“U.S.-Soviet Trade Relations”

Testimony of

President, RWR, Inc.,
former Senior Director for International Economic Affairs
at the National Security Council (1982-1985)

Before the U.S. HOUSE OF

Mr. Chairman, I am very pleased to have the opportunity to
testify before the Subcommittee on International Economic Policy
and Trade on the subject of East-West economic and financial

The Subcommittee is appropriately gathering various
perspectives on several measures under consideration by the
Congress and the executive branch which could potentially lead to
a substantial increase in the USSR’s trade and financial ties
with hard currency countries, including, but by no means limited
to, the United States. Given perestroika’s failure, thus far, to
boost Soviet economic performance and living standards, there are
many indications that Moscow intends to expand the USSR’s role in
the international economy as a means of resolving at least some
of its key economic and hard currency earning problems.

President Mikhail Gorbachev has no doubt been impressed by
China’s success in carrying out domestic economic liberalization
and foreign trade reforms as well as establishing workable terms
of agreement with the GATT, the IMF, the World Bank, and the
Asian Development Bank (ADB) . Gorbachev may well assume, in
light of China’s current upheaval, that the USSR can somehow
capitalize on these developments and move onto a faster track —
with Western government assistance — in luring foreign capital,
investment and technology, and joining international financial
and trade institutions.

I believe it would be a serious mistake for the United States
and our allies to respond favorably to such appeals by Moscow for
several reasons, despite efforts to encourage a fundamental
transformation of the Soviet command economy and totalitarian
political system.

First, as the examples of China, Poland, Romania and others
have demonstrated, greater integration into the global economy
and large-scale infusions of Western capital, technology and
investment into command economies do not automatically assure a
transition into market-based reforms and necessary levels of
political liberalization. The large centrally-controlled economy
of the USSR remains fundamentally incompatible with the
market-oriented philosophy underpinning international trade and
financial organizations. A multi-year track record of systemic
economic and political reform — including across-the-board price
reform, deep cuts in military spending, termination of a massive
program to acquire illegally strategic Western technology, a
sharp curtailment of the resources expended to maintain a global
empire of impoverished client states, and genuine (not contrived)
ruble convertibility — should be established before the U.S.
supports Moscow’s bid for either observer status or membership in
the GATT, the IMF, the World Bank, the ADB or other such
institutions. Premature acquiescence by the West on this front,
as well as providing substantially expanded Soviet access to
Western capital and technology, is more likely to retard
structural economic reform than promote it. This prediction is
reinforced by the outcomes of similar Western efforts in Eastern
Europe over the past two decades.

Second, I am not yet persuaded that the USSR necessarily wants
to play or is capable of playing a constructive role in the
global economy. Structural economic reforms are not yet underway
in the USSR, as most Soviet economists admit. Moreover, Moscow
still finds it difficult to resist the temptation to recruit
Third World countries into adopting radical policies which
advance the USSR’s short-term political objectives — such as
endorsing Cuba’s efforts to catalyze the coordinated repudiation
of Latin American debts owed the international financial
community. Soviet participation in the U.N. and specialized U.N.
agencies is rife with such examples.

In addition, current friction between the United States and
its major trading partners, faltering progress in the new GATT
round, and increasingly tense North-South economic and financial
relations (stemming primarily from the international debt crisis)
, would provide the USSR with many new opportunities to further
“stir the pot” between the United States and its
traditional allies. We have already witnessed in the NATO context
Gorbachev’s mastery of playing off differences between Western
countries as a way of advancing Soviet strategic goals.

Finally, it is important to recognize that our most
significant export markets and opportunities lie in the
developing world, particularly Latin America, and in the Pacific
— not in the USSR and Eastern Europe. The Rand Corporation has
just completed a study of prospects for comparative economic
growth which clearly shows that Soviet bloc countries are further
declining in importance in the international economy. On balance,
I believe this could well be an irreversible trend for several
reasons, and ought to be reflected in U.S. international economic
policy priorities. For example, the payoffs of focusing our
priority attention on the dynamic economies of the Pacific Basin
and revitalizing economic development in our own hemisphere will
likely be enormous in terms of U.S. employment, global economic
growth, and enhanced Western security.

As far as the Soviet Union and Eastern Europe are concerned,
they should be encouraged to reform but held to strict standards
before being further absorbed into the global trading and
financial systems. In addition, Western taxpayers should be
insulated from this reform effort to the maximum extent possible,
beginning with the multilateral termination of Western government
guaranteed and direct credits. Such official loans and credit
guarantees are subsidies — pure and simple. They artificially
lower the interest rates and increase the size of credits as the
risk of any future debt rescheduling or default is transferred
from private commercial banks to Western taxpayers.

The Administration should also urge G-7 governments at the
upcoming Paris Economic Summit (July 14-16) to supervise the
voluntary phasing out of undisciplined, general purpose loans
from commercial banks to Soviet bloc borrowers (including bonds
and other securities). Western banks should be encouraged to
replace this kind of commercially unsound lending to sovereign
borrowers with tightly structured, specific purpose credits in
support of trade transactions and projects. Greater data
disclosure also needs to be demanded by Western lenders as a
precondition for continued Soviet and East European borrowing,
and current gaps in Western statistical reporting should be

In the field of human rights, I find myself in full agreement
with the position taken by a senior official of the Union of
Council for Soviet Jews in a recent letter-to-the-editor in the Washington
(6/9/89). It states that emigration from the USSR
should be an established right, not a privilege as is now the
case. President Bush is correct if he is demanding of Moscow the
codification and implementation of this basic right as a
prerequisite to any waiver of the Jackson-Vanik and related

Concerning the prospect of restored Soviet access to U.S.
Export-Import Bank credits — this issue should be evaluated
separately from the conditions under which the United States
might grant MFN status. If, as Senator Bill Bradley and others
have suggested, Western government credits and loan guarantees
are taxpayer subsidies which should be ended multilaterally, then
the United States should not send the opposite signal to our
allies by restoring such U.S. credit subsidies. Moving ahead on
Eximbank availability would probably doom any executive branch
effort to forge a common alliance policy on this important issue.
In this connection, three virtually unanimous Senate resolutions
over the past 12 months calling on this President to discuss and
reach agreement with allied leaders on the security dimensions of
Western credit flows to Warsaw Pact countries and Soviet client
states, have, thus far, been ignored by the executive branch.

I have tried in the short time allotted to summarize my views
on most of the questions posed by the Subcommittee. A description
of the broader context in which to assess East-West economic and
financial relations and related issues are discussed in my
written testimony submitted for the record of these hearings.

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