Will Ukraine Wind Up Making Territorial Concessions to Russia?
Foreign Affairs Asks the Experts
PRESENT policy, both in America and the rest of the world, clearly needs to be directed not only to immediate but also to long-term objectives; and it is reasonable that much that is done, or decided, during the present E.R.P. period should depend upon what it is believed will be the situation at the end of that period. A true picture of the future balance of international payments, and a realization of the consequences that must follow from it, would, I suggest, be a valuable guide to present action.
Any forecast made now must of course be based upon one of three alternative assumptions. The first -- unhappily the least probable -- is that the tension between west and east will be quickly resolved, that we shall soon enter a period of such reasonably assured peace as was hoped when the U.N. Charter was drafted in 1945, with the restoration of confidence and reduction of military expenditure that would then follow. The second is that we shall soon be plunged into actual and open war, with consequences that are now incalculable. The third -- not perhaps the least probable, and the only one on which any forecast is now both practicable and useful -- is that we shall long continue in a state of dangerous conflict, but without actual hostilities.
The crux of present difficulties, or the most convenient reflection of them, is the "dollar deficit" -- that is, the inability of countries whose economies were seriously impaired by the war to export enough to pay for what they need for their recovery from the rest of the world, especially from America. It is to meet this need that E.R.P. has been started. Its purpose is to enable the deficit countries, by aid over a transition period of a few years, to increase their production and exports so that, at the end of the period, they will be able to pay their way. Reasonably good progress is being made and, if the plan is not fatally injured by Communist obstruction, especially in France, there is every prospect that, within four years, European countries will at least be very much nearer equilibrium than they are at present. On the basis of present economic trends and policies, however, it does not seem probable that they will fully attain it. In other words, it is improbable that when the special aid ceases they will be able to pay currently for sufficient imports to enable them to maintain, still less improve, their standards of living. So far, E.R.P. appropriations have of course been made for the first year only, and future appropriations will doubtless depend upon the progress already made. The most reasonable assumption upon which to calculate is perhaps that the appropriations will continue for another three years on a diminishing scale and will then end.
One form of additional American appropriations has indeed been suggested by American spokesmen, the renewal of a form of lend-lease to cover the increased imports needed for greater military defense preparations. That, however, at the most is an offset against a greater burden, not an additional relief to the present one. And in present circumstances the most authoritative of recent American estimates contemplates a continuing deficit of something over $2.5 billions in the last year of the four-year period. If that should indeed be the position in 1952, and if the "gap" is not reduced by other measures (such as the revival of American foreign investment in new forms), the result must clearly be a sudden and drastic reduction of American exports, and a serious lowering of European standards of living. This would obviously endanger the political and humanitarian purposes of the E.R.P. policy. It is not improbable, too, that at that time such a reduction of exports would be directly injurious to the American economy, in starting or aggravating a depression. Sooner or later, under a free system, a recession is probably inevitable. Its magnitude cannot be calculated, nor its date foreseen -- especially as increased armaments expenditure may first postpone and then aggravate it. But sooner or later it must come, and a sudden and drastic fall in exports might easily convert what would otherwise have been a salutary and short-lived adjustment into a serious depression.
Quite apart from this risk, however, a high level of international trade (if the constituent factors in the balance of payments which make it possible are sound) is advantageous even to countries whose resources would enable them to be nearly self-sufficient, though it is less essential to them than to others.
However, the disequilibrium between America and the rest of the world is much more than a problem of the next few years. It has, of course, been immensely aggravated by the recent war, but it did not originate then. America has for many years been increasing her production and efficiency at a rate with which older manufacturing countries could not keep pace; and in both wars her capacity, unlike theirs, was increased, not impaired. After the first war, as after the second, she had a surplus which the rest of the world needed. The export of this surplus was made possible for a time by the foreign loans of the 1924 to 1928 period, and the meaning of the 1931 financial crisis is that the borrowing world was unable in the respite so afforded to increase its exports so as to pay its way. There is no danger of a similar financial crash now since the export of American capital (in lend-lease, UNRRA and E.R.P. instead of war debts, privately subscribed loans and short-term credits) has happily been in a different form. But the difficulties of trade adjustments are not less.
In the nineteenth century, when Great Britain had a great surplus of manufacturing capacity available for export, the adjustment was immensely easier because her customers' economies were essentially complementary to her own. Typically, she exported locomotives to the Argentine which did not make them, and in return imported maize which she did not grow. Moreover, in the world of that time there were better opportunities than now for reasonably safe and productive foreign investment. But apart from a few raw materials, America grows or makes everything she needs, as efficiently and (in terms of man-hours if not of money) as cheaply as her customers, and in many cases more efficiently and more cheaply.
