Kennan’s Warning on Ukraine
Ambition, Insecurity, and the Perils of Independence
Economic issues are now front and center for the world's political leaders, topping the agenda of both domestic and foreign policy concerns. While the major international security issues of the last quarter-century are still with us—the competition in strategic nuclear arms, the struggle of differing political systems, the confrontation of massively armed alliances in Europe, the menace of great-power involvement in local conflict—these are now being overshadowed by the risk that the operation of the international economy may spin out of control. For if this happens there will be no graver threat to international stability, to the survival of Western democratic forms of government, and to national security itself.
Last June West German Chancellor Helmut Schmidt spoke plainly at the NATO summit meeting. As he saw it, the most serious risks facing NATO were not military. The growing economic difficulties of its members, he said, "include dangers that cannot be exaggerated. Inflation and the necessarily following recession pose the greatest threat to the foundations of Western society."
Throughout the crisis of the Presidency, it was difficult for the American public to focus on international issues. What serious discussion there was dealt almost exclusively with the problems of détente with the Soviet Union. It is on this issue that Secretary Kissinger has called for a great debate, and Senator Fulbright is responding by holding extensive hearings to air the views of both critics and supporters of the Nixon Administration's dealings with the Soviet Union.
Certainly détente is important. The gains in East-West relations must be consolidated on a realistic basis; negotiations on strategic arms, the European Security Conference and the question of force levels in Europe must be pursued, and the attempt to progress toward a peace settlement in the Middle East (itself in part a test of the scope of détente) must command special and unremitting attention.
But just as inflation has now emerged as by far the most pressing domestic concern, so international economic policy is now our top external challenge. In terms of the scale of the problems and the imagination required for their solutions—and especially in light of the inadequate attention economic questions have received in recent years—this is the area which calls for our greatest efforts. The priority we have accorded for years to traditional political and security concerns must now be given to international economic issues. If we do not resolve them, the security problems that may ensue could dwarf those that now remain.
That economic problems have become critical in their own right should now be evident to us all. The first serious talk of major depression since World War II is gaining currency. Editors and economic analysts, from The Journal of Commerce to The New Republic, are pointing to the danger signs of economic collapse. By midyear, even though the shock of the Arab oil embargo and price rises had been largely absorbed in the United States, inflation was running above ten percent, real GNP was declining by 0.8 percent, while unemployment stayed high at 5.2 percent and was expected to rise.
In Europe and Japan the situation is, if anything, worse. By August the rate of inflation was roughly 18 percent in Great Britain, more than 20 percent in Italy, 15-16 percent in France, and about 25 percent in Japan. Real GNP was dropping in Britain and Italy, while even West Germany, with the healthiest economy in Europe, and Japan, with almost miraculous growth rates in the past, were both down to only two percent growth. High interest rates have choked off investment everywhere while unemployment has grown ominously in almost all major European countries. To these grim statistics must be added the oil bill, which this year will contribute to a European balance-of-payments deficit estimated at $20 billion, and growing concern, fed by the collapse of the Herstatt Bank in Cologne and the near collapse of the Franklin National Bank in New York, that the world's major financial institutions may be in jeopardy. Bankers in Europe and the United States are deeply worried that more banks may go under.
The outlook for the bulk of the poor nations is even more bleak. The additional aid required this year to meet the increased cost of food and energy is not materializing. This shortfall, and the lower North American harvest now projected for this fall, may be laying the groundwork for widespread famine and food shortages.
So far, however, the main dangers lie in the future, at least for the industrialized countries. At this writing, competitive devaluations have not taken place. Arab oil receipts are being recycled. The IMF has acted to help Italy and other countries meet their massive balance-of-payments problems stemming from the oil price rise. In early July, central bankers meeting in Basel agreed to try to help banks in financial trouble. The OECD is now predicting a lower inflation rate in the major industrialized countries for the last half of 1974.
Yet industrialized countries will remain under economic pressure. Even if oil prices soften somewhat, the energy bill will remain staggering. In the United States serious proposals have recently been advanced for at least two more years of stagnant growth to tame inflation, and the prospect of more than six percent unemployment has been greeted with equanimity by Administration officials.
Austerity measures in Italy, France and West Germany now appear to be slowing inflation, but before these countries can breathe a sigh of relief they are already gritting their teeth over the possibility of recession. Europeans and others must confront growing internal pressure to resort to unilateral beggar-thy-neighbor actions—export and import controls, exchange controls, devaluations and dumping. Arab oil revenues may grow into a massive and mercurial threat to international financial stability. Informal cooperation among economic authorities in the major countries, which has been instrumental in containing the crisis thus far, may not be able to stand up under persistent stress.
Ultimately, the intensity and duration of the current economic crisis will depend upon what governments do about it. While it is imperative to avoid self-fulfilling prophecies of economic doom, there is no automatic guarantee that things will come out all right. Therefore, responsible leaders of all political persuasions throughout the industrialized world must, as a matter of prudence, give serious consideration to the grimmer assessments.
