technology and east-west trade - princeton university

Technology and East-West Trade

November 1979

NTIS order #PB83-234955

Library of Congress Catalog Card Number 79-600203

For sale by the Superintendent of Documents, U.S. Government Printing OfficeWashington, D.C. 20402 Stock No. 052-003 -00723-1

Foreword

This assessment was made in response to requeststee on Foreign Affairs and the Senate Committee on

h-em the House Commit-Commerce, Science, and

Transportation. Its purpose is to examine the economic and national securityimplications of the transfer of technology between the United States and theCommunist world.

The study identifies and, where possible, evaluates the economic, political,and military costs and benefits that accrue to the United States in its trade withthe Soviet Union, Eastern Europe, and the People’s Republic of China, takingaccount of the complex ways in which these factors interrelate. It sets forth aspectrum of policy options which could potentially affect these relationships,and explains the difficulties in projecting their consequences.

The report also provides background information on the functioning and theimplications of U.S. trade policy vis-a-vis the Communist world, including theareas of tariff and credit policy and export control, both in the United States andin selected allied nations. Finally, it surveys the past and potential contributionsof Western technology to the economies of the Soviet Union and China.

The Director of this project is Dr. Ronnie Goldberg of OTA’s InternationalSecurity and Commerce program. That program is managed by Dr. Peter Sharf-man (who succeeded Dr. Henry Kelly in September 1979) and is part of OTA’sEnergy, Materials, and International Security Division headed by AssistantDirector Lionel S. Johns.

OTA is grateful for the assistance of its Technology and East-West TradeAdvisory Panel, chaired by Mr. McGeorge Bundy, as well as for the assistanceprovided by the Central Intelligence Agency and the Departments of Defense,State, and Commerce. It should be understood, however, that OTA assumes fullresponsibility for its report, which does not necessarily represent the views of in-dividual members of the Advisory Panel or of any Government agency.

JOHN H. GIBBONSDirector

. . .Ill

Technology and East-West TradeAdvisory Panel

McGeorge Bundy, ChairmanNew York University

Igor BirmanConsultant on Soviet Economics

Morris BornsteinUniversity of Michigan

Lawrence BrainardBankers Trust

Jonathan BungeKeck, Mahin, and Cate

Daniel DruckerUniversity of Illinois

Melvin DuncanExport Programs, Inc.

Patricia FeltesLeague of Women Voters

Thomas FingarStanford University

Frederic FleronState University of New York

Henry ForrestControl Data Corporation

Elizabeth JaegerAFL-CIO

Rhoda H. KarpatkinConsumers Union of the United States

Jan LodalAmerican Management Systems

J. Ray PaceBaker World Trade, Inc.

Charles PhippsTexas Instruments, Inc.

Gertrude SchroederUniversity of Virginia

David SmithLevi-Strauss, Inc.

Seymour WeissSY Corporation

Technology and East-West Trade Project Staff

Lionel S. Johns, Assistant DirectorEnergy, Materials, and International Security Division

Henry Kelly, Program Manager (to September 1979)Peter Sharfman, Program Manager (from September 1979)

International Security and Commerce Program

Ronnie Goldberg, Project Director

Pamela Baldwin Robert RarogMarvin Ott Irene Szopo

Administrative Staff

Dorothy Richroath Helena Hassell

OTA Publishing Staff

John C. Holmes, Publishing OfficerKathie S. Boss Joanne Heming

Acknowledgements

This report was prepared by the International Security and Commerce Program staff ofthe Office of Technology Assessment. The staff wishes to acknowledge the assistance of thefollowing contractors in the collection, analysis, and preparation of material for the report:

Michael Checinski Stephen Sternheimer Business ExperienceRobert Fraser Richard P. Suttmeier InternationalSeymour Goodman Rudi Volti International EconomicMark Kuchment Angela Stent Yergin Studies InstitutePhillips Kuhl

The following Government agencies also provided assistance:

The Central Intelligence Agency The Department of DefenseThe Department of Commerce The Department of State

vi

Contents

Chapter Page

I. Summary:Issues and Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

11. Future Policy Governing East-West Trade and Technology Transfer 19

III. The Economic Implications of East-West Trade andTechnology Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

IV. The Foreign Policy Implications of East-West Trade andTechnology Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67

V. The Military Implications of East-West Technology Transfer . . . . . . 85

VI. Technology Transfer: Definition and Measurement . . . . . . . . . . . . . . . 99

VII. The East-West-Trade Policy of the United States . . . . . . . . . . . . . . . . 111

VIII. Multilateral Export Control Policy: The Coordinating Committee(CoCom). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153

IX. The East-West Trade Policies of Americans Cocom Allies . . . . . . . . . . 173

X. Western Technology in the Soviet Union . . . . . . . . . . . . . . . . . . . . . . . 205

XI. Western Technology in the People’s Republic of China . . . . . . . . . . . . 245

Appendix: Export Administration Act of 1979. . . . . . . . . . . . . . . . . . . . . . . . 287

vii

ACEP — Advisory Committee onExport Policy

AWG — Aussenwirtschaftsgesetz(West Germany)

BGW – Bundesamt fuer gewerblicheWirtschaft (Ministry ofIndustrial Economy, WestGermany)

c c c – Commodity CreditCorporation

CCL – Commodity Control ListCDC – Control Data CorporationCDU –Christian Democratic Party

(West Germany)CG –Consultative GroupChinCom – China CommitteeCIA – Central Intelligence AgencyCMEA or – Council for Mutual

COMECON Economic AssistanceCoCom

COFACE

CTEGs

DODEARB

EDAC

EEEEC

EximbankFRG

GAOGATT

GDR

GNPHVEC

IAEA

ICsIREX

ITC

I.W.JDA

. . .Vlll

– Coordinating Committee forMultilateral Export Controls

– Compagnie Francaised’Assurance pour leCommerce Exterieur(France)

– Critical Technology ExpertGroups

– Department of Defense— Export Administration

Review Board— Economic Defense Advisory

Committee– Eastern Europe— European Economic

Community– Export-Import Bank– Federal Republic of

Germany (West Germany)– General Accounting Office— General Agreement on

Trade and Tariffs— German Democratic

Republic (East Germany)—gross national product– High Voltage Engineering

Corporation— International Atomic

Energy Agency— integrated circuits– International Research and

Exchanges Board– International Trade

Commission— industrialized world– Japan Defense Agency

LIST OF ACRONYMSJERC

LDCsLIBOR

LSIMFNMFT

MIRVs

MITI

NAS

NRC

NSCOCOEA

OECD

PRCPRM 31

R&DSCCC

SCST

SEC

SITC

SPC

SPD

S&TSTC

sub-ACEP

TACs

— Japanese EconomicResearch Center

— less developed countries– London Interbank

Borrowing Rate— large-scale integration— most-favored-nation– Ministry of Foreign Trade

(PRC)— multiple independently

targetable reentry vehicles– Ministry of International

Trade and Industry (Japan)– National Academy of

Sciences– Nuclear Regulatory

Commission– National Security Council– Operating Committee— Office of Export

Administration— Organization for Economic

Cooperation andDevelopment

– People’s Republic of China— Presidential Review

Memorandum on East-WestTechnology Transfer

— research and development— State Capital Construction

Commission (PRC)– Soviet Committee on

Science and Technology– State Economic Commission

(PRC)– Standard International

Trade Classification— State Planning Commission

(PRC)– Social Democratic Party

(West Germany)— science and technology– State Science and

Technology Commission(PRC)

— sub-Advisory Committee onExport Policy

— Technical AdvisoryCommittees -

TECH IMPORT – China National TechnicalImport Corporation

TTG –Technical Task GroupU.S.S.R. – Union of Soviet Socialist

RepublicsVLSI — very large-scale integration

CHAPTER I

Summary: Issuesand Options

CONTENTS

PageINTRODUCTION . . . . ... , . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ISSUES AND FINDINGS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Economic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .l. Howi mportant is trade with the Communist world to the U.S.

balance of trade?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2. What are the major barriers to continued growth in U.S. trade with

the East?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3. How much technology does the Communist world buy from the West,

and how important is that technology to the economies of theimporting countries? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4. What are the prospects for future Eastern purchases of Westerntechnology?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5. Could the sale of American technology to the Communist worldproduce effects detrimental to sectors of the U.S. economy?. . . . . . . . .

Political . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .l. What basic positions have been taken regarding the use of

trade leverage, i.e., using trade to achieve political objectives offoreign policy?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Is there evidence to either confirm or deny theutility of tradeleverage in East-West relations? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Military and Strategic. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .l. Can the military risk entailed in the proposed sale of a dual-use

technology be determined? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2. Will the compilation of a list of militarily criticaltechnologies,

embargoed to the Communist world, substantially reduce this risk? . .3. Have American technology exports contributed significantly to

the military capabilities of the Soviet Union?. . . . . . . . . . . . . . . . . . . . .

America’s Allies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .l. How effective is CoCom? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2. How do other members of the Western alliance view the problems

raised by East-West trade and technology transfer?. . . . . . . . . . . . . . .3. What is the likely future of CoCom and how much influence can

the United States expect to exercise over its policies?. . . . . . . . . . . . . .

POLICY OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

l. Actions in keeping with the existing policy but designed to makecurrent procedures more efficient. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2. Actions that could increase restrictions on East-West trade orstrengthen the use of trade as a foreign policy lever. . . . . . . . . . . . . . . . . . .

3. Actions designed to expand East-West trade. . . . . . . . . . . . . . . . . . . . . . . .

3

5

5

5

5

6

7

8

10

10

11

11

11

11

12

1212

12

13

13

13

1414

CHAPTER I

Summary: Issues and Options

INTRODUCTION

Trade and commerce between nations is a necessary, if not sufficient, requi-site for achieving peaceful relationships. On the other hand, trade with a poten-tial adversary will inevitably, to some extent, strengthen the economy and themilitary capability of the trading partner. It is in the context of this dilemmathat present debates over the value and wisdom of selling US. goods and tech-nology to the Communist world take place. This study has been undertaken atthe request of the House Committee on Foreign Affairs and the Senate Commit-tee on Commerce, Science, and Transportation to help provide Congress withthe capability to address the complex issues raised by this trade, including theextent to which international trade in high technology endangers the nationalsecurity of the United States. It addresses the controversies that surround theissue of East-West trade and technology transfer, i.e., the costs and benefits ofthe United States’ selling technology to and expanding its commercial relationswith the Soviet Union, Eastern Europe, and the People’s Republic of China.

This subject is complicated by both con-ceptual problems and disagreements aboutthe nature and future of U.S.-Soviet rela-tions. The conceptual problems concern thedifficult task of defining and measuringtechnology. These problems are dealt with inchapter V 1. The disagreements are mani-fested in the divisiveness and ambivalencewhich surround the question of the appropri-ate nature and extent of U.S. trade with theEast. At the center of these disagreementsseems to lie an even more fundamental dif-ference of views about the basic strategiesthat the United States should employ in itsdealings with the Communist world.

From one perspective, technology transferis a necessary part of a policy of expandedcontacts with the Communist world. Out ofthis policy of detente arises a series of inter-national and interpersonal relationshipswhich, over time, could contribute to a last-

ing structure of peace. Those that arguefrom this perspective assert that present pol-icies that restrict U.S. exports are both polit-ically and economically ill-advised. The riskof some erosion of U.S. technical leadtime in-curred by trade in technology is justified bythe economic benefits of trade. Moreover,strict export controls are unworkable giventhe availability of much comparable technol-ogy abroad and the inability of the UnitedStates to obtain adequate cooperation fromits allies for a restrictive trade policy. Fromthis perspective, the denial of all but a smalland specialized category of military technol-ogy is practically impossible. The safest pol-icy therefore becomes one of vigorous pro-motion of 1) all U.S. exports to reduce bal-ance-of-trade deficits, and 2) U.S. researchand development to maintain a technologicallead over friends and adversaries alike, thusminimizing the national security risks en-tailed in technology transfer. Consistent

3

4 ● Technology and East-West Trade

with this view is the argument that corpo-rate interest should be more than adequateto protect the United States from sufferingsubstantial economic losses through trade intechnology; it is, after all, in the interest ofevery corporation to protect its position oftechnical leadership.

Others view the basic nature of East-Westconfrontation in more Manichean terms, ar-guing that the fundamentally adversary re-lationship between East and West is unlike-ly to be changed in the near future throughany gradual relaxation of tension broughtabout by trade. Trade is not seen as an op-portunity for strengthening peace; rather itis contended that the West is being slowlybled of its most important assets by nationsit has every reason to distrust. From thisperspective, present policy is not restrictiveenough. The only safe course is to deny as-sistance to our adversaries wherever possi-ble, using trade only as necessary to extractpolitical concessions. The difficulty of ob-taining cooperation from our allies is ac-knowledged but countered by the argumentthat opinion in Western Europe and Japan isnot monolithic and present official senti-ments are not fixed for all time. With suffi-cient determination, funds, and energy itcould be possible both to strengthen West-ern military alliances and to convince our al-lies to restrict trade in a common front.From this perspective even relatively pas-sive aspects of trade in technology assume astrategic significance; programs allowing aconstant interchange between Eastern andWestern technologies, for instance, can grad-ually deplete advantages in technology,management skills, and other areas in whichthe West now enjoys substantial superiori-ty.

The middle ground is occupied by thosewho feel that no judgments need necessarilybe made about the prospects for detente.They argue that while existing policies mayrequire adjustments to increase the efficien-cy and reliability of their administration, nobasic reformulation is required. From thispoint of view, the objective of the export ad-ministration system is to maintain the milit-

arily relevant technological leads that theWest presently holds relative to the Commu-nist world. The system, it is argued, is func-tioning properly so long as it delays the ac-quisition in the East of technologies thatcould close these gaps or ensures that theiracquisition is relatively difficult and costly.Realistically, a Communist nation can ulti-mately acquire any item it prizes highlyenough; either alternative suppliers will befound outside the United States, or it will bedeveloped indigenously, at greater cost per-haps than if it were purchased from theWest. It is acknowledged that the licensingsystem as it is presently administered mayoccasionally err either in subjecting harm-less technologies to excessive and needlessdelay, or, less often, in allowing items ofmilitary significance to slip through the net.These defects can be remedied without alter-ing the fundamental premises of the policy,however. Attempts to weight the policy onthe side of economic advantage may haveserious national security implications; ef-forts in the opposite direction must contendwith economic and political realities. TheUnited States is not the sole supplier of mostof the technologies desired in the Communistworld and U.S. allies in Western Europe andJapan are not likely to concur in more re-strictive policies.

To discuss and evaluate these positions ina meaningful way requires the review of ahost of complex economic, political, and mili-tary benefits and liabilities that may not bequantifiable, but which nevertheless mustenter into any calculation of the risks in-herent in all trading relationships with theUnion of Soviet Socialist Republics(U.S.S.R.), People’s Republic of China (PRC),and Eastern Europe. It is the goal of this as-sessment to present these and related pointsof view as clearly as possible, acknowledgingthe uncertainties which exist and which willcontinue to exist, but providing materialthat will allow a better analysis of the kindsof military, political, and economic costs andbenefits that any program affecting East-West trade and technology transfer is likelyto incur.

Ch l—Summary Issues and Options ● 5

ISSUES AND FINDINGS

The following is a capsule summary of themajor issues arising from U.S. trade—partic-ularly in technology-with the Communistworld. The discussion addresses the econom-ic, military, and political concerns related tothis trade and its role in relations betweenthe United States and its major allies.

E C O N O M I C

How Important Is Trade Withthe Communist World to theU.S. Balance of Trade?

East-West trade is a relatively small com-ponent of U.S. foreign trade, and a minorcomponent of the overall American econ-omy. Although trade with CommunistStates has grown rapidly since the begin-nings of detente, and although trade withthe People’s Republic of China increased dra-matically during 1979, trade with Commu-nist nations is not expected to become a criti-cal factor in the U.S. balance of trade in theforeseeable future.

Total turnover of U.S. trade with the Eastin 1978 was $6.3 billion—4.l percent of U.S.world trade. The United States had a bal-ance of trade surplus with the Communistworld of $2.6 billion in 1978, as compared toa U.S. worldwide trade deficit of approx-imately $28.4 billion. Moreover, East-Westtrade remains a relatively small part of theOrganization for Economic Cooperation andDevelopment (OECD) trade as a whole, andthe United States has captured only a minorshare of this limited market. In no instanceis the United States the major Western trad-ing partner of a nonmarket economy.

What Are the Major Barriers toContinued Growth in U.S. Trade Withthe East?

Three factors are commonly cited as inhib-iting the expansion of American trade withthe Communist world: 1) the lack of officialcredits and guarantees to finance U.S. ex-

Photo credit World-W/de Photo

Coca Cola is now available in the PRC

Photo credit TASS from SOVFOTO

Pepsi Cola production line at Novorossiisk, U.S.S.R.

ports; 2) the lack of normal trading relations,including extension of most-favored-nation(MFN) status to Communist countries, nota-bly the U.S.S.R. and PRC; and 3) U.S. exportcontrols.

In fact, the primary obstacle to rapidgrowth of trade with the Communist world isthe Communists’ inability and/or unwilling-ness to export on a competitive basis toWestern markets. Consequently, a shortageof hard currency inhibits Communist im-ports from the West. Credits that supply


hard currency would attack this shortagedirectly; extension of MFN would facilitatesome Communist exports; direct export con-trols are significant only in certain indus-tries to which Communist nations accord pri-ority in their allocation of hard currency(e.g., computers or oil extraction technologyin the case of the U.S.S.R.).

Therefore, credit is and will continue to bea major factor influencing the growth ofEast-West trade. Subsidized credits and/orloan guarantees, especially for the U. S. S. R.,are far more readily available from Ameri-ca’s Western allies—West Germany, France,Great Britain, and Japan–than from theUnited States. In 1977, for instance, WestGermany and France supplied on the orderof $7 billion in official export credits to theU.S.S.R. and Eastern Europe; Japan pro-vided nearly $5 billion; and the UnitedStates $945 million. There are strong indica-tions that the availability of official creditssubstantially affects the choice of Westernsuppliers. For instance, all Soviet orders forAmerican turnkey plants came during thebrief period in which the U.S.S.R. was eligi-ble for U.S. Export-Import Bank (Exim-bank) credits. Contracts are now often con-cluded by American multinational firmswith subsidiaries in countries that providethe U.S.S.R. with more competitive financ-ing. This means that although Americanfirms supply the technology, the UnitedStates does not receive the economic bene-fits of major equipment orders. It is unlikelyto do so until Eximbank financing is onceagain available to the U.S.S.R.

Lack of MFN status appears hitherto tohave had greater symbolic than practical im-pact on the volume of U.S. imports from theEast.

Owing to the commodity composition oftrade and the demand elasticity characteris-tics of Eastern products, absence of MFNstatus has had a relatively minor effect onthe largest nonmarket exporters (U.S.S.R.and PRC, although the situation with re-spect to the latter may now be changing).

The existing tariff schedule has, however,probably had a relatively greater effect onthe volume of U.S. imports from—and abili-ty to export to—East Germany and Czecho-slovakia.

Many U.S. firms contend that U.S. exportcontrols are a serious barrier to expansion oftrade with the East. Careful analysis doesnot support this proposition. While exportcontrols may affect the U.S. market share ofpresent trade, significant growth is retardedmore by chronic hard-currency shortagesand deliberate policy decisions in the Com-munist world. Even if U.S. trade with thePRC continued to grow at its present rate,for instance, changes in the Communistworld’s share of U.S. foreign trade would beincremental. Major increases in the volumeof East-West trade can only occur if theCommunist world alters certain of its funda-mental policies regarding the degree ofworldwide economic interdependence accept-able to it and establishes alternative ways ofhandling its current hard-currency prob-lems. It is highly unlikely that any such deci-sions will dramatically affect trade volumesover the next few years.

How Much Technology Does theCommunist World Buy From theWest, and How Important Is ThatTechnology to the Economies ofthe Importing Countries?

Communist imports of technology, includ-ing technology-intensive products, consti-tute in value terms a minor share of totalpurchases from the West, but the value tothe East of the technological component ofWestern trade is high relative to other im-ports. Some contend that this is due to West-ern underpricing on technology sales to theEast. Be that as it may, it is certainly truethat Eastern purchasers carefully chooseonly those processes and products with thehighest possibility of productivity gains.Estimates of the macroeconomic impact ofWestern technology imports on the Sovieteconomy vary, but it is clear that impacts in

Ch. l—Summary: Issues and Options ● 7

discrete areas of the economy have been sig-nificant. Thus, while aggregate Western re-source inflows into the U.S.S.R. have rela-tively little impact on overall growth, thereis no doubt that imports of certain commodi-ties–capital equipment and associated tech-nology in particular—have played a largerole in the expansion of key sectors, andhave thus made a significant contribution tototal economic growth. This is particularlymanifest in the chemical and motor vehicleindustries.

The U.S.S.R.’s most productive domesticuse of imported technological developmentshas come in industries that were based onwell-established technologies. But in mostindustries in which significant technologytransfer from the West has occurred, thetechnology gap between the U.S.S.R. andthe West has not diminished substantiallyover the past 15 years. This may be due tothe fact that imported technology substi-tutes for the development of domestic capa-bilities and therefore actually impedes theongoing domestic innovation necessary toclose technological gaps. In these sectors,Western technology has been extremely im-portant, but it has never acted as a panaceafor Soviet economic difficulties.

The Soviets will experience a sharp declinein the growth of the labor force in the nearfuture. Technological improvement, aided byimports from the West, is to be the basis ofplanned increases in Soviet labor productivi-ty. However, the rigidities of central plan-ning inhibit the diffusion of imported tech-nology in Communist nations. This is partic-ularly true in the U. S. S. R., where lack ofcommunication between producer and user,and lack of effective cost criteria hamper theSoviet ability to effectively assimilate anddiffuse imported Western technologythroughout the economy.

