In Praise of Lesser Evils
Can Realism Repair Foreign Policy?
WHEN a dispute erupts in the realms of action and of doctrine at the same time it is ominous. An eruption of this type is occurring now over commercial policy. The lava of argument is pouring over the surfaces where national wills clash and shooting into the skies where doctrines spend their angry eternity. I will begin with the dispute over doctrine as the better way of defining the issues uncomplicated by particular local circumstances.
The American Government is sponsoring at an international conference now meeting in London a suggested Charter for an International Trade Organization. This proposal is the outcome of sustained searching by American and foreign experts for an agreed statement of principles to govern the trade policy of nations. Its terms express a stubborn will to draw countries into a joint program for the reduction of trade restrictions; and they reflect a dogged judgment that the most satisfactory basis for trade is world-wide and unmanaged competition.
It is impossible to condense the detailed prescriptions of the many articles of this Charter satisfactorily. But the basic economic conceptions which shaped them all are easily identified. They are: (1) that governments should reduce all types of restriction imposed on imports and exports; (2) that each should abstain from actions which would cause products produced within their territories to be offered in foreign markets at prices out of correspondence with domestic prices; (3) that each should permit products from every foreign land to compete within its markets on equal terms, and thereby leave the origin of imports to be settled by universal competition; (4) that each should accord all foreign buyers equal opportunity to secure its products on the same terms; (5) that each should abstain from bilateral agreements for the exchange of goods that would or might lessen the opportunity of others to compete for the trade. This is a broad but, I believe, correct interpretation of the conceptions embodied in the many articles of the Charter.
I will not try to trace the intricate ways in which the attempt is made to apply these rules to the medley of restrictions and forms of trading systems -- private, part-private and part state, wholly state. For one thing, the technical details are voluminous; and to omit some is to distort the rest. For another, there seems to be an unsettled difference of judgment even among officials who composed the Charter as to whether or how some of the provisions apply to countries that conduct all their trade through a state monopoly.
But the foregoing recitation of governing standards is enough to indicate that the proposed rules of behavior are less natural for Socialist or managed systems than for private competitive ones. Still, if they are given a common-sense interpretation they might not prove too confining a garment of principle even for the former. It would be by no means easy for competitive private economies to observe them either. Freedom to be arbitrary is a great convenience to them as well. It should be possible to shape most of the provisions by further discussion into a mutually acceptable program. But only if good will exists; and only if the way is left open for exceptions that can be well justified. There are, and there will be, countries that cannot get along satisfactorily without the benefit of some favored trade relationships. We have recently recognized this in the case of the Philippines. These rules, if they are to be tolerable, must not stubbornly block bilateral arrangements that promise healthy growth without plain and needless injury to others.
The specific provisions in the Charter having to do with the conduct of a complete state trading monopoly, such as that maintained by the U.S.S.R., is apt to prove the most stubborn cause of dispute. They seemed designed to assure that the behavior of such monopolies will be akin to that of private trade and to establish a parity of advantage between the two types of systems. I believe the authors have been too much swayed by the judgment that this could be done only by having all trade open to uncircumscribed competition.
Let me illustrate. Article 26 specifies that state trading enterprises should be operated on a non-discriminatory basis; that is, that in their buying and selling they should accord the commerce of all other countries most-favored-nation advantages. The U.S.S.R. has customarily been ready so to pledge itself in general terms. A promise of this kind was contained in the trade agreements negotiated with the United States before the war. It is to be found also, for example, in the commercial agreement recently negotiated with France. But in the Charter this idea is given a more precise and confining interpretation than the U.S.S.R. has ever been asked to observe. It is provided that in order to give effect to a non-discriminatory policy any state trading enterprise "shall, in making its external purchases or sales of any product or service, be influenced solely by commercial considerations, such as price, quality, marketability, transportation and terms of purchase or sale."
The reasons for seeking agreement upon the rules of behavior for state trading organizations are grave. For if this method of trading is used ruthlessly and greedily it can disturb the economic life of other countries greatly. It can be more easily directed than private trading arrangements to dispossess established trade, to acquire a monopoly of resources, and to extort unfair advantage in the exchange of goods. It can also, as German behavior before the war so bitterly illustrated, be intently directed towards the accomplishment of an aggressive political purpose. These are reasons for seeking assurance against the abuse of state systems.