As they look upon the international economic scene, moreover, apprehension is fueled by frustration, because the problems are beyond the span of control of individual nations. With the growth in economic interdependence, the problems are inextricably linked, and only a comprehensive and systematic international effort can deal with them.
There is nothing new in the idea of a comprehensive approach to dealing with the world's economic problems, nor in giving such concerns high priority in our foreign policy. Even as World War II raged, and with the consequences of the Great Depression still vivid, major efforts were made to build new economic institutions on a worldwide basis. The Soviet Union was represented at the Bretton Woods Conference in 1944, which established the International Monetary Fund and paved the way for the World Bank, and the Soviets also were invited to participate in the Marshall Plan.
Both Bretton Woods and the Marshall Plan stemmed from the recognition of interdependence—that the economic health of the major countries of the world affected the security and well-being of the others. It was clear that some kind of international economic system would rise from the ashes of World War II and the real task was to assure that it promoted recovery and did not go haywire as it had after World War I.
During this same period, the late 1940s, there was a parallel effort to build a comprehensive system of collective military security via the United Nations. This, too, was based on the conviction that security was interdependent, or as it was fashionable to say at the time, indivisible.
These first tentative structures for a reasonably universal economic and security system cracked apart in the intensity of the cold war. The industrialized market-economy countries ended up organizing the international economic system on their own while the Communist countries withdrew into autarky and set up their own more rudimentary arrangements. The Third World was so dependent on the industrialized world as to be only an appendage of it.
Over the next two decades, the 1950s and 1960s, the colonial nations of the Third World became independent, but wielded little economic or political power. Competition between East and West, along with traditional ties to the West, assured the Third World a certain amount of development assistance. Over time the Communist countries grew stronger and came to trade more with both the West and the Third World, while the latter began to participate to some degree in the management of the international economic system through the World Bank and IMF—in particular the Committee of 20 dealing with monetary affairs.
But at the beginning of this decade, we in the United States and the rest of the Western industrialized world, including Japan, clearly controlled our own economic security. Interdependence seemed only limited. For practical purposes the international economy was the economy of the Western world. We did not depend on the economic behavior of the Communist world in any significant way, and we were largely in control of what we needed from the Third World, despite the clamor of its representatives for greater equity.
The situation has changed markedly in the last four years. The West's international economic system is no longer insulated. Both the Third World and the Communist countries have dramatically demonstrated a capacity to disrupt it through cartel pricing of oil and massive grain purchases respectively.
In addition, just this year a "Fourth World" has precipitated out from the Third. Its members are those who lack major resources or economic power. The nations in this group are more dependent, more deprived and more aware of it than any large segment of the world's population in history. That some of the desperate nations of this Fourth World now may have access to nuclear weapons only adds to the prospects for tragedy.
There is a new distribution of economic power in the world and we must learn to deal with it. However, the sudden emergence of this changed economic equation is not just the result of Soviet grain purchases and the oil crisis. The impact of those developments has been directly proportional to the long-range changes already underway inside the Western international economic system.
By the early 1970s this system faced a visible breakdown in the way it managed its monetary affairs, and was already in the throes of an acute crisis of inflation—which spread from country to country in accordance with a sort of Gresham's Law toward the highest national rate. Inflation accompanied by stagnation was a new and bewildering phenomenon, undermining confidence in our ability to manage our industrial economies. Aid to developing countries had declined, generating increased desperation and resentment. In the last year, all these developments combined to form the essence of what may now be termed a total crisis: one that is both economic and political and involves the entire international system.
Fortunately this crisis coincides with a period in which political and military security issues are muted, and some of the major divisions in the world are being bridged and even healed. But we must seize the opportunities presented by détente and other improvements in the international picture to deal effectively with our economic problems, or the progress we have made toward a more secure world may be undone.
In the late 1920s there was also a version of détente, symbolized by the Treaty of Locarno, and at the same time an emerging depression. When the nations of the world failed to cooperate to deal with the depression, its consequences rapidly unraveled the elements of that détente, and in the end economic collapse contributed mightily both to the emergence of grave threats from Germany and Japan and to the paralysis of other nations, including the United States, in the face of those threats.
It is not alarmist to suggest that something of the same sort could happen today. If the economic crisis continues to deepen, détente, now stalled at several key points, could well go into reverse. Already the economic pressures on the members of NATO are undermining their defense postures and reducing Soviet incentives to negotiate. A more grave economic crisis in the West could generate dangerous temptations for the relatively less-affected Communist countries, possibly reviving their hope for the "demise of capitalism" and encouraging a more aggressive and interventionist foreign policy.