It is true that this need not prevent mutually advantageous trade. The economic inferiority of other countries is reflected in lower wage rates, and with the advantage of lower wage costs they can, if they are allowed to, compete successfully in the American market in those classes of goods in which the disparity in their manufacturing efficiency is least. On economic principles such trade is of course of advantage to all the countries concerned. But from the point of view of the particular American manufacturers, the importation of articles at a price only made possible by lower wages is "unfair competition," and, however sound the economists' arguments, the political difficulties of securing unimpeded entry for such articles on a sufficient scale are obviously likely to be very great.
For these and other reasons it seems certain that for many years there will be disequilibrium in the balance of payments in the sense that America will be able to produce more which she would wish to sell abroad than other countries (though they would wish to buy) will be able to pay for by current exports.
At this stage it may be well to discuss rather more broadly the balance of payments in relation to policy.
There is some confusion usually in the popular discussion of this question. In the exact sense there can, of course, be no such thing as an absence of balance in international payments. Not only for the world as a whole, but for every country, and not only in the long run but at every moment, the plus and minus items of every balance of payments account must be equal. Receipts from exports, invisible and visible (including gold), together with the net import if any of capital (whether through loans, capital investment, gifts or credits) must always cancel out to zero against the total of imports and any net export of capital. This is an inescapable arithmetic fact which no country can any more change than it can make two plus two equal three or five. It follows that when a change takes place in one item it is necessarily accompanied by a change in one or more of the other items to an exactly equivalent extent. The change may of course be in an export or import of gold which does not immediately affect the pattern of ordinary trade; or in an increase in sales on credit terms which postpones a decrease in their volume. But in one way or another an exactly equivalent adjustment is inevitable. In the end (as other adjustments fail) the only final adjustment possible is, of course, a decrease of the exports of the countries whose current transactions show a surplus and a corresponding decrease in the imports of the others.
It follows equally, of course, that if a government takes any action which affects one item in its balance of payments it necessarily causes equivalent changes in other items. If, for example, it reduces its imports of a given commodity by a new tariff by say $100,000,000, or by subsidies increases its exports by a similar amount, there must be consequent changes in the gold movements or its ordinary exports or imports, or its export of capital, which in total equal exactly $100,000,000.
In a world of free trade and a functioning gold standard in which all governments abstained from interference with the course of trade, these adjustments would be made automatically, as they were for a period in the last century. But that world, for good or ill, has gone. For many years all governments have, in varying degrees, taken action which is designed to affect, and does affect, certain items in their balance of payments. Only, however, where current trade deficits are threatening their reserves and their means of importing essentials, do they usually have anything like a balance of payments policy which is conceived as a whole. Such a policy must be based on a calculation of the result of governmental action on some items and a consideration of what is the most desirable form of consequent adjustment in the others.
Throughout the attempts at Geneva during the later twenties to reduce the barriers to international trade I always felt that this was the greatest underlying difficulty. So far from there being an international policy, there were not even, in any true sense, national policies. Each country's tariff was the result of pressure for protection from particular home industries. It rarely had as its counterpart a policy of encouraging such adjustments in other items as would make a total desirable pattern of trade and payments. In particular, while countries with current trade deficits aimed at removing them, for example by reducing imports, those with trade surpluses aimed at maintaining them. And they usually took no precautions to ensure that the consequent adjustments were of a desirable character, even from their own point of view, to prevent them, for example, from taking the form of unsound loans, which, in view of general world trade, were bound to lead to a financial crisis.
I thought, then, that it would be a great advantage if "surplus" as well as "deficit" countries would take their general balance of payments position as a guide to all policy affecting it. This does not mean that governments would replace a free by a directed economy. But it does mean that, with the help of non-governmental institutions, they should attempt to forecast their balance of payments as a whole, that before changing tariffs or subsidies affecting some items of the balance they should consider the probable consequences to the other items, and that, so far as the ordinary means of governmental influence allow, they should try to encourage such adjustments as will make, in total, a desirable pattern of payments. What this might involve in detailed policy will be discussed later.
Even on the most optimistic assumptions of progress in Europe, and of a resumption of productive foreign investment by America, it would seem certain that, for many years to come, the limit to the total value of American exports will be determined absolutely, and to a dollar, by the ability of her customers to pay.
