and more effective multilateral
actions in favor of developing countries. And common action
must be begun with special procedures to counter the pressures of
neoprotectionist groups. No agreement, even on whose aim is to
allow so-called "orderly marketing adjustments," should be
permitted solely for restrictive purposes if they are not objec-
tively justified. As stated by Harald B. Malmgren, "The aim must
always be orderly adjustment, expansion of trade and a return to
liberal conditions of access in due course." In this respect, the
Burke-Hartke Bill should be rejected. If it were adopted by the
U.S. Congress, it would inevitably mean a trade war between the
U.S. and the EEC.
Similarly, common action is indispensable to create special
procedures for helping producers and workers adapt to the
changes imposed by keener international competition. General
plans for restructuring less competitive sectors should be studies
by all the Atlantic nations together. This would permit them,
within a multilateral framework, to initiate the readjustment of
some economic activities like textiles in a relatively orderly way,
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It is also in the common interest of both the United States and
the Community to set the basis for agreements on better
coordination of i lonetary and fiscal policies, to ensure stability
for the international system of payments. In particular, it would
be quite useful ( ) guide and coordinate capital movements, so
that there can be certain equilibrium between deficit and surplus
countries. The United States should follow a restrictive credit
policy by increasing rates of interest, though without delaying
economic resurgc nce. Meanwhile, Europe and Japan should
follow an expansi mist economic policy, including lower rates of
interest. While th - American government should stop the exces-
sive increase of liquidity, stimulated by the uncontrollable
expansion of federal public expenditures, a U.S. program aiming
at liberalizing capital movements would find Europe in agree-
ment, provided hat American obstacles to European direct
investments are re roved.
Increased economic cooperation on both sides of the Atlantic
can also touch on several industrial sectors, including the
following: the spa :e industry, especially the post-Apollo program;
the nuclear indus-ry, especially nuclear controls and delivery of
enriches uranium; the aeronautics industry; and the non-strategic
armament industry, to coordinate military research in order to
limit costly competition. Similarly, specific consultations should
be started on prob ems of multinational enterprises and the efforts
of some countries to regulate them. In the field of defense
considerable developments are possible if the United States
accepts the prii ciple of the complementarity of nuclear
deterrence_
Finally, the United States and the European Community should
develop a joint effort, within revised and adapted international
organizations like the United Nations, to promote a better
distribution of incomes in the world, to face the explosion of
violence, to protect us from pollution, and to fight poverty,
unemployment an J the drug traffic.
Within this insti utionalized mechanism of the Atlantic partner-
ship, it would be :asier to develop more efficient efforts directed
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American countries. These countries could be favored by (1) the
development of Euro-American investments, (2) the promotion
of their exports to the American and European markets, (3) the
improvement of the generalized preference scheme of the
European Community (while wishing rapid approval of the U.S.
preferential scheme by Congress), (4) the fostering of Latin
American economic integration, and (5) the setting up of specific
working groups to consult on the consequences of European
Community enlargement, the reform of the international mone-
tary system, and the new GATT trade negotiations which should
start in 1973.
This kind of practical measure, addressed to real world
problems, would renew the Atlantic partnership and confirm the
essential inter-dependence between North and South America and
Europe.
Gian Paolo Casadio is Professor of
International Economic Organization, at the
University of Bologna, Italy.
Buchan, Alaistair, A World Restored, "Foreign Affairs," New
York, July 1972.
Casadio, Gian Paolo, Atlantic Trade, From the Kennedy Round
to the Neoprotectionism, to be published by D.C. Heath Ltd.,
spring of 1973.
Casadio, Gian Paolo, I rapporti economici internazionali della
Communita', Institute of International Affairs, Rome, 1972.
Courtois, Bernard, Les Etats-Unis Face au Marche' Common
Agricole, Editions Cujas, Paris, 1970.
Duverger, Maurice, Les deux Europe, "Le Monde," May 26,
1972.
G.A.T.T., Trends In United States Merchandise Trade 1953-1970,
Geneva, 1972.
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 Approved F;ov easet200r4Aditi$3s:1 F/ ri P 8, 13+15RO 20Qr110001-3'
Chemins. Institut rstlantique, Paris, 1972.
Hoffmann, Stanley. Weighing the Balance of Power, "Foreign
Affairs," New York. July 1972.
Iloussiaux, Jacques, Les politiques economiques dons la zone
A tlantiquc, Editions Sirey, Paris, 1970.
Levinson. Charles. Capital, Inflation and the Afultinationals, G.
Allen & Unwin Lt J., London, 1971.
Malmgren, Harald B., International Economic Peacekeeping in
Phase II, The Atlintic Council of the United States, New York,
1972.
Malmgren. Harald B., Trade for Development, Overseas Develop-
ment Council. Washington, 1971.
Mirabile, Francesco, America Latina, USA e C'EE, "Rivista di
Studi Politici Internazionali," anno XXXIX, no .2, Rome, 1972.
O.E.C.D., Polies Perspectives for International Trade and
Economic Relatio,ts, Paris, 1972.
Ossola, Rinaldo, roblemi monetari mondiali e regionali, "Euro
Cooperazione." n` .1, Rome, June 1972.
Poelmans, J. & Lccomte, J., I. agriculture europeenne ei les pays
tiers, Presses Univcrsitaires de Bruxelles. Bruxelles. 1972.
Spinelli, Altiero, l'oix Indipendance ce Personnalite' de l 'Europe,
report presented to the 25th Round Table of the "Associa-
tion pour I 'etude des problemes de I `Europe," Paris,
1972.
Tatu, Michel, Le triangle Washington-Moscou-Pekin et les deux
Europes, Castermrn, Paris, 1972.
Trade Policy R.-search Centre, Towards An Open World
Economr?: The Nest Phase. MacMillan. London, 1972.
Weil, L. Gordon, ,I Foreign Policy for Europe, College of Europe,
Bruges, 1970.
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New Relationships
Between the Big Powers.
During the decade of the seventies, Latin America will have to
operate within a complex and rapidly changing international
context. New powers are appearing (or being acknowledged)
upon the world scene. Traditional relationships between estab-
lished powers are in a state of flux, and a rather encouraging spirit
of innovation is bringing diplomacy back into the ranks of serious
occupations.
Reasonable care is advisable in order to avoid being dazzled by
the spectacular features of recent exercises in summitry. Neverthe-
less, after making all the allowances required by a realistic
perspective, important changes are taking place in world affairs.
The following events or trends seem relevant as affecting the
international community between now and 1980:
? In economic as well as in military terms the world is moving from
a bi-polar to a multi-polar model.
? Western Germany and Japan have emerged as important factors in
international trade and finance. In spite of their almost non-
existent military capability, both countries are beginning to take
diplomatic initiatives based upon their economic success.
? China's new status brings a developing country into the councils
of the great powers for the first time. The international
recognition of China implies an acceptance of geographical and
political reality in Asia.
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" (immunity
has
most important tr iding unit. The economic policies and the trade
initiatives of the c ilarged European Common Market will have a
decisive influence !ipon international commerce.
?1t is in the interest of the big powers to avoid a major
confrontation. l:ff iris will be made to maintain conflicts such as
those in Southeast Asia and the Middle East localized geo-
graphically and in scope. Although the millenium is not yet
within reach, a tolerable approximation to world peace can be
counted upon.
?The division of tie international community along ideological
lines is being repl,teed by the division between Rich and Poor.
The redistribution of wealth, income and power between nations
as well as within nations is rapidly becoming the fundamental
issue on the agendh of humanity.
? A minimum of international cooperation appears possible in the
following fields: cisarmament, environmental protection, trade
and monetary refo m.
?The United States is in the process of reducing its international
commitments. It will therefore play a less important role in the
hemisphere and in The rest of the world.
?The developing co intries collectively, as well as individually, will
make use of ever} bit of leverage they can avail themselves of
(economic, political or strategic), to shift the balance of world
power away from the present overwhelming predominance by the
developed countries.
In different ways these trends and events will shape the
international community in the foreseeable future. Because it is
playing a larger and more assertive role in world affairs, these
events are relcvan- for Latin America. They should be followed
closely by the region's leadership and every advantage should be
taken of the target margin for maneuver which they can provide.
however, the relationships between the big powers and the
changes taking pftce in- those relationships are not matters of
supreme importance for Latin America. They could become
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ecrsive only under extreme - an ope u y impro ab e -
circumstances, i.e., a global conflagration or a traumatic and
prolonged disruption of the world economy. Barring nuclear (or
ecological) catastrophe as well as a repetition of the Great
Depression of the 1930's, - events which are undoubtedly
beyond Latin America's control - the critical issues for the
region are quite different from, and only marginally related to,
those that determine the big power game.
The significant fact of Latin America today is that to an
un-precedented degree the region is responsible for its own
destiny. With few exceptions the decisions that will determine the
region's future will be taken within Latin America by natives of
the region. But first it is useful to examine the most recent
changes in big power relationships with special emphasis on their
impact upon the region.