However, the dangers are not solely from the Communist world. New or dormant ambitions may be kindled in countries internally divided by economic disruption. Economic differences could precipitate a breakdown in our security relationships with Japan and Europe, leading perhaps to go-it-alone defense policies with profound consequences for regional stability. Other countries may become so self-absorbed as to completely withdraw from their responsibilities for international security: Great Britain may be nearing this point already, and some believe that Italy is past it.
The time has come to face the fact that the fundamental security objectives underlying the process of détente are now linked to the world economic situation. The economic cooperation that is required will involve us most deeply with our traditional postwar allies, Western Europe and Japan, but it must also embrace a new measure of comity with the developing countries, and include the Soviet Union and other Communist nations in significant areas of international economic life. Only thus can the present precarious period of détente lead beyond uncertain balance-of-power arrangements to the worldwide sense of common economic interest that is an essential underpinning of a relatively peaceful world.
The economic and financial dislocations created by last year's fourfold increase in oil prices pose the most urgent set of issues with which we must deal. The size of the price increase and the abrupt manner in which it was imposed (not to mention the use of oil as a political weapon) smacked of economic aggression. The first task of a foreign policy aimed at enhancing economic security should be to try to get an oil price rollback. Because of overproduction and decreased consumption there is some prospect for lower oil prices. We should do all we can to encourage the trend (and ensure its being "passed through" to the consumer), but as a realistic matter we must also plan our economic strategy on the assumption that high oil prices will continue.
The oil price hike is like a huge tax levied on most of the world's economies. However, it is a form of taxation without representation, for the size and expenditure of this tax is beyond the control of those who pay it or of their governments. Most of the payments made to the oil producers are remaining in Geneva, London and New York, where they are recycled back into the world economy. Nonetheless important problems remain:
-the burden of recycling the oil receipts is threatening to undermine the stability of the international banking system;
-the recycling of oil "tax" receipts is not putting funds into the hands of those who need it most.
To these pressing issues must be added the longer-term problem of how to handle the continued acquisition of foreign exchange reserves by the oil-producing countries—an accumulation which could reach over a trillion dollars by 1980.
Today oil revenues are taking the form of short-term demand deposits in European, and increasingly American, banks, while the banks themselves must make longer-term loans for normal purposes such as capital investment, and now also to help governments meet the balance-of-payments cost of the oil price increases. The possibility of being caught in the squeeze (borrowing short and lending long) is real, particularly since no one knows how volatile the oil funds will prove to be.
Banks are also being pressed to hedge against potential exchange rate fluctuations stemming at least in part from the balance-of-payments drain of higher oil prices. This can involve extensive foreign exchange dealings of the kind that drove Franklin National and Herstatt to the wall.
The private international banking system must not be asked to take on alone this task of recycling oil receipts. Not only is it too great a burden on the system, but it also means that the recycling, the loans that are made, will be on the basis of commercial criteria when larger political and security objectives often should be controlling. Thus we find bankers understandably concerned about the credit-worthiness of countries such as Italy, when unfortunately the overriding issue is whether democracy will survive or be replaced with a far Left or rightist revolutionary regime—with profound effects on NATO and stability in the Mediterranean.
To ensure that such political and strategic requirements are met, and to calm the anxieties of the international banking community, governments must now take on the task of reapportioning credit and financial resources. Acting together with the central banks and the IMF, governments must in some fashion assume the responsibility of lender of last resort. Clearly, certain safeguards must be built-in so that private banks do not have a blank check that they can cash to save themselves from the consequences of imprudence and mismanagement. But this risk is far less significant than the risk of collapse of major financial institutions and even of governments.
Such support for the international banking system, hopefully, will be sufficient to meet the reallocation problems of the industrialized countries without the need to resort to large-scale direct government aid, although such a possibility has been the object of lively debate among policy planners in Washington throughout the summer. For the have-not nations of the Fourth World, however, a substantial governmental aid effort is required.
The poorest countries—primarily on the Indian subcontinent, in Africa, and in parts of Latin America—are suffering severely from the oil price hike. It has been estimated that the increase in the oil bill for the developing countries this year more than cancels out the aid they are receiving. The skyrocketing costs of food and fertilizer are equally large. As a result, the developing countries face a total increase in import costs this year of $15 billion, which is twice the amount of all the aid they receive.
While some of the developing countries will get by, for others—notably India, Pakistan and Bangladesh—it is not an exaggeration to characterize the situation as desperate. Just to get through this year will require an estimated $3 to $4 billion in additional aid, if the lives of nearly one billion people are not to be threatened by economic collapse and ultimately starvation. The special $3 billion oil loan facility set up last June by the IMF will be of some help, but because of the IMF's formula for lending to its 126 members, the poorest countries cannot get sufficient assistance from this source.