What Are the Prospects for FutureEastern Purchases of WesternTechnology?

In the U. S. S. R., the allocation of converti-ble currency is the most important single ele-

ment in import planning. Decisions to allo-cate currency among purchase options in theWest are made either within the frameworkof regular 1- and 5-year plans governing theentire economy or through irregular (ad hoc)decrees that concern single branches of in-dustry or individual enterprises.

The Soviets are careful customers. Eachministry, nearly all R&D organizations, andmany large enterprises systematically col-lect and process available Western scientificand technical data. The Ministry of ForeignTrade collects technological and marketingdata abroad. Nevertheless, import prioritieschange over time and the U.S.S.R. has devel-oped no consistent and universally applica-ble criteria for selecting Western imports.The decisionmaking process is time-consum-ing, complex, and often inconsistent.

The hard-currency debt of the East, al-though small from the standpoint of world-wide borrowing, has risen dramatically inthe last 8 years. In spite of debt increasesthe credit ratings of nonmarket economies inthe West are good, and their debt in theUnited States is relatively small. But be-cause the short-term prospects of greatly in-creasing exports to the West are dim, thecost of hard-currency capital may be ex-pected to rise. As the accumulation of hard-currency debt in the East increases, furtherborrowing will become more expensive.Should this occur, there are three alterna-tives open to Communist nations. They canallow more direct Western involvement intheir enterprises in the form of joint owner-ship; they can resort to internal financing; orthey can expand and diversify their hard-currency earnings from exports. On exam-ination, only the latter option seems viable inthe long term. It will require the import ofWestern manufacturing and marketing tech-nology.

In the short and medium term, credit willconstrain further technology purchases onlyinsofar as it becomes difficult to obtain fi-nancing for large and costly projects (as inthe U.S.S.R.). As the cost of capital in-creases, nonmarket economies may begin to


place a higher priority on purchasing tech-nology and technology-intensive commodi-ties since these products promise the highestreturns. The purchases of Western commodi-ties as short-term means of achieving 5-year-plan targets will probably diminish asplanned technology purchases increase inrelative importance.

The situation of the PRC is quite differentfrom that of the U.S.S.R. Imports of West-ern products and technology have tradition-ally been regarded by the Chinese leadershipwith ambivalence. The history of Chinesetechnological interaction with the West ispunctuated with attempts to ignore or sup-press the cultural consequences engenderedby the transplant of Western productivetechniques. But while Chinese imports of in-dustrial plant and technology have (untilrecently) been relatively small, their im-portance in providing a cumulative qualita-tive improvement in key industries has beensubstantial.

Foreign technology provides the cuttingedge of the general program of economicmodernization announced by Premier HuaGuofeng in February 1978. The current lead-ership has manifestly committed itself togenerating policies that will control Westerncultural influence during the process oftechnological development, but it will never-theless aggressively push for technologicalmodernization. While the overly optimisticplans announced at that time have sincebeen scaled down, major purchases of West-ern plant and technology will still occur, fi-nanced in part through increased levels ofborrowing in the West.

The Chinese will experience no difficultyin obtaining credits. Their borrowing in theWest, until now, has been extremely modestand their credit rating is high. They alsowould appear to have significant potentialfor hard-currency earning exports such as oiland labor-intensive handicrafts and consum-er products.

The PRC has shown increasing sophistica-tion in the search for and acquisition of for-

eign technology. There has been a coordi-nated national effort to accumulate as muchpublished technical and scientific data aspossible from Western sources. The last 2years have seen an enormous growth in Chi-nese technical delegations traveling abroadto Western Europe, Japan, and the UnitedStates. The Chinese also seek to extract themaximum amount of information from tech-nology negotiations as well as to utilize con-tractual arrangements that will yield asmuch experience to China as possible. Pro-ductivity gains resulting from Western capi-tal and technology inflows will be mostmarked in centrally controlled urban indus-tries, which stand to benefit greatly from theimport of modern process equipment andcomplete plants.

Chinese import selection and hard-curren-cy allocation procedures are relatively decen-tralized in comparison with the SovietUnion. Accordingly, it is possible that recentorders of foreign plant and equipment werepermitted to outstrip China’s ability to gen-erate the hard currency needed to pay forthem. Even though the decentralization ofdecisions regarding allocation of currencyfor foreign trade may be expected to con-tinue, decisions regarding the purchase ofwhole plant and high-technology items arelikely to remain centralized and the centralgovernment will exert closer control over for-eign exchange.

Could the Sale of AmericanTechnology to the Communist WorldProduce Effects Detrimental toSectors of the U.S. Economy?

Some sectors of the U.S. economy aremore vulnerable to the repercussions of tech-nology transfer than others. Perhaps themost important of these is the chemical in-dustry, where American plants have beensold to the U.S.S.R. and are to be paid for byproducts produced in them. As a result ofthis “buy-back” transaction, U.S. firms pro-ducing anhydrous ammonia have experi-enced domestic plant closures and signifi-cant declines in prices over the last 2 years.

The U.S.-U.S.S.R. contract has a life of 20years and it will probably result in seriousmarket disruption for domestic producers ofammonia. Other problems in the same indus-try have arisen in Western Europe whereproduct buy-back provisions in contracts forturnkey plants have required the import oflarge quantities of chemicals, to the detri-ment of domestic producers.

Despite this growing threat to the WestEuropean chemical industry, existing legalmechanisms have proven ineffective in deal-ing with the glut. “Dumping,” i.e., sellinggoods cheaply in overseas markets at belowdomestic production costs, is also a problem.Chemical firms have found it difficult todemonstrate dumping because the requiredevidence includes the exporters’ prices in thehome market or actual costs (prices in Com-

munist nations are administered and aretherefore unusable for comparisons). Al-though rulings in the United States havefound dumping of some Eastern goods, oftenit takes Western firms at least a year to as-semble a case based on the exporter’s inter-nal costs. By this time the damage has al-ready been done.

It is highly unlikely in the near or mediumterm that any Eastern economy could offerserious competition to the United States in aproduct area involving advanced design andmanufacturing technology. But Eastern na-tions are anxious to increase their exportpotential and any significant increase inEast-West trade in the long term must in-clude more Eastern exports.

In the long term, the proliferation of in-dustrial technology in the East might weak-

54 - 202 0 - 79 -2 .

10 . Technology and East-West Trade

en the competitive position of U.S. firms assuppliers of technology to newly industrial-izing nations. Nonmarket economies are in-creasingly attempting to break into thismarket.

On the other hand, there may be signifi-cant advantages to sectors of the U.S. econ-omy actively engaged in East-West trade.Although the total volume of trade in tech-nology between the United States and theCommunist world has been relatively smallin dollar terms, some firms contend thatsuch technology sales play an important rolein their corporate strategy and are linkedboth to potential sales of much greater size—in third markets as well as in the East—andto decisions regarding innovation and exten-sion of product lifecycles. Should tradevolumes increase, so too may these indirecteffects.

Another potential benefit may lie in re-verse technology transfer—from East toWest–which is at present miniscule. Thefailure of Western firms to search for tech-nology in the East and the inability of thecentrally planned economies to market effec-tively in the West has resulted in significantopportunities for Western technology pur-chases being missed.

P O L I T I C A L

What Basic Positions Have BeenTaken Regarding the Use of TradeLeverage, i.e., Using Trade ToAchieve Political Objectives of ForeignPolicy?

The question of the political uses of tradehas generated considerable controversy andat least three schools of thought. The firstrests on a judgment that trade is not an ef-fective instrument to achieve political objec-tives. This is the official view of the SovietUnion and is held by a number of OECD gov-ernments which contend that history hasshown that efforts to obtain political conces-sions from the nonmarket economiesthrough policies of economic pressure or in-

ducement have been unsuccessful. Conse-quently, each trade and credit transactionshould be judged on its economic meritsalone.

The second perspective is associated withdetente. It rests on the proposition thattrade can have a moderating effect on inter-national politics by enmeshing national econ-omies in a web of interdependence. The Sovi-et economy’s acute need for imports of tech-nology and capital equipment from the Westprovides the opportunity to deliberatelybind the U.S.S.R. in such a web. Additionalbenefits could include a strengthening of theSoviet consumer economy as a claimant ondomestic resources and a moderating factorin national policymaking; and increased op-portunities for the penetration of Soviet soci-ety with Western products, culture, and val-ues. This perspective adopts a limitationistview of American power and is skeptical ofthe extent to which the United States can co-erce Soviet policy. Washington is seen tohave little real choice but seek a stable coop-erative relationship with Moscow. Through acombination of economic inducement and be-nign political subversion, trade offers onemeans of drawing the Soviet Union into sucha relationship.

The third perspective accepts the proposi-tion that technology transfers can be har-nessed to political purposes, but is profound-ly skeptical of the hypothesized connectionbetween such trade and political moderation.Proponents of this view contend that thebasic relationship between the Soviet Unionand the West is, and will remain, one of con-flict due to deep-seated differences inideology, social and political systems, andforeign policy objectives and interests. Con-sequently, Western transfers of technologymay have the net effect of strengthening anadversary—particularly if they are financedby credits at low rates. Such transactionscan only be justified if the West obtains con-cessions in Soviet domestic or foreign policyin return. Thus the need for Western technol-ogy can and should be exploited as a sourceof leverage on Soviet policy.

Ch 1— Summnary: Issues and Options 11

Is There Evidence to Either Confirmor Deny the Utility of Trade Leveragein East-West Relations?

To date the effort to use trade for politicalleverage has focused on establishing thefreedom of Soviet Jews to emigrate. An anal-ysis of Jewish emigration in the context ofthe Jackson-Vanik amendment, which linksU.S. trade concessions to such emigration,provides no conclusive evidence that theamendment either has or has not had a sig-nificant impact on Soviet emigration policy.

Much disagreement surrounds the ques-tion of whether there exist technologiescritical to the U.S.S.R. in which the UnitedStates has a clear worldwide monopoly.To beeffective for this purpose a technology mustbe highly valued by the Communist coun-tries and must be unavailable from alterna-tive sources. Few technologies meet thesetests. Attempts to identify technologieswith the greatest promise as instruments ofU.S. leverage have focused on advanced oiland gas exploration and extraction equip-ment and on certain types of computers.Even in these cases, careful analysis sug-gests that while some leverage may indeedbe possible, it will be of limited potency andduration as supplies from alternative foreignsources and domestic production becomeavailable. Leverage in other technologieswould depend on cooperative efforts in theWestern alliance.

Efforts to use trade to moderate Sovietpolicy as part of a broader detente policyhave led to inconclusive results. During re-cent years there has, in fact, been a substan-tial growth in Soviet trade with the UnitedStates but there is little evidence that suchtrade has so far had the desired effect onSoviet foreign policy or domestic politics.Whether it will do so in the future is open todebate.

M I L I T A R Y A N D S T R A T E G I C

Can the Military Risk Entailed inthe Proposed Sale of a Dual-UseTechnology Be Determined?

A conclusive determination is probablyimpossible. Assessment of the military con-tribution of a product or process entails con-sideration of the following: the capabilities ofthe technology itself; the nature of the trans-fer mechanism; the character of the recipientenvironment, including infrastructure capa-bilities; the relative technological capabil-ities of the seller and the recipient; the avail-able deterrents to diversion of end use; thepriorities and intentions of the recipient; andthe character and volume of related pur-chases in the past. Much of this informationis necessarily based on informed speculation.Determinations of the motives and probablebehavior of potential adversaries, for in-stance, are judgmental and can never whollyaccount for the impact of unforeseen eventson priorities and decisions. The sale of anydual-use technology-and this means virtu-ally all high technology-therefore necessar-ily entails some degree of security risk,which end-use guarantees or monitoring ar-rangements cannot eliminate.

Will the Compilation of a List ofMilitarily Critical Technologies,Embargoed to the Communist World,Substantially Reduce This Risk?

The critical technology approach current-ly under examination in the Department ofDefense (DOD) is far from implementation.One present difficulty is the degree of confu-sion in Government and business communi-ty alike over its intention and probable con-sequences. For instance, it is hailed both bythose who believe it may reduce the numberof items currently controlled and by thosewho feel that it will make export controlsmore extensive. The recent DOD reorganiza-tion may well add momentum and a renewedsense of purpose to the critical technology

———.——


exercise, but it is unwise to regard it as apanacea to the difficult problems inherent inadministering export controls. A list of em-bargoed technologies cannot simply replacethe existing licensing system. No export con-trol system can be effective unless it makesprovision for case-by-case reviews of exportapplications. This case method approachmay be combined with procedures such asthe critical technologies list, designed toscreen the number of applications subjectedto detailed analysis, but it cannot be whollyeliminated.

Have American Technology ExportsContributed Significantly to theMilitary Capabilities of the SovietUnion?

Most observers of the export-licensingprocess would agree that U.S. and otherWestern technology has contributed to So-viet military capabilities. There is no agree-ment, however, on the degree or significanceof any such contributions. This is partly dueto lack of explicit policy guidance in the pre-sent export administration system on thespecific military objectives and desired rela-tive force capabilities of the United States;but disagreements also stem from divergentperception of Soviet capabilities and basicintentions, and even from different assess-ments of the technological capabilities of ex-ported items. In this connection, it is rele-vant to note that no export license has everbeen granted over the objection of the Secre-tary of Defense.

It is unlikely that these contributionscould have been totally avoided without acomplete economic embargo of the Commu-nist world by the entire West.

A M E R I C A ’ S A L L I E S

How Effective Is CoCom?

CoCom (Coordinating Committee for Mul-tilateral Export Controls), the multinationalorganization that attempts to implement auniform export control system throughout

the Western bloc, remains a viable, albeit im-perfect, organization despite its informalnature, the lack of sanctions or adequatepolicing mechanisms, and the equivocal at-titude of several of its members towards thecontinuation of present levels of export con-trol. There are frequent charges, both in thebusiness community and Government cir-cles, that firms in other CoCom nations haveevaded or ignored CoCom restrictions. Thereis at least convincing anecdotal evidence tosupport such charges, but the extent of for-eign government connivance at such prac-tices is open to question.

How Do Other Members of theWestern Alliance View the ProblemsRaised by East-West Trade andTechnology Transfer?

East-West trade has always been econom-ically more important for Western Europeand Japan than for the United States. Ger-many and Japan lead the United States inexports of “high technology” products tothe East and consider such sales desirableelements of their normal foreign trade. WestGermany, for instance, is the leading West-ern overall supplier of machinery and equip-ment to the U. S. S. R., providing nearly one-third of such Soviet imports. Japan suppliesapproximately 20 percent and the UnitedStates less than 10 percent. Japan is theU.S.S.R.’s leading Western supplier of oil-refining equipment.

America’s allies do not deny the basic ne-cessity of withholding items of direct mili-tary relevance from the Communist world.But although there does not appear to bemuch enthusiasm for disbanding CoCom, itsEuropean and Japanese members wouldgrant it a narrower role in export controlthan would the United States.

There is little, if any, debate similar tothat in the United States over the political,military, and strategic implications of trans-ferring technology to the East in WesternEurope and Japan. It appears that Japan,West Germany, France, and Great Britain

Ch, 1—Summary: Issues and Options ● 13

all consider the sale of technology a primar-ily economic issue and are content to rely onthe self-interest of the companies affected toprotect domestic industry. Any use of ex-port controls for political purposes is largelyeschewed. West Germany, in fact, considerstrade with East Germany a part of its do-mestic commerce and not “foreign trade, ”although it does observe CoCom restrictionsin its sales of dual-use and military items toEast Berlin.

With the exception of the small number ofcases subject to delays in CoCom, or held upin the U.S. reexport licensing system, Japa-nese and West German export controls workquickly and efficiently and appear satisfac-tory to their business communities. UnlikeU.S. firms, companies in these countries usu-ally know how their cases will be resolvedbefore a license application is submitted.

What Is the Likely Future of CoComand How Much Influence Can theUnited States Expect to ExerciseOver Its Policies?

Because of its position of leadership in anumber of technologies of critical military

significance, the United States feels it has aspecial responsibility to ensure their safe-keeping. If it can play this role with intelli-gence and integrity, the United States maybe able to initiate and maintain a strong andunified Western bloc position on the transferof technology. Policymakers, however, mustbe cognizant of the fact that the attitudesand behavior on the issue of technologytransfers to the East of at least four majorCoCom partners (West Germany, France,Britain, and Japan) differ from those of theUnited States. Without major changes in theinternational climate and U.S. policy and be-havior, attempts to strengthen the organiza-tion or impose formal sanctions on its mem-bers are likely to be resisted. Meanwhile,there is no immediate reason to expect anyfundamental changes in the operation of theorganization or the behavior of its members.

POLICY OPTIONS

There are three basic sets of options for fu-ture East-West trade and technology trans-fer policy. Each rests on a basic orientationtoward the Communist world and set of be-liefs and expectations regarding America’sfuture relations with it. These orientationswere discussed in the introduction to thischapter.

Present U.S. export control policy is theresult of a decision to forego attempts ateconomic warfare against the Communistworld and to further the dual aims of encour-aging trade with the Eastern bloc and pro-tecting U.S. national security. Legislationhas attempted both to eliminate proceduralbarriers to trade and to strengthen nationalsecurity safeguards. At times provisions of

the law have pulled in opposite directions,but the trend over the past 1O years has beentoward liberalization of export controls.

There are three broad categories of policywhich can impact on East-West trade andtechnology transfer. Suggestions in eachcategory are listed here and discussed atlength in the body of the report.

1. Actions in Keeping With theExisting Policy But Designed toMake Current Procedures MoreEff ic ient .

The vast majority (90 to 95 percent) ofU.S. exports are shipped under a general


license that requires no formal applicationprocedure. Similarly, only a minority of ex-ports to Communist destinations require val-idated licenses. However, these must enteran export-licensing system which is complexand which has come under severe criticismfor the delays it occasions. In fact, given thevolume of applications handled by the sys-tem, it works reasonably efficiently and onlya small number of cases are actually subjectto excessive delays. Delayed cases assume adisproportionate importance, however, be-cause they are often large and highly visibleand concern areas of high trade-growth po-tential.

Suggestions for increasing the efficiencyand reducing delays in the licensing processinclude the following: increasing appropria-tions for export-licensing administration;establishing a new form of export license; in-stituting timetables to curtail excessivedelays; ensuring that application rejectionsare undertaken at the recommendation of allagencies in the review system; improving thedata base for East-West trade; and enhanc-ing the foreign availability assessment capa-bilities of the Office of Export Administra-tion.

Procedures can and should be institutedto streamline the system without tamperingwith its basic structures or effectiveness,thus eliminating unwarranted, costly delays.Most promising among this family of sug-gestions is finding a means of systematicallymonitoring the availability of technologiesdesired by the Communist world fromsources outside the United States. This is acrucial task of the export administration sys-tem. The establishment of a continuingcapacity for undertaking such “foreign avail-ability assessments” would be an importantresource for administrators and policy-makers alike.

2. Actions That Could IncreaseRestrictions on East-West Tradeor Strengthen the Use ofTrade as a Foreign Policy Lever.

Suggestions that aim at shifting the bal-ance of U.S. policy in the direction of re-stricting increases in trade with the East in-clude the following: enhancing the role of theSecretary of Defense in the licensing proc-ess; compiling a list of embargoed criticaltechnologies; exercising trade leveragethrough foreign policy controls, MFN, andofficial credit restrictions; strengtheningCoCom; and curtailing academic and scien-tific exchange programs.

The effectiveness of several of these sug-gestions is problematic. First, the criticaltechnology exercise currently underway inDOD has made slow progress in the past 3years and is the subject of widespread mis-conceptions. Even the compilation of acritical technologies list will not allow easyor comprehensive solutions to the problemsposed by East-West technology transfer.Second, the United States is restricted in thedegree of potential trade leverage it can exer-cise. As discussed above, evidence of thepast effectiveness of such leverage has beenambiguous. Finally, the United States atpresent has a limited ability to persuade itsallies to strengthen CoCom. Such changesmight be possible only if the United Statesitself embarked on a new and clearly confron-tational policy vis-a-vis the Communistworld.

3. Actions Designed to ExpandEast-West Trade.

The third group of suggestions for shift-ing the balance of U.S. policy in the directionof increasing trade with the East includes

Ch 1—Summary. Issues and Opt/ens . 15

the following: expansion of official exportfinancing; granting MFN to Communist na-tions not presently enjoying it; limitingPresidential discretion in imposing exportcontrols; reducing and/or indexing the Com-modity Control List; bringing U.S. exportcontrol procedures into closer conformitywith those of other CoCom nations; and afamily of measures designed at export pro-motion in general.

Here, providing access to official exportfinancing is probably the Government policy

with the highest potential for increasing thevolume of U.S. trade with the East. The im-pact of granting MFN varies greatly amongindividual recipients. From a purely econom-ic perspective, MFN to selected EasternEuropean nations might have greater impactthan granting it to the U.S.S.R. and PRC.And while the removal of items from theCommodity Control List might affect U.S.market shares in certain industrial sectors,this would have less overall impact on U.S.trade with the East than would changes incredit and tariff policies.