If this is agreed, as surely it must be, the acceptance of the inevitable consequences may have an important influence on many aspects of immediate policy. It is perhaps worth while to look, from this point of view, at a few current problems.
The first concerns loans and investment policy. It is to be hoped that a substantial part -- though it can only be a part -- of the gap which will be left when E.R.P. ends will be filled by the export of capital in other forms, whether through private channels or through such an inter-governmental agency as the International Bank. All such capital exports will of course enable American exports to be maintained on a higher level than could otherwise be the case. During the E.R.P. period itself there is not much expectation that much dollar capital will flow into Europe aside from the E.R.P. loans and grants themselves. Private investment will hardly be attracted during this precarious transition period, and the International Bank (apart from the half billion dollars lent before E.R.P. began) will naturally look mainly to other investment areas. Its chief task during this period will be to find where and under what conditions safe productive investment can be made, and, in particular, where after its own pioneering work there is a reasonable prospect of a substantial later development through private loans or private enterprise.
The task is difficult and the scope limited. Foreign investment, if it is to be permanently productive and not lead to the same disaster as was witnessed between the wars, needs not only promising economic conditions but such political conditions as will give economic development its chance and reasonable assurance to investor against confiscation. In many areas where the economic condition is satisfied the political condition is obviously not. This will, for example, restrict investments in Asia. But there is one category of countries, covering the greater part of the undeveloped regions of Africa, which perhaps merits especial consideration, namely those under colonial government. In these areas there is a metropolitan government, whether French, British or Dutch, which provides more stability than in countries of a similar type which are independent, and with which it is possible to make reliable arrangements. Foreign investment will not easily flow into such areas, unless special steps are taken to clear a channel for it, because the metropolitan government establishes conditions to the entry of foreign capital, sometimes in the interest of the natives, sometimes to give a preference to their own nationals. It is difficult for a succession of private investors to negotiate separately with the metropolitan governments. But if the Bank, as an inter-governmental agency, negotiates loans even on a limited scale, the channel might be cleared for considerably greater private investment later. If so, many advantages might follow. The natives would benefit from the higher standard of living that would result from a more rapid and extensive development than the limited capital available from the metropolitan countries would make possible. The latter countries would benefit from a relief to the strain on their capital resources which their present development policies involve. If the American capital is forthcoming under conditions which enable it to be spent on imports from non-dollar countries, the general dollar deficit would be reduced (without, for the reasons given, reducing at all the total of American exports). And, lastly, in the difficult but inevitable evolution of the status of colonial areas a useful association would develop between the "imperial" countries and the greatest of the "nonimperial" countries.
But with the utmost practicable development of American foreign investment, whether in colonial areas or elsewhere, this certainly will not, in any future that can now be foreseen, do more than reduce the gap; it cannot close it. World conditions are too precarious, and the investor, after earlier experience, will naturally be cautious and reluctant. Foreign investment will keep the level of American exports higher than it would otherwise be; but it will still be true that the limit, and the absolute limit, to them will still be set by a continuing dollar shortage. Nothing, therefore, that can be done to increase production in the non-dollar countries, and trade among them, will diminish the total value of what they buy from America. It will only increase the total resources at their disposal, and make a difference in the choice of the commodities they import. Some essentials now imported which can be produced in the deficit countries as well, or with the least comparative disadvantage, will no longer need to be imported; and what America continues to send will be what she produces with the greatest comparative advantage. American exports, without being reduced by a dollar, will be then what she can most advantageously supply. That is, the changed pattern of trade will be to the benefit of all parties. These reflections clearly have a bearing on all that is now being done to rebuild and readjust the economy of Western Europe.
The conception of "Western Union," of an integration of the countries of Western Europe, including Great Britain, into a single economic union, within which the specialization of industry and the pattern of trade would develop as it has in the federated republic of the United States, has fired the imagination of both Europe and America. In the modern world the nineteenth century dream of an international trade so unrestricted by governmental action as to make political frontiers economically without significance can obviously not be realized. Failing a world economic unit in this sense, there would obviously, in the final result, be a great increase in the total wealth of the countries concerned if an area as large and potentially as rich as Western Union could be a single economic unit. Here is an area with a population of some 250,000,000, rich in resources of industrial skill and easily able to manufacture enough to raise standards of living greatly, with an ample surplus of manufactured products to pay for any deficit of food and raw materials. The economies of mass production, which can be realized only with the assurance of an adequate market exempt from tariffs and other governmental interferences, could in time give to Europe the same advantages as they have to the United States. And with economic union, and the increased economic strength that would result, there would of course be a corresponding increase of defensive power against any threat of aggression from without.