Additional help is needed; it can take many forms, from financial assistance to concessional sales of food, fertilizer and energy. The U.N. Secretary-General's effort to develop a special emergency fund or the IMF's Committee of 20 proposal for an IMF-World Bank joint Ministerial Committee on aid to the less-developed countries could become means to work out a package of emergency help. Moreover, the joint Ministerial Committee in particular, to be set up in October with its membership from both the developed and developing countries and strong representation by finance ministers, holds out the possibility of becoming a much needed vehicle for more long-term planning and greater support for international economic development.
Whatever the means of international cooperative action, the main need now is for the United States, the other industrialized countries, and the oil-producing countries to make a firm commitment. We have to stop waiting for the other fellow to act, and as a practical matter this means the United States must take the lead in proposing a specific commitment for itself. Once that decision is made, the logjam should break on other countries' contributions, and we can turn to the resolution of technical issues such as whether assistance will be in the form of debt rescheduling, food assistance, etc.
Even though American leadership is essential, the United States cannot, and should not, become the primary source of increased development assistance—which by 1980 should amount to an estimated $12 to $13 billion annually according to a World Bank study. Along with Western Europe and Japan, the oil-producing countries and the Soviet Union need to pick up their share of this responsibility. The oil-producing Arab countries in particular will soon have massive reserves and liquidity. By the end of this decade it is estimated that Saudi Arabia, Kuwait, Qatar, the United Arab Emirates and Libya may accumulate up to $966 billion in reserves. A significant part of this should somehow be brought to bear on the plight of the Fourth World.
The vast projected increase in Arab financial reserves underscores the fact that the oil price crisis is not a one-shot affair. Even if oil prices soften, the balance-of-payments drain will go on and on. Loans and interest will pile up. The burden will be great not only in the developing countries but also on the industrialized countries which are the oil producers' largest customers. There will be a continuing challenge to handle the stresses of recycling on the banking system and the industrialized economies.
Over time there is hope that the oil producers will put their excess funds into longer-term securities and equity investments. We should welcome such investment. However, there may be real limits, political and economic, to the amount of Arab equity investment that can be absorbed in the Western industrialized countries, including the United States.
The problem is not just economic nationalism, although there is already popular concern in the United States about Arab and Japanese purchases of American industry and real estate—and it is not hard to imagine the reactions to a Saudi Arabian purchase of 25 percent of U.S. Steel along the lines of the recent Iranian investment in Krupp. There are serious policy questions, too. For example, we regard equity investment as an essentially long-term proposition, but it is not clear the Arabs view it the same way. If Arab countries bought large holdings and then pulled out from companies like General Motors or General Electric, this could have a major impact not only on the companies, but on the stock market and the U.S. economy. We and others will want some measure of control to provide safeguards against these and other possible actions inimical to our overall national interest.
On the other hand, Arab governments will be concerned about the hospitality their investments are to receive. Although they are now in the process of taking over the holdings of the international oil companies in the Middle East, they clearly do not want the same thing to happen to their foreign investments. Given the benefits and potential risks for both sides, there appears to be a reasonable incentive to work out reciprocal assurances on how Arab equity investments will be handled in the industrialized world.
Thus the outline of a new pattern of cooperative effort can be envisioned. The oil-producing countries should be granted a larger role in the IMF and the World Bank, where today they have almost no executive positions. The developed countries could make commitments to protect the equity investments of the oil-producing states in their countries in return for appropriate assurances about the stability of such investments. In addition, the oil producers should put some of their reserves into the international lending institutions and engage in long-term aid to the less-developed countries (and possibly provide some short-term balance-of-payments assistance to troubled developed countries). Such a broader distribution of oil producers' revenues would also serve to reduce somewhat the volume of short-term bank deposits, ease the pressure on the banking system, and limit the size of equity investments in the developed countries.
The difficulty in arriving at such a new pattern of relationships and responsibilities cannot be overstated. There is an impressive lack of enthusiasm on the part of the oil producers toward helping their former brethren of the Third World, apart from Arab nations and a few others with whom they seek special ties. But there are a few encouraging signs, too. The World Bank is apparently finding it possible to borrow from Saudi Arabia, Kuwait and even Venezuela, and if the rate is not exactly concessional (reportedly eight percent), it is a step in the right direction.
If some such pattern of greater cooperation is to come about, American leadership is again essential. The United States has the largest single voice in the World Bank and the IMF. It is our overall support that reduces the risks to the oil producers who are channeling funds to the less-developed countries through loans to the World Bank. The United States is the greatest potential market for Arab equity investment, and the response of the American government in providing assurances and establishing rules for such investment is likely to set the standard for the rest of the world.
We must also give priority attention to the international dimensions of inflation and the threat of recession. Inflation is the most politically regressive force at work in the world today. It has been said that no country has ever had an inflation rate of more than 20 percent and continued with a democratic government. There may be no magic in this figure, just as there is little precedent for our current situation. But it is sobering to recognize that the United States is about halfway to this rate of inflation, Britain and France are approaching it, and Italy and Japan have been beyond it. Elsewhere, among semi-industrialized and developing countries, rates are usually far higher. No other phenomenon provides as firm a common denominator for all the weak and minority governments now prevalent in the non-Communist world.