CHAPTER II

Future Policy GoverningEast-West Trade andTechnology Transfer

CONTENTS

PageINTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

REFORMS AIMED AT EFFICIENCY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Increase Appropriations for Export-Licensing Administration . . . . . . . . . . . 20Institute a New Form of Export License . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Improve Efficiency and Accountability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20Require License DenialsToOccur at the Level of a Deputy

Assistant Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Improve Assessment of Foreign Availability . . . . . . . . . . . . . . . . . . . . . . . . . . 21Improve the Monitoring of Trade in Technology . . . . . . . . . . . . . . . . . . . . . . . 21Clarify CoCom Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

POLICIES DESIGNED TO RESTRICT EAST-WEST TRADE ANDTECHNOLOGY TRANSFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

Enhance the Role of the Secretary of Defense in Licensing . . . . . . . . . . . . . . . 23Compile a List of Embargoed Critical Technologies. . . . . . . . . . . . . . . . . . . . . 23Exert Leverage Through Foreign Policy Controls and Use of Tariffs and

Official Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Limit Foreign Availability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Strengthen CoCom . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26Curtail Scientific and Academic Exchange Programs . . . . . . . . . . . . . . . . . . . 27

POLICIES DESIGNED TO ENCOURAGE EAST-WEST TRADE ANDTECHNOLOGY TRANSFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

Expand Export Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Grant MFN to CountriesNot Presently Enjoying It . . . . . . . . . . . . . . . . . . . . 28Restrict the Use of ForeignPolicy Restraints on Trade . . . . . . . . . . . . . . . . . . 29Reduce the Commodity Control List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Alter Export-Licensing Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Create a Trade Promotion Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Relax Antitrust Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31Encourage Export Promotion Activities in U.S. Embassies and

Missions Abroad . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31Bolster the U.S. R&D Enterprise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31

Table l.—Recommendations for Bolstering the U.S. R&D Enterprise . . . . . . 32

CHAPTER II

Future Policy Governing East-WestTrade and Technology Transfer

The continuing objective of U.S. regulation of East-West trade has been tobalance both the commercial benefits of trade and the objectives of detenteagainst the need to safeguard U.S. security interests. Continuing controversyabout the proper balance is inevitable: there is no objective test of whether sucha balance has been achieved, the economic and political circumstances affectingEast-West relationships are in constant flux, and the United States has no com-prehensive East-West trade policy. Alternatives for reforming existing policycan be broadly divided into three categories:

●

●

●

Policy options premised on an assumption that existing policy has, on thewhole, achieved an acceptable balance between trade and security inter-ests. Such recommendations are designed primarily to make existing pro-cedures more efficient and less costly.Policy options designed to increase restrictions on East-West trade inorder to decrease the risk that such trade could enhance the military in-terests of the nonmarket nations; and to use the threat of trade curtail-ments to exact political concessions from the East.Policy options designed to move U.S. policy closer to that of our Euro-pean-and Japanese allies by relaxing some of the current restrictions onEast-West commerce, making licensing procedures less onerous, and pro-viding trade incentives through the Export-Import Bank (Eximbank) andother mechanisms.

The disagreements that have characterized the debate on U.S. trade policyas it applies to nonmarket nations result primarily from differences in the inter-pretation of the broader direction of East-West relationships. These are dis-cussed at length in chapters I and IV. This chapter describes policy measures(some already incorporated in the Export Administration Act of 1979) that canaffect the implementation or direction of U.S. trading policy with the East; ana-lyzes whether these policies would have the desired effect; and reviews any inad-vertent or unintended consequences that might result from their implementa-tion.

REFORMS AIMED AT EFFICIENCY

The administration of U.S. export control tics in chapter VII indicate that the situa-policy has come under repeated attack by tion has recently improved (i. e., the licensingU.S. businessmen who charge that it is cum- procedure is being speeded), few would arguebersome, expensive, and slow. While statis- with the desirability of streamlining some of

19


the more mechanical parts of the decision-making process. Suggestions to accomplishthis have included the following:

Increase appropriations for export=licensing administration.

One way to accelerate the licensing proc-ess would simply be to increase the fundingand staff available for processing applica-tions; most offices in the Departments ofCommerce and Defense dealing with theseareas appear to be overworked. This solu-tion, of course, would not resolve any flawswhich might exist in the basic structure ofthe system. Moreover, the Office of ExportAdministration (OEA) claims that, at pres-ent, lack of qualified applicants has made itunable to fill all the positions for which fundshave already been authorized.

Institute a new form of exportlicense.

Recent legislation has created a new cate-gory of export license, a “qualified general li-cerise. ” These authorize multiple exports tothe same end user for items that have beenroutinely approved in the past, and willhopefully reduce the volume of validated li-cense applications as well as the cost and de-lay associated with the present need to applyfor a separate license for each transaction.The strength of controls should not be di-minished and their implementation shouldbe made more efficient through the conse-quent reduction of the stress placed on theFederal administration of licensing. How-ever, one potential ramification should benoted. At present, the U.S. Governmentkeeps records only of those technologytransfers that proceed under validatedlicense. Unless data is also kept on trade con-ducted under qualified general licenses,there is the possibility that information onsales volumes, which could be valuable in in-ferring the intentions of the purchasers orthe impact of sale on the U.S. economy,could be lost.

Improve efficiency and accountability● Establish detailed timetables and dead-

lines for review of applications for vali-dated licenses;

● Establish procedures by which appli-cants could take legal action against theGovernment if undue delays occur; and

● Improve reporting to applicants on thereasons for denial of applications.

Each of these measures was incorporatedin the Export Administration Act of 1979.Taken together, they could significantly im-prove the relationship between applicantand Government.

Deadlines, for instance, would providegreater predictability for applicants andeliminate cases dragging on for months,even years, without resolution. Some indus-try critics have charged that present licens-ing procedures are overly complex and in-volve too many layers of consultation, andthat important policy decisions are beingmade by midlevel bureaucrats. Administra-tion goals for processing claims have alreadyhad the effect of speeding up the licensingprocess, and the recent reorganization of theDepartment of Defense’s (DOD) export-licensing activities may also help in thisregard (see chapter VII). But deadlines canonly accelerate licensing to the extent thatdelays result from overworked, unrespon-sive, or sluggish bureaucracies. This is plain-ly not always the case; major delays in con-troversial cases may be occasioned by inter-nal disagreement or uncertainty and exten-sive analysis on the part of the agencies in-volved. The speediest approach to resolvingsuch cases would be simply to summarilydeny controversial licenses. A forced dead-line, therefore, could conceivably have theunintended consequence of reducing thenumber of approvals granted.

Until now, OEA has been neither alwaysprompt nor explicit in informing applicantsof the grounds for the rejection of their ap-

Ch. II—Future Policy Governing East-West Trade and Technology Transfer ● 21

placations. The reason given has been asvague as simply “national security objec-tions. ” Prompt disclosure will improve theatmosphere of business-Government rela-tions; fuller details (security classificationspermitting) will help industry prepare futurecases and might forestall applications sub-ject to the same objections.

Require all license denials to occurat the level of a Deputy AssistantSecretary.

This reform alone would have little bear-ing on the de facto policymaking occasionedby delay. Indeed, it might even increase it.The requirement could, however, have someimpact. on the process by creating a situationin which midlevel officials could approve,but not deny, license applications. ChapterVII demonstrates that, as the system nowstands, the vast majority of validated li-cense applications are eventually approvedin any case; this change would affect thoserelatively few rejections that occur at mid-levels by requiring the participation of allthe agencies involved in the review process.

Improve assessments of foreignavailability.

The determination of whether products orprocesses equivalent to those in the UnitedStates are available to controlled destina-tions from sources outside the United Statesis an important factor in decisions to grantvalidated export licenses. Determining“availability y’ requires either establishingthat the controlled country already pos-sesses the technology or product in questionor that another Western nation has a tech-nology functionally equivalent to the oneproposed for sale and is itself prepared to sellit.

Problems of assessing foreign availabilitybegin with gathering information; but this isonly a prelude to the difficult task of devel-oping policy guidelines for deciding claims ofequivalency and comparability for a widevariety of complex technologies.

Until now, the assessment of foreign avail-ability has proceeded in an ad hoc manner—carried out on a case-by-case basis by vari-ous agencies involved in the technical assess-ments of applications. A new plan to managethis activity from a single office within OEAcan improve the continuity of foreign avail-ability assessment in the Government andhelp create institutional expertise. The database established by such a coordinating or-ganization could become a valuable resourcefor ensuring uniform and equitable treat-ment of foreign availability issues. If proper-ly staffed by engineers and technicians fa-miliar with a large spectrum of technologies,it will also give the Government an inde-pendent resource for verifying and interpret-ing the assertions of comparability made bythe industrial Technical Advisory Commit-tees (see chapter VII). Because no one bodyin the licensing system has been responsiblefor foreign availability assessments, the U.S.Government has been criticized by some in-dustry observers for failing to adequatelymonitor activities such as trade fairs or totake advantage of opportunities to inspectproducts and processes in the East. Thissituation could be remedied by hiring in-dividuals specifically assigned to travelabroad, especially in the East, to make suchinspections.

It must be pointed out, however, that theestablishment of such a capability will noteliminate difficult decisions. Just as thedetermination of strategic significance ispartly judgmental, so too the determinationof the degree of technical equivalency neces-sary before items are deemed comparablecan never be automatic.

Improve the monitoring of trade intechnology.

Chapters III and VI discuss the difficul-ties encountered by analysts in locating sta-tistics that accurately characterize the sizeand character of U.S. trade in technology.Better data would undoubtedly improve theanalysis of trade policy both in the Adminis-tration and in Congress. But steps to ensure

—


that the development of techniques for im-proving monitoring of technology and trans-lating this technique into a workable data-gathering program entail agreement on thefollowing difficult definitional problems:

1. obtaining a clear definition of what rep-resents technology, including embodiedtechnology and high-technology prod-ucts;

2. refining the definition of “high-technol-ogy products;”

3. arriving at some measure for the level ofactivity conducted under cooperationagreements between U.S. firms andCommunist nations; and

4. arriving at a way to acquire accurate,up-to-date, and easily accessible in-formation on the number of turnkey fa-cilities constructed by U.S. firms in con-trolled-market economies.

Data gathering could be improved in thenear term by:

1. obtaining interagency agreement on theformat for collecting information fromU.S. firms trading in the East; and

2. revising the manner in which data onsales of patents and licenses is kept inaccordance with the General Account-ing Office (GAO) recommendations (seechapter III).

More explicit reporting requirements havenow been applied to the details of any agree-ments between U.S. companies and Commu-nist nations. This will almost certainly be

strenuously opposed in the business commu-nity. Similarly, more comprehensive datamight be collected on the activities of Com-munist nationals engaged in academic ex-change programs. This would elicit objec-tions from those concerned with the issue ofacademic freedom.

Clarify the Coordinating Commit-tee for Multilateral Export Controls(CoCom) procedures.

As chapters VIII and IX indicate, theUnited States has little freedom to changeCoCom procedures. Many of our allies are ex-tremely sensitive on the whole issue ofCoCom. Some are willing to cooperate in theorganization but not willing to publiclyacknowledge that they are doing so for feareither of alienating Communist nations orpolitical groups within their own countries.With some caution, however, it may be pos-sible to open the proceedings and delib-erations of CoCom to public scrutiny with-out embarrassing any member nation. Forexample, it may be possible to be more ex-plicit about the precise nature of the CoComlist reviews and about the internal proce-dures that lead to alterations. At present, itis difficult to be overly optimistic about thechances for persuading some of our allies totake even such simple steps, for any increasein public information about CoCom couldmake it more difficult for them to maintainthe fiction that they are not active members.


POLICIES DESIGNED TO RESTRICTEAST-WEST TRADE AND TECHNOLOGY TRANSFER

Recommendations designed to move thebalance of current policy in the direction ofincreased concern about security (and possi-bly a corresponding relative diminution of in-terest in trade) would reverse the direction ofthe evolution of U.S. trade policy since themajor export control reforms of 1969 (seechapter VII). Since 1969, the United Stateshas moved in the direction of incrementallynormalizing trade with the East. While fewargue that we should attempt to restore thestrict export controls which were in force im-mediately following the Second World War,there has been repeated concern that U.S.policy has drifted too far in the direction ofpromoting short-term corporate profits atthe expense of fundamental security con-cerns. A number of measures have been pro-posed for reversing this drift:

Enhance the role of the Secretaryof Defense in licensing.

This proposal would probably have agreater symbolic than operational impact.DOD now plays a major role in all cases in-volving questions of military relevance. Ifthe Secretary of Defense is concerned abouta license application, the Secretary is in aposition to make these views known and, indisputed cases, to demand a ruling from thePresident. In fact, no item has ever been ex-ported to the East over the objection of theSecretary of Defense. The proposal’s sym-bolic value could be significant, however. Itmight be a first step in an overall program topersuade allies that the United States ismaking a serious attempt to increase the im-portance of security interests in overall tradepolicy. In the U.S. business community itwould certainly be taken as a signal thatGovernment policy was moving in the direc-tion of restricting trade with the East.

Move rapidly to compile a list ofcritical technologies, and embargotheir export.

The preparation of a comprehensive “criti-cal technologies” list was advocated in areport of the Defense Science Board TaskForce early in 1976 (the Bucy report). Atthat time, work was initiated in DOD with aview to implementing the report’s recom-mendations. Little substantial progress hasyet been made, however. The chief difficultyis probably not a lack of resources (seechapter V) so much as the inherent difficultyof the task and lack of consensus over the ob-ject of the exercise. There has been uncer-tainty, for instance, about whether the com-pletion of the exercise will have the effect ofincreasing the restrictiveness of U.S. tradecontrols (by placing more severe tests on anyproduct or technology qualified for exportand increasing the number of such items), orof weakening the controls by limiting thecategories of products that would require ex-port licenses. If the former, the establish-ment of such a list provides an opportunityfor strengthening trade restrictions andreducing the flow of products and know-howto the East.

It is difficult to be overly sanguine eitherabout the imminence of results or the degreeto which the appearance of a list of embar-goed critical technologies will solve the dif-ficult national security problems posed bythe existence of dual-use technologies. Aschapter V points out, determinations of thedegree of risk posed by any particular salecannot be made in an automatic way. Case-by-case analysis will always be necessaryand subjective judgments and policy consid-erations inevitably enter the decisionmakingprocess. The critical technology exercise


may, at the very least, be a useful in-houseexercise for DOD, but it is unlikely to be apanacea for the complex problems posed byEast-West technology transfer.

Retain the existing restraints onEast-West trade exercised throughforeign policy controls, tariffs, andofficial credits and work tostrengthen the leverage availablethrough these mechanisms.

Although the utility of attempting to usetrade to extract political concessions is thesubject of considerable debate, the tactic isplainly a current part of U.S. East-Westtrade policy. Indeed, the effect of the TradeAct of 1974, which prohibits the UnitedStates from extending most-favored-nation(MFN) tariff treatment and Eximbank cred-its and guarantees to nations which, in theview of the President, are violating humanrights, has been to institute the maximumrestrictions possible in this area. The ExportAdministration Act, moreover, gives thePresident the authority to deny certainclasses of export licenses for reasons offoreign policy (see chapter VII). Europeanand Japanese trading policy contain no suchprovisions (see chapter IX).

An examination of the effectiveness of us-ing trade leverage as an element of foreignpolicy must address the following issues:

●

●

●

Would denial of U.S. technology have asignificant impact on the economy ofthe target nation?Would the tactic of using trade to ex-tract concessions have the desired ef-fect?What technique could best be employedto curtail trade when such curtailmentsare required by the leverage policy?

Opportunities for Exercising Leverage

There are only two areas in which theUnited States is widely thought to have asignificant unilateral lead in a technologycritical to the Soviet Union: computers andequipment for discovering and producing oil

and gas. But even in these cases, equipmentavailable from other Organization for Eco-nomic Cooperation and Development(OECD) nations could provide a workablesubstitute for U.S. technology. Leveragewith respect to the People’s Republic ofChina (PRC) and nations in Eastern Europemay be somewhat greater, but in all casesthe flexibility of unilateral U.S. actions isseverely constrained by foreign availability.It is clear that a coordinated OECD effortwould be needed to significantly increaseareas where a threat of an embargo of tech-nology would have significant impact onEastern economies.

The Utility of Attempting to Exercise Leverage

How will the Soviets or any other Easternnation react to the exercise, or the threat toexercise trade leverage? There can be no un-ambiguous answer to this question. Severalcriteria must be considered.

●

●

●

●

●

How central to the maintenance of theentire system of the target nation andhow integral to the country’s aimsabroad is the object of the leverage?To what degree can the issue be framedso that the country can comply withoutlosing face, either at home or abroad?Has the country yielded before on thisor a similar issue?How will compliance be viewed withinthe country, in the United States, bythe rest of the world?What stake does the United States havein the issue, i.e., how important are theactivities in question of the target na-tion to the United States?

Soviet response to previous attempts toexercise trade leverage is discussed in chap-ter IV. The record is ambiguous at best, butcertainly when leverage fails, trade is con-stricted. It must be recognized, of course,that some observers feel that regardless ofthe practical impact on Eastern economies,the practice of withholding trade from na-tions whose internal policies are offensive tothe United States is amply justified by ethi-cal considerations and the need to focus in-


ternational attention on those aspects of theCommunist system that violate humanrights.

The reaction of an Eastern nation to aU.S. attempt to exercise leverage cannot beeasily anticipated. In some cases these na-tions may prefer to accept economic damagerather than make political concessions underpressure. Moreover, even in cases where theUnited States could inhibit an economic ac-tivity clearly critical to the target economy,the nation could take actions that mightadversely affect U.S. foreign policy interestsin unanticipated areas. A case in point is theembargo of oil and gas extraction equipmentto the U.S.S.R. Here,

● The U.S.S.R. might turn to Japaneseand Western European firms for mas-sive orders of equipment and technol-ogy, many of which would otherwisehave come to U.S. industries. TheUnited States would thereby be de-prived of revenues and the Soviet Unionwould receive the help it needs in anycase.

● The U.S.S.R. might become unable toexport enough oil to Eastern Europe tofulfill its needs. This would increase theeconomic distress of many EasternEuropean countries and contribute todomestic unrest, place stresses on therelationships between Warsaw Pact na-tions, and perhaps force countries ofEastern Europe increasingly on worldmarkets for oil.

● The U.S.S.R. might itself become a netoil importer. This would cause a seriousdisruption in the present market situa-tion. These potential liabilities wouldneed to be weighed against the poten-tial foreign policy gains that could berealized from an attempt to exerciseleverage.

Policy Mechanisms

The United States has restricted trade forpolitical purposes in three ways: Presidentialintervention in the granting of export li-

censes, tariff policies, and denial of officialcredits and guarantees.

Executive Discretion in Granting ExportLicenses

Existing law gives the President theauthority to withhold export licenses incases where the denial would serve broadforeign policy interests. This power, and theflexibility it implies, can be used in a timelyway to influence fast-moving events: li-censes are always pending in OEA. The needto make a rapid political point, however, maylead to a somewhat arbitrary selection of thelicense to be denied, the most convenientlicensing issue at hand being seized for thepurpose.

Presidential use of the power to deny ex-ports for reasons of foreign policy has beenthe subject of a number of recent controver-sies. Use of such controls may be effective asstatements of principle on the part of theUnited States, but there is no doubt that theuse or threatened use of such power has in-troduced an element of unpredictability intothe export-licensing system. This may haveadversely affected the bargaining position ofU.S. corporations in the East. A good exam-ple is the recent denial of a license for aSperry-Univac computer ordered by theU.S.S.R. This action has had greater sym-bolic than practical value. The computeritself was identical to models already in-stalled in the U.S.S.R. and its capabilities in-ferior to those of previously licensed com-puters. Moreover, the Soviets have now pur-chased an equivalent computer from France(see chapter IX).

It is possible for the President to be givengreater latitude in controlling trade as an ele-ment in an overall program to indicate U.S.interest in strengthening its determinationto confront the Soviet Union and other Com-munist nations. But, as the above examplewould suggest, the value of such Presiden-tial latitude as a foreign policy tool in the ab-sence of complete cooperation from our alliesis open to question. This is the subject ofmore complete discussion in chapter IV.

54-202 0 - 79 - 3

26 ● Technology and East- West Trade

Most-Favored-Nation Status.—The eco-nomic value of MFN varies among individ-ual Communist nations, depending on theirexport mix. A detailed discussion of the eco-nomic aspects of granting MFN appearslater in this chapter. For leverage purposes,however, its symbolic importance to thePRC and U.S.S.R. is perhaps even more sig-nificant. Granting MFN to China while stillwithholding it from the Soviet Union willalmost certainly in itself be construed as anattempt to apply leverage in foreign policy.

Official Credits.–The availability ofcheap Government credits and loan guaran-tees is a matter of substantial importance inthe Communist world where hard-currencyshortages restrict the ability to purchaseWestern goods and technologies (see belowand chapter III). The high level of Sovietborrowing before the cutoff of Eximbankcredit in 1974 (see chapter VII) suggeststhat the impact of this policy was felt strong-ly in the U.S.S.R. China’s modernizationplans will require substantial use of Westerncredit (see chapter XI) and the PRC is obvi-ously anxious to take advantage of credits inthe United States. Again, extension of Ex-imbank and other official credits to the PRCand not to the U.S.S.R. could have seriousforeign policy repercussions. As notedabove, restrictions on official credits to mostCommunist nations are already as stringentas possible. Further contraction would re-quire legislation covering the extension ofU.S. private commercial credits to the Com-munist world.

Attempt to limit as far as possiblethe foreign availability of technol-ogies that appear only on the U.S.export control lists.

One way of accomplishing this is throughpresent U.S. policy requiring reexport li-censes for technologies originally developedin the United States, sold to a CoCom mem-ber, and subsequently shipped to a con-trolled country. Under this rule, West Euro-pean and Japanese businessmen obtain both

U.S. and CoCom licenses for such shipments.The United States is the only CoCom mem-ber to impose this kind of control, and its ex-istence conveys an impression that theUnited States lacks confidence in the CoCommechanism. But such a policy obviously hasno impact on the availability of technologiesnot of U.S. origin. Efforts to limit such salesthrough diplomatic efforts outside of CoComhave met with limited success (see chaptersVIII and IX). It may be possible to under-take bilateral or multilateral agreementswith OECD nations with conservative gov-ernments if these nations can be persuadedto reverse the trend of European and Japa-nese trade policy and entertain more restric-tive export programs.