But it is best not to insist upon formulas which seem too deeply dyed by the values of private competitive practice such as the one cited. And in this instance the impulse to evade might be bolstered by knowledge that privately conducted trade is not entirely determined by commercial considerations. It is sometimes affected by governmental measures taken for political reasons -- domestic or foreign. Thus, for example, our foreign loan program and the trade resulting therefrom is subject to reckonings that are not wholly commercial. And the impulse to treat such a formula cynically may be encouraged by the knowledge that private trade is not always competitive; that private monopolies sometimes discriminate. There are in fact students of the Charter who argue that this provision will be accepted without question, because it can be twisted to mean anything.
I do not know, and it is not necessary now to guess, what position the U.S.S.R. and countries closely allied to it or under its control will ultimately take towards the Charter proposals. They may be much modified before a decision is required. The U.S.S.R. alone of all countries did not respond to American invitations to confer about measures to make effective Article VII of the Lend-Lease Agreements; it is supposed, in fact, not even to have acknowledged the invitation. After an earlier show of willingness to become a member of the International Fund and the International Bank, it has remained outside. The fact that the text of these agreements contained provisions having to do with trade policy may well have been one of the reasons. And now the U.S.S.R. is absent from the discussions being conducted in London. In short, its responses in the recent past do not encourage the belief that it will join.
This possibility gives more than theoretical importance to the provisions of the Charter proposals having to do with the relations between the members of the International Trade Organizations and non-members. I will state them in full despite their cumbrous clauses. The proposed text (Article 31) stipulates first that no member shall seek exclusive or preferential advantages for its trade in the territory of any non-member which would result, directly or indirectly, in discrimination against the trade of any other member. Construed by standards defined in other sections of the text, this stipulation would mean that members could not enter into agreement with the U.S.S.R. which provided for specific exchanges of goods unless the exchanges fitted into quotas allotted by reference to a previous representative period. This would require modification of most, if not all, the agreements to which the U.S.S.R. is now a party. It was quite possibly this provision of the Charter that the Deputy Minister of Finance of Czechoslovakia had in mind when he remarked that the chief obstacle to a new trade understanding with the United States was our desire to include a clause providing for membership in a world trade body. He explained that Czechoslovakia could not pledge itself to join a trade arrangement that might in effect exclude the Soviet Union and the eastern bloc of states with which Czechoslovakia is closely linked economically.[i] Article 31 of the Charter further provides that no member shall be a party to any agreement with a non-member under which the latter becomes contractually entitled to any of the benefits under this Charter. And also that members shall not, except with the concurrence of the Organization, apply tariff reductions made in pursuance of the Charter to the trade of non-members.
This group of provisions should be reconsidered, if they already have not been by the time this article appears. It is probable they are intended merely to provide a basis of joint defense against any member that threatened the unity of the organization or took advantage of its weaker members. But they may be construed as a threat. A serious attempt to apply them would result either in the demoralization of the International Trade Organization, or open economic warfare between members on the one side and the U.S.S.R. and its allies on the other. Either would be a sorry outcome of a good impulse, valiantly pursued, to restore and bring order into international trade relations.
This conclusion is not meant as a dismissal of the need of obtaining proofs and promises of reasonable behavior from the U.S.S.R. -- whether or not it joins the International Trade Organization. These should be definite enough to testify to its willingness to abstain from using its trading system unfairly, or as a means of forcing other countries to join it in a bloc, separated from, if not actively hostile to, the rest of the world. That the U.S.S.R. may now be attempting to do just that is suggested by the agreements negotiated with the former satellites of Germany and other neighboring countries. The agreements with Bulgaria, Rumania and Hungary in particular have caused anxiety and resentment on the part of the American Government. They were completed in secrecy. Unless I am mistaken, their texts have not been published. The Soviet Government is reported to have refused to supply even foreign governments with copies. So any account of their contents is subject to error in detail.
