With great fanfare, representatives of the United States and the Soviet Union signed a trade agreement in Moscow in October 1972. By this point, trade between the two countries, starting from a very low level ("trivial," Aleksei Kosygin called it in 1971), was already beginning a rapid rise. It continued to grow over the next few years. The total trade turnover between the two countries was almost four times greater in 1972-74 than in 1969-71. Much higher levels yet and still more intense cooperation seemed shortly in store. Then, in January 1975, the Soviet Union announced that it would not agree to put the trade agreement into formal effect. It said that the conditions attached by the U. S. Congress to the development of trade - specifically, the Jackson-Vanik Amendment on emigration and the Stevenson Amendment on export credits - violated the terms of the 1972 agreement, and so effectively voided it.

Since the Soviet renunciation, trade has stagnated, though superficially such does not appear to be the case. The total volume of U. S. exports to the Soviet Union has generally continued to rise - a peak of $1,195 million in 1973 was followed by a drop to $607 million in 1974, and then by further increases, to $1,833 million in 1975 and $2,300 million in 1976.1

But these figures are misleading in a number of ways. First, they are distorted by very large agricultural purchases - over 60 percent in both 1975 and 1976 - the result of an uncharacteristic second bad harvest within a five-year plan. Putting aside the wildly erratic agricultural element, it becomes clear that Soviet-American trade is actually in stagnation. The Commerce Department predicts a decline in 1977. Moreover, many of the transactions officially attributed to 1975 or 1976 (or to be included in 1977) are actually the overhang of deals negotiated three or four years ago, and, although no reliable figures are available, the number of current transactions is widely thought to be in sharp decline. The Russians have diverted a good deal of their purchases to Western Europe and Japan (though not to the extent they claim, and some of that business has gone to the subsidiaries of American corporations). General Secretary Brezhnev told visiting American businessmen late last year that between the end of 1974 and the end of 1976, up to two billion dollars in contracts would have been diverted. Although this should be regarded more as a selling point to his audience than as a firm estimate, the basic fact of stagnation is of great significance. Not only does it harm the interests of the Soviet Union and the prospects of individual American firms, it also runs counter to the U.S. national interest.

The opening of trade between the two countries was much celebrated. It became a media event. A disproportionate attention was devoted to it, if one looked only at the scale involved. After all, U.S. exports to the Soviet Union in 1975 were less than those to Venezuela or Belgium, neither of which provokes much front page news as a trading partner of the United States. Of course, it was not the amounts involved, but the novelty of the peaceful interaction between the two superpowers that explains the fascination. There was a widespread impression, fostered by spokesmen on both sides, that this trade development would bring substantial changes in the overall relationship between the two nations. Some of these pronouncements may have been believed by the speakers; some were the inevitable exaggeration of politicians; and some were political sales talks, intended to overcome obstacles within the two societies.

Yet the utility of trade from the American point of view is very considerable. Reaction to exaggeration should not cause us to lose sight of the benefits. We must, of course, distinguish between the interests of the firm and the nation. We cannot assume that what is good for the executive officers and stockholders of Pepsi Cola is also good for the United States. (On the other hand, it also does not mean that those interests are necessarily in conflict.) For some firms, doing business with the Russians can be a very profitable exercise. Perhaps also, their chief executives gain important psychic rewards from flying into Moscow and playing the role of head of state, or at least of visiting statesmen, which compensates them for the day-to-day tasks of administering their far-flung enterprises. But it must also be said that other firms have found that doing business with the Russians affords an opportunity to lose a good deal of money in pursuing business that does not materialize, wasting a lot of time learning that they will not get the business, and finding their compensation measured only in frustration.

The point of view for the United States is different. Expanded trade, in itself, will not - as its critics so often remind us - create peace and a harmonious international order. It is no guarantee against conflict, nor is it likely to generate any dramatic changes in the Soviet political system. But what the critics do not admit is that, at a step below that level, it can do a great deal. First of all, it creates common interests between the two superpowers; provides incentives for stability; and lays the groundwork for a cautious expansion of interaction. It draws the Soviet Union into the community of advanced industrial nations. It provides a useful flow of business on the national accounts. It is the major non-arms control aspect of relations between the two superpowers, and helps to promote an ongoing dialogue between the two nations. It helps to reduce suspicions, which is useful both for arms control and for containing international crises, the stakes in both of which are so large, not only for the two countries but for the entire world, that it is important to take what steps one can.

Although hardly fulfilling the more expansive promises, important changes have taken place. Prior to this decade, relations were characterized primarily by their absence. Mutual deterrence, the military balance, and the unstated rule to cooperate in containing crises - this is what existed. There was little communication between the two superpowers, and very little comprehension of how the other's system worked. The network of relations is much denser today than it was seven years ago. A whole host of exchanges - involving such different groups as doctors, water pollution engineers, scientists and other academics - have become much more extensive, frequent, and productive. The civil bureaucracies of the two governments have some involvement with each other. Arms-control negotiations have proved, to some degree at least, to be a mutually educative process for the military bureaucracies of both nations. The man-in-space programs of the two countries, born of cold war rivalry, turned not merely into a joint mission in 1975, but into a joint production for a worldwide television audience. But the most intense of all relations is that which now exists between American businessmen and their counterparts in the Soviet Ministry of Foreign Trade, the foreign trade organizations and banks, and, increasingly, in ministries and enterprises as well. What is even more striking is the interpenetration of the two political processes. The U.S. Congress and American public opinion have had an impact on the Soviet treatment of political dissidents and minorities. In turn, there was the spectacle in 1974 of Soviet officials lobbying on Capitol Hill, suggestive almost more of a platoon of out-of-town shoe manufacturers worried about tariff protection than of emissaries from America's most deadly rival.