Attempt to strengthen CoCom byrecognizing the organizationthrough treaty; increasing policingof CoCom decisions, and/or for-malizing sanctions to be usedagainst transgressors in membernations; or expanding the CoComlist to more closely conform to theU.S. Commodity Control List(CCL).

There is every indication that, at present,suggestions for a longer list, more stringentpolicing or the imposition of sanctions inCoCom would be strenuously resisted bysome members. Attempts to strengthen theorganization would probably better prosperthrough the continuation of quiet, informal,high-level negotiations. Only given a dif-ferent international climate and a broadchange in U.S. foreign policy, might theUnited States be able to persuade its allies toalter their policies on East-West trade. If, forinstance, the United States entirely aban-doned detente and adopted a clearly confron-tational policy with respect to the SovietUnion, parties and individuals in other West-ern governments more sympathetic to astrengthened CoCom might be expected togrow in influence.

Ch. Il—Future Policy Governing East-West Trade and Technology Transfer ● 27

Curtail the transfer of informationthrough academic and scientificexchange programs by controllingthe subject matter and/or facilitiesto which visiting scientists andscholars are admitted.

It has frequently been charged that aca-demic and scientific exchanges are an impor-tant and relatively unmonitored and uncon-trolled source of technology transfer. A con-sistent attempt to restrict the flow of poten-tially strategic information to the Eastwould have to include careful supervision ofthis channel, at least as it allows visits fromhigh-level technicians in strategic areas.This might amount to the determinationthat the potential danger to the nationalsecurity of the United States of such visits

outweighs the political, scientific, andcultural benefits which accrue from ex-change programs. It must be pointed out,however, that many regard these passivemechanisms of transfer as far less likely toresult in the ability to absorb, diffuse, andimprove on a technology than are other com-mercial channels. Moreover, even those whosee such exchanges as important channels oftechnology transfer are often reluctant toimpose any requirements on the institutionsinvolved for fear of violating academic free-dom. In this sense, there may be somethingof a double standard in regard to the con-straints placed on academic versus commer-cial exchange activities. Proposals to requirecompany reporting of commercial exchangeagreements have received more widespreadsupport.

POLICIES DESIGNED TO ENCOURAGEEAST-WEST TRADE AND TECHNOLOGY TRANSFER

The special role of technology in East-West trading relationships is difficult todefine. It is theoretically possible to increasetrade volumes without increasing trade inhigh technology, but this opportunity isultimately limited by the fact that withoutsome increase in technological sophistica-tion, the Eastern trading partners will beunable to improve their capacity for earninghard currency. Moreover, it is often impossi-ble to decouple sales of technology fromsales of products in the corporate strategiesof many U.S. firms (see chapter III).

Policies oriented toward expanding andencouraging U.S. trade with the East fallinto two categories: 1) measures designed tochange the trade/security balance in thedirection of increased trade in technology byrelaxing some of the current restrictions in-herent in the licensing regulations, and 2)measures designed to increase the overalllevel of U.S. exports to the East. Most of thelatter are indistinguishable from the familyof suggestions that have been made for gen-erally improving the U.S. export enterprise.

Many elements of the U.S. business com-munity have pressed anxiously for a relaxa-tion of those regulations restricting U.S.technology trade with the East which, intheir view, put them in a position of disad-vantage vis-a-vis European and Japanesecompetitors. Further steps to encourage thetransfer of U.S. technology would inevitablyrisk repercussions on U.S. national security,while more general trade policies aimed atproducts rather than technology entail lesserrisks.

It must be recognized, however, that thereis little likelihood that even complete remov-al of political barriers would lead to vastly in-creased trade between East and West. Suchtrade is now limited primarily by a shortageof hard currency in the Communist world.While increasing the availability of debtfinancing can provide short-term gains, theonly long-term gains likely to be achievedmust be the result of an increased ability ofEastern nations to export. Promoting trade,therefore, must ultimately lead to a promo-tion of the strength of the trading partner.


This imposes commercial risks in anytrading relationship, since there is a dangerthat a strengthened trading partner willbegin to replace U.S. exports with domesticproduction and possibly begin exportinginto third nations that currently purchaseU.S. goods. In the case of Communist na-tions, there is the additional risk that astrengthened economy will inevitably lead toincreased military prowess.

The following policies aimed at the expan-sion of U.S. trade with the Communist worldmust be considered in light of these caveats,and the potential benefits accruing in theU.S. economy must be weighed againstthem.

Expand export financing.

Given the chronic hard-currency short-ages in the East, access to Eximbank andCommodity Credit Corporation guaranteesand credits is probably the single most im-portant factor in significant expansion ofoverall levels of U.S. trade with the East.

The United States ranks fifth behindWest Germany, France, Japan, and theUnited Kingdom as a supplier of officialcredits to the Communist world. In 1977,West Germany extended nearly eight times

Photo credit U S Department of Commerce

Former Secretary of Commerce Juanita Kreps in Chinafor U.S.-PRC trade negotiations

more export credit to the East than did theUnited States, France over seven times, andJapan about five times. While no quan-titative estimates of the impact of this situa-tion on overall trade volume are available,many U.S. exporters contend that it putsthem at a serious competitive disadvantagevis-a-vis other OECD nations. There are in-dications, for instance, that the availabilityof credit is an important reason for multina-tional corporations’ preferring to handletheir Eastern transactions through Euro-pean subsidiaries.

Although purchases of U.S. technologywould almost certainly increase with theavailability of credits, a program to expandcredit in the East might be targeted at fi-nancing for “nonstrategic” commoditiessuch as grain. Credit expansion would re-quire both raising the ceilings on availablecredit, and also eliminating barriers to fi-nancing exports to the East posed by theTrade Act of 1974. Congress might, for in-stance, make financing equally available toall countries with which it is U.S. policy toencourage trade, subjecting the policy toperiodic review for individual nations. Theavailability of Government credits would beattractive to those Eastern nations in whichborrowing has risen dramatically in recentyears, but which are still considered goodcredit risks in the West (see chapter III).

Grant MFN to countries notpresently enjoying it.

Amending the Trade Act to allow nondis-criminatory trade treatment for Communistcountries not presently receiving it wouldalso have an impact on levels of U.S. tradewith the East. However, at least in the shortrun, these increases would not materially af-fect the U.S. balance of trade—either interms of flooding the United States withCommunist imports or of significantly in-creasing the prospects for U.S. exports. Inorder to purchase goods and technologiesfrom the West, Eastern nations must earnhard currency through their own exports(see chapter III). Nondiscriminatory tariff

Ch. II— Future Policy Governing East-West Trade and Technology Transfer ● 25

levels, by encouraging import of Easterngoods in the West, can thus indirectly affectthe volume of Eastern purchases.

A number of factors determine the extentto which levels of trade with individual na-tions can be increased through the grantingof MFN. Foremost among these is the com-modity composition of the exports. The ex-tension of MFN does not result in a uniformreduction of tariffs. Under the existingHawley-Smoot tariff scheme, tariffs on someitems are more severe than on others; fur-ther, negotiations over the years have re-sulted in differing rates of relaxation, andthe granting of MFN leads to considerablevariation in tariff reductions. For example,the Soviet Union is predominantly an ex-porter of raw materials which at presenthave relatively low tariffs. Czechoslovakia,on the other hand, is an exporter of lightmanufactured products on which high tariffsare levied. From a purely commercial pointof view, extension of MFN would affectCzechoslovakian exports relatively more, al-though MFN retains a great symbolic valueto the U.S.S.R.

In 1977, the U.S. Department of Com-merce estimated that the extension of MFNto the two largest Communist economies,the U.S.S.R. and the PRC, would result in avery modest increase in U.S. imports fromthose countries—together in the $30 millionto $40 million range. This may be contrastedwith the expected $50 million increase re-sulting from recent MFN extension to Hun-gary. Extension of MFN to Czechoslovakiaand East Germany if accompanied by con-current normalization of commercial rela-tions could increase imports from thosecountries by as much as $200 million in theabsence of other, nontariff barriers. AndMFN extension to all other Communist na-tions could mean an increase in imports fromthose countries of between $200 million and$225 million. This figure would representless than 0.2 percent of total U.S. merchan-dise imports in 1977.

These figures are based on the assumptionthat volume of U.S. trade with the East and

its commodity composition remain static.However, long-term effects could be signifi-cantly greater. To the extent that the remov-al of political barriers fosters familiarityboth with U.S. markets and with U.S. pro-ducers, U.S. imports from the East and con-sequent U.S. export potential may be im-proved in the future. Eastern nations willnot only earn hard currency through theirsales; MFN agreements create legal and fi-nancial structures under which commercialinteraction can be carried out more efficient-ly and with more certainty for U.S. entrepre-neurs. In this regard U.S. business operatesat a disadvantage vis-a-vis West Europeanand Japanese firms in marketing products inthe East.

Owing to relatively late normalization oftrading relations with the East, however,U.S. business may be at a permanent disad-vantage with its OECD competitors in East-ern markets, even if MFN is extended in thenear future. Moreover, a note of caution iswarranted: while such background agree-ments are a necessary condition for greaterU.S. exports, they are not sufficient. Expec-tations regarding significant increases inRomanian purchases in the United Statessince extension of MFN in 1975, for exam-ple, have not materialized. The entire tradeclimate, including availability of credit andlevel of export controls, must be taken intoaccount when projecting the possible im-pacts of MFN extension.

Restrict the President’s ability toimpose trade restrictions forreasons of foreign policy.

A proposal recently adopted by Congressrequires that the President stipulate thatreasonable efforts had been made to achieveforeign policy objects through other instru-ments than trade before the leverage of traderestrictions could be exercised. In addition,some have argued that Congress also be em-powered to overrule such prohibitions byconcurrent resolution. The enactment ofsuch a regulation would have some effect inreducing the uncertainties inherent in the


potential use of trade for foreign policy pur-poses. The uncertainties would not be entire-ly removed, however, since in many casesCongress could be expected to concur withthe President. Moreover, restrictions on thePresident’s freedom to use trade in this waycould, in some circumstances, dilute the ad-mittedly weak leverage now available to theUnited States.

Bring the U.S. CCL into closer con-formity with the CoCom list and/or“index” the list to allow forautomatic removal of obsolete orout-of-date technologies.

It is argued that U.S. producers areuniquely disadvantaged by the fact that theU.S. CCL is more restrictive than thosemaintained in other CoCom nations. At theheart of this issue is the question of whetherthe United States because of its technicalstrengths has a special responsibility forrestricting categories of products beyondthe CoCom list. While the perception (andthe reality) of broad U.S. technologicalleadership has changed during the lastdecade, the United States does retain somesupremacy in certain military technologiesand therefore a special responsibility forsafeguarding them. Whether this special re-sponsibility is fairly represented in the U.S.export list has become a matter of conten-tion.

A less comprehensive means of scalingdown the CCL is to index it, i.e., to requireannual updates on the performance levels ofgoods and technologies and the automaticremoval of items that fall below these levels.There is obviously a range of standards bywhich such levels might be set. Items re-moved from the list because they are obso-lete in terms of the Western state-of-the-artmight still significantly improve existingmilitary capabilities in the East. Otherstandards, based perhaps on levels alreadysold to or developed in the East, might in-volve less chance of this, but any automaticalteration of CCL entails the danger of elim-inating items of potential military signifi-cance.

Alter the present export-licensingsystem so that it more closelyresembles those of other CoComnations.

Descriptions of the export-licensingsystems of West Germany, France, theUnited Kingdom, and Japan (see chapter IX)reveal significantly more informal consulta-tion between industry and Government overlicense applications than in the UnitedStates. In many cases this includes priorconsultation which permits firms to knowthe disposition of their cases before applica-tions are actually submitted.

Unquestionably, U.S. export-licensingprocedures are universally regarded as themost time-consuming, rigorous, and uncer-tain of all CoCom nations. To the extent thatdelays or denials of licenses result in loss ofcontracts or deter Eastern countries fromseeking out U.S. suppliers or U.S. firms fromactively pursuing business in the East, thismay have an impact on U.S. market sharesin existing East-West trade. It is unlikely,however, that the relaxation of these con-trols would have much effect on increasingoverall trade volume without concurrent al-teration of credit and tariff policy in theUnited States and increase in export capabil-ities in the East (see chapter III). Moreover,the licensing systems in Europe and Japanreflect judgments on East-West trade andnational security that have not been sharedby U.S. policymakers. They also reflect closeand consensual business-Government rela-tionships that are not typical of private andpublic sector relations in the United States.It is unlikely that U.S. institutions wouldreadily lend themselves to procedures whichare predicated on such consensual relation-ships.

Create a single Government agen-cy charged with advancing U.S.trading interests.

Proposals have been made for establishinga Department of Trade incorporating a varie-ty of trade-related Government activities.Alternatively, the existing Office of the

Ch. II—Future Policy Governing East-West Trade and Technology Transfer . 31

Special Trade Representative in the WhiteHouse could be established as a permanentorganization and enlarged to embrace tradepolicy coordination and trade negotiationswith the East.

The United States has no concerted, coor-dinated policy on East-West trade. The de-velopment of such a policy would be wel-comed in many quarters of the Governmentand business communities. Proponents of aTrade Department argue that it could helpto counter activities of organizations inother nations where the interests of businessand Government are more closely tied thanis the case in the United States. Japan,where trade-related ministries work veryclosely with private industry, is an extremeexample. Whether such a system is eitherappropriate to or even possible in the UnitedStates is open to question, and a completeanalysis of the issue is beyond the scope ofthe present study. Objections may be ex-pected to the creation of a new bureaucracy,especially if this is not accompanied by con-scious formulation of coherent and internallyconsistent aims in East-West and otherworld trade.

Relax antitrust restrictions in-hibiting consortia of U.S. in-dustries organized for export.

Present antitrust law is vague and hassometimes been narrowly interpreted as itapplies to the cooperative activities of U.S.firms abroad. Revision to allow various ex-port trade associations, trading companies,etc., could help U.S. firms to compete withJapanese trading companies and Europeanbidding consortia, without precluding thepossibility of penalties for impeding faircompetition.

Increase participation and improveperformance of overseas Govern-ment personnel in fostering U.S.exports.

American businessmen have charged that,unlike their Western European and Japa-nese counterparts, U.S. embassies do little ifanything to further U.S. commercial inter-ests abroad. Redefinition of the respon-sibilities of commercial attaches or otherState Department personnel to explicitly in-clude active support for businessmen at-tempting to conclude foreign contracts (solong as such aid does not discriminateamong U.S. firms) would help to eliminatesome of the competitive edge presently en-joyed by firms in other nations. If it is feltthat such activities are inappropriate for ex-isting embassy staff, new export-related of-fices could be created in appropriate coun-tries.

Bolster the U.S. R&D enterprise.

All other things being equal, trade withthe East will benefit from the same kinds ofmeasures that promote U.S. foreign trade ingeneral. Moreover, regardless of whetherEast-West trade in technology expands orcontracts, the best way to ensure continuedU.S. superiority in technology is to maintaina vigorous program of Federal and privateR&D projects. Attempts to control the ex-port of technology can be effective only up toa point. It would be foolhardy to rely entirelyon such controls to maintain a position ofrelative technical strength. Investigation ofall the actions that could be taken tostrengthen the R&D enterprise in the UnitedStates would require a much lengthier anal-ysis than can be conducted here. Several pro-posals for mitigating certain perceived barri-ers to expansion of U.S. R&D and for provid-ing incentives for accelerated R&D are listedin table 1.


Table 1 .—Recommendations for Bolstering the U.S. R&D Enterprise

Amelioration of disincentives— — .

Establishment of incentives●

●

●

●

●

●

●

●

�

Modification of antitrust regulations to permit easierpooling of research efforts for environmental improve-ments.Institution of a uniform patent and licensing policy forGovernment-sponsored research.Passage of legislation controlling third-party product lia-bility litigation.Partial stabilization of raw material costs by stockpiles,trade agreements, and long-term national planning.Modification of Government regulations to make themless expensive and time-consuming, while still achievingthe desired goals.Continuation of the effort to strengthen the present pa-tent system.Development of better integration of antitrust laws andpatent laws.Extension of the life of a patent beyond 17 years, possiblyfor a period of 10 to 15 years after final Government ap-proval, if long-term testing is required for Government ap-proval, or other factors delay commercialization.

-.

●

●

●

●

●

●

●

●

●

●

●

●

●

●

●

Greater than 100-percent deductibility of research ex-penses from taxable income.Grants-in-aid for cost of new research facilities and/orequipment.Tax credits (possibly at the rate of 80 percent) for in-creases in industrial R&D over base-period expenditures.Exclusions from taxable income or part of any royalty re-ceived from the export of technology.Accelerated depreciation allowances for research facili-ties and equipment.Long-term low-interest loans for high-risk R&D.Cash grants repayable only from successful projects forhigh-risk R&D.Inclusion of R&D expenses under the 10-percent invest-ment tax credit provision,Initiation of a technological depletion allowance pro-gram.Deduction (or accelerated depreciation) of the cost ofnew technology or patents.Special, low capital gains taxation for small businessesengaged in R&D.Institution of an option for small businesses to capitalizetheir research expenses.Direct deduction from Federal income taxes of all ex-penses incurred in the performance of research associ-ated with Federal regulations. This deduction can be pro-rated, at 80 percent for example, so that the FederalGovernment and companies can share the expendituresroughly in proportion to the direct benefits obtained fromthe research.Increase of Federal support of basic research in universi-ties to compensate for decreased basic research in in-dustries.Encouragement of cooperative research between univer-sities and private industries.

SOURCE: The American Chemical Society, U.S. Chemical and Engineering News, Apr. 30,1979

.

CHAPTER III

The Economic Implicationsof East-West Trade and

Technology Transfer

CONTENTS

EAST-WEST TRADE AND U.S.MARKET SHARES . . . . . . . . . . . . .

The Present Volume of East-WestTrade. . . . . . . . . . . . . . . . . . . . . . . . . .

U.S. Policies Affecting Trade Volumes.Import Barriers. . . . . . . . . . . . . . . . . .Credit. . . . . . . . . . . . . . . . . . . . . . . . . .U.S. Export Controls . . . . . . . . . . . . .

Eastern Policies Affecting TradeVolumes . . . . . . . . . . . . . . . . . . . . . . . .

The Growth of East-West Trade . . . . . .

THE CONSTRAINTS ON GROWTHOF EAST-WEST TRADE. . . . . . . .

The Size of the Eastern Debt . . . . . . . . .The Composition of the Eastern Debt. .The Credit-Worthiness of the

Communist World. . . . . . . . . . . . . . . .The Growth of the Eastern Debt. . . . . .Alternatives to Borrowing. . . . . . . . . . .

Western Involvement in EasternEnterprises . . . . . . . . . . . . . . . . . . .

Internal Financing . . . . . . . . . . . . . . .Increased Exports to the West . . . . .

Conclusions. . . . . . . . . . . . . . . . . . . . . . .

THE ROLE OF TECHNOLOGY INEAST-WEST TRADE . . . . . . . . . . .

Future Prospects . . . . . . . . . . . . . . . . . .Present U.S. Market Shares. . . . . . . . . .

Sales of High-Technology Products .Industrial Cooperation Agreements .Conclusions. . . . . . . . . . . . . . . . . . . . .

THE IMPACT OF TRADE WITHAND TECHNOLOGY SALES TOTHE EAST ON THE U.S.ECONOMY. . . . . . . . . . . . . . . . . . . . .

Technology Vendors: U.S. CorporateStrategy . . . . . . . . . . . . . . . . . . . . . . .

Page

37

3738394040

4141

43

4446

474748

48484849

50

5051515253

54

54

PageImport Competitive Industries . . . . . . . 58Importers of Eastern Technology . . . . . 61The Consumer . . . . . . . . . . . . . . . . . . . . . 63

SUMMARY AND CONCLUSIONS. . 63

Table 2.–U.S. Trade With the World andWith Selected NonmarketEconomy Countries. . . . . . . . . . .

Table 3.–The Trade of the IndustrialMarket Economies With EasternEurope and the Soviet Union ., .

Table 4.–0fficial Export CreditCommitments to CMEACountries, as of End-1977. . . . . .

Table 5.–Trade With the Developed WestTable 6.–Average Annual Rates of

Change of East-West Trade andWorld Trade by CommodityCategory, 1955 -76. . . . . . . . . . . .

Table 7.–Estimated Net Hard-CurrencyDebt of Eastern Europe,U. S. S. R., and CMEA Banks,End of Year, 1970, 1974-77 . . . . .

Table 8.–Hard-Currency Debt andForeign Trade, 1977 of CMEAand Selected Western Countries.

Table 9.–Estimated Composition of NetHard-Currency Debt of EasternEurope, U. S. S. R., and CMEABanks, Dec. 31, 1977 . . . . . . . . . .

Table 10.–Growth in Debt, SelectedCommunist Countries, 1974-77.

Table il.–Comparison of High-TechnologyExports With ManufacturedGoods and Total Exports–15Industrialized World Countriesto the Communist Countries andto the World. . . . . . . . . . . . . . . . .

Table 12.–U.S. High-Technology Exportsto the Communist Countries andto the World, 1977 . . . . . . . . . . . .

37

38

4042

43

45

45

46

48

51

52

Figure l.–East-West Trade and U.S. Share 39Figure 2.–U. S.-Eastern Trade, 1972-78. . . . 41

CHAPTER III

The Economic Implicationsof East-West Trade and

Technology Transfer

Policy decisions regarding the future of U.S. trade, including transfer oftechnology, with the Communist world require weighing the economic and polit-ical benefits of such trade against the military risks it may incur. This is diffi-cult, not only because it entails the comparison of unlike things, but because theeconomic merits, particularly of technology sales, are difficult to assess and theresults of such assessments are controversial. For instance, the profits andother returns of technology exports to the East must be balanced against thepossibility that unrestrained technology transfer by U.S. corporations could bedetrimental to this country’s long-term economic interests. In this connection,the economic dangers of technology sales currently lie primarily in transactionswith our Western trading partners and not in trade with the East where majorrisks are military; the Communist nations at the moment have a relatively smallexport capacity and a systemic difficulty in rapidly assimilating and diffusingWestern technology. This is not to say, however, that this situation could notchange, especially with the help of Western management expertise and Easternimpetus to expand trade in technology.