The agreements seem to fall into two groups. One may be called trade agreements; these contain arrangements for the exchange of products, specifying quantity, prices, payment methods and other related matters. The others have become known as economic collaboration agreements; these provide for 50 percent participation by the Soviet Government in various branches of the economic life of the former satellite countries. Any appraisal of the significance of these two sets of agreements must take into account as well the claims on production acquired by the U.S.S.R. as restitution and reparations.
The student of the history of these agreements gets the impression that the U.S.S.R. first sought to put itself in a position to claim control of all the trade and production of these smaller countries that desperate need or grasping desire could identify. After all, these countries were defeated enemies which had taken part in an attempt to destroy the Soviet Union; and most of the former directors of their industrial life had close ties with Berlin. Then, the general claim having been established, the U.S.S.R. seems to have proceeded to adjust its demands to actual possibilities and to the protests encountered.
The first trade agreement with Rumania (May 1945) contemplated an exchange of goods to the value of $20,000,000 in each direction. The total scheduled Rumanian deliveries were in excess of the country's immediate capacity. This is proven by the fact that during the first year of the agreement's operation Rumanian exports to the U.S.S.R. were only 33 percent of the scheduled total; and, contrary to intention, less than Soviet deliveries to Rumania. Under the economic collaboration agreement negotiated simultaneously, joint Soviet-Rumanian companies were to be established for the development of Rumanian resources. It is reported that such joint companies have been created for oil production, navigation, civil aviation, banking and lumber. Whether or not these are as yet on a full operating basis is not known. The capital of these joint companies is divided equally between the appropriate Soviet state enterprises and private Rumanian companies. The Soviet contribution has consisted mainly of former German assets acquired by the U.S.S.R. under the Potsdam Agreement, or under the war booty clause (Article VII) of the Armistice agreement. In each of the fields in which these joint companies are to operate they appear to have been accorded a preferential or almost monopolistic position -- in fact, if not in form. Rumania is also obligated under the Armistice arrangements to make extensive deliveries as restitution and reparations. The expected result of a perpetuation of these arrangements, in combination, would be that Rumania would not be in a position to trade on a satisfactory scale with other countries.
The Bulgarian trade agreements (March 1945 and April 1946) are similarly comprehensive. It is reported that the cash value of the trade arrangement included within its scope about one-half of the total value of Bulgarian trade in 1939. But here again the actual trade up to the present has been less than the specified amounts. The only economic collaboration agreement known to have been concluded between the two countries is in the mining field; under the nationalization program it was apparently planned that this joint company would acquire control of all important mining enterprises in Bulgaria.
The trade agreement between the U.S.S.R. and Hungary (August 1945) provided for an exchange of goods of $30,000,000 in each direction. This would be only about 19 percent of Hungarian trade in 1939, and much less than the prewar trade between Germany and Hungary. It is reported that the agreement operated unsatisfactorily and that deliveries were much smaller than those set forth in its text. There is reason to believe it is in process of re-negotiation. The economic collaboration agreement with Hungary (August 1945) has been carried out by the formation of joint companies for aviation, navigation, oil and bauxite production. The navigation and aviation companies would be placed in dominant, if not exclusive, positions. The bauxite company would possess a preferential position, and the oil company a favored one in regard to future opportunity. It is understood that these agreements do not seriously jeopardize the operation of existing American properties in Hungary; but they would curtail the possibility of expansion or of entry into new fields.
It is unsafe to draw final conclusions regarding the economic consequences of these arrangements, for the actual outcome thus far seems to have been quite different from that scheduled. But it is easy to appreciate why the American and other governments have suspected that these arrangements might result in bringing the economic life of the small countries in question under Russian domination. It has been estimated that the value of imports into the U.S.S.R. specified in the trade agreements concluded in 1945 with Rumania, Hungary, Bulgaria and Finland was approximately $60,000,000, while reparations deliveries from the same countries were scheduled at about $130,000,000. This, combined with the arrangements for joint control of basic branches of economic activity in the case of Rumania and Hungary, might well have left the smaller countries unable to resume outside trade relationships on a satisfactory scale. Or at least they would have made that possibility subject to Russian tolerance. Thus our opposition up to the present has been justified. This opposition has been more directly addressed to the economic collaboration accords than to the trade agreements. And our criticism of the latter has not been unique; it is part of our general show of dislike for all bilateral agreements of this kind. But we have not usually pushed our protests so vigorously and dramatically. Or is it that the press and radio have selected them for noisy demonstration?