The entire process has been unsteady, characterized by many disputes and problems, and many, many doubts. Still, much of what has happened would have seemed altogether beyond the realm of political possibility prior to 1970.

Yet we must ask ourselves whether we have already reached the limits of the Soviet-American relationship. The stagnation in trade is not only a symbol, but also one of the major operative factors. As already pointed out, trade is the major non-military aspect of the relationship, and the most important cooperative venture that is available. As matters look now, we face the prospect not merely of stagnation but of decay in the trade, and that is not in the long-term interests of the United States.

One of the major tasks before the new Administration is to restore that trading link. But it is not simply up to the Administration. There are three basic questions which, in their outcomes, will determine the future development of economic relations between the two countries.

How far are the Russians willing to go from independence to interdependence?

Will Americans generally perceive the development of trade to be in the national interest?

And how will the Russians be able to pay for what they want to buy?

These three questions are, in themselves, tightly tied together.

II

For the Soviet Union, trade with the industrialized Western world has been consistently, if erratically, important - first as a key element in industrialization and then as a way to upgrade and modernize its industrial structure. It has been oriented to the Western world as, in effect, a developing country. It has just as consistently sought to deny this relationship. "We do not in the least intend to strengthen the existing international division of labor," said a report to the Party Congress in 1927. "We do not intend to be an agrarian appendage of the capitalist economic system." Today, Soviet representatives go out of their way to assert that one-fourth of all the scientists and engineers in the world work in the Soviet Union, that theirs is the second largest economy in the world. But most disinterested observers would still conclude that the Soviet Union is oriented toward the Western world not as an economic and technological compatriot, but as an example of extremely uneven development, with some obviously very advanced sectors and some equally obvious backward sectors. The Soviet Union remains a buyer of technology, an importer of innovation, and a seller of raw materials, at least insofar as Western Europe, Japan and North America are concerned.2

Of course, from the late 1940s through the end of the 1960s, this relationship was hampered by the strategic embargo, the driving force behind which was the United States. For their part, the Soviets sought to promote trade with the West, but it was not of the highest priority, as the U.S.S.R. was able to generate respectable growth rates from high investment and a large labor pool.

Around the 1970s, the Soviet interest in trade with the West became much more intense, and Moscow did begin an energetic effort to expand economic relations with the West, particularly with the United States. There were two obvious and related political reasons. With tensions at a high point with China, it was prudent to seek some greater stabilization in the West, and trade was perceived as an adjunct toward that end. More generally, even without its rivalry with China, the Soviet leadership saw value in trying to reduce tensions with the leader of its rival bloc.

But the economic needs were even more pressing. The Russian economy faced an acute problem - the only way it could continue to grow was through increasing productivity. The Soviets themselves have made clear that this is now at the base of their economic planning as reflected in their discussion of how the Soviet economy is moving from an "extensive" mode (growth based upon increases in the labor force and the capital stock) to an "intensive" mode (growth resulting from improved technology leading to higher productivity). The Tenth Five-Year Plan, discussed and approved in 1976, was presented as "the plan of efficiency and quality." This theme is constantly reiterated. "Efficiency and quality," Brezhnev told the Central Committee last autumn. "These two words have now become the motto of our entire economic activity. . . . The center of gravity of the draft plans is shifting increasingly toward qualitative indicators."3 The goal of this emphasis is to spur growth directly in the form of production and to spur it indirectly by providing additional incentives to the workforce.

In the mid-1960s, the U.S.S.R. was going to modernize its economy in two ways - through economic reforms, particularly decentralization; and through increased trade with the industrialized West, with focus on technology transfer. Both policies were enunciated in 1965. But by the end of the decade, the domestic economic reforms were in the process of being largely abandoned. They were seen to pose too great a threat to established economic and political interests. Indeed, if there is a trend today, it is back toward centralization and an effort to rely on more sophisticated means of control. What were to be economic methods or "levers" of control are being replaced by administrative "levers."4

The discarding of reforms meant an increased emphasis on the acquisition of foreign technology. The 1971-75 plan projected a growth in foreign trade of 35 percent; the actual growth was 186 percent. Trade with developed capitalist countries in 1975 made up 31 percent of total Soviet foreign trade turnover.

Could not technological change have been generated internally? Only with difficulty, experience indicates. For the Soviet Union had clearly failed to keep pace with technological change, outside of those narrow spheres where resources are heavily and wastefully concentrated. The very character of the organization of the Soviet economy creates powerful, almost insurmountable barriers to innovation.5 In addition, isolation from world markets acts as a drag on productive change. Within the COMECON bloc, the trend appears to be that the Soviet Union has pulled down the level of production of what were more advanced countries, such as Czechoslovakia.

Thus, the Soviets were moved to seek expanded trade by their realistic desire to participate in the "scientific and technological revolution," seeing in it an alternative to domestic economic reform. That is, trade offers the hope of growth not through change in organization, but rather through new modes of production.

Moreover, the Soviets have come to recognize that technology transfer, if it is to achieve desired ends, is not a simple, one-stop form of shopping. One can still, as in the 1930s, merely buy the requisite machinery and set it up and then close the door on the outside world. But there are significant losses in such an operation. The pace of technological change is much quicker than in the 1930s and the benefits of acquisition are much enhanced if contact with the outside world is on an ongoing basis. If further proof were needed, the Russians could look, as they apparently did, at Japan, and observe how effective technology transfer can be as a source of growth. In addition, as a superpower, the Soviet Union now desires to fly its flag in the entire world's economy, not merely that of its own bloc.