The Emergence of Japan
Although Japan's economic miracle has been underway for well
over a decade her appearance as a major independent power on
the world stage is a recent development. The year 1971 was a
turning point in the relations between the United. States and
Japan. The announcement of President Nixon's visit to Peking as
well as the trade and monetary measures of August of last year,
caught the Japanese government by surprise. The political and
economic embarrassment resulting from those unexpected events
contributed to the downfall of Premier Sato, and thereby brought
to an end Japan's postwar role as a United States, protectorate.
Premier Kakuei Tanaka has re-established diplomatic relations
with China and is already seeking closer relations with the Soviet
Union.
Japan's economic success is particularly relevant to the
developing countries of Asia. Trade and investment are providing
Japan with the "sphere of influence" that it failed to obtain by
military conquest three decades ago. Japan is already the most
important trading partner of Asia, as well as the largest donor of
non-military aid to the region. In an effort to secure supplies for
its industry, Japan is purchasing most of the raw materials of the
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Asia's non-socialist countries has grown from 14%'(, in 1960 to 26%
in 1970; by 1980 i is expected to exceed 40%.
Japan's trade with Latin America has been growing regularly
during the past d.cade. In 1970 the value of Latin America's
exports to Japan was USS962.1 million: imports from Japan
totalled USS870 i zillion. Japan accounts for about 7% of Latin
America's exports to the world. Although not an insignificant
figure, it is smaller than the value of Latin America's intra-
regional trade (USSI.6f.5.4 million in 1970). It represents about
one fifth of the region's exports to Western Europe.
A major role fo- Japanese investment in the region does not
appear likely. Japan is interested in fuels and mineral deposits and
is willing to invest abroad in order to secure their future supply.
With few exceptions., Latin American countries take a dim view
of direct foreign investment in the area of natural resources,
regardless of the nationality of the potential investors. Further-
more, one does n)t visualize the cautious Japanese businessmen
rushing into the kind of relationship with Latin American
countries that ha! been responsible for so much friction with
investors from other developed nations.
Japan is certain o play a major role in any future international
agreement on tr de and monetary reform. The size of its
economy (third largest in the world), the magnitude and
dynamism of its external trade and the level of its international
reserves (USS13.3 billion in 1971) provide Japan with a leverage
in world affairs -ar beyond whatever influence it could ever
obtain on the basi' of military strength.
The Re-L?isenvery -)f China
A year has gone oy since the question of representation in the
United Nations a=id the right to sit on the Security Council was
decided in favor o ' the People's Republic of China. Since then the
list of countries establishing diplomatic relations with China has
increased while he number of those maintaining diplomatic
relations with Taiwan has dwindled. Japan and West Germany
have recently raised to 75 the number of countries that have
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already done so and the probabilities are high that several other
Latin American countries will take a similar course in the near
future.
The admission of China into the United Nations will contribute
to give more meaning to the proceedings of the organization. The
region of the world most directly affected by China's new status
is Asia. It is now an accepted reality that in the settlement of any
major question concerning the Far East, China (as well as Japan)
will play a decisive role.
Having finally laid to rest the myth of China's non-existence,
restraint will be required to avoid erring in the direction of
exaggerating China's size and influence in the community of
nations. In spite of her nuclear capability and the magnitude of
her population, China is basically a poor, agricultural, inward-
looking country that through great effort and remarkable
organization is providing its people with the minimum necessities
of food, clothing, health and shelter. As can be seen in Table I,
China's Gross National Product is less than half that of Japan. It
is comparable to that of Canada and amounts to about 60% of
Latin America's.
In foreign trade the comparison is even less favorable. China's
total exports are about one fourth those of Japan or the United
Kingdom, one seventh those of West Germany and one third
those of Latin America. Even such relatively small countries as
Sweden and Switzerland surpass China in value of total exports.
(US$6.8 billion and US$5.1 billion respectively in 1970).
China's trade with Latin America (excluding Cuba) is practi-
cally negligible. In 1970 total exports to Latin America were
US$900,000 while total imports from the region were US$2.7
million.
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Inv TABLE 1: China. An International Comparison
Population
(millions)
GNP
(USSbillion%)
Lsports
1 L'SSbiltions)
China (estimates)
700.0
75.0
5.0
Japan (1969)
103.5
167.2
19.3
Canada
21.4
80.2
16.1
United Kingdom
55.8
121.2
19.4
West Germany
61.6
187.1
34.2
France
50.8
148.2
17.9
Italy
54.5
71.9
13.2
Netherlands
13.0
21.8
11.8
Latin America
266.8
124.5
14.3
)-or Latin America OAS Secretariat. UNECLA and Latin American
Demographic Center (CLLADE).
Unless otherwise spec ified. data is for the year 1970.
Due to the scarcitt of statistics, the figures for China are very rough
estimates.
If in the military - phere, power indeed grows out of the barrel of
a. gun, in the trad( and financial battlefields, power grows out of
such items as size of the national economy, importance in world
trade and level of nternational reserves. It is a fact of life that for
the moment the economic gun that China wields is a modest one.
However fascinati )g it may be to speculate about what would
happen if the 700 million Chinese decided to jump simulta-
neously, start dr nking coffee, or demand automobiles, the
likelihood of dw-ir actually doing so appears remote.
But economics is not everything. The Chinese episode has been
instructive for Latin America. The subsequent behavior of the
Chinese leadership has not gone un-noticed in the region. Over
the years, most L tin American delegations to the United Nations
General Assembly voted against giving China's seat to Peking.
Effective persuasion on the part of United States diplomacy had
strongly identified in their minds the survival of Western
civilization with 1 aipei's claim as the legitimate representative of
China. The change: in United States policy embarrassed the docile
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The lesson is that it is best to do one's own thinking on these
matters.
Latin America's radical youth is also going to have to adapt to
the new situation. Recognition has brought China's leaders down
from the legendary heights. Suddenly they are behaving as
pragmatic politicians, compromising, calculating, huddling with
the arch-enemy, balancing one power against the other, striking
deals and pursuing selfish national goals. The remote demi-gods
are now ordinary mortals carrying on the business of government
and diplomacy with more or less skill but much like the leaders of
other world powers. China's position on the India-Pakistan war,
the question of nuclear disarmament, or membership in the
United Nations for Bangladesh can only be understood in the
light of her national interests. The faithful will argue that of
course China's national goals and the cause of World Revolution
are identical. But are there any doubts about which would prevail
in case they should not always coincide?
The Common Market Expands
Next January first the United Kingdom, Ireland and Denmark
will join the European Common Market. This addition will
provide new stimulus to a process of economic cooperation that
will probably bring together in some kind of association all of the
Western European countries in this decade.
The Common Market is the largest trading bloc in the world. As
can be seen in Table II, it accounted for 31% of the world's
imports in 1970. If the three new member countries are included,
the enlarged Common Market accounts for almost 40% of the
world's imports.
Western Europe's sustained economic growth and its movement
towards trade liberalization have had an impact on Latin
America's exports. By 1970 Western Europe accounted for 35%
of Latin America's total exports, a higher proportion than that of
the United States (30.4%).
These figures help to explain why Latin America has an interest
in the economic health of Western Europe and in its movement
towards general trade liberalization.
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62 TABLE 1I. The Cornnon Market In World Trade 11) 70
(Figures in Million' of US Dollars)
Total World Imports
Value
(d Imports
293.869
Percent of
World Imports
100.0
E.E.C. Member Count ie.r
90.177
30.8
United Kingdom
20.448
7.0
Ireland
1.215
0.4
Denmark
3.436
1.2
United States
46.707
15.8
Latin America
16.130
5.5
Japan
19.310
6.5
I Belgium, Netherlands. Luxembourg, France. Italy and West Germany.
Source: IMF. IBR D, Lirection of Trade Annual 1966-1970.
The enlarged community will try to agree on a common
negotiating position on international trade and monetary reform.
Should it succeed, the stage will be set for a new round of trade
negotiations within the industrialized world.
The Common Market authorities will also be considering
proposals to increase imports from the developing countries,
either by assigning proportions of the E.E.C. market for specified
products to those countries or by setting growth targets for
imports from deve oping countries. Proposals such as the exten-
sion of non-reciprocal tariff references to exports of manufac-
tured goods from Iass developed countries will probably receive a
more sympathetic hearing in Brussels than in Washington. In fact
the initiative on preferences for developing country exports will
probably have to be taken by the Community, given the strength
of protectionist for-es in the United States at present.
Latin America should bring to bear all its influence on the
common Market for the adoption of generalized preferences for
exports of manufacturers from developing countries.
Inter-American Reiitions in Transition
The winds of change in international relations on a worldwide
scale have not by-fussed the hemisphere. Both the United States
and Latin America are regarding the inter-American system in
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of the few items on the inter-American agenda on which there
appears to be a consensus is the need for a reappraisal of
hemispheric relations.
A major factor (although not the only one) in the change that
has taken place in United States policy towards Latin America
has been the Vietnam war. From 1964 on, as the magnitude of
the U.S. military effort in Southeast Asia increased, pre-
occupation with developments in the hemisphere diminished.