Even factoring out the impact of the oil price hike, the present economic situation is essentially unprecedented. The international economy, characterized for decades, if not centuries, by boom-and-bust cycles, was brought under reasonable control after World War II. The objective of full employment was for a time achieved in most developed countries through Keynesian management. However, "stagflation"—high inflation and low growth—began to appear in the 1960s in Great Britain and elsewhere. Now we have what The Economist has called "slump-flation," in which there is recession or zero growth while inflation is soaring.
Unfortunately, our comprehension of the problems involved in this phenomenon has not kept up with our vocabulary in describing it. There is grave concern that no one really understands the present economic conundrum, nor knows how to deal with it.
This concern is exaggerated. The monetary and fiscal tools of economic management can be adequate to deal effectively with the present situation. What is needed are new, more selective measures for the domestic application of these tools and a new appreciation of the need to take into account the international aspects of our economic difficulties.
It is an obvious but important fact that we are in the grip of two quite contradictory pressures. On the one hand, even the most economically powerful nations, the United States included, are now highly vulnerable to international economic developments. On the other hand, national governments are expected to deal effectively with all aspects of domestic economic conditions from unemployment to the supply of beef. The choice for governments is between trying to reduce problems to proportions they alone can manage, by seeking to insulate the domestic economy through a return to trade and monetary controls, or going on to a new and deeper level of international coordination of domestic economic policies.
One of the hopes in adopting a more flexible exchange rate system has been that it would make it possible for countries to pursue different national policies in their struggle with inflation and recession. While the system has worked well in many areas, it appears that the increased flexibility of countries to follow their own monetary and fiscal policies under the floating rate system may be seriously overrated. For example, if the policies of individual countries stray from the international norm, they may import too much inflation or suffer too much competition. Hence countries are likely to coordinate their monetary policy at least as closely with their major trading partners as they did under the fixed rate system—witness Giscard d'Estaing's recent and unprecedented pledge to conform France's policies and inflation targets to those of West Germany. This sense of interdependence significantly constrains most countries' abilities to fight inflation unilaterally, since monetary policy has become a central if not the exclusive weapon in this struggle.
Thus, although controlling inflation is preeminently a national responsibility, there is now a requirement for closer international coordination to ensure that the major countries are not working at cross purposes with one another. Several cooperative efforts can be envisioned. Adequate international funding for oil-generated balance-of-payments deficits will help avoid devaluations and the consequent boost to inflation. The balance-of-payments objectives of the major trading countries should be brought into line. Efforts to coordinate monetary policy, an elusive objective in the past, deserve renewed emphasis. Each country should try to assure that its domestic policies are not really exporting inflation or unemployment; all must avoid beggar-thy-neighbor reactions.
In effect, industrialized countries must coordinate their overall economic programs concerning growth, inflation and employment. The United States cannot, for example, consider unilaterally embarking on a policy of controlling inflation by two or more years of stagnant growth, oblivious to the fact that this could lead to a major recession in Europe (not to mention its impact on the American people).
We are fortunate that the American economy of all the market economies is least sensitive to international economic pressures. But we are not invulnerable, and ill-considered policies which look good in the short run can have an important adverse impact on our economy through the effects they have on others.
The United States therefore has an important stake in better international economic coordination, whether through existing institutions or through the creation of some new, more efficient international mechanisms. But even the existing institutions such as the OECD can be much more effective if we are prepared to exercise leadership, use our influence on behalf of increased international coordination, and, of course, accept the constraints that may well go with it.
The handling of trade policy will have a major impact on whether we are effective in fighting inflation and holding the line against recession. In the short run, the most urgent task is to head off increasing pressures for trade restrictions. In the long run, we need to find ways to assure fair access to commodities and raw materials at prices which are stable and reasonable.
The liberal international trading system that exists today, and which has been one of the key elements in the growth of the international economy over the last two decades, is now under serious political and economic pressure. Increasing unemployment and sluggish growth in sectors of national economies are tempting governments to control imports and to subsidize exports in selected cases. At the same time, inflation or shortages in still other economic sectors encourage export controls.
With interest rates as high as they are, the utility of monetary policy alone as a tool to manage economies is approaching its limit, and the use of fiscal policy is constrained in many countries by the dictates of internal social and political cohesion. There is therefore a real prospect of increasing reliance by governments on a patchwork of import and export controls to manage their national economies. The likelihood of turning to trade restrictions is, of course, increased in many countries by the balance-of-payments drain resulting from high oil prices.