At the same time, there were and still are powerful obstacles to greater involvement in the world economy. The basic hindrance is the organization of the entire society, which, both for its political and its economic functioning, has depended upon a high degree of isolation from that part of the world over which the U.S.S.R. has no control. Expanded trade in itself constitutes an economic reform, introducing not only new modes of production but of thought, thus challenging ingrained patterns, putting unfamiliar stresses on many points in the economy. The Soviets had always known this, and it was surely a reason why over the years they had not more eagerly sought a major expansion of trade. But the needs were finally perceived as pressing enough that the leadership became willing to accept the economic costs of involvement; to seek, in the words of Foreign Trade Minister Patolichev, "a deeper international division of labor with the industrial capitalist countries."6 Trade with the advanced capitalist countries has been the most rapidly growing sector. The new plan envisions a growth of 30 to 35 percent in foreign trade, and expects to accommodate the economy to this change.7 Clearly, while the results of expanded trade have been mixed, the Soviets have come to regard the economic costs as acceptable, especially as measured against the need and the gains, both actual and hoped for.

But the Soviets were unprepared for the political costs of expanded trade. They thought that the Western world would be so eager to trade with them that they would be able to avoid the political costs of interdependence. This conclusion resulted from several miscalculations. The Russians assumed that they would be able so to whet the appetites of capitalists with visions of a bottomless Soviet market that the capitalists would exert themselves to the utmost to get in. Second, they had a rather simplistic view (even as late as the early 1970s) of how Western, and in particular American, society works. They overestimated the political might of the business sector and the willingness of market societies to make profit-seeking the highest criterion in foreign policy. Third, around 1970, it had become clear that a change was occurring in the world economy, that America's political allies, Western Europe and Japan, were becoming its economic rivals. As Marxists, the Russians again exaggerated, in this case assigning greater significance to the "capitalist contradictions" than has been the actual case.

What the Soviets have discovered in the last seven years is that it is more complicated to be involved with the West than they thought, that it is extremely difficult to become moderately interdependent at one level and not at all at another, and that decision-making in the Western world is a far more complex process than they had imagined when they were merely looking on.

The political costs to the Soviets, while not massive or even large by any reckoning, are still real. Basically, these costs involve checks upon Russia's freedom of action - "restraint" in the international sphere and some mild mellowing of the domestic political order. Major checks certainly existed prior to the trading relationship. The U.S.S.R. also has much to lose in a large conflict, and so therefore shares an interest in limiting instability. In addition, the Western alliance system has been a check in the form of military deterrence. In the domestic sphere as well, there have been obstacles. It is prudent, in terms of their own survival, for the leaders to avoid the absolutism of the Stalin era, and there is also some question as to how well an increasingly technological society can function in a highly repressive environment.

Thus, expanded economic relations may not in themselves introduce any drastic new restraints, but they still do bring about a situation where external forces can have a greater degree of direct and indirect influence on what has been to date a highly insulated political system. There does not have to be a formal or conscious system of "linkage" for such forces to be felt. The pluralistic political systems of the West represent a blending of many different political tendencies. If it comes to be believed in the West that trading with Russia is merely providing it with some extra tools to expand its sphere or to drive for "hegemony," then powerful pressures will quickly make themselves felt in Western governments and public opinions to interrupt that trade, and thus to deny to the Soviet Union its now ongoing benefits.

This also applies to Soviet domestic policy. Scientific exchanges between the United States and the Soviet Union are a case in point. The Soviets clearly regard these exchanges as a very high-priority enterprise. Yet, in 1973, Soviet security officials warned scientific workers in various research institutes that, with an opening to the West, ideological vigilance would have to be increased. The point was that Party "reliability" and commitment would be very important criteria for participants. In some cases, those who perhaps were less interested in politics and more interested in science apparently found that they were worse off. On the other side, Washington cannot compel American scientists to participate. If U.S. scientists conclude that they are restricted to contacts with scientific bureaucrats, if they feel that their more capable counterparts in the Soviet Union are suffering at the hands of those they meet in conferences, if they feel that the utility of the exchanges, beyond the novelty effect, are not of much value or are too one-sided, then they will lose interest and cease participating. The purpose of the exchanges from the Soviet point of view will then have been defeated. (Moscow's recent decision-making in this area appears to have favored science over the concerns of the "security-minded.")

In fact, the most dramatic example of the trade-off is the Helsinki document, now coming up for its two-year review. The agreement has been much criticized in the United States, less so in Western Europe. One might be able to make the case that in sum it amounts to little, but the argument that it is one-sided in favor of the Soviet Union is not credible. It is, indeed, a trade-off - involving a recognition of the status quo in Europe and increased economic and scientific cooperation, in exchange for "confidence-building measures" - the most important of which is not the exchange of observers at military maneuvers, but a freer flow of communication. There is no way to read the document save as a package. Without being too rigid in interpretation, there can be no doubt that without some observance of Basket III - the human rights basket - Baskets I and II lose their force as well. (Of course, without observance of Baskets I and II, Basket III also loses its force.) Helsinki posed the problem for the Soviets: significant increases in economic involvement means a small increase in political interdependence.

