The Heritage Foundation

Executive Memorandum #24 on Trade, Economic Freedom

May 24, 1983

May 24, 1983 | Executive Memorandum on Trade, Economic Freedom

East-West Trade, The Summit's Key Issue


(Archived document, may contain errors)

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1. EAST-WEST TRADA THE SUMMMS KEY ISSUE

The leaders-of the' sevenmajor industrialized democracies will convene for their ninth -annual economic 'Summit ii'i the idylli c setting of colonial Williamsburg, Virginia, at one of the most critical'junctures of the international trading system since the Gr6at Depression. Their decisions on a wide range of pressing problems may well determine whether the still fragile recovery n ow underway in the United States will provide the necessary impetus to pull the world economy out of its longest recession since world War II. The results of th@ summit will indicate their political resolve to come to grips with and reconcile their diverg - ing attitudes toward the strategic roleof tradeiwith the Soviet Union that prevailed throughout most of the postwar era. As host of this summit, the United States must provide the leadekship to guide its allies toward agreements that arrest the rising ti de of protectionism, -reaffirm the commitment to free trade, and safeoard the international monetary system and, as a result, instill renewed confidence in a lasting consensus on common political and security objectives.

Perhaps the key issue for Western-l eaders will be how to construct a unified policy for commercial relations with the Soviet bloc. For the past two years, the Administration has endeavored to focus attention and forge agreement on three interrelated components;of East-West trade: first, ti g hter controls on the flow of dual-use high technology products and know-how; second, limitations on government iubsidized or guaranteed loans to finance exports; and third, the growinglenergy dependence of Western Europe on the Soviet Union. By-squarely;a ddressing these issues, the Administration correctly has underscored thelbroader strategic implications of East-West trade.

At-the Ottawa summit in 1981, agreement was,reached to review the list of embargoed security exports maintained by;Cocom,-the Paris- based Coordinating Committee on East-West trade. DuriAg the years of-economic detente, this list had been limited to goods witA direct military applica-. tions. As a result, the Soviet Union could freely acquire technologies of ancillary military utility. . It also freed the' Soviets from the need to expend vast amounts of money for-research andidevelopment and allowed them to funnel these funds into their military bdildup. Considerable agreement has been reached at the ministerial lex@el on how to curtail the outflow of sensitive Western technology. Despite the potential divisiveness of this issue, the Reagan AdministrAtion should insist on further strengthening the Cocom guidelines and seek endorsementlor a

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r eview board within CoCom that will have the responsibility of'monitoring the flow,of high technology among Western nations to detect illicit diversions to the-Sovietbloc. The U.S. also should urge the Allies to implement the conclusions and recommendations ofiseveral studies that were initiated in order to examine contending pekspectives on advanced technology-exports.

Just-in time for last year's Versailles summit, the OECD countries concurred on elevating the Soviet Union to indusirialized country status, -erest!loans from national thereby renderi ng it ineligible for low-int export agencies. As part of the comprehensive review of East-West trade agreed to by the Europeans in return for the Administration's decision to lift the Siberian pipeline embargo in Novembek-1982,governments are studying way s to close the hidden loopholes for subsidies in East-West trade. The Administration should emphasize that:restraint on subsidies is not tantamount to-a declaration of economic wArfare. Instead, when viewed properly,-it aims at putting East-West trAde on a strictly commer- cial footing. The Administration also should pi6ss for'an overall ceiling on credits to the Eastern bloc at the lowest agreeable level. It should insist on unequivocal commitments in okder to avoid the recur- ' It -actually been rence of last year's post-summit dispute over wha -had agreed to.

This dispute resulted from differing interpretations of the ambigu- ously worded statement that governments would exercise "commercial prudence" in their dealings with the Soviet Union; in accordance with their common "politics and security interests.'! Months of internecine warfare followed over the applicability of this @ledge to the Siberian gas pipeline. The Administration should extractia commitment from European.leaders not to build the second s trand 6f the pipeline as planned so as to deny the Soviet Union the vast liard-currency purchasing power it would derive from this single project and to freeze European dependence on Soviet gas at presently anticipated levels. Stopping credits to the Sovi e t bloc will automatically limit future opportunities for such long-term capital projects and dry up Western assistance for the development of the Soviet industrial infrastiucture. Agreement on a burden-sharing formula to e @alize the costs of qu restraint in East-West trade would be helpful in;forging a consensus that national security considerations should determine the scope and level of commerce with the Soviet Union. It could also facilitate Administration efforts to obtain apolitical declaration endor s ing deployment of intermediate-range nuclear forces in Europe beginning this fall. As the three principal recipients of these' U.S. missiles will be represented at Williamsburg, the Reagan Administration should use the visibility of the summit to demonstr ate the political resolve of the Western allies. Manfred R. Hamm Policy Analyst

For further information see: Soviet Acquisition of Western Technology, Central Intelligence-Agency, April 1982. Cord Meyer, "How to Trade with the Soviets," Washington Times, October 22, 1582, p. 11. East-West Trade: The-Prospects to 1985, Joint Economic Committee, U.S. Congress, August 18, 1982.

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