Part 1

East-West Trade Trends

MUTUAL DEFENSE ASSISTANCE CONTROL ACT OF 1951

(the Battle Act)

* * *

FOURTH REPORT TO CONGRESS

Second Half of 1953

LETTER OF TRANSMITTAL

_To the Congress of the United States_:

I have the honor to submit herewith the fourth semiannual report on operations under the Mutual Defense Assistance Control Act of 1951 (Battle Act), the administration of which is a part of my responsibilities.

The period covered is July through December 1953.

A large part of this report is an examination of what the Soviet Union has been doing in its trade relations with the free world. In order to put the Russian activities of the last half of 1953 in a more understandable framework we have ranged back over the last 30 years to show how foreign trade fits into their economy and serves their purposes. To study Soviet trends and tactics is obviously important to the economic defense of the free world. To make a report to the Congress and the public on these matters should also be useful. There has been much public interest in the subject.

The selection of this theme, however, does not mean that Soviet trade activities are the only important consideration to be taken into account in the formulation of U. S. economic defense policy. They are not. Many other factors enter in, as told in Chapter V.

In preparing the report my staff has drawn heavily upon the expert knowledge of the Department of State and other agencies. But of course the responsibility for the report is ours.

In my last Battle Act report I said that the strategic trade control program had been hampered by lack of public knowledge. This is still true, but to a less extent, it seems to me. There is a better understanding of the Government's policies, a greater realization that the soundness of East-West trade policy is to be judged not primarily on the amount of trade, but more on what kind of goods move back and forth, and on what terms they move.

HAROLD E. STASSEN, _Director, Foreign Operations Administration_.

MAY 17, 1954.

CONTENTS

INTRODUCTION: Page NOTE ON "STRATEGIC" AND "NONSTRATEGIC" 1 CHAPTERS: I. STALIN'S LOPSIDED ECONOMY 3 Emphasis on Heavy Industry How Forced Industrialization Affects Trade How the Kremlin Controls Trade West Has Never Barred Peaceful Exports Stalin's Last Gospel

II. THE NEW REGIME AND THE CONSUMER 11 Letting Off Pressure The "New Economic Courses" Malenkov's Big Announcement Khrushchev and the Livestock Lag Mikoyan Advertises the Program Has Stalin Been Overruled?

III. THE KREMLIN'S RECENT TRADING ACTIVITIES 19 The New Trade Agreements More Consumer Goods Ordered A Shopping Spree for Ships Most of All, They Want Hard Goods Something Different in Soviet Exports They Have Dug Up Manganese The Emergence of Russian Oil Gold Sales Expanded Reaching Outside Europe

IV. WHAT'S BEHIND IT ALL 35 The Kremlin and Peace A Mixture of Motives Their Objectives Haven't Changed Their Practices Haven't Changed The Free World Is Strong The Challenge

V. U. S. POLICY ON STRATEGIC TRADE CONTROLS 43 The Background Basic Policy Reaffirmed The New Direction of Policy Reviewing the Control Lists East-West Trade: Road to Peace Trade Within the Free World The China Trade Falls Off They Play by Their Own Rules United States Policy on the China Trade

VI. THE BATTLE ACT AND ECONOMIC DEFENSE 55 Battle Act Functions The Money and the Manpower Meshing the Gears Improving the Machinery The Termination-of-Aid Provision Miscellaneous Activities Summary of the Report

APPENDICES

A. TRADE CONTROLS OF FREE WORLD COUNTRIES 65 B. STATISTICAL TABLES 89 C. TEXT OF BATTLE ACT 99

CHARTS

1. VOLUME OF TRADE OF OEEC COUNTRIES WITH EUROPEAN SOVIET BLOC 6 2. FREE WORLD TRADE WITH THE SOVIET BLOC 21 3. EDAC STRUCTURE 57

_INTRODUCTION_

=Note on "Strategic" and "Nonstrategic"=

To help protect the security of the free world, the United States and certain other countries have been working together for more than four years to withhold strategic goods from the Soviet bloc.

But how can you tell strategic goods from nonstrategic goods? A good many people have asked that question. It is a reasonable question and it deserves a nontechnical answer.

The answer is that strategic goods, as understood in the day-to-day operations of the program, are those goods which would make a significant contribution to the warmaking power of the Soviet bloc.

This is a practical guide to action. There is no rigid definition that holds good for all times, places, and circumstances. All strategic goods don't have the same degree of strategicness. The free countries have embargoed some, merely limited others in quantity, and kept still other items under surveillance so that controls could be imposed if necessary. Even the same item may vary in strategic importance, depending on the destination, the changing supply situation behind the Iron Curtain, and other circumstances which may change from time to time. Whether an item includes advanced technology is an important consideration. In specific cases, two experts of equal competence may disagree on these things. Two agencies of government, differing in function, may bring different points of view to a given problem. The same is true of governments.