The Soviet response has been mixed. There are many disturbing reports of increased repression in the Soviet Union, including the testimony of the recently released Vladimir Bukovsky, to the effect that treatment of political prisoners actually worsened after Helsinki.8 The Soviets have taken to expelling the most troublesome dissenters, as if trying to purge their political system of an infection. On the other hand, this method is certainly less harsh than that which would have been used in the Stalinist era (although it is doubtful that Soviet leaders would want that era to be their standard of comparison). The Soviets are somewhat more cautious in their handling of dissidents, at least those known in the outside world, and the small trickle of permitted emigration is, despite the sometimes crude harassments that attend it, unprecedented in the last 50 years of Soviet history.9 That very caution may also indicate, curiously, a greater self confidence than that of an earlier generation of Soviet leaders.

The nub of the matter seems to be that the Soviet leadership did not expect the kind of political costs encountered, and is still uncertain as to how to handle them, how to manage a somewhat less insulated political system. Some of the counter-steps could reflect the contradictory responses of different bureaucracies and different levels in the same bureaucracies. It was a more significant admission of perplexity than many may have thought when Brezhnev told the 25th Party Congress last year: "In foreign economic relations are intertwined politics and economics, diplomacy and commerce, industrial production and trade." That is the dilemma for Russia. The economic benefits of a small moderation can be very great, but it is not at all clear that the current leaders are willing to bear that cost. Indeed, that may turn out to be one of the most important questions that they bequeath, unanswered, to their successors. One answer, and not the other, is clearly one of the three legs upon which an expanded trading relation must sit.

III

The second question concerns the judgment on détente and on the role that trade plays in détente. This is a question to be answered in the American political process, and it is central to the framing of policy by the new Administration.

In essence, it involves a competition between two images of the Soviet Union. These are polar views, archetypes, and the distinction may strike some as exaggerated. But they do reflect two different basic sets of premises or axioms about Russia, and they give rise to very different policy prescriptions, different ways to seek to structure relations with the Soviet Union.

In Image I, the Soviet Union is seen as a world revolutionary state, single-mindedly geared to expansion. According to this view, there is a strong policy coherence in Moscow, and little confusion about objectives. The goals are well-defined - "preponderance" and "hegemony." This view tends to emphasize Soviet strengths and capabilities, rather than problems and weaknesses. The Soviet Union is seen as a fundamental and permanent adversary of the United States. For those who hold this view, détente is not merely a fraud, but a danger, a relaxation less of tension than of the American guard, so enabling the Soviet Union to take advantage of American goodwill. Image I has been the fundament of the American policy and attitudes through much of the cold war.

Image II has underlain détente, or at least what might be called tentative or unsentimental détente. This views the Soviet Union less as a world revolutionary state than as a conventional great power. While obviously possessing vast military strengths and not lacking in imperialist drives, it is still a cautious power, concerned with protecting what it has, and with much to gain from stability. Its ideology is more a stale rhetoric than a guide to action. There is less emphasis in Image II on the policy coherence of the Kremlin. Rather, the leadership is seen as confronting the need to reconcile many competing interests and demands, and facing great internal problems. The crucial point is that, according to this image, the Soviet Union is not genetically programmed to move in one course. Rather, its leaders can make choices that move in different directions. While nothing is certain in dealing with such a power, the United States can provide incentives in both the military and economic spheres that encourage the Russians to make choices that, while in their own interests, are also in ours.10

Those who subscribe to these differing images also have very different attitudes toward trade. In Image I, trade is one of the major items of transport on the "one-way street." Those who hold to Image I are fond of quoting the remark attributed to Lenin that the capitalists will sell the Soviet Union the rope by which they will be hanged. In other words, economic relations are a form of appeasement, an effort to appease the unappeasable. Trade enables the Soviet Union to exploit the West, get bailed out of its own troubles at low cost, divert resources to the military sector and, in sum, subsidizes totalitarianism. In Image II, trade is one of the major means of encouraging a détente, establishing mutually advantageous relations, and strengthening the Soviet stake in international stability. So long as sensitive technology of military value is kept under export control, proponents on neither side can make a strong case as to whether trade with the West helps or hinders the Soviet military effort - or, perhaps, makes no difference.

In the first half of the 1970s, Image II was dominant. Such axioms underlay the movement toward détente. Détente, it will be remembered, was much criticized as a media event. Many suggested that it was something easy, that it was in process in any event, that it had been much oversold, considering how inevitable it was. "The first verse of the first chapter of Genesis was not dated January 20, 1969," Dean Rusk complained a few years ago.

But, from the standpoint of 1977, we should recognize that détente was not so easy to achieve, that it required, on the American side, policymakers who were willing to operate on different premises. Those who pursued it, in particular Henry Kissinger, deserve more credit, at least for effort, than has become conventional in the foreign policy community. The real proof of the difficulty is how strong the reaction has been against it, as represented both in the vigorous campaign by such groups as the Committee on the Present Danger, and in the strong, emotional, and apparently well-organized publicity campaign over the last year about what is now almost ritualistically known as the "Soviet military buildup."

With the passing of Mr. Kissinger's dominating personality, it is clear that there has developed a struggle between those two images - with their very different policy prescriptions both for arms control and trade - between those who say that relations can be structured only as between two adversaries and those who say that relations can be shaped in more flexible ways.