Those crisis situations that did arise (the Panama Canal Zone
incidents of 1964, the Dominican Republic in 1965) were
managed with a heavy hand, in a style that was supposed to have
gone out of fashion since the 1930's. Economic and social
matters which had been fundamental components of the Alliance
for Progress were relegated to a lower priority, as the war
monopolized the attention and the energies of the United States
government. The administration which took office in 1969
quietly dropped the expression Alliance for Progress and placed
its hemispheric policy in a more modest perspective. Further-
more, its major diplomatic efforts were conditioned to a new
world order viewed as an equilibrium between five major powers:
The United States, the Soviet Union, Western Europe, China and
Japan. Within such a framework it is understandable that the
need for a Latin American policy should not appear as a matter
of great urgency. The question seems no longer to be what
priority should be given to the inter-American system, but rather
whether it is relevant.
The following view seems to be representative:
"Pan-Americanism, at least under U.S. leadership as it was
understood by Presidents from Franklin Roosevelt to Lyndon
Johnson, is in its death throes, if, indeed, it ever lived. The ties
that bind together the nations of North and South America
become fewer and weaker; the policies and actions of the
countries south of the Rio Grande become increasingly inde-
pendent of U.S. influence. The vision of two great continents,
joined by common liberal values and aspirations as well as by
geography, marching hand-in-hand into a better future for all is
distorted almost beyond recognition by the events of the last
several years.i1
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respect to Latin America, the criterion by which the relative
warmth of bilateral relations is measured is the attitude towards
private foreign in 'cstment in each country. The decision on the
part of the Nix-)n Administration to drop any pretense of
"special relationship" with Latin America has been criticized by
some as a downg-tiding of the inter-American system. Neverthe-
less. given the mcod and aspirations of Latin America today, an
arms-length, businesslike relationship with the United States is
not without advantages. A mutual disengagement now may
provide the basis or a healthier and more realistic relationship in
the future. one that is free from the psychological binds of
paternalism or dependence. An inherent part of this mutually
agreed upon sepa-ation is the fact that each partner acquires a
greater degree of freedom to take decisions on the basis of
national interest without excessive preoccupation about how they
might affect the i rterests of the other. It is in this light that Latin
America should v ew the decision of August 1971 not to exempt
its products from the 10: import surcharge. (Mr. Connally's
quaint remark, "We have no friends down there, anyway," should
not be interpreted literally.) Likewise, actions on the part of
Latin American c wuntries concerning territorial waters or control
of their natural resources should be understood as a reflection of
domestic priorities.
Simultaneously with the process of disengagement from hemi-
spheric affairs on the part of the United States, there has taken
place an acceleration in the pace of change in Latin American
societies. Population growth, rapid urbanization, better com-
munications and greater social and political awareness are creating
new and pressing demands upon the economies and the institu-
tional frameworks of most of the countries in the region. The
impatience with the status-quo has spread to the Church and the
military, two sectors that had previously been identified with the
traditional social and economic order. The pressure for greater
social justice and better income distribution within also extends
to those aspects of relations with the outside world which are
perceived as containing elements of foreign domination. Such as
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e case o s esire to con ro , e
nationalization of the International Petroleum Company,
Mexico's regulations on the transfer of technology or Panama's
struggle for national sovereignty over the Canal Zone. Since there
are private or public United States interests involved in these and
in similar cases, and years will go by before they are satisfactorily
resolved, it can be expected that these disputes will affect the
tone and the content of the inter-American dialogue for the
forseeable future.
An issue that will almost certainly provide material for lively
debate within the hemisphere during this decade is the relationship
between Latin American governments and the so-called multi-
national corporations, that is the large firms (mostly owned or
controlled by United States capital) doing business on a world-
wide scale. The precise nature of the relations between nation
states and these modern economic giants is something that has
yet to be defined even in the industrialized countries.'
Concern over their capacity to influence large and sudden
capital movements as well as the fear of U.S. labor leaders that
domestic job opportunities may be jeopardized by foreign
subsidiaries of North American firms could bring about legislative
action attempting to curtail certain aspects of the multinational
corporation's activities.
For the purposes of inter-American relations, however, the
following points should be kept in mind with respect to the
multinational corporations.
It is unlikely that there will be a common Latin American
policy on this subject. Treatment of private foreign capital will
vary between countries. Even where common ground-rules have
been established as in the Andean Group where a uniform code
towards foreign capital exists, there are different attitudes in each
of the member countries according to their economic and
political peculiarities. As a general rule, Latin American countries
will refuse to accept the relations with private foreign investors as
a proper subject for inter-governmental negotiations. Most Latin
American governments insist on separating their political relations
with Washington from the activities of United States corporations
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governmental agreements on the treatment of foreign investment
will be resisted b:, Latin American countries, independently of
whether those agreements are of a bilateral or a multilateral
nature. In brief, there is a deeply rooted feeling that treatment of
foreign investment is a domestic matter which should be dealt
with through the rational legislative and judiciary process rather
than diplomacy.
With few exceptions, Latin American countries will strive for
national control over natural resources and strategic sectors of the
economy such a+ electric power and other energy sources,
transportation, balking and insurance, telecommunications, the
information mcdi i, and the principal foreign exchange earners.
While the methods of bringing about such national control will
differ from country to country the overall trend is unmistakable.
Capital exporting countries, particularly the United States,
should not try to oppose this trend. On the contrary they should
welcome it and t,y to facilitate the process by all the means at
their disposal. It the long run it can be considered as an
investment in good international relations. Once the irritation
caused by certan obsolete forms of foreign investment is
removed. it is to he expected that Latin American countries can
carry on their political relations with the United States in a more
conciliatory mood. Furthermore, once the political issue of
foreign control of the economy is defused, in all probability Latin
American governments will come to pragmatic, mutually con-
venient arrangements with the multinational corporations for
specific projects where technology or access to international
markets are important considerations.
In this respect n is useful to bear in mind the case of Colombia,
a country that fcr over decades has enjoyed remarkably cordial
relations with the United States. It is not a coincidence, that of
the major Latin American countries Colombia is the one where
foreign investmen' (from the United States or any other source)
is the least signifcant. Coffee, the largest export commodity, is
totally in Colom-)ian hands. The railroads, electric power and
other utilities are in the public sector. Telecommunications were
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dominantly owned by nationals, as is manufacturing and com-
merce. Even in the field of petroleum where there is a sizeable
investment by the international companies, there is the counter-
vailing influence of a large and growing state petroleum company.
Under these circumstances the authorities can deal with the
international business community on a pragmatic basis, without
the interference of either xenophobia or inferiority complexes.
At present it is difficult for North Americans to understand the
asymmetry that exists in an economic relationship that implies
ownership by foreigners of important means of production. The
irritation which they experimented in the early nineteenth
century because of British investments in the United States is too
distant. And the hypothetical case of a foreign group acquiring
control of the North American steel industry for example has so
far appeared too remote to be credible. Therefore, it is
understandable that private and public United States attitudes
toward foreign investment should reflect the fact that while
foreigners do not typically control important assets in the United
States, the reverse situation is part of reality. However, rapidly
changing events may put those attitudes to a test in the not too
distant future.
It is estimated that by 1980 the member countries of OPEC
(Organization of Petroleum Exporting Countries) will obtain
additional resources from the sale of petroleum, of the order of
sixty billion U.S. dollars. Such a sum will provide these countries
with sufficient funds for the most ambitious development
programs and still leave a considerable surplus of liquid assets. It
is not too farfetched to conceive of a multinational corporation
created by one or several of the OPEC countries and endowed
with a few billion dollars for the purpose of investment in a safe,
dependable industrialized country that can offer growth potential
along with an attractive climate for investment, for example, the
United States.
With judicious counselling and a certain amount of imagination
such a multinational corporation could acquire a controlling
interest in attractive and profitable industries, say in the field of
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68 computers, jet arcraft, a ectrictty, automo i es, petroleum an
gas, radio and television, to name a few. It is interesting to
speculate on whit the reaction of United States public opinion
and government would be in such an eventuality. In fact, there
have already been some statements of concern in the United
States about suet a possibility and its political inacceptability. It
has suddenly been realized that decisions affecting the jobs and
well-being of Un ted States citizens should not be taken in the
Persian Gulf. Tlus realization may be of invaluable help to the
developing counties and particularly those of Latin America, as
they try to defir e the proper role for private foreign capital in
their economics it the same time as they attempt to maintain
normal relations with the United States.
Latin America's New Perspective
The customary warning about Latin America's heterogeneity is in
order. The political differences between the major countries in
the region are such, that the common ground on international
and economic questions is approaching the vanishing point. The
differences in size and degree of economic development make
generalizations dangerous.
As a rough approximation, however, it is useful to keep in mind
that the seven I irgest countries in Latin America (Argentina,
Brazil, Chile, Colombia, Peru, Mexico and Venezuela) account for
84% of the region's population and 90% of its economic output.
See Table Ill.