Since there is no distinctly visible boundary between "strategic" and "nonstrategic," some people insist there is no such thing as a nonstrategic item at all. It is true that even bicycles, typewriters, or ordinary hardware may help the other fellow by strengthening his general economy. And these people argue that anything that contributes to the general economy helps in a military way, too.

That is a correct concept in actual warfare but it is not an acceptable concept of "strategic" in the present situation, for trade on certain terms can help the free nations too. They carry on two-way trade with the Soviet bloc for concrete commercial benefits. The problem is to gain those benefits without permitting the Kremlin to accelerate the growth of military power or to divide the free world.

In rating items as strategic or nonstrategic, it is clear that there are innumerable commodities, used entirely or mainly for civilian purposes, which would not make a clearly significant contribution to war potential. No one would have trouble drawing a line between a jet plane and a suit of clothing, to take an extreme example. Few would have difficulty putting cobalt on one side of the line and butter on the other. As for the border area where it is less clear what contribution an item would make, the allied governments put their heads together, pool their facts, and try to arrive at mutually acceptable judgments.

As President Eisenhower has said, "Unity among free nations is our only hope for survival in the face of the worldwide Soviet conspiracy backed by the weight of Soviet military power."

_CHAPTER I_

=Stalin's Lopsided Economy=

_The weakest link of the socialist chain is merchandising and distribution; if this can be strengthened, present difficulties will be overcome. Upon it the Kremlin has wisely concentrated attention. The Kremlin's immediate objective, as recently announced by the resolutions voted at the plenary session of Bolshevik leaders, is to increase the supply of foodstuffs and consumers' goods and stimulate their mutual exchange._

That quotation is from a Moscow dispatch to the _New York Times_. The dispatch was written by Walter Duranty and printed on November 6, 1932.

As long ago as that, and even before, the Russian people were wondering when something was going to be done about the supply of food and other things they needed, and the dictatorship was making motions--but not very helpful--in that direction. Goals were set and decrees were issued. But the results were disappointing, and the standards of living of the Russian people stayed low.

Stalin's First Five-Year Plan called for a 50 percent rise in gross farm production during 1928-32 inclusive. But by 1932, farm production had declined by 20 percent. The difficulties have continued ever since. For example, the Third Five-Year Plan, beginning with 1938, was scheduled to bring a large increase in consumer goods--larger than the increase being promised nowadays--but instead the supply of consumer goods actually decreased, even in the three prewar years of the period. Per capita consumption in the Soviet Union is lower now than it was in the 1920's, before the 5-year plans commenced.

=Emphasis on Heavy Industry=

The basic cause of these continual disappointments now is widely understood: The Communist elite, while preaching continually about the "uneven development of capitalism" and the "ever-increasing decomposition of the world economic system of capitalism," created a remarkably lopsided economy of their own, in comparison with which the free economies of the West look very well-balanced indeed.

Beginning in the 1920's the Bolsheviks deliberately concentrated on building a base of heavy industry. In their 5-year plans, pig iron, steel, coal, oil, electric power, factories, heavy machinery, armaments have always been given the right of way over the needs of the people for meat, fish, vegetables, vegetable oils, milk, butter, chairs, tables, beds, bicycles, watches and clocks, radio sets, decent homes, boots and shoes, fabrics of cotton, wool, and silk--and so on through the myriads of consumer items that are commonplace in most Western countries.

Impressive advances have been made in heavy industry. But this was done at a staggering cost to the inhabitants. It was accomplished through a vast use of forced labor and police discipline, and through the neglect of the manufacturing of consumer articles, the growing of foodstuffs and textile fibers, and the building of homes and retail stores.

The Kremlin made strenuous efforts to maintain the flow of farm products to the cities, even while drawing labor away from the farms. But heavy metalworking industry was always considered more important than food and clothing. And more important, too, was the long, bitter and as yet unsuccessful attempt to cram collectivism down the throat of the Russian farmer. Stalin considered this struggle ideologically essential. Moreover, it was the means of forcing the peasants to supply food and raw materials to the growing industrial complex without receiving consumer goods in return. All in all, the failure of Soviet farm policy was one of the most resounding failures in the brief history of the U.S.S.R.--and it still is. Bread and potatoes are the principal diet of the masses, and even the grain and potato crops are unsatisfactory.