Image I superficially appears to afford more security, but does not in the long run. For it is too complacent about the dangers of the spiraling arms race. It ignores problems on the common agenda, exaggerates Soviet capabilities, distorts Soviet intentions, and overlooks the problems Soviet leaders face. It takes the Soviet monolith too seriously, and assumes that the Soviet Union is unafflicted by change. But that society, with the passing of the Stalinbred leadership, is entering a new phase. One cannot confidently predict what kind of changes are in store, but it would be fair to indicate one important determinant. It is probably correct to say that in a schematic sense the first Soviet generation was governed by ideology; the second, by terror; and the third, by cynicism, perhaps militant cynicism, but cynicism all the same. What consequences flow from this change are admittedly not all that clear. But we do have an opportunity at a critical time to go further, or at least to attempt to go further, in our relations with the Soviet Union. The current Soviet leaders have shown surprising flexibility, especially given their own experience and their age. We should not close off this avenue without investigating it further. Expanding economic relations are a prime method for such investigation.

While the lines of debate have been fairly consistent as between these two points of view for the last three decades, the relative balance has not. Until the 1970s, the weight was mostly with the more emotional Image I. For a few years, it shifted to Image II, a more rational image, and more sensible to use in shaping U.S. policy. In 1977, it is rather even.

The outcome of the debate, however, hinges not only on the discussion within American politics. There are many in between; that is, those who, depending on events, tilt in one direction or another. They are very much affected by what the Russians themselves do. If there does appear to be an easing of tension in the international sphere, that will reinforce the argument for détente. If the Soviets embark on new adventures and seem bent on amassing vast new military capabilities, then that will strengthen the case on the other side. Some in the United States have already found such proof in events in the Middle East, despite the fact that the relationship between client and sponsor in 1973 is not altogether clear. Others find their proof in what is expressed by that code phrase, the "Soviet military buildup," although its reality has yet to be clearly established in the ongoing debate. The less alarmed cannot but wonder how much the projection of this threat has to do with the American budgetary process.

If there is a single factor that should help the anti-détente party in the United States and convince many who do not belong to that party that it is right, then it is the introduction and continuing use by the Soviet Union of Cuban troops as its proxy in Angola. Some have come to believe that the Soviet Union wants to stir up a race war in southern Africa. This adventure has had a profound effect on the informed public in the United States, reviving the darkest interpretations of Soviet intentions. No doubt, those in Moscow who came up with the "brilliant improvisation" of using Cuban troops have been praised, rewarded, even promoted. But the Kremlin leadership should face the fact that if there is a loss of interest in détente on the American side, and a new spiral to the arms race, then those in Moscow who invented the Angola adventure will bear a good deal of the responsibility.

The debate in the United States will also be affected by the perception of trends within the internal Soviet political system. Few Americans will want to be trading partners in repression.

There is no general consensus at this time in the United States about how to proceed with relations with the Soviet Union. If Image I emerges triumphant, then there will be little interest on the American side in promoting trade, and indeed many roadblocks. If, on the other hand, the party of what might be called realistic détente carries the day, then trade is likely to expand to higher and more stable levels. The answer to this question will be derived from a debate within American politics, but a debate very much affected by the actions of the Soviet Union in other spheres.

IV

The problem of how to finance Russia's trade with the West has been a continuing constraint on the growth of business, for the Soviet Union always faces the question of how it will accumulate the hard currency required for its transactions. The ruble is not convertible, and, for the most part, the Soviet Union has had to rely on raw materials to earn marks, dollars, yen and pounds. The finance question has been so important that it has also been a recurrent political issue of some substance. Diplomatic relations between the United States and the Soviet Union were opened in 1933 with high, if not altogether clear, expectations of what would eventuate. Economic relations were to be a key element. Indeed, the Export-Import Bank was established to finance that trade (although it would be 39 years before it extended its first credit for trade with Russia).11 One of the major reasons trading relations did not expand after recognition was that the two parties could not work out the matter of finance - that is, whether the United States would or would not make credits or a loan available. Again, toward the end of World War II, there was much talk on both sides of a large postwar increase in American exports to the Soviet Union, but again such growth was frustrated by the inability, in the context of growing political difficulties, to move on the question of loans or credit.

Recently, we have witnessed yet another example of the fundamental importance of financing. The tenuous position of the Jewish minority in the Soviet Union, made even more difficult by the harsh Russian propaganda that followed the 1967 Arab-Israeli war, set off a Jewish rights movement in the U.S.S.R. Its energies became concentrated on securing the right to emigrate to a Jewish "homeland." Despite Stalin's invention of a Jewish "autonomous region" in eastern Siberia, the Jews are virtually the only Soviet minority without a homeland within the U.S.S.R., and thus Israel qualifies as that homeland. This concern came to be reflected in the Jackson-Vanik Amendment to the Trade Reform Act of 1974, which tied the granting of most-favored-nation status to relaxation on the emigration question. When all was said and done, the Jackson-Vanik Amendment was seeking only a small concession, affecting not internal affairs, but rather the point of tangency of internal and external affairs. It was merely asking the Soviets to live up to what they had, in any event, said they would live up to in the form of their general assent over the years to the Universal Declaration on Human Rights. Soviet responsiveness on this issue would also be taken as an important confidence-building measure.

Initially, many had thought the Soviets would never accede. However, by October 1974, a compromise had been worked out among the Soviets, the Ford Administration, and the Congress. An emigration rate of 45,000 to 60,000 a year seemed a reasonable expectation. At the time, Soviet Foreign Minister Gromyko filed a letter denying that there was any formal agreement, but the letter appeared motivated primarily by pride and the felt need to have it on record. It certainly would have been helpful had the final compromise not been so thoroughly publicized. In any event, while not happy with the outcome, the Russians saw the overall arrangement in their interest, and they seemed willing to live with it.