"The political 3roblem of mankind," - wrote Keynes - "is to
combine three things: economic efficiency, social justice and
individual liberty "t Latin American countries are trying to solve
the political problem in a variety of ways. The diversity of the
political models 3eing tried out throughout the region is one of
the hemisphere's zxciting features.
Two models that ire being closely followed are those of Chile and
Brazil. Chile is experimenting with a democratic transition to
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KAI
Population
(millions)
GNP
(US$ millions
at 1960 prices)
Argentina
24.4
22.718
Brazil
93.2
32.646
Chile
9.8
5.770
Colombia
22.2
7.861
Mexico
50.7
31.559
Peru
13.6
4.897
Venezuela
10.8
7.163
Sub-total
224.7
112.614
Total Latin America
266.8
124.487
The seven as % of total
84%
90%
Source: OAS Secretariat, UNECLA and Latin American Demographic
Center (CELADE)
socialism. President Allende is attempting to redistribute income
and change the social structure rapidly, even if the economic cost
is high. The Brazilian military government has given top priority
to economic growth in an attempt to transform Brazil into a
world power before the end of the century.
Twelve countries, comprising over 60% of Latin America's
population, are ruled by military governments. The Peruvian
military have departed from the traditional pattern with .a model
that combines nationalism and social reform and is situated
ideologically in between the Brazilian and the Chilean regimes.
The Ecuadorean and Panamanian military regimes could probably
be also classified as reform-oriented rather than traditional.
Colombia, Costa Rica, the Dominican Republic, Mexico,
Venezuela and Uruguay have civilian, elected governments,
operating within market economies.
Economic nationalism appears to be on the rise individually as
well as collectively. An increased self-confidence on the part of
Latin America will mean greater assertiveness in dealing with the
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eve ope countries in general. attn American countries can be
expected to ba-gain vigorously on matters such as access to
markets, monetary reform, commodity agreements, control over
natural resource' and direct foreign investment.
Greater self-awareness has also meant that increasing emphasis is
being placed on domestic problems. The population explosion,
rapid urbanizati in, unemployment and the inequitable distribu-
tion of income are creating severe strains on the region's social
fabric. A formidable political and economic effort will be
necessary to provide the jobs, housing, public utilities, nutrition,
education and health services required to insure minimum
standards of economic and social welfare for the people of Latin
America. The leadership, the resources and the inspiration
required to solvr these problems can only come from within the
region. The contribution of the outside world towards an effort
of this kind will lecessarily be marginal.
Assigning priority to internal problems need not imply with-
drawal from tl e outside world. Latin America is becoming
integrated into the international economy. A multilateral, lib-
eralized pattern of world trade provides an opportunity to
expand and diversify the region's exports. As can be seen in Table
IV Latin America's exports increased from US$1 1.1 billion to
US$14.3 billion between 1966 and 1970. Although exports to
the United Mates increased, exports to Western Europe and Japan
increased at a hitjier rate.
Cooperation between the countries of the region, and between
Latin America ind other developing regions will contribute to
improve the bar;aining position of the developing countries with
respect to the industrialized world. The Organization of Petro-
leum Exportinf; Countries, which Venezuela contributed to
create, has given ample proof of the benefits to be gained from
working togethc -.
Summary and C inclusions
The bi-polar na urc of the world has changed. China and Japan
have joined the United States and the Soviet Union as major
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 Approved For
1966
US$ millions
Per Cent
1970
US$ millions
Per Cent
United States
3.803.8
34.1
4.353.8
30.4
Canada
287.7
2.6
463.2
3.2
Latin America
1.175.5
10.6
1.665.4
11.6
Sub-total
5.269.0
47.3
6.482.4
45.3
Industrial Europe
3.391.8
30.4
4.399.5
30.8
Other Europe
395.8
3.6
609.1
4.3
Sub-total
3.787.6
34.0
5.008.6
35.0
Japan
491.8
4.4
962.1
6.7
Socialist Countries
405.4
3.6
321.0
2.2
Rest of the World
1.196.1
10.7
1.525.8
10.7
Sub-total
2.093.3
18.7
2.808.9
19.6
powers. The European Common Market is predominant in
international trade. Its role will be decisive in shaping world
commercial and monetary policy. China's role in the world
economy is still modest. Nevertheless she will have a decisive
political influence in Asia. Japan has emerged as a major
industrial and trading nation exerting considerable economic
influence over the non-socialist countries of Asia.
Latin America's traditional relationship with the United States
is changing by mutual consent. Although inter-American
economic ties continue to develop, both sides are moving towards
a less intimate political relationship.
The relationships between the big powers are relevant for Latin
America to the extent that world peace and reasonable stability
in the international economy are maintained.
Given these external conditions, Latin America can be expected
to concentrate its efforts on the solution of its pressing economic
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with each county' 's cultural and political values.
Rodrigo Botero k executive Director of
Fundacion Para 17 Educacion Superior v el
Desarrolo, Bogot.t, Colombia.
From an article by Lawrence E. Harrison entitled, "Waking from
the Pan-American Dream," published in Foreign Policy, Number
5, Winter 197'-1972. Although Mr. Harrison explains that the
views expresse 1 in the article are his alone, they constitute a
candid and coherent summary of an attitude towards Latin
America, that is not inconsistent with recent governmental
behavior towar is the region.
2 For a provo:ative and comprehensive discussion of the
economic and political implications of the growth of the MNC's
see Raymond Vernon's Sovereignty at Bay, Basic Books, New
York, 1971.
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Corporation: Paths,
Pitfalls and Politics
Ahead
The multinational corporation not only promises the most
efficient use of world resources, but as an institution, it poses the
greatest challenge to the power of a nation-state since the
temporal position of the Roman Church began its decline in the
15th century.
George Ball
During the 1970s and 1980s the multinational corporation will
likely become the major engine of development for both the less
developed countries and those countries which we now think of
as developed but which have not yet attained American standards
of living.
Herman Kahn
A multinational corporation is an American-registered company
manufacturing its products where labor is cheapest, and chan-
nelling its profits to another country where taxation is lowest or
preferably non-existent.
England's Sir Arnold Hall
We are lending money to the Americans to enable them to buy
us.
France's J-J Servan-Schreiber
The most important international commercial phenomenon of
the last two decades has been the burgeoning of private foreign
investment, especially in its characteristic form, the multinational
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policy in the ne ct two decades - and especially for our three
areas of South America. North America and Europe - will be less
determined by what is said at international conferences than by
the gut reactions of people and governments back home,
particularly in thu developing world, to this growing force in their
midst.
The multinational corporation (MNC) is already the most
involving of all th-- international economic relationships which are
binding nations more closely together, while complicating their
political relationships and compromising their sovereignty. It is a
phenomenon with profound consequences for the kind of world
we will be living in ten or thirty years from now, yet it has no
institutions to guide its development or to set ground rules for its
operation, and no accepted machinery for reconciling conflicts of
interest which it engenders. It is subject to the often conflicting
laws of both the nation in which it is based and the nation in
which it does bu: iness, yet it is not fully in the control of either
one. It vastly complicates the problem of economic decision-
making by goveriments. Nations cannot even agree whether the
multinational corporation is a modern form of extraterritoriality,
basically exploit, live, or whether it is a benign agency for the
redistribution of wealth and the diffusion of technology through-
out the world. A great deal is going to depend on which of these
two views eventu thy becomes the majority one.
A paper like this can be of use to a conference like this only if
the author sticks out his neck and sets down his own guesses, so
that the other participants can discuss how wrong they think the
guesses are. I begin with relations between multinational corpora-
tions in western Europe and North America, although, as will
soon emerge, I suspect that these relations are going to become
much less important than those in the developing south of the
world.
Americo-L-'uropecn-Jalwnese Treaty
As between western Europe and North America I do not think
that the challerge from multinational corporation -- "le deft
American" or any counter "deft Europeen" - is going to become
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a ormer issue i e n~
misunderstandings about mergers: not just transatlantic ones, but
also intro-European ones - particularly between companies in
Latin European countries (where tax rates are negotiable) and
non-Latin countries (where they are statutory). But the European
Commission at Brussels will move gradually towards harmoniza-
tion of company law, tax law, and monopoly regulation; the
United States will probably. slowly adopt these European innova-
tions that work (like value-added tax), while the Europeans
modify, towards the American pattern, those that don't.
Thus it should increasingly be realized that between the
European community and America - and, perhaps later, between
them and Japan - a body of common interest exists. A next step
might be to reach agreement among the European and North
American governments on a set of restraints with regard to their
multinational corporations. Among the friendly industrial nations
of the non-Community world, there is no reason why govern-
ments should intervene on behalf of their multinational corpora-
tions; they might even gradually move towards making equal
treatment a fact instead of a fiction. This will more easily come in
the form of equal treatment among foreign corporations and, far
more reluctantly, in the form of equal treatment for all. By
contrast, at present, almost all nations favor their own domestic
firms, particularly in government purchasing.