The economic balance sheet which must be drawn up in technology trade in-cludes the following considerations: On the positive side are the final gains re-sulting from the sale of patents, licenses, construction of turnkey plants, andthe sale of items that may embody sophisticated technology. The balance ofpayments in such items has historically been decidedly in favor of the UnitedStates. Further, even where the direct income from technology transfers issmall, broad agreements in other trading areas often depend critically on suchtransfers, and there may be indirect commercial benefits to U.S. firms operatingin Eastern markets.

On the other hand, the possibility existsthat transferred technology can be used tobuild industries in the purchasing nationwhich will eventually supplant U.S. exportmarkets in that country or in other nations,perhaps eventually even in the UnitedStates itself. These situations would clearlythreaten a loss of employment in the UnitedStates. The difficulties now being encoun-tered by Occidental Petroleum in the United

States and by other companies in Italy andWest Germany as a result of buy-back agree-ments with Eastern Europe highlight thesefears, as does the U.S.S.R.’s emergence as acompetitor to Fiat in Europe and Canadawith cars produced at the Italian-built Togli-atti (Volga) auto plant.

In an attempt to evaluate the economicvalue of East-West trade and technology

35

—


transfer to the United States, this chapter ● the impact of sales of technology to theexamines the following issues: East on the U.S. economy.

. the volume of East-West trade in gener-al and trade in technology in particular,

● the potential for growth in East-West Discussions of the value of Western tech-trade, including trade in technology, nology to the Soviet and Chinese economiesand appear in chapters X and XI.

Photo credit: The National Council for U.S. China Trade

Ammonia concentrator, La Madian #2 Multipurpose Pump Station, Taching, China

Ch. Ill— The Economic Implications of East-West Trade and Technology Transfer ● 37

EAST-WEST TRADE AND

THE PRESENT VOLUME OFE A S T - W E S T T R A D E

Trade with the Communist world hasnever constituted a large part of U.S. foreigntrade. Despite the fact that the total turn-over of American trade with the East grewby approximately 50 percent between 1977and 1978, the volume of this business in ab-solute terms, including sales of agriculturalcommodities, is small. In 1978, the UnitedStates earned about $4.5 billion from ex-ports to Communist nations, half of whichcame from the U.S.S.R. The net trade bal-ance with these countries was $2.7 billion.This must be evaluated in the context of1978 U.S. worldwide trade turnover of over$315 billion and overall deficit of $28 billion.The Communist world thus accounted foronly 3.1 percent of U.S. exports and 1 per-cent of U.S. imports in 1978. Even the recentacceleration in trade with the People’s Re-

U.S. MARKET SHARES

public of China (PRC) has done very little toalter this overall trade picture (see table z).

Part of the reason for these magnitudeslies in the fact that for both trade in generaland trade in technology in particular, theUnited States has captured only a smallshare of the Eastern market relative to theother countries of the industrialized West.Since the end of World War II, the UnitedStates has never held more than 10 to 15 per-cent of the total Western trade with Commu-nist nations (see table 3 and figure 1). Thereare a variety of reasons for this: because ofits vast domestic market the United Stateshas traditionally been relatively less activein foreign trade than Japan or Western Eur-ope; Western and Eastern Europe are natu-ral trade partners; and as chapters VII to IXargue, America’s allies have been less re-strictive in controlling trade with the Com-munist world.

Table 2.— U.S. Trade With the World and With Selected Nonmarket Economy Countries(in millions of U.S. dollars)

U.S./world trade

1977 1978 January to June 1979

Exports. . . . . . . . . . . . . . . . . . . . . . . . 121,206 143,659 85,532I m p o r t s . 147,492 172,025 95,506Balance. . . . . – 26,286 – 28,366 -9,973

Trade turnover (exports plus Imports) 4,077 6,303 3,972

U.S. trade with selected nonmarket economies—

Exports Imports BalanceJan-Jun

————Jan-Jun Jan-Jun

1977 1978 1979 1977 1978 1979 1977 1978 1979. — — . — —U. S. S. R., . . . . . . . ... ... . . . . . . . . . . . 1,623 2,249 1,457 422 ‘ 2 5 4- - 2 4 3 1,201 1,995 1,214People’s Republic of China . . . . . . ., 171 818 704 197 324 245 – 2 6 593 459Poland. . . . . . . . . . . . . . . . . . . ... . . . . 437 677 275 327 439 212 110 238 63Romania . . . . . . . . . . . . . . . . . . . . . . . . . . . 259 317 260 231 347 167 28 29 93Czechoslovakia . . . . ... ... . . . . . . . 74 105 83 36 163 25 38 47 58East Germany. . . . . . . . . . . . . . . . . . . . . . . 36 170 138 17 205 19 19 135 119Hungary . . . . . . . . . . . . . . . . . . . . . . . . . . 80 98 42 47 69 48 33 29 – 6Bulgaria . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 48 31 26 19 23 – 2 29 8

Total . . . . . . . . . . . . . . . . . . . . . . . . . . ‘2,704— — — . —

4,483- 2,990 1,303 1,820 982 1,401 2,663 2,008

1977 1978 January to June 1979

NME share of total U.S. tradeExports (percent). . . . . . . . . . . . . . . . . 2.2 3.1 3.5Imports (percent). . . . . . . . . . . . . . . . . . .9 1.09 1.03

. — —NOTE Both Imports and exports are valued on a free-along-side basis

. — .

SOURCE U S Department of Commerce

— . —


Table 3.—The Trade of the Industrial Market Economies With Eastern Europe and the Soviet Union

W e s t G e r m a n yItaly . . . . . .Y u g o s l a v i a . ,F r a n c e . .United Kingdom

Finland . . .A u s t r i a .Sweden. . .N e t h e r l a n d sBelgium-Luxem..

D e n m a r k . .S w i t z e r l a n d .Spain . . . . . . . . . . . .G r e e c e . . . .

N o r w a y . .T u r k e y . . . .I r e l a n d . . . .Iceland . . . .Portugal . . . . . .

Total WesternEurope. . .

U n i t e d S t a t e sCanada . . . .Japan. . . . . . . . . .

S u b t o t a l

Grand total . . . .

Imports, c.i. f.

PercentageValue share of Percentagemillion country’s change over theu s total same period of the

dollars) imports preceding year

Jan -May

1977 1976 1977 1978

4,4742,5962,7142,2162,172

1,7951,2491,1411,040

718

593598345385

39534411975

166

45

2833

249622

4326

362

123

25 1128 616 2618 1123 16

2 1115 144 0

18 11– 5 22

10 445 20

– 7 – 2 047 – 5

38 1531 7

0 307 15

97 1— — —

2724

225

915

- 2 21528

—

9781154

—

- 311

1214—

23,135 5 18 12 13

977 1 19 5 49189 0 22 – 4 – 1 1

1,627 2 – 1 19 0

2,793 1 7 12 16— .

25,928 3 17 12 13

——Exports, f.o. b.

PercentageValue share of Percentage

(million country’s change over theu s total same period of the

dollars) exports preceding year

Jan.-May

1977 1976 1977 1978

$ 6,6492,2872.0442.7811,457

1,7091,416

945816760

286878284334

276172296281

6 –3 6 145 - 1 0 16 – 10

39 8 1 144 5 2 – 123 –9 23 35

22 14 14 2414 1 10 17

5 –6 –8 – 12 –4 7 52 –8 –4 –2

3 –9 2 15 7 11 343 18 – 6 15

12 9 16

3 8 0 11

10 35 4 351 – 43 46 51

12 1 51 – 514 96 – 3 –37

$23,266 5 0 7 92,542 2 26 –27 35

546 1 31 –31 152.669 3 27 – 5 2

$ 5,757 2 27 – 18 19

$29,023 4 5 1 11

Trade balances

Exports minusImports a (million

U.S. dollars)

Jan.-May

1976 1977 1978

$2,439 $2,327 $ 952- 3 3 9 – 153 – 9 4

55 – 446 - 1 2 3832 663 119

- 521 – 584 11

2 32 85228 214 114

– 19 – 116 56- 116 – 171 – 5 7

222 77 1

- 263 – 275 – 124309 298 102

- 9 1 – 3 2 17– 70 – 10 – 1– 48 – 107 – 71

– 121 – 135 1– 67 – 85 – 3 0– 14 – 6 - 9– 6 6 – 7 0 - 4 1

$2,352 $1,421 $ 908

2,638 1,626 1,203595 362 132

1,590 1,225 625

4,823 3,213 1,960

$7,175 $4,634 $2,868

aExports f.o.b. minus imports f.o.b. The latter have been adjusted according tO data taken from IMF, International Financial Statistics for each Industry

SOURCES: OECD, Statistics of Foreign Trade, Series A, Pans, IMF, Direction of Trade and International Financial Statistics, Washington, D C national statistics; andU N Economic Bulletin for Europe, vol. 30, No 1, New York, 1978

But equally important is the fact thatoverall volumes of East-West trade are arti-ficially low. Foreign trade has played a rela-tively minor role in the Communist worldand within this already circumscribed arena,the volume of East-West trade is particular-ly small. China until very recently virtuallyexcluded itself from world markets. The So-viet Union has been far more active in worldtrade, but in 1977 imported only $150 ingoods per capita, as compared to $700 forthe United States.

U.S. POLICIES AFFECTINGTRADE VOLUMES

American policies on trading with theCommunist world probably influence U.S.market shares in existing trade more thanthey do the volume of East-West trade over-all. These shares are determined generally byU.S. foreign trade and export promotionstrategies and in particular by credit, tariff,and export control regulations directed atCommunist countries.

Ch. IIl—The Economic Implications of East-West Trade and Technology Transfer ● 39

Billionsof dollars

30

25

2C

Is

10

5

(

I Total West

Us.

Figure 1 .—East-West Trade and U.S. Share

48.8 51.7 54.1———

19.9

Total11.6

—6.2

1968

15.0—

8.2

1970

16.9

9.1

1971

29.6

41.5

23.4

30.1

1974 1975

East = Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, Romania, U. S. S. R., and PRC.West = Austria, Belgium, Canada, Denmark, West Germany, France, Italy, Japan, Luxembourg, The

Netherlands, Norway, Sweden, Switzerland, United Kingdom, and the United States.

SOURCE Selected Trade and Economics Data of the Centrally Planrred Economies, U S Department of Commerce, Industry and Trade Administration, Bureau of East-West Trade, 1979

Import Barriers

Eastern exports have elicited strong pro-tectionist sentiment among some Americanproducers, and the tendency has been forcommercial import policies to remain restric-tive even in the face of stimulative exportstrategies. In a number of Western coun-tries, the United States among them, bothtariffs and quantitative restrictions, and vol-untary restraints inhibit the quantities ofEastern goods that are imported. The aim ofnontariff barriers is to help the balance ofpayments and in particular to assist importcompetitive labor-intensive industries suchas woodworking, textiles, and shoe manufac-turing. There is now even discussion of ex-tending protection to such technology-inten-sive products as electronics and chemicals,

in which Western countries enjoy or have en-joyed a comparative advantage.

U.S. action on tariffs–notably the denialof most-favored-nation (MFN) status tomost Communist nations—has been politi-cally rather than economically motivated(see chapter VII). It is virtually impossibleto link the lack of MFN status directly to ex-isting levels of trade, although it is unlikelythat the extension of MFN over recent yearswould have led to dramatic increases inEastern imports. As chapter II has pointedout, however, the removal of the politicalbarriers to trade symbolized by the U.S. ’Swithholding of MFN status might, over thelong run, contribute to more regular and ex-panded trade relations with the East.


Credit

Chapter VII documents the history of theU.S. restrictions on the amount of subsi-dized official export credits available to theCommunist world. The availability of suchfinancing is often an important factor in thechoice of a Western supplier. The curtailedrole of the United States in this area can beseen by comparing it to other Western na-tions (see table 4). The Chase World Informa-tion Company has estimated that at the endof 1977 outstanding commitments on exportcredits extended to Eastern Europe and theU.S.S.R. by Western governments totalednearly $32 billion. The U.S.S.R. and Poland,which together are responsible for nearly 60percent of the Communist bloc’s total hard-currency debt, received the bulk of these–$14.2 billion and $8.3 billion respectively.West Germany was the greatest lender, pro-viding official credits of $7.5 billion; Franceranked second at $7 billion, followed byJapan at $5 billion. The United States, withthe activities of the Export-Import Bank(Eximbank) severely curtailed by Congress,ranks fifth, after the United Kingdom, with$945 million.

This fact may support the contention ofsome U.S. exporters that the availability of

cheap official credits in other nations putsthem at a competitive disadvantage. It alsohighlights the limited role of the U.S. Gov-ernment in promoting exports to the East.The impact of such credit policies on U.S.trade cannot be assessed with any precision,but the general effect seems to have far out-weighed any positive actions to encouragetrade with the Communist world.

U.S. Export Controls

A third important factor in the mainte-nance of low levels of trade with the Com-munist world is the restrictions imposed ontechnology sales. These, as well as the atti-tudes of U.S. businessmen toward them, aredescribed in detail in chapter VII. There is awidespread perception among businessmenthat U.S. export control policies are a signifi-cant, if not the most important, barrier to ex-pansion of U.S. trade with the East.

It is impossible to estimate the amount ofbusiness lost to American companies be-cause of the stringency or inefficiency of ex-port controls and licensing procedures, but itis probably safe to assume that—the percep-tions of some businessmen apart—it is by nomeans the predominate factor. An as yet un-published report being prepared by the U.S.

Table 4.—Official Export Credit Commitments to CMEA Countries, as of End-1977(in millions of U.S. dollars)

—— —East

Bulgaria Czech. Germany Hungary Poland Romania U.S.S.R. Total

Commitments on signed contracts offered by:a— — — .

Austria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 183 $ 85 $ 455 $ 395 $ 600 36 $ 260 $ 2,014Britain. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 50 45 40 960 100 720 1,945Canada . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 3 0 0 454 9 173 639France. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 540 350 480 110 1,800 390 3,400 7,070West Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140 450 1,200b 65 1,900 430 3,300 7,485Italy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 70 530 70 800 200 1,950 3,700Japan c. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280 0 400 200 450 500 3,150 4,980United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0 0 0 0 408d 74 463 945Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265 195 465 95 950 215 750 2,935. — .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,518 $1,203 $3,575 $ 965 $8,322 $1,954 $14,166 $31,713Estimated drawings on official creditse . . . . . . . . . 798 841 2,455 460 5,775 1,256 10,730 22,315Undrawn balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . 720 362 1,120 515 2,547 698 3,436 9,398

aRefers to active commitments of official credit. Figures take into account maturing credits and are adjusted for repayments.blntra-German trade swing creditsclncludes sup[plier credits that are provided jointly by Japan’s Eximbank and commercial banksdlncludes $220 million in U S Eximbank commitments and $188 million in CCC creditseApproximate disbursements.

SOURCE: Adapted from a review of CMEA debt by Miriam Karr in East-West Markets, Chase World Information Co., May 15, 1978, p. 3, and May 29, 1978, p 3.

Ch. Ill—The Economic Implications of East-West Trade and Technology Transfer . 41

International Trade Commission (ITC), forinstance, investigated cases involving theloss by U.S. firms of 85 separate contractswith the U.S.S.R. between 1972 and 1977.Noncompetitive price was cited by the firmsinvolved more than twice as often as anyother reason for the failure. Inability to ob-tain Government credits, guarantees, and in-surance; and competition from firms with abetter foothold in the Soviet market werenext more frequently mentioned. Exportcontrols and license delays appeared fardown the list.

EASTERN POLICIESAFFECTING TRADE VOLUMES

While part of the reason for the low vol-ume of U.S. trade with the East may be at-tributed to American failure to capture highmarket shares, decisions on the other side ofthe Iron Curtain have had greater impact onthe nature and extent of East-West commer-cial relations.

The great majority of Soviet and EasternEuropean trade is conducted within theCouncil for Mutual Economic Assistance(CMEA or COMECON). The members ofCMEA are the U. S. S. R., Poland, East Ger-many, Czechoslovakia, Romania, Hungary,Bulgaria, Cuba, Mongolia, North Korea, andVietnam; associate agreements have beenconcluded with Yugoslavia and Finland. TheCMEA, founded in 1949 as the Soviet re-sponse to the Marshall plan, was intended togive the Communist bloc economic as well aspolitical and military cohesion. It providesfor the exchange of economic and technicalinformation among Socialist countries, andapproximately 70 percent of all Eastern-bloctrade takes place within it. Potential tradewith the West is circumscribed by the politi-cally motivated controls imposed on CMEAmembers. These are both direct and indirect.For example, Eastern European dependencyon Soviet raw materials diminishes oppor-tunities for Western raw material exports.Further, Eastern European manufacturesare frequently of such design and qualitythat they can be marketed only in the SovietUnion. The effect of CMEA, together with

the barriers to complete economic interde-pendence posed by the structural differencesbetween market and nonmarket economies,and the lack of hard currency in the East(discussed below) work against the possibili-ty that East-West trade will ever rise tolevels comparable to those between Westernnations.

THE GROWTH OFEAST-WEST TRADE

Barriers to increased trade in both theEast and the West have eroded steadilysince the onset of the era of detente. Asfigure 2 demonstrates, although absolute

Figure 2.— U.S.-Eastern* Trade, 1972-78**

Billions of dollars

6 “ — Total trade--- U.S. exports

5 - --U.S. imports43 -2 -101972 1973 1974 1975 1976 1977 1978

U.S. exports:Bill Ions of dollars

5t t. I --- U.S. exports J

1972 1973 1974 1975 1976 1977 1978

U.S. imports:

Bill Ions of dollars

1972 1973 1974 1975 1976 1977 1978

● Bulgaria, Czechoslovakia, East Germany, Hungary, Poland,Romania, U. S. S. R., and PRC.

** 1978 trade estimated imports do not include U.S. importsof nonmonetary gold from U.S.S.R.

SOURCE: Selected Trade and Economic Data for the Centrally PlannedEconomies, U S Department of Commerce, 1979


levels of East-West trade have been small, ithas grown rapidly in recent years. Table 5shows this growth in absolute terms. Table 6demonstrates the fact that the rate ofgrowth in trade between the industrializedWest and the East has consistently outrunworld trade as a whole from 1955 to the pres-ent. This trend has been particularly mani-fest in Eastern exports of raw materials andlabor-intensive commodities and imports ofmanufactured goods.

sion to expand contacts with the West in allfields. An attempt was made to exploit theadvantages offered by trade with WesternStates, but to avoid if possible the social andpolitical liabilities inherent in East-Westcommunication. A second decision involveda shift in development strategy, which re-quired the use of advanced Western capitaland techniques to increase productivity inspecific sectors. Finally, purchases in theWest began to be utilized on a wider basis tocompensate for shortfalls in annual plans.This has been especially true for agriculturalproducts and, to some extent, consumergoods. The result has been that increases inEastern imports from the West have oc-curred at a greater rate than has expansionof exports.

On the Eastern side, an important set ofreasons for this growth lies in three interre-lated decisions made at some point in the de-velopment of each Communist nation. First,the policy of detente involved a political deci-

Table 5.—Trade With the Developed West(in millions of U.S. dollars)

1972 1973 1974 1975 1976 1977

BulgariaExports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CzechoslovakiaExports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Imports ... ... . . . . . . . . . . . . . . . . . . . .Balance. . . . . . . . . . . . . . . . .

East GermanyExports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Imports . . . . . . . . . . . . . . . . . . . . . . . . . . .Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

HungaryExports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Imports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PolandExports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Imports. ., ., ., . . . . . . . . . . . . . . . . . . . . . . . .Balance. ,. . . . . . . . . . . . . . . . . . . . . . . . .

RomaniaExports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Imports ..,..... . . . . . . . . . . . . . . . . . . . . . .Balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

U.S.S.R.Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Imports. . . . . . . . . . . . . . . . . . . . . . . . . . . . .Balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PRCExports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Imports, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Balance. ..., . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 310349

- 3 9

$ 403480

–77

$ 403928

–525

$ 3631,204–841

$ 420940

–520

$ 392821

–429

9211,056–135

1,2661,513–247

1,6392,031–392

1,6002,178–578

1,6002,178- 5 7 8

1,6981,443–245

1,4061,929–523

1,9152,735–820

2,6463,540–894

2,5863,630

–1,044

2,8504,050

–1,200

2,6952,906–211

739851

–112

1,0851,135- 5 0

1,2211,862-641

1,0961,843–747

1,2901,860- 5 7 0

1,5622,195–633

1,3971,772–375

2,0633,431

–1,368

2,8655,233

–2,368

3,0266,076

–3,050

3,3306,660

–3.330

3,4954,570

–1,075

8261,043–217

1,2031,451–248

1,4022,436–534

1,6532,164–511

1,4502,150–200

1,6822,152–470

2,5703,317–747

4,1214,957–836

6,3416,250

91

6,75010,714

–3,964

8,77311,653

–2,880

10,07911,412

–1,333

1,0851,670- 5 8 5

1,8253,525

–1,700

2,4155,305

-2,890

2,6205,480

–2,860

2,6954,110

–1,415

2,9393,585- 6 4 6

SOURCE UN Trade Data from the U S Department of Commerce, East-West Trade Center, CIA, “PRC-lnternational Trade Handbook,’’ 1976

-— —

Ch. Ill—The Economic Implications of East-West Trade and Technology Transfer ● 43

Table 6.—Average Annual Rates of Change of East-West Tradea and World Trade byCommodity Category, 1955-76

(percentages computed on the basis of current prices)——— ——————

Raw material-and Capital- andFood and labor-intensive skill-intensive

Period beverages Raw materials Fuels manufacturers manufacturers Total exports

Western exports to the East—————

1955 -60.... 3.9 8.7 18.3 27.3 20.0 17.01960-65 . . . . 27.2 5.4 30.3 2.4 14.1 11.01965 -70.... 2.9 1.7 42.5 18.1 13.4 10.91970-76 . . . . 31.0 20.3 16.8 25.7 20.0 26.11955 -76.... 14.6 9.3 15.4 18.3 18.6 16.5

Eastern exports to the West1955 -60.... 10.9 9.3 9.7 15.9 11.0 10.51960 -65.... 6.9 8.6 8.7 18.0 10.7 9.11965 -70.... 6.5 6.3 10.5 12.3 11.3 12.21970 -76.... 15.7 27.7 53.8 24.0 25.7 30.21955 -76.... 10.2 13.3 20.8 17.8 15.0 15.9

World exports1955 -60.... 4.1 4.2 4.3 7.7 10.0 6.61960 -65.... 6.8 3.1 7.2 8.5 10.5 7.91965-70 . . . . 5.9 5.9 9.6 11.8 14.0 10.91970 -75.... 20.4 15.1 41.9 18.7 22.3 22.81955 -76., . 9.1 7.0 15.0 11.6 14.1 11.9

aExcluding Inter-German trade.