But a basic question of policy remains to be settled. How far shall we carry our objections? Shall we merely try to satisfy some broad purposes by rough compromise, sufficient to assure that these arrangements do not deprive us of our main natural opportunities to trade with these countries and do not ban American enterprises from fields like oil production and aviation in which they are competitively well qualified? Or shall we go further? Shall we insist that these countries and the U.S.S.R. abstain from any accord that may supplant previous trade flows, and might interfere with the full operation of international competition? Shall we contend against any arrangements which may result in granting the U.S.S.R. a greater or more privileged place in the trade and economic life of these countries than it would obtain if all opportunity was left open to competition? It is the latter course that the American Government seems now inclined to take -- if I interpret correctly the meaning of some of the contentions we have advanced. Inclined to take, let me make clear again, not only in connection with this set of accords, but whenever two countries arrange for an exchange of products in channels not clearly etched by past competition or bounded by future competition.
The American Government had made several direct attempts to halt and bring about a revision of the agreements to which objection has been taken. As early as July 1945 it informed the U.S.S.R. that it judged the economic collaboration agreements with Rumania, particularly those concerned with oil, were discriminatory. It repeatedly presented objections to both the Soviet and Hungarian Governments regarding their agreements. In both cases it urged that all such arrangements be deferred until the peace treaties had been concluded; and it asserted that the only satisfactory and fair approach to the problem of economic reconstruction, in these countries was a comprehensive, tripartite arrangement that would provide a framework for the reintegration of their economies with the general economy of Europe. It advanced the same view in the course of discussions of a possible loan from the United States to the U.S.S.R., proposing joint negotiations for the establishment of concerted policies to assist former Axis satellite states to solve their economic difficulties. All these American proposals were denied and the suggestions for joint discussions have been evaded. The Soviet Government has refused to accede to the American conception of equality in its trade agreements; and it has claimed that the arrangements for economic collaboration were not discriminatory. It has cited the dominant place obtained by private American enterprise in some of the countries of this hemisphere; and it has noted the fact that American private enterprise abroad has sometimes acquired exclusive opportunity.
And now this issue has become the subject of a harsh public quarrel in the Council of Foreign Ministers, engaged in framing peace treaties with Rumania, Hungary, Bulgaria and Italy. The American and other Governments proposed that the following clauses be put in the treaties:
1. Pending the conclusion of commercial treaties or agreements between . . . . . . . . . . . . and the United Nations, the . . . . . . . . . . . . Government shall, during the . . . . . . . . months following the coming into force of the present Treaty, grant the following treatment to each of the United Nations, which, in fact, reciprocally grants similar treatment in like matters to . . . . . . . . . . . . :
(a) In all that concerns duties and charges on importation and exportation, the internal taxation of imported goods and all regulations pertaining thereto, the United Nations shall be granted unconditional most favoured treatment.
(b) In all other respects, to make no arbitrary discrimination against goods originating in or destined for any territory of any of the United Nations as compared with like goods originating in or destined for any other territory of the United Nations or any other foreign country.
(c) Natural and legal persons who are nationals of any of the United Nations shall be granted national and most-favoured-nation treatment in all matters pertaining to commerce, industry, shipping and other forms of business activity within . . . . . . . . . . . . .
The U.S.S.R. has denied both the necessity and the equity of these provisions; and it has sought to destroy their clinching meaning by various amendments. Their representatives have asserted in bitter phrases the opinion that the United States and other countries were trying to force abandonment of their type of state trading arrangement. They have said particularly that we were doing this in order to keep the economies of the smaller states of central Europe subject to capitalist control. Thus Molotov avowed before the Peace Conference in Paris, on August 15, that "Nobody can say that the unlimited application of 'equality of opportunity' is equally suitable for powerful and for weak states, for great and small Powers. Nobody could prove this. . . . It is obvious that the unlimited application of this principle is something which is convenient for those who have the power and the wealth, for those who are trying to use their capital to subjugate those who are weaker."