An encouraging sign came from the OECD in July when the members pledged not to resort to such controls. However, without more concrete action on the underlying economic issues, the pledge may count for little. Italy slapped on import restrictions in the teeth of major Common Market obligations. While she faced a clear emergency and the import control measures are supposedly temporary, other countries may face similar emergencies. Moreover, there is doubt about how temporary these controls are, since the consequences of the oil price rise will continue indefinitely.
To contain such pressures, it is imperative to start up the long-immobilized trade negotiations. The Europeans and Japanese, once reluctant participants, are now eager to move ahead before protectionist pressures in their countries intensify to the point that negotiations become impossible. The Europeans want to begin serious bargaining this fall and fear that further delay, even to December, could entail serious risks.
This requires prompt action on the trade bill which is before the Senate. The reasons for the delay on the trade bill illustrate the pull between the issues of the past and those of the future on our response to the international economic crisis.
From the outset, the Nixon Administration pursued the strategy of linking most-favored-nation treatment for the Soviet Union, a matter more political than economic, to the broader economic purposes of the trade bill. Confronted with the issue of the right of Jews in the Soviet Union to emigrate free of harassment, President Nixon stalled, apparently hoping the problem would either go away or that the need for the other parts of the bill, combined with the threat of a veto if an emigration amendment were included, would be sufficient to get the bill he wanted. In other words, his Administration viewed the trade bill primarily as a vehicle to advance its détente objectives rather than as an essential means for dealing with the grave international economic issues that confront us. Understandably, a vast majority of U.S. Senators also found it appropriate to pursue what they considered valid political objectives vis-à-vis the Soviet Union by tying MFN to freer emigration.
At this writing there are encouraging signs of progress on the emigration issue, as the Executive has come to realize that the only approach is to work out a firm agreement on this subject with the Soviet Union. Such a solution would pave the way for prompt passage and an early start to the next round of trade negotiations.
A major long-term issue, which should be given priority attention at the trade negotiations, is the issue of access to commodities and raw materials. The rules of the General Agreement on Tariffs and Trade (GATT) focus on the problem of access to markets. What is also needed are rules and other arrangements providing for fair access to sources of supply at reasonable and stable prices.
The impulse to assure access to supplies is not a new form of colonialism. First, while the oil price increases are one obvious example of the kind of irresponsible price-fixing that should be brought under control, it is important to recognize that this is not solely, or even primarily, an issue between the less-developed and industrialized countries. The U.S. embargo on soybeans, the Japanese embargo on fertilizer, and widespread controls on scrap iron are all examples of steps by industrialized countries inimical to international economic stability.
Second, complicated equities are involved. Supplier countries which are also underdeveloped have an economic and moral case for an increased return on their products. Cartel pricing of oil and the efforts to build producer cartels in bauxite and copper are in part aimed at redressing what developing countries have always considered unfair terms of trade. Rightly or wrongly, they have felt that the industrialized countries set the price of their commodity exports as well as the price of their imports, and did so to the developing countries' disadvantage.
The problems the copper- and bauxite-producing countries have encountered in developing a cartel arrangement lend weight to the view that commodity cartels are difficult to achieve. However, efforts to construct such cartels have a destructive impact even if they fail; and continued inflation in the price of imported industrial goods will further stimulate efforts to raise commodity prices—if not by cartels then possibly by unilateral tax increases such as those imposed on bauxite by Jamaica.
The desire on the part of producers of raw materials to revalue their output is also based on concern over the exhaustibility of their resources. The developing countries now have a clearer appreciation of the enormity of the development task as well as little reason to believe that they can depend on anyone but themselves for the resources required. Those with finite resources are therefore particularly anxious to squeeze all they can out of them and are not likely to be very responsive to lectures on economic morality by the developed world.
Third, there may be justifiable reasons for individual countries to impose export controls in legitimate short-supply situations. However, the objective of such controls should be to allocate the short supplies equitably between the domestic economy and foreign purchasers and not solely to export inflation. Otherwise export controls can lead to retaliation, disruption in trade, and further disorder in the international economic system.
Stability in the price and supply of commodities is important if we are to deal with inflation over the long term. In comparison with other goods, most commodities were, until recently, low priced and there was thus a low rate of investment in producing them. With the surge in demand in 1972-73, production could not respond, causing shortages and large price increases. New investment in commodity production will bring the cycle down again, but this wide up-and-down swing in commodity supplies and prices is both wasteful and inflationary. It operates to the disadvantage of suppliers and consumers of commodities alike. To deal with this issue, as well as head off pressures for further cartels, means must be found for stabilizing individual commodity prices and supplies to the extent possible.
The United States bears a special responsibility and burden in this regard. We are now the major source of foodstuffs traded in world markets. Since 1971 U.S. farm exports have more than doubled and in 1973 amounted to $18 billion. The United States and Canada control a larger share of grain exports than the Middle East does of oil. The world has literally come to depend on U.S. agriculture for its well-being. At the same time, the surge in world food demand has also directly affected inflation in the United States. The temptation to resort to export controls, as we did briefly for soybeans last year, could well recur.