The advantages of union are indisputable. But the obstacles to rapid and complete union are formidable, and perhaps insuperable. It is natural that the difficulties should be felt more acutely by European countries than by those who have a more distant, and more global, view from across the Atlantic; and, within Europe, that those who, as ministers and officials, are enmeshed in the daily problems of current administration, should be more conscious of these difficulties than those who have no such official responsibility. Those who are all the time in the midst of the trees may fail to see the wood. It is easier for America than for Europe, and in Europe for those out of office than those in office, to see the wood as a whole. But, after all, a wood consists of trees, and its pattern can be changed only by dealing with the trees. Changes can come only through the machine of actual government if the impetus to the change must come largely from without. This is why, in the development of Western Europe, governments seem to lag behind public opinion, and European action behind what America believes to be both practicable and desirable. It is perhaps equally important at this moment that European governments should, by external impulsion, be pressed to make the utmost progress that is in fact practicable; and that those who press them should equally realize that there are, after all, practical limits to progress and its pace.
An economic union, with the abolition of all internal tariffs and barriers, is a simple and attractive conception, and it would automatically avoid all the difficulties that arise from the "most-favored-nation" principle of commercial policy. But practicable Western Union, now and for some time to come, must mean both much less and much more than this.
In the first place, internal tariffs are not now the only, or the principal, obstacles to intra-European trade. Inconvertible or unstable currencies (and the differences in trade balances which cause them), and economic restrictions on imports which are more prohibitive than tariffs, are all more important. Practical progress involves painful and intricate action in clearing and compensation agreements, with agreed general plans for the location of power installations and heavy industries. If economic union does not include this, it does little good; if it does, it involves political changes that amount to something approaching federation. Even under prewar conditions the attempts to create economic unions failed unless they were accompanied, or quickly followed, by political union. Tariffs were so important as a source of revenue, and as determining the pattern of national development, that a common political authority entrusted with the power of deciding the common tariff necessarily also determined the internal policy of each constituent country. Still more if such a common political authority deals also with currencies and every form of governmental action touching reciprocal trade, it necessarily affects the domestic expenditure (including that on social services) of every member country. That is, it reduces the national governments to something like states in a federal system.
The rapid adoption of anything like a federal system comprising an economic union would, however, encounter the most formidable obstacles, both political and economic. Quite apart from all the interests and ideas that buttress national sovereignty, there is the special difficulty at this moment of comprising in the same political and electoral system countries in which the industrial and electoral strength of Communist organization differs greatly. It is often forgotten that even the 13 States of America, though homogeneous in race, language and outlook as the European democracies are not, and with a clean slate to write on, took many years before they achieved federation under the leadership of such great personalities as Washington and Hamilton.
However, the economic problems of a complete and rapidly established union are no less than the political. The reallocation of basic industries which would result, and is indeed its purpose, would necessarily mean great transfers of the population. In America the transfer of population caused by the de-industrialization of large parts of New England as industries established elsewhere drove them out of business was facilitated by the free migration westward to available land with ample and immediate opportunities for absorption. No such free migration is possible in Europe, and the unemployment that would result, without this preparation, from the quick transfer of industries on a large scale would have the most dangerous social and political results. This does not preclude union, but it is bound to retard the pace of our approach to it. For a long time we must contemplate progress toward closer union by stages, and the progress cannot be rapid.
It is important that this should be clearly realized, not only because there must otherwise be serious disillusionment in America, but because intermediate stages raise questions of the most-favored-nation principle and of nondiscrimination generally. The purpose of these principles was, of course, to secure the greatest practicable range of unrestricted trade by the general extension of reductions of tariffs and trade barriers negotiated bilaterally. But in the Geneva negotiations of 1927 and the following years it became evident that the strict application of the most-favored-nation clause under modern conditions was an obstacle and not a help to the realization of this purpose. If it was impossible for two contiguous and homogeneous countries to lower their tariffs against each other without admitting similar goods at the same reduced tariff from other countries, including those which had a more advanced industrial organization and a higher general tariff level, the result was that either they did not make the tariff reductions at all or they evaded the purpose of the clause by various administrative devices.
Belgium and Holland attempted a half stage at the Conference of Ouchy in 1932. Their attempt was then blocked, I have always thought unwisely, by the opposition of Great Britain and America, who had commercial treaties with them that included the most-favored-nation clause. The same two countries are now attempting a complete union, and finding that effective union requires much more than the abolition of internal tariffs. Even if they succeed, other countries in the west will certainly find that they must choose between a halfway union or no union at all; and the first will be possible only if the rest of the world, especially America, will consent to waive the "nondiscrimination" principles.