As momentum built up, and as European and North American
governments and businesses became reassured that a measure of
equalization and a set of ground rules were in the interest of all,
more ambitious institutional innovations might become pos-
sible - such as international courts of law and regulatory agencies
with independent powers. Eventually, we might see the emer-
gence of a body of international law applying specifically to the
multinational corporation, and the creation of genuinely inter-
national companies free of national ties and registered with an
international agency having clearly defined powers, though I
suspect that for a long time even these companies would still look
Dutch or German or American! I think that the first steps in this
direction will be taken as between Europe, North America and
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span unng he aiou I am quite uncertain o t to
pace at which the,, will proceed. But the pace of events between
them and the developing countries to the south including Latin
America - seems I kely to be much more important.
Therefore I have donated the bulk of this paper to the
relationship between the multinational corporation and the
developing countres. especially in Latin America. It is here that
we will see the most important developments of the next decade.
It is here that we race the greatest potential promise and danger.
And it is here that we most need fresh thinking.
Manufacturing Goes South
Most of the argument in this paper is based on three main
guesses:
I During the next zwo decades there will be a large transfer of
manufacturing ind istry from the three rich industrial areas of the
world (North America, Northwest Europe, Japan) to the poorer
areas to the south. In particular, this transfer will include
manufactures of both finished goods and components for export
back to today's richer countries. Between now and 1993 the rich
one-third of the world will increasingly find that both economic
and social logic are impelling it to move into the post-
manufacturing age, and to shift more and more manufacturing
output down to the poor south of the world.
2The multinational corporation will naturally be the mechanism
initially most favored by corporations in the rich countries for
this southward transfer of manufacturing. Often this will mean
the wholly-owned American (or European or Japanese) sub-
sidiary. There are some advantages as well as disadvantages for
poorer countries in this form of transfer, and later in this paper
we will be frankly discussing them. But the key strategy for a
successful developing country should be to put itself into a
position where it an choose. My guess for the next two decades
is that, if a developing country has a thriving domestic business
ethos and domest c business sector, then it is likely that the
multinational corporations of the world will beat a path to its
door, asking to be allowed in. It will then be up to the developing
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policy that will not succeed will be one that stops the growth of a
domestic business ethos, and that then erects barriers against the
participation of foreign firms that, as a result of these factors, will
not want to come in anyway.
3 I agree that in some cases host governments in the poor south of
the world will inhibit economic development, either by mistake
or because they do not want it. In many developing countries, the
class struggle today is really between the "new men of govern-
ment" and the "new men of business" (both domestic and
foreign.) These "new men of government" may win the struggle
in some countries, either because they have the military on their
side, or because the masses can be won to support them by a
mixture of economic apathy and emotional romanticism (fos-
tered by nationalism, anti-colonialism, anti-Americanism, anti-
capitalism, etc.) But while this scenario is convincing as a sketch
of what may happen in many of today's poorer countries for
some of the time, it is not convincing as a sketch of what will
happen in all of them for all of the time. At least some of today's
poorer countries are likely to climb eagerly onto the development
bandwagon, and there will then be an incentive to follow them.
Those leading the climb will be the "new men of business" in the
developing countries. Sometimes (as in Mexico and Japan) the
.policy they will carry through will be one that will restrict the
importing of technology through the particular medium of MNCs;
sometimes (as in Brazil and Singapore) they will be self-
confidently liberal in importing technology through the MNCs. My
belief is that both policies will sometimes work in the particularly
favorable circumstances of the years ahead, because the urge on
the part of the rich countries to transfer manufacturing activity
southwards - to areas like Latin America - will often be strong.
Let me now explain why.
Gathering Pace
Business generated by multinational enterprises outside their
home countries already amounts to about $350 billion worth of
goods and services a year (three-fifths of it by U.S. companies).
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 Approved
world. The proportion is increasing rapidly, because the
production of mt ltinational corporations seems to be expanding
at about 107 a year. On a crude extrapolation of recent trends,
one could expect multinational corporations to be responsible for
one-fourth of the production of the non-communist world by the
early 1980s.
If there is not a revolt against receiving multinationals by the
host countries, there is a strong probability that this last figure
will prove to be an under-estimate. Trends in the rich countries
suggest that the growth of multinational business activity in some
form is likely o be faster in the near future than in the
immediate past. partly because (a) American companies have
acquired the tecl.niques of multinationalism; but largely because
(b) western Eurcpe and Japan are very likely in the period
1973-93 to follow American's 1950-70 trend, and start "ex-
porting companies and knowhow, much more than goods, to the
outside world."
The essence of argument (a) is that there is a certain technique
in "going multin itional": namely, acquiring a degree of expertise
in foreign tax lass, employment customs, written or unwritten
business regulati?'ns, and social and political habits. That tech-
nique was pioneered in the 1950s and 1960s by the giants, and is
to some extent now almost available in packaged form (especially
for companies cperating out of a U.S. background) as well as
being made easi' r by the presence on the spot abroad of U.S.
chambers of corimerce, U.S. banks, and the like. Smaller U.S.
firms are now wd.ll placed to take advantage of this development,
especially in countries where U.S. multinational corporations
have already spread like wildfire.
The key statist.c for argucment (b) is that, at present, overseas
production by European and Japanese companies is less the
annual value of heir exports. This was true of America until the
1950s, but now production by U.S. companies abroad exceeds
U.S. exports by five to one. The U.S. multinationals' production
abroad has therefore become, quite suddenly, by far the most
important form of American involvement in the world economy.
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become true of the EEC countries and Japan, and that their
investment and export of knowhow - like that of the United
States - will go especially to the poorer countries.
Some people deny this trend by pointing out how much U.S.
investment in the period 1950-70 went to mature, white,
industrialized countries (such as western Europe, Canada and
Australia). They say that American production knowhow could
be transferred fairly easily to this sort of country with slightly
lower wage rates, but that it will be more difficult for American
and European companies to shift manufacturing jobs to countries
where people have visibly lower living standards than themselves.
This argument ignores the extent to which northern Europeans
have already done precisely this, by moving workers instead of
plants.
During the 1950s and 1960s, northern Europe did not follow as
strongly the American course of exporting manufacturing plants
overseas, but instead imported workers in large quantities from
the south. In Britain, the imported workers came first from the
West Indies and then from India and Pakistan; in northern
continental Europe from poorer southern continental Europe
(Italy, Spain, Greece, Yugoslavia, and Turkey) and then north
Africa. At first, it was supposed that these workers would do
mainly the "dirty" or "heavy" or unpopular service-industry jobs.
But the experience of the Renault motor works in Paris - which
is one of the few big automobile plants in a national capital - has
shown that sophisticated Parisians do not any longer want to
work even in highly-paid manufacturing jobs like those in
automobile production, which only fifteen years ago were
regarded as the most envied and plum jobs for most Europeans.
More than half of Renault's workers today were born outside
France.
Immigration of workers into northern Europe has now become
unpopular, because it raises social problems; and the Europeans in
the next two decades are highly likely to move their plants south
to the workers instead. By the 1980s, any big new European
automobile-producing plant will probably be located either in
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Until the Iasi few years Japan's industry has been based on
high-wage big firms, and on low-wage small firms from which the
big firms have nought their components. The "lifetime employ-
ment" system in Japan meant that the small firms field on to
their cheap lab )r for a long time. The big Japanese firms thus
became very sk fled at breaking down their production processes
into systems wl ere component work could be sub-contracted to
small firms, wl ich made these components in ways that were
efficient but did not require the use of much highly-skilled or
well-educated craft labor. Now, however, young Japanese will not
go into low-wag, small firms, and wage levels are levelling up. The
Japanese. who certainly do not intend to allow mass immigration
of unskilled foreign workers, are therefore likely to set up these
"small firm" in lustrics in some profusion in parts of Asia with
cheaper labor. They have already begun to do so. North American
and west European industrialists might do well to study (and
imitate) some of the ways in which the Japanese thereby
subdivide their f reduction.
Developing countries should also study Japanese experience. Big
Japanese firms sire used to dealing with large numbers of small
Japanese sub-contractors, which at least regard themselves as
independent films. Some typical relationships between big
Japanese firms and small Japanese sub-contractors are not in the
sub-contractors' interests (e.g. credit terms, monopoly dealing,
etc.), but other, provide an excellent framework within which
small independent firms can grow. Governments of developing
countries would be well-advised to study the terms under which
they would like locally-owned firms in their own countries to
develop along this potentially profitable road as sub-contractors
to big Japanese -ompanies. These governments should suggest the
sorts of sub-con ract arrangements into which local firms should
and should not omter. And they should then encourage maximum
competition to get the sorts of contract which seem desirable.
This effort might sometimes be aided by changes in local law
(including the aw of bankruptcy and debt collection), local
credit facilities, local import and export regulations, etc. Many
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to study the question: "What are the prospects for independent
local firms becoming sub-contractors to big Japanese industry,
and what steps should this government take to encourage
desirable participation in this?"
Should They Want Multinationals?
The clutch of recommendations above assumes that developing
countries, like those of Latin America, should want to see the
spread of multinational corporations in their lands. There are
some strong arguments on the other side. I would draw up the
present lines of debate in the following way. The arguments that I
have underlined are those that I take most seriously on either
side.