On the other hand, the United States also has a big stake in unfettered access to raw materials. For example, we import 100 percent of our chromium and tin and more than 90 percent of such important commodities as platinum and nickel. The United States thus has a particular interest in developing reasonable rules governing export controls, along with arrangements for assuring access to supplies at reasonable and stable prices. These rules must protect the domestic economy of countries from world inflation, and yet provide a responsible source of supply.
In addition to the clear need for new GATT rules on access to resources, and the urgent need to explore stabilization arrangements for specific commodities, there is the question of commodity reserves. At present the United States has large strategic reserves of several key raw materials, which might be used to help stabilize world prices more than has been the case to this point. However, if we move in this direction it should be in concert with others, and under arrangements through which other countries would share in the cost.
The creation of a world food reserve is urgent. This is a complex problem, made more difficult and pressing because American and Canadian reserves have been drawn down to perilously low levels in recent years. They should now be reconstituted, but if they are to form the bulk of a world food reserve (designed both for price stability and to meet famine situations) then others must act in parallel and the direct and indirect costs must be fairly apportioned.
Moreover, it is inconceivable that the United States could take on the task of world food supplier through a reserve system, while markets for American food exports are restricted and denied by trade barriers. The forthcoming World Food Conference can be a major forum for addressing proposals for world food reserves. At the same time the trade negotiations should give priority attention to reducing trade barriers to American foodstuffs.
The task of working out suitable forms of economic cooperation on the foregoing issues will fall mainly to the industrialized market-economy countries and to a lesser extent, the developing countries. However, the actions of the Communist world can either help or hinder these efforts.
Today the Soviet Union and the other Communist countries, including China, are at least superficially insulated from the economic tides sweeping the rest of the world. But, as we saw in the 1972 Soviet grain purchases, their erratic actions in world markets can have profound effects on international economic stability and, in particular, inflation.
The problem is how to integrate the growing volume of economic transactions with the Communist countries into the world economy. Its solution will take patience and a long-term effort. We need to find ways to deal with the issue of unfair pricing and dumping on the one hand, and massive unpredictable interventions in short-supply situations on the other. The former will be difficult because the Communists' concept of price, and of its function in their economies, is totally different from our own. The latter also will be hard, not least because the Soviet Union and other Communist countries do not perceive a problem. But a start can be made by pressing the Soviet Union to play a constructive role in alleviating the world food situation—at least to the extent of agreeing to provide the U.N. Food and Agricultural Organization (FAO) with all relevant agricultural information and not to jump into the market for large quantities of food without warning. And the Soviet Union should participate directly in whatever can be worked out for fertilizer supply and for a world food reserve.
The Soviet Union is also potentially a much greater source of economic development assistance than it is today. Total economic aid by the Soviet Union last year was only $622 million, while its military assistance was estimated at $1.7 billion. With the less-developed nations in such desperate condition, the Soviet Union should be persuaded to reorder its aid priorities.
Finally, the Soviet Union must be brought to realize that the need to exercise restraint in East-West political competition has an economic dimension as well. Soviet efforts to get the Arabs to maintain their oil cutback and embargo were just as menacing to Western security interests as Soviet military support (and apparent encouragement) for the October War. Certainly progress toward a reasonable and viable Arab-Israeli settlement is fundamental to a lasting arrangement on oil supplies and prices, and this in turn is a major economic security interest of the United States and its allies. This is an additional reason why, if the Soviet Union imposes obstacles to peace in the Middle East, it will be running grave risks of jeopardizing improved East-West relations.
We must, of course, have no illusions about the difficulty of moving the Soviet Union to recognize the long-run interest it has in cooperating in these areas. Soviet officials often regard the raising of legitimate trade problems as being "anti-détente." Economic aid to the less-developed world has always been regarded as a political weapon. The notion of exercising restraint is novel and controversial to Soviet leaders in regard to political issues, let alone economic interests.
Yet, the Soviet Union's hopes for basic internal improvement—hopes central to the power position of the Soviet leadership—hinge on the development of much greater economic ties with, and in effect economic assistance from, the industrialized world. Moreover, it was the Soviet Union that became in World War II the greatest victim of the chain of political and security consequences stemming from the Great Depression. If there is another worldwide depression, the Soviet Union too will suffer.1
Hence it should be in the Soviet interest to involve itself more responsibly in world economic cooperation. Indeed, the West is now justified in making such cooperation a central test and touchstone of détente. Western credits and peaceful non-strategic trade should be related to commitments on the part of the Communist countries to work out a reasonable code of economic behavior with the Western market-economy countries, and to participate in the new aid effort required for the developing countries.