Unfortunately, the Stevenson Amendment to the Export-Import Bank authorization bill suddenly appeared, overloaded the process, and inadvertently disrupted the compromise. The Congress wanted to assert its oversight functions on the Ex-Im Bank, the activities of which had grown rapidly under the Nixon Administration. In 1969, it had supported exports worth $2.9 billion; by 1973, exports worth $12.8 billion.12 There was also widespread concern about a "credit war" among the export promotion agencies of the advanced industrial countries. And certainly there was some suspicion as a result both of the 1972 grain deal and Watergate.

But the Stevenson Amendment came to center on the Soviet Union. Since October 1972, when President Nixon had issued the executive order approving Ex-Im participation in trade with the Soviet Union, it had provided $469 million in credits. The Stevenson Amendment, as finally worked out at the end of 1974, set a $300-million limit on further credits over the next four years, allowed up to $40 million for equipment and services to be used in energy exploration in the Soviet Union, but prohibited any Ex-Im financing of American energy developments in the Soviet Union. Unlike Jackson-Vanik, there was little in the way of extended debate over the implications of the Stevenson Amendment, the Administration failed to pay attention to the shape it was taking, and Congressmen voted on the basis of very little knowledge and information. It seemed, superficially, a "good thing."

Those who pushed the Stevenson Amendment promoted it as a better alternative to the Jackson Amendment.13 It is very hard to see how this was the case. Jackson-Vanik was a clear trade-off; it said: "You give this, we give that, and then we get down to business." The Stevenson Amendment attempted to strike a negative bargain: "You do this, you don't get that, and then there will be some business, but not very much."

It appears now that the Stevenson Amendment was the decisive reason that the Soviets refused to put the trade agreement into effect. From their point of view, such an action was rational. For the most part, the need for most-favored-nation status was (and is) primarily theoretical. Credits, on the other hand, were of immediate importance and utility. If trade were to expand substantially, credits were required. But the Stevenson Amendment said, in effect, that after having made an important concession, the Soviets would be eligible for less in credits over the subsequent four years than had already been received over the previous two, before they had made any concession! It looked very much as though the Congress were putting a ceiling over trade rather than a floor under it.

The proponents of the Stevenson Amendment point out that the legislation did allow the bank to come back to Congress to request further authorization, but, given the difficulties already encountered, there was reason to doubt the ease with which the ceiling would be raised. In addition, the Stevenson Amendment was singling out the Soviets for specific discrimination in a very blatant way. Thus, it seems that the Soviets saw the Stevenson Amendment as a major impediment to any development of trade. At the same time, they could observe that the Western world was heading into a severe downturn, and they assumed that "trade contradictions among the industrially developed capitalist states" would grow "deeper."14 They expected that, as in previous downturns, the capitalists would soon be knocking loudly at their door with attractive new packages. They also overestimated the strength of their own position, focusing on the (then) rising prices of raw materials, and not realizing that they were not insulated, that demand would drop in the West, and that they too would suffer the ill effects of worldwide recession and inflation.15

Now more than two years have passed. Soviet-American trade has stagnated. The Russians assuaged their pride by almost immediately securing ten billion dollars in credit lines with other Western governments. They also made clear to American firms and banks that they wanted to use what trading channels were available, and encouraged the Americans to carry on commerce with them through European subsidiaries.

V

It is clear today that the single most important step that the Congress and the new Administration can take to stimulate economic relations with the Soviet Union is to remove the Ex-Im restrictions. The Stevenson Amendment really reflected a three-pronged attack. In part, the Soviet Union bore the brunt of a more general assault against the entire notion of the United States having such a facility as the Ex-Im Bank. There are objections to such an institution, but they are weaker than the arguments in its favor. It is said that export credits in general, no matter who the trading partner, create an economic distortion, encouraging a less than optimal distribution of capital. This is an interesting theoretical position, but one rather divorced from reality, given both the nature of international commerce and the relatively small share of financing that goes into such export promotion. This position assumes that both capital markets and information are perfect, neither of which is the case. It ignores the fact that domestic purchasers of capital goods have to resort to longer term forms of financing (insurance companies, investment bankers, pension funds) not available to foreign purchasers. Although such export credits are called a subsidy, this is not quite the case. The money is raised on domestic markets, and Ex-Im makes a profit on its spread. Moreover, it is very difficult to prove that the Bank's activities crowd out other bidders for the capital.

The second prong was directed specifically against making such facilities available to the Soviet Union. But no purpose is achieved by singling out the Soviet Union for specific and explicit discrimination to which no other of America's trading partners are subjected. Indeed, an economic purist might ask whether such discrimination in itself constitutes an economic distortion.

There was a third, more narrowly defined, concern that helped shape the amendment. This was the reasonable worry that U.S. firms would become incrementally committed, without anybody attending to the overall pattern, in the huge, expensive and very long-term projects to develop fossil-fuel reserves in Siberia. But sufficient review mechanisms now exist to make it unnecessary to single out the Soviet Union.

If we want to expand trade, then Ex-Im is useful for a variety of reasons. Most major banks are, without Ex-Im participation, up against their legal lending limits to the Soviet Union.16 Such government-supported export credits are a conventional part of international finance, and are used in putting together financing packages in all the major countries. The "Gentlemen's Agreement" on export promotion credits among the major Western industrial countries will help to check an out-and-out credit race.17 Ex-Im is a way of introducing a needed note of stability into trading with the Soviet Union, for the Russians take its participation as a sign of Washington's "approval."