NOTE Figures are rounded

SOURCES United Nations, Monfhly Bulletln of Sfatistics, 1955.76, Organization of Economic Cooperation and Development, Trade Commodities Country Summaries,series B (Paris OECD, 1955.76)

THE CONSTRAINTS ON GROWTH OF EAST-WEST TRADE

Some U.S. corporations point to thisgrowing volume of Eastern imports from theWest as evidence of the fact that U.S. poli-cies that inhibit trade in general and trade intechnology in particular with the Commu-nist world exclude the United States fromthe economic benefits of lucrative and grow-ing markets. This claim assumes that thepatterns and growth rates of recent yearswill continue. This assumption, however,must be evaluated against the economicforces at work to inhibit the continuedgrowth of East-West trade and to ensurechanges in the structure of that trade. By farthe greatest of these forces is the chronicshortage in Communist nations of the hardcurrency with which to pay for imports.

Trade between the nations of the indus-trialized West is denominated in “hard” or“convertible” currencies, i.e., currencieswhose value is determined by market forces

outside the complete control of individualcountries. CMEA and the PRC have chosennot to participate in this system. To dootherwise would be to allow outside forces tomake de facto decisions with significant im-pact on domestic economies. Such an alter-native is unacceptable to Communist na-tions which desire to concentrate economicdecisionmaking in hands of central plannersand which wish to be as insulated as possiblefrom world market forces.

The decision not to have a convertible cur-rency, however, entails drawbacks in tradingwith the Western nations that accept cashpayment only in hard currency. An Easterncountry therefore has three choices: it canearn currency by selling to the West; it canarrange countertrade agreements (i.e., trans-actions in which the seller delivers technol-ogy, finished products, and/or machineryand equipment and at the same time, con-

—


tractually agrees to purchase goods from thebuyer equal to an agreed percentage of theoriginal value of the contract); or it can gointo debt. The policy decisions that have re-sulted in expanded overall levels of East-West trade have greatly increased demandfor Western goods in the East, but they havenot been accompanied by a correspondinggrowth in demand for Eastern goods in theWest. So far, Eastern nations still lag intheir capacities to produce salable manufac-tured goods for export. Moreover, althoughcountertrade is important, it involves com-plex transactions that Western firms enterinto with reluctance. It is the latter choice,therefore, which has most often been made.This means that Eastern nations have hadincreasingly to be willing to resort to borrow-ing to finance their trade, and Western na-tions have had to be willing to supply thenecessary credits.

The rapid growth in East-West trade turn-over has therefore been accompanied by arise in Eastern balance of payments deficits.In 1976, this deficit for the Communistworld as a whole was $7.3 billion, and theonly country that managed to achieve sur-plus in trade with the developed West wasthe U.S.S.R. in 1974, the direct result of theincrease in the price of oil in world markets.1

The paradox of the current chronic Westernexport surpluses vis-a-vis the East is that,desirable as these balances may be in thenear term, they are financed largely throughdebt and cannot continue indefinitely. Thegreatest single curb to the continued expan-sion of East-West trade has become the limi-tations posed by this debt.

It is important to note, however, thatnothing sets the East apart in this connec-tion from other nations, such as less devel-

1 In 1976, the PRC had a favorable trade balance in totalworld trade. This was due to its large trade surplus with theless developed countries. Deficits have been partially offsetby Eastern revenues from shipping, tourism, and sales ofarms and gold, in all of which the East has a positive balanceof payments. But the ability of individual countries to utilizethis method of financing varies greatly, and only in the caseof the U.S.S.R. is it a major means of significantly redressingtrade balances.

oped countries (LDCs), plagued with hard-currency shortages. The size and composi-tion of the East’s hard-currency debt hasbecome a matter of controversy. Allegationsare sometimes made that Communist na-tions borrow huge and disproportionateamounts from the West, that these sums arevirtually “given away” both because theyare provided in the form of cheap Govern-ment credits and because the debts go un-paid, and that for nonmarket economies,there is no incentive to restrict borrowing.None of these contentions hold up under ex-amination.

THE SIZE OF THEEASTERN DEBT

Estimates of the net amount of Commu-nist debt in the West in 1977 range from be-tween $37 billion to $40 billion (U.N. Eco-nomic Commission for Europe Secretariat),to $42 billion, excluding the PRC (BankersTrust), to $47 billion to $58 billion (U.S.Department of Commerce).* This variation isprobably due to different methods of ac-counting. Until 1979, the PRC had not madeextensive use of Western credit facilities; itshard-currency debt in 1978 had yet to exceed$1.6 billion. Table 7 demonstrates the expan-sion of CMEA debt since 1970.

A recent Department of Commerce studycompared the magnitude of CMEA externaldebt to that of other nations, and found thatEastern debt is relatively small comparedwith the aggregate external debt of manyWestern borrowers.3 Table 8 shows Easternexternal debt as compared with other Stateswith large loan commitments. Here, Eastern

‘In 1977, the debt was distributed as follows:%. of total hard-currency debt

Bulgaria . . . . . . . . . . . . . . . . . . 5.3Czechoslovakia . . . . . . . . . . . . . . 5.3East Germany . . . . . . . . . . . . . . . 11.9Hungary. . . . . . . . . . . . . . . . . . . 6.’7Poland . . . . . . . . . . . . . . . . . . . . 25.4Romania. . . . . . . . . . . . . . . . . . . . 7,5U.S.S.R. . . . . . . . . . . . . . . . . . . . . 31.7PRC . . . . . . . . . . . . . . . . . . . . . . . 2.6CMEA banks. ... , . . . . . . . . . . . 3.4

3L. Theriot, “Communist Country Hard Currency Debt inPerspective” in Joint Economic Committee, Issues in East-West Commercial Relations, 1979.

Ch. Ill— The Economic Implications of East- West Trade and Technology Transfer ● 45

Table 7.— Estimated Net Hard-Currency Debtof Eastern Europe, U. S. S. R., and CMEA Banks,

End of Year, 1970, 1974-77(in billions of U.S. dollars)

1970 1974 1975 1976 1977B u l g a r l a . $0.7 $ 1.2$ 1.8 $ 2.3 $ 2.7Czechoslovakia 0 3 1.1 1.5 21 2.7E a s t G e r m a n y 1.0 28 3.8 6.0 5.9H u n g a r y 0.6 1.5 2.1 2.8 3.4Poland 08 39 6.9 10.2 13.0R o m a n i a 1.2 2.6 3.0 3.3 4.0———

Total Eastern Europe. ‘4 6 13.1 19.1 25.7 317U . S . S . R . 1.9 5.0 10.0 14.0 16.0CMEA banks o 0.1 0.5 1.1 1.7

———G r a n d t o t a l ‘$6.5 $18.2 $29.6 $40.8$49,4

SOURCE Paul Marer statement in U S PoIicy Toward Eastern Europe (hearingsbefore the Subcommittee on Europe and the Middle East Committeeon International Relations U S House of Representatives 95thCong 2d sess Sept 7 and 12 1978) (Washington D C U S Government Printing Off Ice 1 979) p 100

nations compare favorably to countries withsimilar gross national product (GNP).Another method for measuring the economicburden of the debt—relating its size to ex-ports (in the Eastern case, hard-currency ex-ports)—is shown in table 8. From this per-spective too the Communist world does not

borrow to an excessive degree compared toother nations.

Care must be taken in drawing these kindsof comparisons. First, comparisons of theU.S.S.R. with even the largest developingnations are distorted to the extent that theyfail to take into account the size and sophis-tication of the Soviet economy. Second, incomparing Communist to capitalist nations,the criteria of relative debt size or level ofdebt servicing must be modified to reflectthe points on which State-controlled andmarket economies differ.4 Even with thesecaveats, however, it is clear that the levels ofEastern debt are by no means alarming orunusual in the context of the world economy.

‘For instance, Communist nations have no recourse to riskcapital (i.e., the sale of stocks). Second, much East-Westtrade is conducted under “self-liquidating”’ countertradeagreements, i.e., the creditor accepts as payment the goodsproduced by the facility for which credit was given. Third, thegreat legal and social powers of a centrally planned economygive Eastern Governments much greater flexibility in meet-ing international financial obligations than is possible in theWest.

Table 8.— Hard-Currency Debt and Foreign Trade, 1977 of CMEA and Selected Western Countries

Net debt Exports——.——-

Imports Balance Ratio of debt/hard-($ billions) ($ millions) ($ millions) ($ millions) currency exports

Country 1977 1977 1976 1977 1976

B u l g a r i a . $ 2.7 $ 608 $ 997 $ -389 $ -422 4.4Cuba . . . . . . . . . . . . . . . . 2.2

4.7 “-

784 1,565 – 872 – 711 2.8 1.7Czechoslovakia . 2.7 1,903 2,639 – 736 – 758 1.4 1.2East Germany. . . . . . . . . . . . . . 6.0 2,900 4,070 – 1,140 – 1,456 2.1 1.7Hungary. ... . . . . . . . . . . . . 3.7 1,712 2,441 – 729 – 474 2.2 2.3Poland . . . . . . 12.8 3,852 6,374 – 2,522 -3,235 3.3 3.1Romania . . . . . . . . . . . . . 3.8 2,270 2,660 – 390 – 4 1.4 1.7U.S.S.R. . . . . . . . . . . . 11.3 11,666 14,747 – 3,081 – 5,516 0.97 1.4Vietnam. . . . . . . . 0.2 128 434 – 306 – 183 1.6 1.8

Total CM EA. . . . . . . . . . . . . . . . $49.6 $25,823 $35,927 -$10,104 -$12,759 1.9 1.8

Other developing countriesArgentina . . . . . . . . . . . . . . . . . .Brazil . . . . . . . . . . . . . . . . . . . . . . . . . . .Colombia. . . . . . . . . . ., . . . . . .Mexico. . . . . . . . . . . . .South Korea ., . . . . . . . . . . .Spain ., ... . . . . . ... . . . . . . . . .Venezuela . . . . . . . ... . .Yugoslavia . . . . . . . . . . . . . . . . . . .

$ .519.32.6

20.98.57.04.56.5

$ 5,80012,139

1,9004,166

10,04710,2239,4873,600

$ 4,40013,2292,0005,489

10,81417,8359,2697,400

-t- $1,400-1,090

– 100– 1,323

– 767-7,612

+ 218– 3,800

-$883– 2,200

– 125– 2,732– 1,059– 8,732+ 2,844– 2,515

0.841.61.385.00.840.70.471.8

1.72.61.46.50.961.20.31.2

SOURCE Lawrence H. Theriot, Communist Country Hard-Currency Debt in Perspective,” Department of Commerce Project D-66.74


THE COMPOSITION OF THEEASTERN DEBT

There are three major sources of financingavailable to Communist nations—WesternGovernment financing in the form of guar-antees, insurance, and direct credits; regularprivate commercial credits, including Euro-currency financing; and supplier credits. Themix of these varies among countries. In theU.S.S.R. approximately 60 percent of thegross foreign debt is financed by officialcredits; Western commercial banks hold 25percent, and supplier credits constitute theremainder. Eastern Europe, however, reliesmuch more heavily on commercial bankloans, although again the mix varies amongindividual countries. PRC debt still consistsalmost exclusively of supplier credits.

It is impossible to generalize about thedegree to which the Communist world as awhole relies on “cheap” Government creditsand guarantees, but it is clear that the short-age of negotiable currency in the East meansthat Western official and private credits can

have a significant impact on the growth ofEast-West trade.

Not all this borrowing is subsidized, how-ever. At year end 1977, Western commercialbanks held approximately $25 billion in netclaims on CMEA nations (see table 9).Again, the value of comparison betweenmarket and nonmarket economies is limited,but some perspective on this figure may begained by considering that for the same peri-od non-OPEC LDCs owed Western banksapproximately $30 billion.

Furthermore, the share of CMEA debt inpublic and private facilities in the UnitedStates is relatively modest. As of June 1977,U.S. private bank claims totaled $4.9 billionor about 10 percent of the net debt of theU.S.S.R. and Eastern Europe. In contrast,U.S. banks hold 41 percent of Brazilian debtand 44 percent of Mexico’s. In addition, al-though U.S. banks hold about 10 percent ofCMEA external debt, their claims representonly a relatively small commitment of thetotal equity capital of the banks. The shares

Table 9.—Estimated Composition of Net Hard-Currency Debt ofEastern Europe, U. S. S. R., and CMEA Banks, Dec. 31,1977

(in millions of U.S. dollars)— ———————— — ———

Net liabilities IMFDrawings on Supplier to Western Outstanding and IBRDc

official credits credits a banks b bonds & notes drawings TotalBulgaria . . . . . . . . . . . . . . . . . . . $ 798 —$ 1 0 0 ‘– - - –$ 2 , 0 6 5

——$ 0 $ 0 $ 2,963

Czechoslovakia . . . . . . . . . . . . . 841 200 884 0 0 1,925East Germany . . . . . . . . . . . . . . 2,455 400 3,729c o 0 6,584Hungary ., . . . . . . . . . . . . . . . . . 460 0 3,630 180 0 4,270Poland . . . . . . . . . . . . . . . . . . . . 5,775 1,200 6,890 82 0 13,947Romania. . . . . . . . . . . . . . . . . . . 1,256 200 1,073 0 670 3,199

Total Eastern Europe . . . . . .. —

$11,585 $2,100——

$18,271 $262 $670 $32,888U. S. S. R.. ., . . . . . . . . . . . . . . . . . 10,730 2,200 3,411 0 0 16,341CMEA banks . . . . . . . . . . . . . . . 0 0 3,500 0 0 3.500— . — — — — —

Grand total. . . . . . . . . . . . . $22,315 –——

$4,300 $25,182 $262 $670— —

$52,729-— —— — ——

aIncluding outstanding a Iorfait obligations.bBanks in Group of Ten countries, Switzerland, and foreign branches of U S banks in the Caribbean and Far East.clnternational Bank for Reconstruction and DevelopmentdExcluding net Iiabilities of East Germany to banks in West Germany.

SOURCE East-West Markets, May 15.1978, pp. 3 and 10

Ch. Ill— The Economic Implications of East-West Trade and Technology Transfer . 47

of capital accounted for by outstandingloans range from 0.9 percent for Czech-oslovakia to 5.6 percent for the U. S. S. R..

THE CREDIT-WORTHINESS OFTHE COMMUNIST WORLD

The borrowings of Communist nationsare, therefore, not alarmingly large in abso-lute terms, and the private market’s evalua-tion of the risk entailed in lending to themhas been generally favorable. Commercialbanks reflect their evaluation of this riskthrough the terms at which individual East-ern nations are granted loans; i.e., the in-terest rate spreads between their rates andthe London Interbank Borrowing Rate(LIBOR), the risk-free rate utilized in theEurocurrency market.’ The interest spreadon commercial loans to the East, therefore,reflects the private market’s objective andcarefully weighted evaluation of creditworthiness.

Poland, with the highest debt-export ratioof the countries under consideration and thehighest interest rate spread, is the leastcredit-worthy of the Eastern nations. Never-theless in April 1979, Poland received $550million, the largest syndicated loan it hadever obtained in the Euromarket, and the 1¼point spread over LIBOR was identical tothat granted on a similar loan to Egypt. Thisloan was oversubscribed, a fact interpretedin Warsaw as a relatively positive marketevaluation of Poland’s credit-worthiness,although there are growing indications thatthe Poles may be increasingly hard-pressedto begin hard-currency repayments to theWest.

A syndicated loan of similar magnitude($500 million) was recently granted to thePRC. As might be expected from the very

‘These spreads presently are as follows:Poland . . . . . . . . . . . . . . . . . . . . 1 1/4Romania. . . . . . . . . . . . . . . . . . . . 3/4Hungary. . . . . . . . . . . . . . . . . . . . 5/8Czechoslovakia . . . . . . . . . . . . . . 5/8U.S.S.R. . . . . . . . . . . . . . . . . . . . . 5/8PRC . . . . . . . . . . . . . . . . . . . . . . . 1/2

(LIBOR = 119. for 6 months)

low debt/export ratio as well as conservativeChinese borrowing practice in the past, theChinese were granted an extremely low rate—one-half percent over LIBOR. The size andinterest spread of this loan indicate a posi-tive evaluation not only of Chinese ability torepay, but also of political stability in thenear term.

During 1977, Communist countries ar-ranged for approximately $3.4 billion inpublicized Eurocurrency credits. While con-siderable, this borrowing accounted for onlyabout 8 percent of total borrowing on theEuromarket during 1977. Borrowing by allEastern nations in that year was roughlyequal to that of Canada, and in general, withthe exception of Poland and the CMEA in-vestment bank, Eastern use of the Eurocur-rency markets has been relatively modestcompared to many developing countries.Furthermore, international bankers have notonly been willing to increase the debt, buthave rendered relatively favorable interestrate judgments on the Eastern economies.

THE GROWTH OF THEEASTERN DEBT

Discussion thus far has centered on thelevel of the Communist world’s external debtand concluded that its volume and structureare unexceptional in the context of worldtrade as a whole. This does not mean, how-ever, that this debt can continue to accrue atits present rate.

Between 1974 and 1977, the debts of Bul-garia, Czechoslovakia, East Germany, andHungary roughly doubled. Growth in Polishand Soviet debts was proportionately evenhigher, 230 and 220 percent, respectively.Only the debts of Romania and China grewsomewhat more slowly (see table 10), but aschapter XI discusses, the hard-currencydebt of the PRC can be expected to growrapidly over the next several years.

In addition to debt incurred by individualnations, CMEA’s two international banks,the International Bank for Economic Coop-eration and the International Investment


Table 10.—Growth in Debt, Selected CommunistCountries, 1974-77

Country % growth in debt, 1974-77

Bulgaria . . . 125C z e c h o s l o v a k i a . 145E a s t G e r m a n y . 115H u n g a r y , 150Poland . . 230Romania. . . . , . . . , . . . , . . . , . 48U.S.S.R. . . 220PRC . . . . . . . . . . . . . . . . . . . . . . . 30

SOURCE: Offlce of Technology Assessment

Bank, have been active borrowers in West-ern private credit facilities. The Eurocur-rency obligations of these two banks rosefrom $100 million in 1974 to $l.7 billion in1977.6

These enormous growth rates reflect theexpansion of East-West trade. But while ad-ditional loan capital seems to be available invarying degrees to all the Eastern nations, inthe long run continued growth of East-Westtrade cannot be financed through borrowing,even should the East wish to do so. Accord-ing to Department of Commerce estimates,East European nations would have to sus-tain growth rates of between 6 and 9 percentand cut import growth to zero to stabilizetheir debt levels by 1985.7 As both these pos-sibilities are highly unlikely, all other thingsbeing equal, the accumulation of debt willprobably increase. If this happens, the finan-cial risk component of interest rate spreadson East European loans will increase untilborrowing becomes uneconomical.

ALTERNATIVES TOBORROWING

Should further borrowing become prohibi-tively expensive to the East or should West-ern lending be restricted for noneconomicreasons, three alternatives are open to the

‘Morris Bornstein, “Issues in East-West Economic Rela-tions, ” unpublished paper for Research Conference in East-West Relations in the Eighties, Rockefeller FoundationStudy and Conference Center, Bellagio, Italy, 1979.

‘Allen Lenz, “Potential Hard-Currency Debt of theU.S.S.R. and East Europe Under Selected Hypotheses” inJoint Economic Committee, op. cit.

centrally planned economies. They can allowmore direct Western involvement in their en-terprises; they can resort to internal financ-ing; or they can expand and diversify theirhard-currency earnings from exports.

Western Involvement inEastern Enterprises

There are at least two ways of increasingWestern involvement. A country can obtainrisk capital by establishing joint enterpriseswhich enable foreign firms to invest directlyin its economy. Such entities are permittedin Hungary, Romania and, to a lesser extent,in Poland. In the PRC the possibility is un-der discussion. The current contribution ofthese enterprises is small, however. Alterna-tively, eater use may be made of leasing,although the existence of foreign-ownedproperty in a Socialist country raises ideo-logical problems. This has not prevented theSoviets from leasing containers from theWest, but there are no prospects for rapid orwidespread basic policy changes in thisregard.

Internal Financing

Internal financing requires the allocationof a larger share of the national income to in-vestments. Because standards of living inev-itably suffer as a result of this tactic, it issubject to political constraints. Poland, forexample, has found it extremely difficult toraise internal consumer prices without imme-diate and violent reaction from the populace.While this is an extreme example, the in-creases in savings necessitated by internalfinancing make this alternative unattrac-tive.