During the years of Hitler's devastating invasion, the Kremlin had to dedicate the energies of Soviet Russia to a fight for survival. But when the Grand Alliance crushed Hitler, and the western nations, hoping for a peaceful world under the United Nations, practically dismantled their military establishments and fell back into their normal roles as consumption economies, the Kremlin did not alter the lopsided war economy of the Soviet setup. The Stalin regime inaugurated a new phase of hostility toward the West. The grim drive to build up an industrial-military foundation continued. Consumer goods were still given a low priority in the scheme of things. And all this was discouraging not only to prospects of world peace but also to the prospects of happiness and dignity for the weary and heroic Soviet peoples.

=How Forced Industrialization Affects Trade=

Moscow laid the same pattern upon the European satellite countries and cut them to fit the pattern. Heavy industrialization was imposed on them regardless of their desires and the needs of the people. This forced industrialization absorbed large amounts of commodities that were formerly available for export to the free world. At the same time the collectivization of agriculture was imposed on the satellites, and this aggravated the difficulties of keeping pace in farm output.

While these policies were reducing the total amounts of goods the satellites had available for export to the West, the U.S.S.R. was siphoning off great trainloads of what remained. The ability of these countries to trade with the West was further reduced as they were pushed into granting priorities to one another on the exchange of items they could have more profitably sold to the free world.

Moscow also forced upon the satellites the characteristic Soviet trading goal of reducing and eventually eliminating all dependence on the free world. Lenin himself had emphasized that the first goal of the Soviet Union in its economic relations with the outside world was to gain "economic independence from the capitalist countries." A prominent Soviet economist, Mishustin, in a book published in 1941, spelled out this principle in greater detail:

The main goal of the Soviet import (policy) is to utilize foreign products, and above all, foreign machinery ... for the technical and economic independence of the U.S.S.R.... The import (policy) of the U.S.S.R. is so organized that it aids the speediest liberation from the need to import.

In 1946 the leading Soviet economist, Vosnosensky, restated the objective in the Government periodical, _Planned Economy_:

The U.S.S.R. will continue in the future to maintain economic ties with foreign countries in accordance with the tested line of the Soviet government directed towards the attainment of the technical-economic independence of the Soviet Union.

The Kremlin's new Eastern European empire included vast natural resources and sizeable labor reserves. Nevertheless it was--and still is--a long way from being self-sufficient, in the sense of being able to match the production levels of the free world, or even in the sense of fulfilling its own ambitious production plans, without trade with the West. Imposing an ultimate goal of self-sufficiency thus could not eliminate the Soviet bloc's dependence on the free world. Communist trade planners still found it advantageous to import from the free world many things the bloc countries needed. The new goal did, however, affect the composition of the satellites' trade. The planners placed much greater emphasis on the importation of industrial raw materials and equipment that would, in the long run, reduce the need to import.

In the U.S.S.R. itself, the Government had always been disinclined to offer exports in order to import consumer goods, like meat, butter, textiles, and appliances. Now the same policy was clamped on the satellites. So the bulk of Soviet-bloc imports from the West consisted of goods that did not enter the homes of the people.

The result of all this was a big decline in trade between Western and Eastern Europe, as compared with prewar years. Before the war, countries which now make up the Soviet bloc in Europe carried on less than 10 percent of their foreign trade with one another; now this has risen to more than 75 percent.

=How the Kremlin Controls Trade=

All foreign trade of the countries of the enlarged Soviet empire was placed under absolute state control. For both the U.S.S.R. and the satellites, international trade is now not only a 100-percent monopoly of the state, but also an integral part of the planned economy, officially proclaimed as such. Each country, as a part of its general economic plan, estimates its import requirements and then develops a program of exports to pay for the imports. These country plans are coordinated by Moscow. Part of the machinery of all this economic planning and trade coordination is an organization, with headquarters in Moscow, called the Council of Mutual Economic Assistance.

This totalitarian trading system insures that foreign trade serves the purposes of the state.

Top priority in trade planning is given to the requirements of the U.S.S.R. Bloc countries are required to give one another preferential treatment in trade. With this system the export of any items to the West is easily restricted as it suits government purposes--whether or not the items could be considered as "strategic."

A vast amount of commercial information is obtained by bloc governments through their dealings with free-world traders and through their intelligence services. This provides Moscow with a comprehensive picture of the bargaining strengths and weaknesses of free-world traders.

Moreover the Soviet-bloc governments, as large buyers and sellers controlling the production and trade of a whole country, indeed a group of countries, enjoy certain bargaining advantages in dealing with the many smaller competing buyers and sellers in the marketplaces of the free world. Since losses on individual transactions can be absorbed in longer-term government gains on other deals, the unit profit need not be the factor that determines the advantage of a deal, as it generally does for the free-world trader. Soviet-bloc governments can--and not infrequently do--set their prices at levels which discriminate among the various buyers and sellers with whom they deal. They exercise monopoly control not only in selling their own goods abroad but also in disposing of imported goods at home. The Soviet-bloc governments get bargaining advantages from such practices, made possible by their totalitarian trading system--practices which the West would not wish to imitate but which it might as well squarely face.