One of the constant concerns about trading with the Soviet Union is the supposed weakness of individual firms and banks when up against the U.S.S.R., Inc. Thus Ex-Im becomes one of the instrumentalities for righting such a balance. It gives the U.S. government an input into negotiations, allows it to monitor what is going on from the point of view of the national interest, and can be used to express the temperature of overall relations. These are exceedingly important roles. Not all Western countries are concerned with the political content of trading with the Russians. Britain and Canada, for instance, regard the provision of export credits almost entirely as a way to stimulate domestic employment. For the United States, however, the political aspects are just as important as the economic, and we do ourselves no good by denying ourselves this most useful instrumentality. The Congress can find better ways to exercise its oversight than through rigid and self-defeating Export-Import Bank restrictions.

We must recognize, however, that the issue of credits has taken on a new dimension since the disruption of the trade agreement, etching more starkly the basic question of how the Soviet Union will pay for what it buys. The strengthening of the Soviet position in the world economy implied by the recent rise in gold and oil prices now seems to have been more apparent than real, at least when measured against its demand for the products of the West. The Soviet drive to acquire Western technology, coupled with the purchase of grain because of two bad harvests, has led to a dramatic increase in the Soviet hard currency debt - from $2.5 billion at the end of 1970 to $10 billion at the end of 1975 to $14 billion at the end of 1976.

There is a tendency in some quarters to dismiss too quickly the significance of this debt. For instance, it is noted that Brazil's debt is almost twice as large. As reassurance, this is not altogether satisfying, however, for Brazil's debt is also something to be concerned about. Moreover, the rest of the world has much more data about Brazil's economic and financial situation than about the Soviet Union's, and so can see more clearly what is in store for Brazil. Another explanation is that this debt is the result of the two bad harvests, and so does not reflect a trend. However, it is reasonable to assume that a good deal of hard currency slated for one area (technology imports) was shifted to another (agricultural imports), but that the total amount set aside for hard currency transactions may have been unchanged.

A third reason often proffered for not worrying is Russia's reputation for commercial probity: while squabbling from time to time over interpretation, Moscow has never defaulted. But we cannot be sure that this behavior will last forever. Indeed, we have had one recent example of a communist country that came very close to defaulting. For a year or so, North Korea not only did not make payments due, but did not even answer letters from those in the West who had extended credits. Even with good intentions, the matter can get out of hand. After all, as already noted, foreign imports in the Ninth Five-Year Plan were to rise by 35 percent; instead, they rose by 186 percent.

It is also pointed out that the Soviets have a large amount of credit available in the West that they have not even touched.18 While some may want to see such facilities as a sign of stability, we must recognize that they also afford the Soviets the opportunity to pile up even more debt. The leverage that the debtor has over the lender cannot be altogether discounted, nor can we completely ignore the possibility that Russia might join the ranks of the less-developed countries and even some of the developed countries - endlessly rolling over and rescheduling debts never to be repaid in the context of an increasingly unstable international payments system.

None of these concerns can be simply waved away. Still, it is reasonable to expect that the Soviets will be able to manage their debt. The hard currency debt is small when measured against GNP, unlike the case with many developing countries.19 The flow of trade with the West is very important to the Soviet Union, and default or some other form of repudiation would have a shattering effect that would take many years to repair. That in itself, combined with the central control over the economy, would suggest that the highest priority will be given to handling the debt.

The new Five-Year Plan does, however, project a further increase of up to 35 percent in growth of trade with the West, and that will certainly put more pressure on the Soviet balance of payments. Preparations for the 1980 Olympics in Moscow are creating a whole new range of foreign currency demands. Thus, attention must be given to how the Soviets will pay. The question is being phrased in the international capital markets, where, despite Soviet irritation, lenders are now asking the U.S.S.R. to pay slightly higher rates.

Over the last several years, the Soviets have consistently talked of entering Western markets in a large way with manufactured products.20 In the past few months, there have been strong indications that they are backing away from such thinking. They realize that a very considerable concentration of resources would be required in order to produce to world market standards; enterprises would have to develop much quicker reaction times than those to which they are accustomed; and they are unwilling to make such commitments for uncertain results. As a variant, they have talked a good deal about compensation agreements, whereby Western firms would provide technology, equipment and skills, and, in turn, take part of the enterprise's manufactured output as payment. However, there is very little to show for all the seminars and discussions on the subject. For it would have to be a very bold Western firm that would want to commit itself to take the manufactured products of a Soviet enterprise for sale on the world market over a period of years - given the questions about quality control, flexibility and responsiveness to changing demands.21

However, compensation agreements further down the production ladder will be one of the main ways that the Soviets will finance their trade, in effect paying for the Western imports with the raw materials and semi-processed goods that result from the various projects - natural gas for pipelines; chemicals and fertilizers for chemical factories; timber and coking coal in exchange for participation in timber and coal developments in Siberia. A substantial part of the debt arises from such projects, and this portion of the debt will be self-liquidating over several years.

In general, the Soviets will continue to rely on their raw materials, as they have from the beginning, to pay for their modernization, although domestic demand and fears of future shortages will increasingly compete with the need to earn hard currency. Oil will become more important; raising prices for oil deliveries to Eastern Europe is meant to enforce demand restraint and so free Soviet oil for sale at higher prices in hard currency markets. The Soviets always have their old standby - gold sales - although, as one of the major producers, Russia must exhibit restraint to avoid driving the price of gold down.22 In a form of petrodollar recycling, the Soviets have been able to raise hard currency by selling weapons to Middle Eastern oil producers. Finally, Moscow has clearly gambled on raising hard currency through invisible trade - especially its rapidly expanding merchant fleet.