Increased Exports to the West

Given the limitations inherent in boththese approaches, it seems inevitable thatthe hard currency necessary to finance tradeand economic growth in the Communistworld over the long term can be obtained insufficient quantities only through the sale ofgoods in the industrialized West and theLDCs. Western imports must ultimately be

——


paid for through Eastern exports, and pre-sumably through the reduction or elimina-tion of present Western trade surpluses withthe Communist nations. The Western tech-nology sold to the East will help to accom-plish this to the extent that it is aimed atcapacity expansion or long-term productiv-ity increases in potential export sectors.

Undoubtedly, the attempts of many Com-munist nations to transform themselves intonet exporters of manufactured goods havealready been aided by technology importedfrom the West, much of which is specificallydirected into export industries. At the sametime that Eastern markets for technology-intensive goods have been expanding, East-ern exports to the West have become in-creasingly capital intensive. Structuralchanges in Eastern exports in favor of capi-tal-intensive products do not, however, ade-quately reflect the progress in industrializa-tion or capital accumulation and technologi-cal expertise which has been achieved byEastern countries. In particular, relative tothe level of economic development in theEast, too few technologically advanced andsophisticated capital-intensive products oftoo low a quality are produced for sale toWestern countries. This is largely due to thenonmarket economies’ inherent systemic dif-ficulty in developing products suitable toWestern demands and effectively marketingthem. Comparisons of Eastern export devel-opment to that of Japan, Taiwan, or Koreaare therefore invalid.

C O N C L U S I O N S

In the last analysis, deliberate policies inboth the East and West may be hostage tolarger economic conditions. CMEA behaviorduring the 1974-75 recession provides an ex-ample of the problems many planned econo-mies have experienced in controlling theirtrade balances with the West. Except in theU. S. S. R., which is the sole oil exporter inCMEA, growth in East-West trade and re-sulting trade imbalances became a particu-larly acute problem to CMEA members after1974, when the slow pace of world economic

recovery hindered the growth of Eastern ex-port earnings at a time of greatly expandedimports of food and other items. In EasternEurope, restrictive action directed at import-elastic sectors such as industrial investmentwas instituted. As a result, industrial expan-sion in the region declined from 8 to 8.5 per-cent in 1974, to 5.5 percent in 1978. Thisdecline in the growth rate of domestic outputseems to have affected the expansion of ex-ports more strongly than that of imports,with the result of a further widening of thedeficit in 1978. In other words, attempts toreduce the deficit indirectly have only in-creased it.

In contrast, when the PRC was faced withlagging demand for its goods in Westernmarkets in 1975, it simply slashed its agri-cultural imports by $1 billion. Its ability totake such incisive action was predicated onthe low absolute value of its trade with theWest and its consequent lack of dependenceon Western imports, a situation which, atleast in some sectors, no longer exists inmany CMEA countries.

It may be, therefore, that world energyprices and Western economic growth levels(and their effect on import demand) ultimate-ly have as much direct and indirect impacton the level of East-West trade as any policydecisions taken in either East or West.

In any case, it is clear that U.S. (and otherWestern States’) willingness and ability topurchase more Eastern exports are vital con-ditions for the long-term expansion of East-West trade. How large could this trade ul-timately grow? One optimistic assessmenthas been made by Michael Forrestal, Presi-dent of the U.S.-U.S.S.R. Trade and Eco-nomic Council, who estimated recently that“over a relatively tranquil five-year periodahead with no remedial U.S. tariff or creditlegislation, U.S.-U.S.S.R. trade could reach20 billion; 15 billion in U.S. exports and 5billion in Russian sales to the U.S. If tariffand credit limitations were removed, the to-tal would be substantially higher.”8

*Industry Week, Mar. 5, 1979.


While significantly expanded East-Westtrade rates may be possible in the long run,Forrestal’s estimates are spectacularly op-timistic for the near future. Given the sizeand diversity of its economy, the U.S.S.R. re-tains an extremely low level of foreign im-ports per dollar of gross domestic product,and there is no reason to expect this policy tochange in the near future. Moreover, Sovietimports from the United States could in-crease fivefold and still be only $7 billion to$10 billion annually. And these figures fail totake into account the limitations posed by

present Eastern export potential and thelimitations of demand for Eastern exports inthe West. Nor do they allow for the fact thatthe United States has never captured a largefraction of Eastern markets. Large increasesin East-West trade as a whole would benefitother Western countries proportionallymore, especially in the absence of vigorousU.S. export promotion campaigns, favorablefinancing terms, relaxation of export con-trols, and other policies aimed at foreigntrade expansion in general.

THE ROLE OF TECHNOLOGY INEAST-WEST TRADE

FUTURE PROSPECTS

Trade in technology has remained a rela-tively stable and relatively small componentof East-West trade as a whole. There is rea-son to believe, however, that Eastern im-ports of technology may rise, and that thiswill occur regardless of whether East-Westtrade expands or whether world economicconditions, U.S. commercial or political poli-cies, or the pressure of increasing hard-cur-rency debt cause it to stagnate or contract.Indeed, the very structure of East-Westtrade is creating a situation in which Easternimporters will have higher incentives to ac-quire foreign technology.

In the future, the Communist world is like-ly to place a greater emphasis on obtainingtechnology than on pure capital inflows.9

Presently technology-intensive productsconstitute only a minor share of the totalresource inflows from the West. These, how-ever, have a disproportionate importance tothe economies of the Eastern nations (seechapters X and XI). This is not only becauseof the need to expand exporting sectors ofthe economy, but also because the increasein productivity resulting from the use of the

‘Padma Desai, “The Productivity of Foreign Resource In-flows to the Soviet Economy, ” in American Economic Re-uieu~, LX I I (2), p. 74.

new technology usually more than offsetsthe cost of the credit needed to obtain it. Solong as this remains the case, Eastern na-tions will be increasingly eager to borrow inorder to purchase Western technology. Bythe same token, if as Eastern debt continuesto grow, interest rate spreads increase, othertypes of imports will become even less eco-nomical; high-productivity technology im-ports will thus begin to constitute a largerrelative share of Eastern imports. This sug-gests caution in concluding that debt con-straint will inhibit technology purchases. Onthe contrary, it may create incentives forpurchasing more technology at the expenseof other imports. Demand for technologicallyintensive products in Communist nations is,therefore, unlikely to abate in the future. Inthe absence of foreign production and mar-keting know-how, however, long-term abilityto market usable products cannot be createdwithout major structural changes that suchcountries are unwilling to make. The demandfor Western management technology istherefore expected to grow enormously. Themedium-term result of this is that Westerntechnology-intensive industries and firmsproviding management expertise will benefitmost from expanded East-West trade overthe next several years, while import-sensi-tive capital and labor-intensive industriesmay be injured by increased competition.


PRESENT U.S.MARKET SHARES

The implications of this for the U.S. econ-omy must be understood in the context ofthe U.S. share in Eastern technology pur-chases. This is impossible to determine withany precision. A rough picture of the value ofU. S., sales of technology to the East relativeto those of America’s major Western tradingpartners may be constructed, but this is pos-sible only through categories of technologytransfer for which data exists–trade in high-technology products and industrial coopera-tion agreements (see chapter VI).

Sales of High-Technology Products

As table 11 demonstrates, in 1977 U.S. ag-gregate sales of high-technology products tothe U. S. S. R., Eastern Europe, and the PRCamounted to less than $300 million, and inno case did these products constitute a ma-jor share of U.S. exports to individual Com-munist countries. High-technology sales

thus ranged from a high of 19.7 percent ofU.S. exports to Bulgaria to 3.3 percent oftotal exports to East Germany.

Nor is the United States a leading sourceof high-technology products among Westernsellers. In the case of the U. S. S. R., WestGermany is by far the largest single exporterof high-technology products, followed byJapan and France. In 1977 those three coun-tries accounted for more than 62 percent oftotal Soviet imports of such items from theWest. The U.S. share in high-technologyproducts in that year amounted to only 9.1percent. Nearly a third of Western high-tech-nology exports to the PRC originate in Ja-pan. West Germany and France account foranother 29 percent, and the United Statesranked fifth in this category with a 6-percentshare.

Table 11 has also demonstrated that East-ern purchases of high technology from theUnited States have, if anything, occurred ata slightly lower rate than purchases from the

Table 11 .—Comparison of High-Technology Exports With Manufactured Goods and Total Exports—15 Industrialized World (1. W.) Countries to the Communist Countries and to the World

(in millions of U.S. dollars)

1977 1976 1974 1972High-tech. High-tech. High-tech. High-tech.

exports exports exports exportDestination as % of as 0/0 of as % of as 0/0 of

U.S.S.R. - ‘ -

High-technology I.W. exports. . . . . . . $ 2,003 – $ 1,627 – $ 1,036 – $ 582 —Manufactured goods I.W. exports . . 9,537 21.0 9,169 17.7 5,546 18.7 2,430 24.0Total I.W. exports. . . . . . . . . . . . . . . . . 11,412 17.6 11,653 14.0 6,250 16.6 3,317 17.5

Eastern EuropeHigh-technology I.W. exports. . . . . . . 1,741 — 1,525 — 1,223 — 619 —Manufactured goods I.W. exports . . . 11,769 14.8 11,438 13.3 10,432 11.7 4,738 13.1Total I.W. exports. . . . . . . . . . . . . . . . . 12,866 13.5 12,757 12.0 11,322 10.8 5,098 12.1PRCHigh-technology I.W. exports. . . . . . . 248 – 342 – 410 — 64 –Manufactured goods I.W. exports . . . 2,986 8.3 3,094 11.1 3,166 13.1 1,090 5.9Total I.W. exports. . . . . . . . . . . . . . . . . 3,585 6.9 3,423 10.0 4,369 9.5 1,445 4.4

Total all Communist countriesHigh-technology I.W. exports. . . . . . . 4,886 – 4,140 — 3,197 – 1,562 —Manufactured goods I.W. exports . . . 29,991 16.3 27,955 14.8 23,714 13.5 10,266 15.2Total I.W. exports. . . . . . . . . . . . . . . . . 34,263 14.3 32,808 12.6 27,261 11.7 12,234 12.8

WorldHigh-technology I.W, exports. . . . . . . 71,576 — 64,366 – 49,314 — 29,092 —Manufactured goods I.W. exports . . . 523,890 13.7 459,351 14.0 381,983 12.9 214,182 13.6Total I.W. exports. . . . . . . . . . . . . . . . . 669,393 10.7 590,833 10.9 498,470 9.9 273,045 10.7

SOURCE Quantification of Western Exports of High Technology Products to Communist Countries, prepared by John Young, Industry and Trade Administration, Off Iceof East-West Policy and Planning, U S Department of Commerce, Project No D-4I.


industrialized world as a whole. In 1977, thefraction of high-technology, as a percentageof total Soviet imports from the UnitedStates was 11.3 percent as opposed to 17.6percent for the total industrialized world.The comparable figures for Eastern Europewere 10.6 percent for the United States ver-sus 13.5 percent for the industrialized world.Only in the PRC did America garner a higherthan world share of high-technology sales—8.8 percent as opposed to 6.9 percent.

As is evident in table 12, Communistworld (including Yugoslavia and Cuba)shares of total high-technology exports fromthe United States are slightly higher thanoverall world averages (14.3 versus 10.7 per-cent). Of the Eastern countries, the U.S.S.R.purchased the highest proportion of hightechnology (17.6 percent). In the cases ofboth the U.S.S.R. and Eastern Europe, how-ever, these shares have not risen notablyover the past 5 years, despite large increasesin the total volume of East-West trade.

Industrial Cooperation Agreements

The paucity of information available onthe value of coproduction agreements, li-censes and patents, and turnkey venturescan be seen from a brief survey of the bestexisting data. In 1975, U.S. firms partici-pated in 424 agreements. Nearly four-fifthsof these (79.3 percent) were in the manufac-turing sector. Within this sector machinebuilding and chemicals predominated, eachwith approximately one-fifth of total agree-ments. Electrical machinery and petroleumprocessing industries were also important.The U.S.S.R. and Poland signed the largestnumber of agreements with U.S. firms.

Care must be taken in interpreting this in-formation however. Although the U.S.S.R.ranks third, after Hungary and Poland, inthe number of substantive arguments con-cluded, it has been estimated that the totalvalue of the Soviet agreements exceeds thatof all Eastern European cooperation agree-ments combined. ’” Thus, the number of

10Paul .Marer and Joseph C. Miller, “U.S. Participation inEast-West Industrial Cooperation Agreements, ” Journal ofInternational Business Studies, fall-winter 1977, p. 21.

Table 12.—U.S. High-Technology Exports to theCommunist Countries and to the World, 1977

Millions of High tech.Exports to: dollars as % ofBulgaria

High technology. . . . . . . .Manufactured. . . . . . . . . .Total exports . . . . . . . . . .

CzechoslovakiaHigh technology. . . . . . . .Manufactured. . . . . . . . . .Total exports . . . . . . . . . .

East GermanyHigh technology. . . . . . . .Manufactured. . . . . . . . . .Total exports . . . . . . . . . .

HungaryHigh technology. . . . . . . .Manufactured. . . . . . . . . .Total exports . . . . . . . . . .

PolandHigh technology. . . . . . . .Manufactured. . . . . . . . . .Total exports . . . . . . . . . .

RomaniaHigh technology. . . . . . . .Manufactured. . . . . . . . . .Total exports . . . . . . . . . .

Total Eastern EuropeHigh technology. . . . . . . .Manufactured. . . . . . . . . .Total exports . . . . . . . . . .

U.S.S.R.High technology. . . . . . . .Manufactured. . . . . . . . . .Total exports . . . . . . . . . .

$ 4.720.123.9

7.118.474.0

1.24.1

36.1

12.944.879.7

37.0114.2436.5

23.661.0

259.4

86.5262.6909.6

182.7547.4

1,623.5—Total Eastern Europe & U.S.S.R.

High technology. . . . . . . . 269.2Manufactured. . . . . . . . . . 810.0Total exports . . . . . . . . . . 2,533.1

. — . —PRC

High technology. . . . . . . . 15.1Manufactured. . . . . . . . . . 86.9Total exports . . . . . . . . . . 171.3

—23.419.7

—38.5

9.6

—29.1

3.3

—28.716.2

—32.4

8.5

38.69.1

32.99.5

—33.411.3

—33.210.6

—17.48.8

SOURCE: Quantification of Western Exports of High Technology Products toCommunist Countries, prepared by John Young, Industry and TradeAdministration, Office of East-West Policy and Planning, U S Depart.ment of Commerce, Project No D-41

agreements tells nothing of their magnitudeor technological significance. Unfortunately,no comprehensive data exists to fill thesegaps. This is a reflection not simply of thecomplexity of the deals, many of which in-volve other countries as well as U.S. foreignsubsidiaries, but also of the reluctance offirms to divulge details of their transactions.There is at present, therefore, no way of ac-curately estimating the amount earned byU.S. firms in cooperation agreements.

Ch. Ill— The Economic Implications of East-West Trade and Technology Transfer 53

The little information that is available forthe United States is in data for the value oflicense and patent sales collected by the De-partment of Commerce. Unfortunately, thisis presented in a form that makes interpreta-tion difficult. Although for the past 3 years,the General Accounting Office has sug-gested that the Department of Commercedisaggregate this data, Commerce continuesto report only cumulative revenues from roy-alties, not payments collected annually.

Among Western countries, West Ger-many is the leading licenser to the East. It isfollowed by the United Kingdom, the UnitedStates, France, Japan, Italy, Sweden, Switz-erland, the Netherlands, and Belgium. Butwhile certainly a common mode of tech-nology transfer, licensing is by no means amajor money-earner for any nation. Whilethe number of transactions involving thesale of licenses by Western firms is not ac-curately known, a 1976 estimate placed thefigure at less than 2,400. Again, this in itselfis deceptive. The U.S.S.R. has sold more li-censes to the West than it has bought, butthe price paid for Western licenses has beenestimated by Licensintorg, the Soviet licens-ing agency, as an average of 10 times greaterthan the price paid by Western firms forSoviet licenses. It has been estimated that inthe mid-1970’s annual proceeds in the Westfrom Eastern license purchases were in theorder of $300 million. Much of this, however,was paid for in the goods produced by thelicense under countertrade agreements.There is no official estimate of the share ofthis revenue accruing to the United States—in cash or in goods.

Moreover, although there are persistentrumors about patent infringements by theSoviet Union, no reliable estimates exist onthe magnitude of this problem. A recentstudy by the National Research Council re-ported that “conversations with several ex-perts on international patent law have ledthe panel to believe that Western companiestend not to take legal action even when theybelieve their rights have been infringed upon

by the U.S.S.R. simply because ‘it is toogreat a hassle. ’ 11

Conclusions

The only reliable information for measur-ing the value of U.S. technology sales to theEast is in data for high-technology productexports. Even this must be treated with ex-treme caution since many subjective judg-ments are made in preparing quantitativeestimates. The information is valuable pri-marily for indicating changes in overall tradevolumes and for making crude estimates ofrates of change. The gross outcome of thisanalysis suggests that U.S. trade in technol-ogy and technology-related products withthe East is relatively small (less than $300million in 1977) and has been growing atroughly the same rate as overall East-Westtrade. The data does not clearly support thethesis that the nonmarket nations havemade a concerted effort to extract technol-ogies from the United States on a massivescale to support economic or military in-terests. Nor can it be taken as a certainrebuttal of the thesis. The Soviet Union andEastern Europe did import relatively moretechnology as a fraction of total importsthan the world average, but the PRC im-ported considerably less. The differencesmay be due primarily to relative degrees ofindustrial development and deliberate Chi-nese policy which, as chapter XI demon-strates, is changing. Beyond this, it is safe toconclude that sales of technology constituteonly a small fraction of U.S. trade with theCommunist world, trade which itself hasbeen very circumscribed. If, as is likely,technology purchases from the West accel-erate, U.S. policies designed to capturelarger market shares would be necessary forAmerican firms to benefit as much as wouldfirms in allied nations.

1 INationa] Academ v of Sciences, “Review of U.S.-U.S.S.R.Interacademy Exchange and Relations, ” National ResearchCouncil, May 1977.


THE IMPACT OF TRADE WITH AND TECHNOLOGYSALES TO THE EAST ON THE U.S. ECONOMY

Any evaluation of the merits of expandingU.S. trade as a whole or trade in technologywith the Communist world must take intoaccount the net effects of such trade on theU.S. economy. Many attempts have beenmade to approach this conceptually complexquestion, but qualitative generalizationshave addressed themselves to relatively nar-row segments of the issue. Satisfactoryquantitative assessments, except for singlesectors or commodities, simply do not exist.The reasons for this paucity of analysis aremanifest. Technology is notoriously difficultto measure empirically, either for particularcommodities or through macromodels of en-tire economies. At present, for instance,there is no universally accepted model for as-sessment of aggregate technical change inthe U.S. economy. Furthermore, any satis-factory model of the macroeconomic effectsof technology transfer in the United Stateswould entail an accurate assessment of tech-nology not only as a factor in U.S. growth,but in the nonmarket and third-countryeconomies as well. This is not only beyondcurrent capabilities; it is unlikely that a suf-ficient data base for such an attempt willever be assembled. In light of this, assess-ment of the impact of East-West technologytransfer on the U.S. economy must be lim-ited to narrowly defined generalizations.

In the United States, those with a stake incommercial technology transfer to nonmar-ket economies may be divided into four cate-gories: the vendors of U.S. technology; in-dustries that must compete with Communistexports both in the United States and inthird markets; purchasers of Eastern tech-nology; and the U.S. consumer. Policymak-ers must aggregate and balance the interestsof all four.

TECHNOLOGY VENDORS:U.S. CORPORATE STRATEGY

The primary motive for American firms’sales of technology to the East is profit. Ex-port income is generated by the sale of“high-technology” commodities and know-how, and also by the sale of associated plant,equipment, and services. In addition, in-direct results of the transfer transactionmay bear fruit in the medium or long term inthe form of future sales. Highway construc-tion equipment, for example, may be pur-chased in the future as a result of the trans-fer of automotive manufacturing technol-ogy.

Gains to individual firms obviously in-crease the aggregate income of the UnitedStates as a whole. Moreover, sales resultingfrom growing demands for exports lead to in-creased employment, not only in research,design, and engineering services directly as-sociated with technology sales, but in associ-ated industries which benefit from the de-rived demand. In addition, there is an impor-tant sense in which overall trade levels,analyses of numbers of plants and licenses,or of the revenues received from these sales,may not provide a useful estimate of the fullrole of technology sales to the East in inter-national commerce. In most cases, technol-ogy transfers are only a part of complextransactions which include barter, two-waytechnology transfers, coproduction agree-ments, buy-back agreements, and other ar-rangements often involving third countries.The participation of a U.S. firm in such rela-tionships can become an integral part of itscorporate strategy and therefore assumes animportance disproportionate to the dollarvalue of the transactions.

Ch. Ill— The Economic Implications of East-West Trade and Technology Transfer . 55

Companies engaged in East-West trade,therefore, often contend that its value toU.S. corporations cannot be measured solelyby its present volume or profitability. Thecontinued ability to compete in the sale oftechnology to the East is important to a vari-ety of other corporate activities. OTAsought to explore this argument by conduct-ing interviews with high officials in 10firms,12 all of which have clearly articulatedpositions on the importance of trade withCommunist nations to their corporate strat-egy. No attempt was made to assemble a rep-resentative or statistically relevant sample,and the following discussion should there-fore be regarded merely as an attempt tosynthesize as a cohesive argument the viewsof an identifiable segment of U.S. industry.Interviewees by no means agreed on everypoint, but the case presented here is faithfulto the opinions of many of those interested infostering trade with East.