It is not likely that either side will completely yield on this question. It may be necessary to exclude any economic provisions from these treaties to avoid indefinite postponement of their signature. That the U.S.S.R. is determined to secure a greatly extended, if not dominant, place in the economies of these countries is clear. That it intends to supervise their political and social development seems no less clear. And in this matter the United States cannot compromise happily or too far. For it is not striving merely to obtain a few extra million dollars of trade or profit. It is seeking to assure that these small countries have a genuine chance to follow their independent judgment in economic and political spheres. And it is seeking to protect American trade relations throughout the world against a possible assault of a combined bloc of countries under the leadership of the U.S.S.R.
The line of settlement -- if any is to be reached -- would appear to be a loosening of the formulas we have been propounding. We can accept arrangements between the U.S.S.R. and these countries that permit them to develop trade and economic relations not confined by theoretical calculations of competitive opportunity. But these should be well defined and so limited as to enable the smaller countries to take advantage of opportunities to deal with the outside world. For we cannot freely consent to arbitrary exclusion from their economic life or to have our entry decisively subject to the will of the U.S.S.R.
The dilemma we face over the matter of how strictly to insist upon application of a theoretical principle of equality of opportunity will not be restricted to the geographical area that is the present field of dispute. It is almost certain to arise, and with great tension, in connection with the German peace settlement. Here both the rights and the interests of the United States would justify insistence on terms that place no country in an advantageous position as compared with others. If foreign governments are to join with a central German Government in the administration of any branch or enterprise in that country, the participation should be joint and equal, or in accord with agreed principles. But if the American Government intends to obtain and retain an equal place in the economy of Germany, it must be prepared to have more positive instruments of policy than formulas. It will have to be willing to undertake or underwrite trading operations.
And what if the same issue spreads even further? What if the Soviet Government should negotiate economic collaboration agreements with the countries of western Europe or of this hemisphere of the kind it has with Hungary and Rumania? The chief source of trade and financial advantages for most foreign countries is clearly outside of the U.S.S.R. They will be hesitant to risk these -- as they would be doing -- for fulfillment of any very objectionable accord with the U.S.S.R. The accord with Sweden was a warning incident. This was a combined loan and "goods delivery" agreement, not an economic collaboration accord. American refusal to countenance the very form of these agreements is not likely to prevent their negotiation. And American attempts to confine them by rigid formula are likely to be evaded. All that we can successfully hope to do, I think, is to insist that they remain within the realm of easy justification on economic grounds; and if they do not, withhold the advantages that we have the power to bestow.
The most promising safeguard against harsh train of argument would be universal participation in the International Trade Organization. Within its web of mutual obligations, equities could be debated and defined, rivalries adjusted, compromises conceived and benefits exchanged. If this cannot be realized, a direct understanding should be sought with the U.S.S.R. Failing either, the question may prove to be one of the most troublesome in the realm of Great Power politics. The sponsors of the Charter effort should be given the utmost of support -- and be "aided" by criticism.
The various lines of compromise I have suggested may be ridiculed as pointless. For it may be argued that the positions of nations in this field represent only strategic steps in a long struggle regarding the political and social destinies of central Europe, and perhaps of the whole world. But it would be desperate defeatism now to be deterred by this conjecture from making the utmost effort to find out whether reconciliation in the trade field -- as in others -- is not possible. If it can be achieved, other phases of the struggle for power may be somewhat softened, suspicions somewhat lessened, the points of conflict made fewer. In time, even the fury of doctrinal dispute might wane -- though of this possibility there seems not the slightest gleam at the present time.
I believe it to be the wish of the two peoples that their trading operations be adjusted without warlike friction. I believe it is in the power of their leaders to find the terms of adjustment. I am sure that the American leaders are eager to do so. Hence, if -- and this is the decisive if -- the U.S.S.R. will make it possible to believe that its trade policies are not directed to secure political domination or social revolution, we will not frustrate compromise by inflexible economic conceptions.
[i]The New York Times, November 1, 1946.