The arguments of the critics need to be taken as seriously as the
arguments of the proponents. But it will be convenient to discuss
the latter first, concentrating on those underlined in Table 1.
Table 1: The Debate Over The Multinational Corporation (MNC)
1 Pro: By focusing on economic rationality, the MNC represents
the interests of all against the parochial interests of separate
nations. It is the most effective available counter to rampant
nationalism and a concept of sovereignty made obsolescent by
the intensity of our interdependence. Its only political weapon is
that it can remove its benefits from developing countries that are
politically unreliable or confiscatorily anti-business; and this is a
political and economic incentive towards responsibility that is in
the poor countries' own interests.
Con: The MNC removes a significant part of the national
economy from responsible political control, without escaping
improper political influence, including influence from the govern-
ments of the MNC's home countries. The MNC is an invasion of
sovereignty and frustrates national economic policies. It frag-
ments industries, causing proliferation without hope of
consolidation.
2 Pro: The MNC is the best available mechanism for training
people in countries for modern managerial skills.
Con: It does not train people in entrepreneurial skills, which is
what a developing country most needs.
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diffusion of technology.
Con: The transfer of technology is often minimized because
(a) R&D is generally carried out by the parent company; (b) the
training of nationals of the host country for R&D posts is often
neglected; (c) th - technology itself is often closely held. The
phenomenal grow th of Japan was made possible not by the MNC
but by licensing a;reements.
4 Pro: The MNC is the most promising instrument for the transfer
of capital to the developing world and its role will be crucial in
overcoming the income gap which endangers the peace of the
world.
Con: The cost o the capital brought by the MNC is far higher
than the host go%ernment would be charged as a direct borrower
in capital market The MNC often invests relatively little of its
own capital, and nanages to buy up foreign enterprises with local
capital. The prof is of the MNC are exorbitantly high, and too
low a proportion Af them are reinvested.
5 Pro: The MNC's integrated and rationalized operations in many
lands make it incomparably efficient. It has proven to be the only
really effective intrument for economic development.
Con: The rationalization of production is sometimes a tax dodge.
The MNC does distort development programs by channeling its
reported profits to countries where taxation is lowest, by
manipulating cha-ges for services and transactions on behalf of
particular affiliates so as to disguise real earnings.
6 Pro: The MNC enhances competition and breaks local monopo-
lies. To the consumer, it provides a better product at a lower
cost. To the host country it can provide a new export industry
for tomorrow, aid this will become especially important in
the /uture.
Con: Its sheer si'e and scope represents unfair competition to
local enterprises. ft tends to pre-empt the fast-growing, advanced-
technology indusries where profits are highest, ignoring older,
more competitive fields. Often the subsidiary does not export to
its country of on in. in order to avoid competing with its parent
company and causing trouble with its labor force at home.
7 Pro: Management of the MNC is becoming increasingly flexible,
sensitive to local customs, and genuinely international in fact and
in spirit.
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and centralized control, the interests of the parent company must
remain dominant and the MNC cannot ever become genuinely
international. Often, the MNC has resisted genuine inter-
nationalization by declining (a) to put foreigners into manage-
ment and (b) to make shares of its affiliates available to nationals
of the host country.
8 Pro: The MNC is an agent of change which is altering value
systems, social attitudes and behavior patterns in ways which will
ultimately reduce barriers to communications between peoples
and establish the basis for a stable world order. Opposition to the
MNC arises essentially from the fact that the process is inevitably
disruptive and that all change is resented.
Con: Far from breaking down barriers between peoples, the
MNC aggravates tensions and stimulates nationalism. Moreover,
there is every indication that these tendencies will intensify in
years ahead.
Tomorrow's Exporters
The main advantages of multinational companies to developing
countries are tied up with arguments of economic rationality,
efficiency, and the growing importance of the companies as
exporters. I believe that this last point is going to become the
crucial one for Latin America. All experience has shown that it is
wise to try from the beginning to direct industrial development in
Latin America in ways whereby the new industries have in-
centives to keep down inflation. Export-oriented industries have
such incentives, because cost increases prevent the selling of more
exports. By contrast, development on the basis of attempted
import-substitution is much more likely to breed inflation.
Unfortunately, attempted import-substitution was the main-
spring behind most development programs in poorer countries
during the 1950's and 1960's. As Professor Raymond Vernon put
it in his Harvard study on multinational corporations, "Sov-
ereignty at Bay":
During World War II, import substitution in Latin America and
Asia was a necessity; after World War II, it was turned into a
virtue. And as Africa during the 1950's emerged from her period
of colonialism, her countries were quick to adopt similar policies.
As a result, most countries in the less-developed group systemati-
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might be manufactured locally. Most instituted procedures by
which local businessmen could bring such opportunities to the
attention of the appropriate ministries. Practically all the less-
developed countries were prepared to prohibit the importation of
a product as soot as the obstacles to local production no longer
seemed utterly irsurmountable.
It was this sort c I 'development that fostered inflation rates of 50
per cent a year and more. The break-out towards inflation-
countering, export-oriented production came largely with the
multinationals. To quote Raymond Vernon's study again:
The capacity tc use the less-developed countries as areas of
production for export appears to have been intimately related to
the multinational character of the exporters. Without multi-
national links, tl e subsidiaries probably would not have increased
their exports on anything like the same scale. illustrative of that
tie is the fact that although US-controlled manufacturing sub-
sidies accounted for 41 per cent of Latin America's manufactured
goods exports in 1966, they were responsible for less than 10 per
cent of Latin America's gross manufacturing value added in that
year. Even more to the point was the type of goods being
exported. These were the products of industries in which barriers
to entry were rclatively high and in which successful marketing
required a rcla-ively advanced degree of sophistication and
control. As a result, the marketing process itself generally
required the set' ices of affiliates as well as the supervision of the
parent.
Critics will poin out that, as I have said in the table, "often the
subsidiary does not export to its country or origin, in order to
avoid competing with the parent company and causing trouble
with the labor force at home." But my guess is that this factor
will be progressively mitigated by three factors: (a) the fact that
consumer taste: are becoming more and more international;
(b) the great growth of new products in manufacturing
schedules; (c) tae educational and training revolution which is
going to make t le training of labor in the poor countries a much
quicker and more scientific process.
On point (al, I believe that most businessmen are under-
estimating how last the trend towards multinationalism of
shopping is gong to go. A recent Delphi poll among leading
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the view that, in the 1980's, multinational information systems
will be available to permit catalog shopping from computer
terminals across national boundaries. Once that sort of facility is
available, it will become very difficult for big companies to decide
to make their transportable products in any but the cheapest
places. And the poorer countries will have a big advantage as
exporters of manufacturing goods because of their relatively
cheap labor, including an increasing number of skilled artisans in
manufacturing, at a cost and in a quantity that is increasingly not
going to be available in the United States, northern Europe and
Japan.
On point (b), above, the biggest expansion in developing
countries' manufacturing for export during the period 1972-92
may well take place in very new products, including products that
have not yet been invented. This follows the trend of the last 25
years. In the mid-1940's, few people would have forecast that, by
the mid-1960's, so many television sets sold in the U.S. under
American brand names would in fact be manufactured in
countries of Southeast and East Asia, such as Taiwan. Few people
would have forecast that, during this period, television sets would
have swollen from not being available at all to over 80 per cent
household coverage in so many developed countries of the world.
They also could not have forecast this development for transistor
radios, because in 1945 transistor radios had not yet been
invented.
The reasons why new products, like electronics, are especially
successful exports for poorer countries spring partly from the fact
that the knowhow for producing them tends to be codified in a
form that can be transmitted to inexperienced labor forces (it has
to be, because nobody is experienced in making something
entirely new). But the reasons spring chiefly from the absence of
pressure groups in the rich countries. These newest industries, like
electronics (ranging up to such things as integrated circuits),
developed so quickly that production in them had taken boat to
Taiwan almost before U.S. labor unions and business lobbies back
home were sufficiently organized to realize that such industries
existed!
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duction during the period 1972-92 will consist of entirely new
products. When the products are not entirely new, manufacturers
will increasingly pretend that they are.
To this obsc vation should be added the great spur to the
"southward transfer of manufacturing," point (c) above --
which may spring from the fact that mankind is on the edge of a
breakthrough it the whole concept of its learning and informa-
tion processes. Business will probably adapt well to the new
educational tecinology during this training revolution - better
indeed than many schools and universities - because business is
generally free from prejudice against the application of machines
to human endeavour; it has no educational bureaucracy; and its
focus is more on results than on defending institutional methods.
The training and information revolution is likely to include:
?A huge expansion in computer-based education. The computer
will become a means of discovering each student's learning
pattern and thus make education (and training) truly in-
dividualized. St t in a heuristic configuration, drawing from
recorded responses by other students with similar difficulties, the
computer will by itself check out alternative ways of overcoming
or circumventin, the students' difficulties, vastly increasing the
efficiency of the energy the student applies to his education.