Temporary and conditional exceptions are indeed contemplated in the recent Havana conventions, and doubtless no objection would be made to discrimination as a merely intermediate stage to an early economic union of a complete type. But it may prove necessary that the halfway stages should be of long duration, or even permanent. The situation I have briefly sketched was realized after the breakdown of the Ouchy attempt in 1932. The Montevideo Conference of 1933, which included representatives from the United States, recommended much wider exceptions to the most-favored-nation clause while still preserving its main purpose. Those recommendations were not binding and were in fact abortive at the time. But they may yet prove a useful starting point for a reconsideration of the main doctrine.
In the meantime, if this difficulty presents itself, as it certainly will, in the course of the movement for closer union in Europe, the main argument of this article is surely relevant. For, if it is true that, not merely in the next few years, but for many years to come, the total of American exports will be determined by the dollar resources of other countries, what advantage is it to America to insist that a reduction of the tariffs, for example on automobiles between France and Italy, should be extended to America? That might increase the number of American cars exported to those two countries, but it would reduce other American exports to an equivalent value.
I believe that Western Union must not only come gradually, with intermediate stages of long duration, but that it will grow out of the attempts to deal with immediate and pressing tasks, and through the organizations set up for the purpose, such as the military defense committees and O.E.E.C. If these organizations develop successfully and are continued they will form an embryonic common political authority with some of the powers of a federal government. True federation, if it comes at all, is most likely to come as the climax and culmination of a successful development of political organs of this kind. An attempt to establish at once a full federal authority based upon popular election, or to organize an economic union, not through O.E.E.C., but by the creation of a separate and parallel body for the purpose (without the driving force that is given by such an immediate and inescapable task as that of distributing and utilizing the E.R.P. funds), would almost certainly fail.
The practical problem for E.C.A. is how far and by what methods it can and should exercise pressure upon reluctant or resisting European governments when a particular scheme obviously advantageous if taken as a whole is in danger of being blocked by local or national interests.
A new location of certain basic industries, or the establishment of hydroelectric power installations, on a scale and with a range covering areas within several national sovereignties, will in time bring a great increase in total wealth of which the benefits will be shared by all the countries affected. So will the development of unimpeded through transport services by rail, road, water and air. But in every such case, vested local interests will be injured, and some redistributions of population -- with consequent social and political difficulties -- will be involved. Moreover, considerations of national security will arise. These may indeed diminish as the common military defense measures acquire strength, but they will be serious while they are still in their earlier stages.
In these circumstances, agreement among the several countries on a general plan, and on the means of securing its application, is likely to be slow and difficult. The influence of a powerful and disinterested country, in an arbitral position, may often in such cases make just the difference; may overcome a separatism which each national representative may realize is against the general interest but which in view of pressure from interests in his own country he is impotent to resist. For E.C.A. to be completely passive in such a case, and merely to stand ready to help whatever may be agreed by O.E.E.C., and no more, would be to decline one of the most valuable services it can render. On the other hand, to try to force through schemes against the determined resistance of governments, who after all are responsible for the social and political problems of their countries, by making acceptance the condition of grants, would be highly dangerous. Much may be done by tactful persuasion; all may be risked by a harsh insistence.
An instance of the middle and best way has been afforded in the course of distributing the first grants. Where O.E.E.C. agrees upon the distribution of the available funds, E.C.A. accepts. But where O.E.E.C. has found agreement difficult, a solution has in fact been made possible by the tactful, persuasive influence of an authority which has, and is known to have, the power in the last resort to enforce.
It is obvious that the whole pattern of trade relationships between different parts of the world will be profoundly different from what it was before the war. This future pattern is now difficult to discern because temporary war dislocations, for which adjustments will be found, are entangled with other changes both earlier in origin and destined to be of longer duration. It can be neither exactly foreseen nor meticulously directed. But much of its broad outline is already obvious, sufficient to afford a useful guide to policy in many issues of current policy.
Those best qualified to understand it -- American economists and the leaders of finance and the exporting industries -- can, I suggest, render a great public service if they agree upon and make widely known the best practicable forecast of America's future balance of payments and the conclusions that follow from it. A policy based on such advice would greatly help the efforts that are being made to establish a new equilibrium and greatly reduce the frictions and wasteful dislocations that attend the process.