The handling of this debt will, in itself, call for greater economic interdependence, not only through such mechanisms as the aforementioned compensation deals and shipping, but also in the provision of more information. Up to now, the Soviet Union has been able to borrow simply as the U.S.S.R. Inc., in effect, telling Western officials and bankers, "We are the Soviet Union." However, the debt is now so large that more balance-of-payments data will be called for on such matters as debt structure, invisible capital flows, and export composition.

VI

The difficulties and dangers that expanding trade poses for both sides are all too visible, all too frequently cited. It is much too easy to overlook the possibilities and value - again, for both sides. If elements of a new relationship fail to emerge from growing economic relations, little will have been lost except for opportunities foreclosed. But the basic stakes are so important that we must try to develop common interests between the Soviet Union and the United States. Trade is the most obvious area in which to work, and compromise will be required of both sides. The Soviets are more likely to be responsive to Western concerns about human rights in the context of expanding economic relations. We do not want to find ourselves, in three or four years, regretting possibilities missed in Soviet-American relations, as we now recognize was the case in the late 1950s. The seriousness of the Soviet interest in stabilizing relations with the United States should not be discounted. Affirmative decisions are required in Washington. The Congress and the new Administration should respond with care, but also with flexibility, foresight and more than a hint of boldness.

Footnotes

1 Memorandum, Bureau of East-West Trade, U. S. Department of Commerce, December 17, 1976. Soviet exports to the United States totaled $220 million in 1973, $350 million in 1974, $254 million in 1975, and $220 million in 1976.

2 Overall, the trade in technological goods between East and West was seven billion dollars in 1974. The ratio was six to one in the West's favor. International Economic Report of the President, March 1976, p. 56.

4 Gertrude Schroeder, "Recent Developments in Soviet Planning and Incentives," Soviet Economic Prospects for the Seventies, Joint Economic Committee, Washington: GPO, 1973, p. 36. Also see Paul Gregory and Robert Stuart, Soviet Economic Structure and Performance, New York: Harper & Row, 1974, chapter 10. Eugen Loebl, a veteran of centralized planning in the Czechoslovak context, has suggested that computers could cause more problems in such economies than they solve. "The recent decision to introduce computerization as the basis of planning will result in more target figures and even less space for creative possibilities." Humanomics, New York: Random House, 1976, p. 90.

5 See Joseph Berliner, The Innovation Decision in Soviet Industry, Cambridge: MIT Press, 1976.

6 Foreign Trade, Moscow, No. 5, 1975, p.3.

7 Draft: Main Directives in the Economic Development of the U.S.S.R., Section IV.

8 The New York Times, December 20, 1976. See also An Ordinary Trial in the Soviet Union, the transcript of the trial of Dr. Mikhail Shtern in Vinnitsa in the Ukraine. Wolfgang Leonhard argues that increased internal repression in the U.S.S.R. is "required" by détente. "The Domestic Politics of the New Soviet Foreign Policy," Foreign Affairs, October 1973.

9 Jewish emigration did, after all, rise from a mere 400 in 1968 to over 33,000 in 1973. In 1976, it was down to 13,000.

10 The differences in these two images are developed in Daniel Yergin, Shattered Peace, Boston: Houghton Mifflin, 1977, chapters 1 and 2.

11 See Frederick C. Adams, Economic Diplomacy: The Export-Import Bank and American Foreign Policy 1934-1939, Columbia: University of Missouri Press, 1976, chapter 4.

12 Institutionally similar to facilities in other advanced industrial countries, the Ex-Im Bank at that point usually supported 45 percent of the total cost of capital goods exports, with another 45 percent coming from private institutions, and 10 percent paid in cash. The resulting interest rate represented a blend of the going commercial rate and the somewhat lower Ex-Im rate. Ex-Im did, and still does, usually pick up the longer term part of the financing for capital goods exports, while the commercial banks take the shorter end.

14 Y. Kapelinsky, "The Economy of the Capitalist World in 1974," Foreign Trade, Number 5, 1975, p. 44.

16 According to one estimate, there is, because of legal lending limits, less than $450 million in potential credits left in the U.S. commercial banking system. East-West Markets, December 13, 1976, p. 3.

17 After two years of negotiations, seven leading capitalist countries agreed to "exercise self-discipline" and harmonize their export credit policies, beginning July 1, 1976, for a one-year trial period. Among the basic compromises, the West Europeans agreed to raise interest rates, while the United States would shorten maturities. Also, base interest rates were established for developing, intermediate and advanced countries (as determined by per capita GNP).

18 In February 1975, the British arranged a 950-million-pound credit facility for the Russians. Only 42 million pounds had been used until December 1976, when a British-led consortium won a 100-million-pound contract for a gas-pumping system.

19 Steven I. Davis, "How Risky is International Lending?" Harvard Business Review, January-February 1977, p. 140.

21 At this writing, one American firm is close to entering into such a relationship. Bendix expects to sign a contract to assist the Soviets in establishing an automobile sparkplug factory and will take a percentage of the output for marketing through its worldwide network. Bendix apparently will be able to exert control over quality.

22 It is estimated that the Soviet Union sold a billion dollars worth of gold in the West in 1975 and again in 1976. East-West Markets, January 12, 1976, p. 15; January 10, 1977, p. 9. It exported $4 billion worth of oil to the West in 1976, 40 percent of the total merchandise exports.

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  • Daniel Yergin is the author of Shattered Peace, published by Houghton Mifflin this spring. He is a Lecturer at the Harvard Business School and a Research Fellow at Harvard's Center for International Affairs.
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