Foreign trade is a political as well as an economic weapon in the hands of the Soviet Communist state. By way of illustration, in 1948 it was possible for the Kremlin first to reduce and then to cut off all trade between Eastern Europe and Yugoslavia as a part of the attempt to bring Marshal Tito to his knees. The attempt failed, but the Yugoslavs suffered serious economic difficulties before they could readjust. Even earlier, the world had seen how the Kremlin refused to allow the Eastern European countries to benefit from the flow of Western goods that could have been theirs under the Marshall plan--another evidence of how the state's objectives took precedence over the people's needs.

The Kremlin in its propaganda made much of Western trade restrictions. But the West's limited controls over the shipment of strategic goods did not come into existence until long after the Kremlin had begun using trade as a cold-war weapon. Even then these Western controls, far from being aggressive actions against peaceful trade or against the welfare of populations, were common-sense measures of economic _defense_, designed only to foster Western security by withholding from aggression-minded governments the important war-building materials that would make aggression easier.

On the other hand, the Kremlin's long-term objectives in its economic relations with the free world are far more than defensive. They have a dual character: strengthening the bloc and weakening the free-world powers. These objectives can be summarized as follows:

1. To feed the economy, especially the industrial-military base, with imports that help the bloc become more powerful and less dependent on the free world. 2. To drive wedges among free-world nations at every opportunity. 3. To increase the reliance of free-world nations on the bloc for markets or supplies, and thus make the free world more vulnerable to bloc pressures.

=West Has Never Barred Peaceful Exports=

The Kremlin, while coldly managing the East-West trade of its domain in the manner described, always had its propagandists and fellow travelers out beating the drums and making a continual outcry against the security trade controls of the West. The main line of the propaganda was that trade was equivalent to peace and prosperity, and that the Soviet bloc always stood ready for unlimited trade, but that the Western "economic blockade" barred the way. In each country the businessmen were constantly handed the false but inflammatory story that they were being shamefully discriminated against by their government and that the businessmen of neighboring countries were less subject to restrictions. Western Europe as a whole was treated to an alluring picture of a vast prospect of East-West trade, beyond all factual probability in view of Soviet policies.

This propaganda cannot be separated from the Soviet trading objectives. It is merely one of the instruments used in trying to achieve those objectives. It was used lavishly at a Moscow Economic Conference in April 1952, but although some Western businessmen who attended that meeting were impressed, the chief result was not an expansion of trade or elimination of Soviet discriminatory practices, but only the formation of new propaganda councils. And one of the significant facts of the present situation is that, although some new economic factors have arisen, the main propaganda line stays the same. At the Berlin four-power conference in late January 1954, Molotov used it again.

The truth is that Western controls, which did not become effective until the 1950's, have never been an "economic blockade." The controls apply to a small percentage of the types of goods which made up East-West trade in the prewar years or in 1948. They leave room for the expansion of trade in many items. There are even many kinds of industrial raw materials and products which have never been embargoed by the Western Governments. Western security controls were not primarily responsible for the low levels of East-West trade.

The main causes were Soviet policies, which wrenched the customary trade of the satellites away from Western Europe, tying it to the U.S.S.R., and which forced industrialization upon the whole European bloc in a manner which reduced its ability to trade with the West. In addition to these basic causes, the bloc countries were unsatisfactory trading partners in many ways. The prices were often higher than the world market; the deliveries were uncertain and sometimes deliberately withheld; the quality of their goods was often inferior; and some of the countries had a regrettable--and perhaps intentional--tendency to go into debt to the West.

=Stalin's Last Gospel=

Stalin himself, in the year before he died, made some illuminating statements about the reorientation of the trade of Eastern Europe. He wrote an article, The Economic Problems of Socialism in the U.S.S.R., which was published in October 1952, though it had been written earlier in the year. In this article Stalin said that the most important economic consequence of World War II was "the disintegration of the single, all-embracing world market." Actually there was scarcely a single world market before the war, but Stalin obviously was talking about the change in the trade of those countries that fell into the Soviet orbit during the war or shortly thereafter. He said that "now we have parallel world markets," confronting one another. He then made the customary charge that the Western countries, through an "economic blockade," had tried to "strangle" the Eastern European countries. He said the West had thereby unintentionally contributed to the formation of the new parallel world market. On this occasion, however, Stalin went on to say that "the fundamental thing, of course," is not the Western economic blockade, but the fact that since the war the Eastern European countries "have joined together economically and established economic cooperation and mutual assistance."