+ In step with t its codification of the learning process, multi-
national compu erized data banks will become available that will
aid decision makers in choosing where to locate production
facilities (e.g., manufacturing plan(s) all around the world, with an
eye on the trainability of labor as well as on other advantages.
Thus the head offices of multinational corporations will be
helped to plan and control production processes worldwide; to
multinationalize their handling of logistic functions (such as
purchasing bod raw materials, and services, tools, components
and equipment); to plan and control the marketability of
different count -ies' products in third countries; to handle all
credit transactions (by the 1980's most foreign exchange trans-
actions will be carried out by multinational computer systems
which link together, on-line, both large and small international
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towards a world in which multinational computer systems are
used to organize permanent ongoing international conferences in
which research into, and discovery of, new ideas are stored
immediately in data banks accessible to on-line locations in all
countries where patent agreements are honored.
? We are also moving into a world in which the price of
telecommunications will no longer depend on distance. Once the
world has put enough satellites into space, and installed the
equipment, the marginal cost of making a picture telephone call
to China should be no more than the cost of telephoning the
office next door; it will not put any extra strain on manpower or
equipment.
Norman Macrae, of The Economist, has suggested where these
trends might lead for business organization by the beginning of
the 21st century, when three-fifths of today's inhabitants of the
world should still be alive:
As a prototype for the most successful sort of firm in thirty or
forty years' time, it may be most sensible to visualize small groups
of organisers or systems designers, all living in their own
comfortable homes in pleasant parts of the world and com-
municating with others in the group (and with the systems
designers) by picturephone: arranging for the telecommunication
of the latest best computerised learning programme on how to
make a better mousetrap (or, more probably, how to make the
next-successor-but-five to integrated circuits) rooftop to rooftop
to about 2,000 quickly trainable, even if only newly literate,
workers assembled before their two-way-teaching-in computer
terminals by some just tolerably efficient organising sub-
contractor (also taught by long-distance telecommunicated com-
puter lessons) in West Africa or Pakistan.
The logical and eventual development of this possibility would be
the end of nationality and national governments as we know
them. Less and less would people live out their lives where they
were born; more and more would they live where they choose.
Those people working in systems-designing and knowledge-
producing jobs would merely have to live "hooked into" what
would become easily transportable two-way terminals to the big
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and goods-transporting jobs would have to take on-site jobs for
their working years; but probably the working year for these
people would become much shorter, and holidays (including
sabbatical years) -nuch longer and more frequent.
However, this s looking fairly far forward towards what some
people will not r--gard as a world Utopia. We must now return to
more immediate problems of how the developing countries may
react as. and if, the southward transfer of manufacturing gathers
pace.
Objections to hftu'tinationals
I suggest that ti e three most valid objections to multinational
corporations in developing countries, as underlined in Table I, are
(a) they do not cncourage local inhabitants in entrepreneurial (as
distinct from operative and executive) skills; (b) they often fail
to carry as large i tax burden as they might; and (c) MNC's can
aggravate tensions and stimulate nationalism, with every indica-
tion that these te_3dencies will intensify in years ahead.
On point (a), I suspect that there is an easy rule of thumb. If a
country is mana,ing to set a spark of real entrepreneurial fire
alight among its own people, as in Japan and Mexico, then there
probably will be a sufficient inflow of licensing agreements,
proposals of joint ventures, etc., to bring about the southward
transfer of technology, on terms acceptable to local people and
without letting the MNC's dictate their own terms. But I suspect
that the remaining poor countries of the world will, by the end of
this century, include a sad number which have kept out the
operations of multinational corporations on the grounds that
they think that they have sufficient local entrepreneurial talent,
but which have round no support in the world market for their
view.
On point (b), I suspect that a lot of even the biggest
multinational corporations may soon run into a blazing row.
lntra-company trinsfers are used to make it appear that profits
do not arise in I igh-tax countries, but rather mainly in low-tax
ones. It is not sensible to say that poor countries should respond
to this situation by all of them giving very generous tax
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a beggar-my-neighbor policy among them; and some are very poor
beggars already. I would be in favor of poor countries (1) band-
ing together in a tax convention not to give competing tax
concessions to multinational corporations (although they should
be sensible and not make the standard tax rates exorbitant
either); and (2) employing some commission or international
referee to report when unreasonable intra-company transfers to
dodge taxes have been made.
It is point (c) - the aggravation of tensions and nationalism -
that is the most difficult. In confronting it we do not handle easy
and computable things like market research reports and tax
assessments, but rather difficult things like the emotions of free
men.
Probably the best idea for tactful operation by multinationals
has come from Professor Howard Perlmutter, who classified them
as ethnocentric, polycentric or geocentric. But he sees these terms
not as being permanently descriptive of particular companies, but
rather quite often as phases through which a single company may
pass. He points out that to be genuinely international is a state of
mind, and that many multinational corporations, with all the
normal criteria for fitting this description, are extremely ethno-
centric. He tabulates the characteristics of his three types of
multinational corporations as shown in Table 2.
Clearly, it seems desirable to move towards the right in this
spectrum. The trouble is that this diluted solution always sounds
easy to advocate, but will generally be monstrously difficult to
carry out.
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Table 2: Three Trp:'s of headquarters Orientation Toward
Subsidiaries in an International Enterprise*
Organization
Design
Complexity of
organization
Authority;
decision making
Evaluation and
control
Rewards and
punishments;
incentives
Communication;
information flow
Perpetuation
(recruiting,
staffing,
development)
Complex in home country,
simple in subsidiaries
Home standards applied for
persons and performance
High in headquarters
low in subsidiaries
High volume to subsidiaries
orders, commands, advice
Recruit and develop
people of home country for
key positions everywhere
in the world
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Relatively low in
headquarters
Wide variation; can be
high or low rewards for
subsidiary performance
Little to and from
headquarters. Little
between subsidiaries
Nationality of host
country
Develop people of local
nationality for key
positions in their own
country
Increasingly complex and
interdependent
Aim for collaborative
approach between
headquarters and
subsidiaries
Find standards which are
universal and local
International and local
executives rewarded for
reaching local and
worldwide objectives
Both ways and between
subsidiaries. Heads of
subsidiaries part of
management team.
Truly international
company but identifying
with national interests
Develop best men everywhere
in the world for key
positions everywhere
in the world.
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LL-proved N,grotrl7fis7r?pffldTP
C. P. Kindleberger has argued that "the nation state is just about
through as an ecor omic unit." This view is naturally not welcome
in Africa and Asia, at just the moment when countries there have
emerged from the colonial link and become independent nation
states for the first time. The leading men in those countries have
reached the top by sometimes dangerous political endeavor, and
they understandably do not like to be told that the eminence
they have attained is pretty pointless anyway. This is one of the
reasons for an angry socialist ideology in some of these countries,
and in some part, of Latin America. It is one reason why the
governments of so_ne developing countries, after deciding that the
"time is ripe" to set up some domestic industry (often on very
unscientific evidence), then try to raise capital and other
resources domesti:ally and set up an indigenous plant - perhaps
resorting to some "buying-in" of technology and management
ideas from abroac on a contract basis. The danger is that they
may then purchas- the wrong type of production knowhow and
management from abroad, getting only second-class inputs.
Nevertheless, this feeling of nationalism has to be lived with.
The conclusions and recommendations to this paper therefore
begin with recommendations for developing countries themselves;
and then for U.S. and European multinational corporations. I
have formulated t_iese and other recommendations elsewhere, but
will be very inters ;ted to hear the conference's views on them.
The two most important determinants of events in this field will
be:
I What government of the LDC's try to do; and
I believe that LI)C governments can improve their position - to
get more out of the MNC's, if you will - in a way with which
businessmen can come to terms. That at least is the promise. It is
to that end that I have tried to formulate my recommendations.
Recommendation: for Developing Countries
I would like to bt:gin with recommendations for the governments
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nessmen will disagree with these, but I think that they are
realistic.
l Gear policy to the assumption that a much export-oriented
manufacturing production will be switched in the period 1973-93
to the poor south of the world, especially to countries where the
domestic tone of government is not anti-business (with the
attitude to local business often being more important even than
that to multinational corporations).
2 Examine and spur the increasing possibilities for small inde-
pendent firms to become sub-contractors to big foreign manu-
facturers (with a special eye on the great opportunities and
particular problems involved in being sub-contractors to big
Japanese industry). Test whether this "sub-contracting revolu-
tion" can be aided by changes in local import/export regulations,
credit arrangements, business law, and government handling of
foreign contracts.
Recognize, though, that simply to require local procurement
runs the great risk of encouraging high cost production among
sub-contractors. Ways should be found to insure that local
procurement requirements do not become a burden on the whole
enterprise in its ability to export competitively.