Today, the fact that major aspects of détente—SALT, MBFR and the European Security Conference—are bogged down is raising serious questions about ultimate Soviet intentions and the durability of détente. However, we need not, indeed cannot, remain fixated on issues that divide East and West. By taking advantage of the measure of détente we now have, and by moving forward to systematically engage the Soviet Union in some of the economic problems besetting us, we can test the strength of détente and the broad intentions of the East. This also may be the only way to establish the kind of relationship that will enable us to resolve the East-West issues we still face.
From this examination of the specific immediate and long-term actions now required, it is possible to envision the general outlines of a system of international economic security:
-A deeper measure of coordination of national and international economic policies among the industrialized nations in Europe, North America, and Japan.
-A new role for the oil-producing countries in the management of the international economy and new responsibilities for aiding stability, growth, and in the poorest countries, economic development.
-A new relationship between the industrialized and raw material producing countries assuring more stable prices and supplies.
-A more constructive involvement of the Communist countries, particularly the Soviet Union, in world trade and the task of economic development.
Not all of these broad objectives should be pursued at the same time or with equal vigor. Some of the specific issues in the present crisis are clearly more urgent than others, and for a few problems there may not be ready answers. But the important thing is that U.S. policies be informed by a comprehensive vision of the kind of world economic system we hope to achieve.
And we must begin at once. With each passing week the economic problems we face become less susceptible to wise solutions. Progress on the urgent issues will facilitate tackling the longer range questions.
Initiatives and cooperation must come from many quarters if such a vision of worldwide economic relationships is to be realized. In particular, American leadership is indispensable. We are still the largest single economy and have the greatest impact on international trade and finance. Only if the United States plays its full part can the current trend toward economic fragmentation and disorder be turned around in the direction of a comprehensive and global effort of economic cooperation.
At present our government is poorly equipped in terms of talent and organization to handle such a role. Compared to the credentials of the Secretary of State and Secretary of Defense in the field of international security, those charged with international economic affairs are by no means the kind of strong group the United States put together in 1947 on a bipartisan basis and could surely assemble again.
Organizational remedies are no substitute for political commitment and capable people. But one clear need is to coordinate the diverse governmental organizations that affect international economic policy: State, Treasury, Commerce, Agriculture, the Council of Economic Advisers, the Federal Reserve, etc. The present Council on International Economic Policy has never been able to perform the task of developing coherent policies and strategies. Perhaps what is needed is something more akin to the National Security Council, with a statutory base and a strong substantive staff that can cut through the welter of conflicting interests and views to develop clear policy alternatives.
But there should be at least one major difference from the NSC system: the director of such a staff on international economic policy must be accessible to the Congress and to the public. The issues involved are too closely related to domestic policy to be shrouded from public view by the trappings of diplomatic or even presidential confidentiality. And the Congress must, as it did in 1947 and 1948, play a crucial affirmative role. For this it will need to exert greater efforts to coordinate the work of the many committees and subcommittees that have an impact on our economy. The new Budget Committee and the congressional Office of the Budget can make an important contribution in this regard by exerting more responsive and responsible control over fiscal policy.
Finally, an effective international economic policy must be grounded on a sound and equitable domestic economic program. Help for the international banking system or emergency aid for the have-not nations cannot possibly command the necessary support if the new Administration turns a blind eye to six percent unemployment. President Ford has an opportunity now to explain the facts of our current economic crisis to the American people and to take and propose decisive action. There may be strong differences over the right combination of policies and how the cost of meeting our present difficulties should be apportioned, but there is also a tremendous desire in Congress and the public for firm and bold leadership.
Because international economic issues bear so directly on our domestic concerns, moving toward a new system of international economic security and making it our first priority in world affairs could provide a basis for rebuilding the consensus among the American people in support of our foreign policy. The source of increasing isolationist sentiment in the United States is not some atavistic streak in the American character, but rather the fact that the ordinary American no longer sees his primary interests as being served by the current definition of American foreign policy.
If we can redefine our foreign policy and our national security to include not only the concern over strategic position and political influence but also the basic issues of inflation, economic stability, jobs and growth, and in fact make these a key concern, we will find that once again a broad consensus on our world role is possible. If such domestic needs gain a prominent place in our diplomacy, the American people will not only support efforts of international leadership, but will be willing as they have been in the past to accept short-term sacrifices in order to achieve long-range success. To meet the threat we now face to our economic security, foreign policy must truly become the extension of domestic policy by other means.
1 In a recent column, Victor Zorza comments on the Soviet attitude: "While some Soviet leaders appear to welcome the opportunity for gain with which the instability of the West may present them, others are not so sure. 'We are well aware,' says Georgi Arbatov, head of the Soviet Institute of U.S. Studies, 'that the crisis of bourgeois society may have various political results, that the crisis of the 1930s produced Roosevelt and the New Deal in the United States, and Hitler, Fascism and war in Germany.' " The Washington Post, July 30, 1974.