3 Do everything possible to import education and training by
telecommunicated, computer-assisted, visual-aid-assisted means. It
may be worth buying these programs competitively from multi-
national service corporations; giving performance contracts to
profit-making as well as to non-profit-making bodies that will
provide pioneer educational experiments in particular areas;
certainly buying course-broadcasting via satellites, from the great
universities of the world; and hurrying forward the day when
worldwide involvement will be possible in particular educational
programs. I also believe that nutrition is a field in which it ought
to be possible to hire from abroad the services of a multinational
service-corporation of a new type. The multinational corporation
ought to be a specially useful instrument in the struggle to
overcome malnutrition, because it combines almost all the
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LIT elements needed in the sears or so u ions: a capaci y r
large-scale R & fi; access to the most advanced technologies;
experience in. an,l knowledge of, other countries and cultures;
and production a_id marketing knowhow. To improve nutrition
means primarily I riding ways either to raise the protein content
of food that is giown or to add to it in processing. Both entail
dealing with age-old tastes and preferences. It may involve
developing tastes for a vegetable having a texture with which the
individual is unfamiliar, instead of casava, which provides more
bulk per square toot of planted ground, but is almost without
nutrition. Or it nay involve persuading a woman to alter her
cooking habits and the eating habits of her family. All this
requires local pari ners for the MNC of exceptional awareness and
imagination. It would be a very good thing to find out who has
the awareness and imagination by setting competitive ventures
afoot. The devel sped countries. including most especially the
United States. have been very bad at providing incentives to do
socially useful th ngs which government has proved incapable of
doing. I believe that one of the great challenges before the
developing world is to succeed in this field where the developed
world has largely failed. Starting from a cleaner sheet, without
either existing private or bureaucratic interests already in place,
some developing countries might win a great future for them-
selves by experiments in these fields.
4 Recognize that nvestment and production decisions will in-
creasingly be tak=n on the basis of information retrieved from
giant multination it and computerized data banks. Take advantage
of this, and gear your policies rather deliberately in a way that
will not unnecessarily make all these data banks list you as a bad
risk country to in+est in.
5 Recognize that multinational operation, rather than joint
ventures, may b: better initially for export-oriented industries
(including some extractive industries), and large-scale advanced
technology industries. But these multinational corporations
should be required to put out more and more of their subsidiary
functions for competitive local tender.
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importing technological knowhow if the developing country has a
large enough local business infrastructure to have several
competing joint ventures in the industry concerned. But if your
developing country cannot thus set up competing joint ventures,
then it may sometimes be better to allow an ordinary foreign
multinational corporation to enter on generous but non-
monopolistic terms (because another foreign multinational might
then come and compete with it), or else try to import foreign
technology on competitive (i.e., open to tender) fee-paying or
contractual terms.
7 Do not allow protection for the home market of more than, say,
30 per cent of domestic value added.
8 Try to ensure that as many local industries as possible (including
especially those with multinational participation) become capable
of exporting competitively. Even industries whose main purpose
is to substitute for imports should not receive very high
protection once they are established.
9 Do not force - or even encourage - MNCs to pay wages above
the local average, because this will lose you your main inter-
national competitive advantage. Try to impose proper taxes on
the MNC instead, while allowing it the advantage of cheap local
labor. Also, use the taxes to improve the non-wage standard of
living of your people, as through the development of
infrastructure.
10 Set up a joint arbitrating mechanism to insure that taxes are not
being dodged through the manipulation of charges for services
and transactions by the head office of the multinational back in
America or Europe on behalf of its local subsidiary. An
arbitrating mechanism will shame the multinational out of trying
the most obvious dodges that do exist, while rigorous unilateral
searching by your country's own tax inspectors will sometimes be
unfair, and often be expected to be.
Recommendations for American and European Multinationals
American and European multinational corporations have no
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consensus could )e achieved. But pending broad international
agreement, they night consider the following ground rules for
operating in Latin American countries.
I Follow a positive iolicy of hiring out as much work as possible to
local sub-contractors. repair shops, service contractors, etc.
2 Refrain from bu\ ing out local companies in traditional fields
dominated by loco t investors.
3 Avoid special concessions not available to local businessmen.
4 Acknowledge an obligation to give local nationals a sense of
participation by (a) training and employing nationals in top
management; and (b) conducting some R & D locally whenever
feasible.
5 Recognize that th - host country benefits more from taxes which
help infrastructure development than wage inflation for your
favored labor for.cs - even though one of the appeals of the
MNCs is their high productivity.
6 Refrain from avoiding tax by manipulating charges for services
and transactions o_i behalf of a particular affiliate so as to disguise
real earnings.
My concentration in this paper has been at the expense of
working over one again the more familiar ground of relations
between the MNC's and the developed countries. Aside from the
fact that there is no shortage of literature on this subject, I really
do believe that the interplay between the MNC's of the developed
north and the countries of the southern half of our world deserve
the time and atten_ion of this Conference.
John Diebold is ft ,sident of the Diebold
Group. Inc. in Net, York.
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 Appr9yed For FieJ~?M?Bat~0 9iftW1 ~$8-01315R000200110001-3
United States
Frank Church
United States Senator
Charles McC. Mathias, Jr.
United States Senator
John S. Anderson
United States Congressman
Chairman, House Republican
Conference
Roger Anderson
Vice Chairman, Continental
Illinois National Bank & Trust
Company
John Cates, Jr.
President, Center for Inter-
American Relations
Lawton Chiles
United States Senator
John Diebold
President, The Diebold Group,
Inc.
John Drick
President, First National Bank
of Chicago
Donald M. Fraser
United States Congressman
John F. Gallagher
Vice President, International
Operations, Sears, Roebuck &
Co.
Samuel Goldberg
Special Assistant to Senator
Charles McC. Mathias, Jr.
Augustin S. Hart
Group Vice President
Quaker Oats Company
Alexander Hehmeyer
Executive Vice President
Field Enterprises, Inc.
Richard A. Hoefs
Partner, Arthur Andersen
& Co.
Thomas L. Hughes
President, Carnegie Endow-
ment for International Peace
Robert E. Hunter
Senior Fellow, Overseas
Development Council
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Vice President, Leal and
Government AJJaits..1larcor,
Inc.
Jerome Levinson
Counsel to the Sub-Committee
on Multinational Cirporalions,
Senate Foreign Relations
Committee
Harald B. Malmgre i
Deputy Special Re, resentalive
for Trade Negotiations
1. David Mellon t R.ipporteur?
Assistant Executive Director
Chicago Council ot. Foreign
Relations
Charles A. Meyer
Inter-American AJlairs
Martha Muse
President, The Tin? er
Foundation
John E. Rielly
Executive Director. Chicago
Council on Foreign Relations
Alex R. Seith
Partner. Lord, Bissell & Brook
Adlai E. Stevenson III
United States Sena'or
Robert Taft, Jr.
United States Sena or
Canada
Ivan Head
Special Assistant it the Prime
Minister
Argentina
Oscar Camilion
Editor-In-Chief, El CLARIN
Marcilio Marques Moreira
Vice President. Uniao do
Buncos Brasileiros
Chile
Patricia Rojas
Chairman, Executive
Committee of Inter-American
Council for Education, Science
& Culture
Colombia
Rodrigo Botero
Executive Director, Fundacion
Para la Educacion Superior y el
Desarrolo
Peru
liduardo DiBos
Mayor of Lima
Venezuela
Aristides Calvani
Minister of Foreign Affairs
Enrique Perez Olivares
Minister of Education
Jesus Soto Amesty
Chairman, Foreign Relations
Committee, Senate
Marcos Falcon-Bricena
Chairman, Foreign Relations
Committee, House of
Representatives
Carmelo Lauria Lesseur
Vice President, Banco Centrale
de Venezuela, S.A.
Belgium
Thom Kerstiens
General Secretary, UNIA PAC
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Paul Fabra
Assistant Economic Editor
LE MONDE
John W. Tuthill
Director General, The Atlantic
Institute
Italy
Dolt. Piero Bassetti
President, Lombardy Regional
Government, Milan
Gian Paolo Casadio
Professor of International
Economic Organization,
University of Bologna
Renato Altissimo
Member of Parliament, Milan
Filippo Pandolfi
Member of Parliament, Milan
Co-Director, Banca
Commerciale Italiana
Spain
Laureano Lopez-Rodo
Minister of Planning and
Deputy Prime Minister
Jorge Brosa
Director General
Banco Espanol de Credito
Joaquin Ruiz-Gimenez
Attorney and Professor of Law
University of Madrid
Switzerland
Ernst Keller
President, ADELA Investment
Co.
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The Steering Committee of the Atlantic Conference and the
Chicago Council on Foreign Relations wish to express their
appreciation to tie following for providing financial support for
the Conference:
The Tinker Foundation
The Creole Founcation
The Johnson Fou illation
Fiat S. p. A.
Arthur Andersen A Co., of Venezuela
The Continental I linois National Bank and Trust Company
Sears, Roebuck at d Company
Quaker Oats Com ,any
Government of Venezuela
The Conference Director would also Like to express the apprecia-
tion of the Steering Committee and the Chicago Council on
Foreign Relation, to the following for their support of the
publication of the Atlantic Conference Papers:
Sun Times/Daily News Charity Trust of Field Enterprises, Inc.
Marcor, Incorporated
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