U.S. firms seem rarely to enter Commu-nist markets as part of a deliberate globalstrategy. More often their initial involve-ment is the result of an isolated opportunitywhich comes about either as the result ofother international activities, or of ap-proaches by representatives from the East.In some cases, however, the contacts devel-oped in an initial venture result in the estab-lishment of closer forms of cooperation withthe Eastern nation.

Control Data Corporation (CDC) providesa good example of the way in which such anopportunity can grow into a larger relation-ship. In 1968 it sold a CDC 1604 computer tothe Soviets. This model was being phasedout in the United States; nor did it represent

1 ZThe firms included an international chemicals companyand an international consumer industrial manufacturer (bothof which declined to be identified); Control Data Corporation;Corning Glass Works, Inc; Hewlett-Parkard Corporation; In-ternational Harvester; Herman Corporation; Levi-Strauss;Texas Instruments; and Satra Corporation.

a major technological innovation for the So-viets. The sale resulted in additional con-tacts which led CDC to evaluate the Sovietmarket potential and eventually resulted in aprotocol agreement between the companyand the Soviet State Committee on Scienceand Technology. CDC is now actively in-volved in marketing products and technol-ogy in the U.S.S.R.

Once an initial transaction is successfuland longer term contacts are established,U.S. firms evaluate their involvement in theEast in the context of their worldwide ac-tivities, and begin to examine broader formsof cooperation, e.g., coproduction agree-ments. This sequence of events is not uniqueto dealings with the Communist world. Earlytransactions generally have little or no im-pact on corporate strategy. Similarly, thecomplexity of the issues associated withcloser cooperative relationships necessitatesa building of trust that may only be obtainedthrough extended personal or corporate con-tact. But as the involvement in the East in-creases, there is a tendency to consider thesemarkets as a concrete part of the new prod-uct planning and development process.

The development and introduction of newproducts is a large, complex, and costly proc-ess. Because initial activities in the Com-munist world are usually based on exploita-tion of isolated opportunities, there is no in-dication that companies explicitly considerthese markets in their early new product de-cisions. This situation may now be changing,and some large firms consider Eastern mar-kets in the evaluation of worldwide marketpotential for new products. This tendency isparticularly marked in companies with co-production and joint venture agreementswith Eastern-bloc partners. Movementtowards explicit consideration of the Com-munist world market potential appears to beless a reflection of corporate philosophy than


of the broadened geographical perspective ofcorporate decisionmakers.

Those executives who argue that East-West transactions are part of new productdecisions also contend that increases in thistrade will stimulate the U.S. economy by in-creasing innovation, creating new jobs, andimproving productivity.

Other firms contend that, for the firsttime, they are considering Eastern marketpotential as part of the R&D justification onnew product technology because East-Westtrade is now sufficiently institutionalized tobecome part of the global marketing plan.This may include ongoing discussions withEastern trading companies which involve co-operation in design, development, testing,and production of new product models.

The past profitability of East-West trans-actions has been mixed. Some companiesopenly admit that business with the Commu-nist world has not been as profitable as wasoriginally expected. In fact, although no firmwould provide concrete examples, severalstated that in retrospect their expectationshad been unrealistic. Throughout history ex-amples abound of companies’ continuing tofail to realize profits in their dealings withthe Communist world. This is particularlytrue of the Soviet Union, where it is almostimpossible to document cases of Americancorporations’ showing direct profits. Despitethis disappointing record, many firms con-tinue to believe that it simply takes timebefore profits begin to accrue from tradewith the East. There are several reasons forthis:

●

●

It takes time to develop enough insightinto centrally planned economies, theirinstitutions, and people, to know whatbusiness opportunities are possible andwhere to look for them.The authorization and security proce-dures within such countries are rigidand complex. It may take many yearsbefore a firm’s counterparts in the Eastfeel secure enough to propose mean-ingful deals.

● The difficulty in getting access to endusers and to research institutionsmakes it difficult to collect the informa-tion often essential to transactions.

It may be that some companies are notgetting an adequate return because they arenot working hard at developing closer rela-tionships in the East. Those most willing todiscuss complex joint ventures are the mostlikely to identify meaningful areas for futuretransactions. Moreover, some returns inEast-West trade do not involve direct prof-its, but rather may involve the acquisition ofdesign, engineering, and technical develop-ment capabilities of Eastern counterparts.

A firm may also benefit from the sale oftechnology that is no longer competitive inWestern markets, but is appropriate to East-ern technical sophistication. This is a way ofpartially recouping R&D costs, and is likelyto be a factor in industries with a particular-ly high rate of technical innovation (e.g.,computers or integrated circuits).

At the same time, however, U.S. firmshave made very extensive investments inthe East. Anecdotes of negotiations thathave taken place over several years, costingmillions of dollars, abound. To these costsmust be added those of participation in ac-tivities viewed as necessary to the develop-ment of successful East-West ventures—e.g., membership in trade councils or main-taining foreign offices. These expenses are ofsufficient magnitude to warrant continuedefforts, even in the absence of short-run prof-its. They represent a vested interest in thehealth and continuity of East-West commer-cial relations.

Perhaps most importantly U.S. companiesfear that difficulties in dealing with the Com-munist world will have the long-run effect ofshutting them out of other markets. Worldtrade relationships have implications that gofar beyond the contact between two compa-nies. Often transactions are initiated be-cause they meet the needs of worldwide mar-keting strategies. For example, a U.S. com-pany may enter into a coproduction agree-


ment with an Eastern European counterpartto produce products that are no longer cost-effective within the United States, but whichcan be sold in LDCs as part of the company’slarger strategy.

As a company’s experience and expertisein foreign commercial relations increase, itbegins to evaluate the role of these relationsin terms of global market needs. Any rela-tionship with an individual country tends,therefore, to be regarded as a potential leadto new markets. In this area, involvementwith some Eastern European countries isviewed as an entree elsewhere. Two quota-tions from OTA’s interviews with selectedbusinessmen indicate this:

We started negotiating with the Chinese intheir Embassy in Bucharest many yearsbefore there were serious thoughts aboutregularizing relations with the PRC.

We have been contacted by trade repre-sentatives from one of the Eastern Europeancountries regarding the possibility of jointventures to address the needs of LDCs, par-ticularly Africa. We are actively followingup on these possibilities since they are alogical extension of our total marketing in-terests.

Thus, both China and Eastern Europe arelooked towards for potential assistance indealing with third countries. Trade withChina is seen by some firms as an entree intoparts of the Far East. Similarly, EasternEuropean ventures can become part of astrategy to address markets throughout theCMEA, in Western Europe, and in LDCs.

Because of these interrelationships, thereare fears that the diminution of East-Westtrade will have effects beyond immediatebilateral relationships, including isolationfrom other markets. The problem is exacer-bated by the prevalence of barter and coun-tertrade in East-West transactions. Thisform of trade is often new to American firms,but once involved, the need to market theitems purchased in the transaction perforceinvolves breaking into new markets.

In sum, it would appear that both directand indirect benefits accrue to those export-oriented industries that engage in technol-ogy transfer. Moreover, some of these ben-efits can be diffused throughout the econ-omy, although it is usually impossible todisaggregate the effects of technology trans-fers from other sales. However, there can benegative effects stemming from such trans-fers, and policymakers must decide whetherindividual firms can be depended on to pre-vent transactions in which long-run harmfuleffects will make themselves felt in their ownindustries. There is some evidence, for exam-ple, that U.S. firms are encountering increas-ing difficulties in adjusting to technicalchange and are considering the marketing oftheir technology as an alternative to ag-gressively engineering for competitive pro-duction in the high-wage U.S. economy. ’3The nonmarket economies encourage thistrend through providing a market for tech-nology no longer competitive in the West.While such transactions may indeed improvethe cash flow of an individual firm, the long-term effects on an entire industry can bedevastating.

Further, the proliferation of industrialtechnology in the Socialist economies maybe weakening the bargaining position of U.S.firms as suppliers of technology to newly in-dustrializing nations. At present, U.S. firmsreap the greatest return on technologythrough sales to LDCs. Communist nationsare attempting to break into this market,notably in order to procure raw materials.When the long-term interests of a given in-dustry are considered, the immediate short-term gains resulting from the sale of indus-trial technology may be more than offsetboth by the possibilities of future inability tocompete in Western markets, and by in-creased competition in technology sales inthird world markets.

13Jack Baranson, International Transfers of Industrz”alTechnology by U.S. Firms and Their Implications for the U.S.Economy, U.S. Department of Labor, 1976, p. 35.


IMPORT COMPETITIVEINDUSTRIES

The negative effects of technology trans-fer rebound most acutely in the second ma-jor group interested in the process—those in-dustries that compete with Communist ex-ports both in domestic and foreign markets.Owing to the centrally planned economies’desire to increase their exports, their tech-nology purchases are often in export ori-ented sectors. Indeed, compensation agree-ments by their very nature involve U.S. im-ports of the commodity produced as a resultof the technology transfer transaction; othertypes of countertrade involve Eastern ex-ports of unrelated goods which may also af-fect U.S. markets.

The negative effects of Communist im-ports as a whole are rare but relatively easyto document. Victims of Eastern importsmay initiate import restraint petitions withthe ITC charging market disruption. Prob-lems arise however in connecting specific ex-ports of technology not only to export capa-bility in the same sectors in the East, butalso in identifying sectors which may be-come problems in the future.

One clear example of a U.S. transfer oftechnology to the East that resulted in adirect and significant increase in imports oc-curred in 1976, when a U.S. firm signed a$3.2 million contract with Hungary for thesale of equipment, designs, and know-how tomanufacture women’s shoes. The direct re-sult of this transaction was a fivefold in-crease in Hungarian shoe exports to theUnited States between 1977 and 1978. In1978, women’s footwear became the largestsingle Hungarian export to the UnitedStates, and the value of U.S. imports in thatyear alone was nearly double the value of theoriginal contract. It is relatively unusual,however, for cases of this kind to occur in theconsumer goods sector.

There are sectors of the economy that aremore vulnerable to the repercussions of tech-nology transfer. Perhaps the most importantof these is the chemical industry. In April

1973, Occidental Petroleum Corporationagreed to purchase from the U.S.S.R. 33.3million metric tons of ammonia and 18.5 mil-lion metric tons of urea, most to be marketedin the United States. The Soviets in returnagreed to make comparable purchases ofU.S. goods, including 18.5 million tons ofsuperphosphoric acid. The deal also involvedthe construction of several ammonia plantsin the Togliatti area of the U. S. S. R., al-though the technology transfer involved inthese plant sales was handled largely byanother U.S. firm, Chemica.

In 1977, the U.S.S.R. exported no ammo-nia to the United States. As a result of thissingle transaction, 1 year later the SovietUnion became this country’s second largestforeign supplier. Meanwhile, over the last 2years the United States has experienced do-mestic plant closures and significant de-clines in ammonia prices. The U.S.-U.S.S.R.contract has a life of 20 years and ITC hasalready judged that it has led to seriousdisruption in the domestic anhydrous am-monia market.

Other problems in the same industry havearisen in Western Europe. After a crash pro-gram of expansion in the chemical industrygreatly aided by technology sales by West-ern European firms, CMEA production inplastics, ammonia, fertilizers, urea, and sodaash has more than doubled since 1970. NowCMEA's growing self-sufficiency in chem-icals has eroded one of the West Europeanchemical industry’s largest export markets.In 1975, CMEA purchases from Westernfirms amounted to over $2.5 billion; sincethen they have declined to less than $2billion. In addition to the loss of exportmarkets, CMEA producers have begun tochallenge West European firms in their ownmarkets for the sale of many petrochemicalsand plastics. In 1976, CMEA accounted for20 percent of world production of basicchemicals, compared with Western Europe’s30 percent and 25 percent for the UnitedStates. Forecasts predict that CMEA willovertake the U.S. share bv 1986.


The major West European chemical firmsare thus experiencing the results of a boomin technology sales to CMEA for which theynegotiated countertrade deals and acceptedpayment in kind. So long as this paymentwas largely in the form of raw materials,there was little problem in utilizing it prof-itably. CMEA payments in intermediatechemical products were also welcomed. Somefirms, in fact, came to rely on CMEA forquantities of bulk chemicals that they couldnot themselves supply without expensive ca-pacity additions. Now, however, not only arecompensation agreements becoming morecommon, they are involving more sophis-ticated chemicals. Once these are sold touser industries or placed in the spot marketin Rotterdam, the Western companies losecontrol of the market. By now it may be im-possible for chemical companies to stop thisflow. Most large European producers arecommitted to long-term compensation ar-rangements, deals that proliferated becauseof a depressed market for chemical plants inthe West.

Despite the growing menace to the WestEuropean chemical industry, existing legalmechanisms have not been able to deal withthe glut effectively. Chemical firms also findit difficult to prove dumping under Euro-pean Economic Community (EEC) proce-dures, where (as in the United States) rele-vant criteria are the exporter’s prices in thehome market or actual costs. CMEA pricesare administered and are therefore unusablefor price comparisons. Moreover, it usuallytakes Western firms at least a year to assem-ble a case based on internal CMEA costs. Bythis time the damage has already been done.

The case of chemicals illustrates the devel-opment of a novel export strategy in thosenonmarket States whose exports have beenlargely composed of primary products. Thisstrategy is to increase the degree of fabrica-tion of primary exports in order to gain hardcurrency from the increased value added.This is a particularly attractive option be-cause the resulting semifabricate can also beused in domestic industry, thus eliminating

the danger of excess supply in times of lag-ging world demand.

This strategy is now being used in thePRC. In 1974, an American firm, SOHIO, li-censed a process to the PRC for producingacrylonitrile, a chemical used in acrylicfibers : This process was to be used to pro-duce 50,000 metric tons annually. Engineer-ing and construction services were providedby two Japanese firms. The synthetic fiberproduced in this scheme could be absorbedby the domestic market in the PRC. It ispossible, however, that the Chinese maychoose to export and use this product as amajor foreign exchange earner. Already,synthetic fabric from China is being sold toHong Kong and Macao where it is made intoclothing and then exported to the UnitedStates under a favorable (MFN) tariff struc-ture. While in the near future it is unlikelythat China’s production of synthetic fiberswill compete directly in the U.S. marketagainst domestic producers, the PRC is al-ready breaking into U.S. export markets inthe Far East.

The market disruption caused by technol-ogy transfer in the chemical industry isclear, as is the lesson it provides for theUnited States. But this case may not be gen-eralizable to other industries. The chemicalmarket is more open to CMEA assaults thanother sectors because purchase decisions onchemical suppliers are made almost entirelyon the basis of price. Soviet ammonia, inother words, is identical in quality to thatproduced anywhere else. It is likely thatprice elasticity of more sophisticated CMEAmanufacturers (i.e., automobiles, tractors,etc. ) will depend more significantly on non-price factors–quality, design, availability ofservice—and aggressive marketing. For ex-ample, in spite of heavy infusions of Westerntechnology and highly competitive pricesabroad, Soviet exports of passenger auto-mobiles constitute only 1.2 percent of Sovietexports (in value terms) to the industrializedWest and have not significantly increasedtheir share of world markets in recent years.


Photo credit: TASS from SOVFOTO

“Lada” cars, produced at the Italian-built Togliatti (Volga) plant. Similar cars are being exported to the West

Threats of disruption in American mar- aluminum, where capacity increases have oc-kets are therefore more likely to appear in curred as a direct result of infusions ofcategories of semifabricates. Most U.S. Western technology to the U. S. S. R.: Finlanddumping actions against nonmarket com- has provided nickel-refining technology tomodities have, in fact, occurred in these the Soviet Union and a French consortiumareas. The threat of disruption is also great built a l-million-ton-per-year alumina plantin the area of metals such as nickel and on the Black Sea. It is apparently as com-


mon for West European and Japanese firmsas it is for their U.S. counterparts to selltechnology to nonmarket economies, con-scious that in doing so they may ultimatelydecrease the market share of their capitalistcompetitors.

This is an important point, for only rarelyis U.S. industry the sole contributor of tech-nology necessary to increase nonmarket ex-port potential. In the ammonia case, for ex-ample, both Japanese and French firms con-tributed heavily in terms of equipment andknow-how to Soviet productive and deliverycapability, and the American supplier of thetechnology did not possess unique or other-wise unobtainable technology. It is safe toassume, therefore, that had limitations beenplaced on U.S. sales of plant and technology,the Soviets would have obtained themelsewhere.

A U.S. Department of Labor study of theeffects of industrial technology transfer hasconcluded that in most cases restrictions ontechnology transactions made by U.S. firmscould not have eliminated the negative ef-fects in terms of market disruption either inthe U.S. or third-country markets. U.S.firms in most cases do not possess monopo-lies of the required technologies, and limitingsales only deprives the economy of addi-tional income. The long-term negative ef-fects on sales and market shares will stillmanifest themselves.

Obviously, this argument does not hold inthose areas where U.S. firms hold a monop-oly in a given technology, at least for theterm of that monopoly. But there are veryfew of these areas and it is possible that em-bargoes in these instances may acceleratethe development of the technology both inthe East and the West. It has been assertedby Hungarian trade representatives, for in-stance, that when U.S. export controls de-nied them access to advanced computer-con-trolled machine tools, they were driven todevelop their own models. These now com-pete with U.S. products in other markets.

In sum, the threat of net losses in U.S.development through technology transfer is

most significant in those sectors where mar-ket disruption is likely. In these cases, lossin sales by U.S. firms in both domestic andforeign markets may be greater than thevalue of the transfer contract, and net loss inincome will translate into a loss of employ-ment. Moreover, the cost of the resultingloss of jobs in other sectors may be com-pounded by labor market adjustment, relo-cation, and retraining. In terms of the aggre-gate economy, however, these cases may bepartially offset by instances where the in-creased sales of technology and technology-intensive products result in a gain in employ-ment in the selling industries.

I M P O R T E R S O F E A S T E R NT E C H N O L O G Y

By any standard, Eastern sales of technol-ogy to the West have been small. As of Octo-ber 1977, for instance, the total value of alllicense fees and royalties paid by the UnitedStates to the U.S.S.R. was less than $14 mil-lion. It has been asserted that there is con-siderable potential for increasing the amountof technology transfer from Eastern Europeand the U.S.S.R.,14 but barriers to such ex-pansion exist on both sides. In the SovietUnion, and to a lesser extent in EasternEurope, inadequate organization of sales ef-forts and poor marketing inhibit the growthof such trade; in the United States, the wide-spread perception that no technology of in-terest to American firms is to be found in theEast, and the resources required to learn andevaluate the market may preclude U.S. firmsfrom taking advantage of such opportunitiesas do exist. The continued dearth of Easterntechnology in the West thus becomes a self-fulfilling prophecy.

Despite these handicaps, however, a fewU.S. firms have aggressively marketed prod-ucts produced as a result of Eastern technol-ogies. Notable instances from the U.S.S.R.include excavation machines and surgicalstapling devices. Technologies in several

“See John Kiser, “Report on the Potential for TechnologyTransfer from the Soviet Union to the U.S., ” prepared for theU.S. Department of State, October 1977.

Ch. III— The Economic Implications of East- West Trade and Technology Transfer ● 63

It is unlikely that hitherto unsuspectedmajor technological breakthroughs willcome from access to Eastern technologies.The real potential lies in the possibility ofmarginal improvements in products andprocesses. In some segments of mass-pro-duction industries these can be significant.Furthermore, access to new products orprocesses may be an entry to large bodies ofassociated technical information. Soviet con-struction equipment for permafrost condi-tions, for example, has evolved from a vol-ume of basic and applied research on arctic

This would be useful both inconditions.Alaska andtica.

The poorselling their

in the development of Antarc-

showing of Eastern nations intechnology abroad is related less

to the availability of-useful technology thanto systemic factors such as the lack of incen-tive to sell abroad, lack of personnel trainedin marketing, and bureaucratic structurespoorly suited to facilitating foreign sales.Technological performance in the East, espe-cially in the U. S. S. R., is erratic. Generaliza-tions concerning poor performance mayoften cloak formidable accomplishments inpriority sectors.

Thus, the potential for increased technol-ogy transfer from the East is heavily de-pendent on the ability of the Communist na-

tions to organize themselves efficiently andto make buying less difficult. On the otherside, U.S. firms must actively seek thesetechnologies. Systematic monitoring of tech-nological developments of salable Soviet andEast European technology in the civiliansector would greatly enhance the ability ofU.S. firms to identify opportunities. With-out such an effort, purchases of Easterntechnology in magnitudes large enough toaffect the U.S. economy as a whole, or evensignificant sectors of it, are unlikely.

T H E C O N S U M E R

The effects of increased competition, eventhat induced by sales of technology abroad,are not always negative. Such competitionmay result in increased initiative in productdesign, manufacture, and marketing. It mayalso be argued that, given protection againstpredatory trade practices, inefficient pro-ducers should be eliminated if they cannotcompete. In this way consumers benefit, andthrough them, the entire economy. Dispos-able income that was previously used to pur-chase more expensive consumer goods canbe used elsewhere. Factor costs are lowered,raising profit ratios. These gains may beslight but are well distributed throughoutthe economy.

SUMMARY AND CONCLUSIONS

The volume of U.S. trade with the Com-munist world has been low, and the sale ofU.S. technology to the East has as yet madelittle impact, either positive or negative, onthe U.S. economy as a whole. A number ofeconomic benefits have accrued to theUnited States through technology transferto nonmarket economies. These are primar-ily in increased sales and employment inthose industrial sectors that conclude thesales. In other sectors these benefits may beoutweighed by potential negative effectssuch as decreasing market shares for U.S.firms both at home and abroad. It is unlike-

ly, however, that deregulation of technologytransfer can ameliorate these adverse eco-nomic effects except in a few cases where theU.S. completely controls the relevant tech-nology. Furthermore, given the present mag-nitude of East-West trade, any aggregate ef-fects on the U.S. economy have been mini-mal. Should this trade grow significantly,Eastern exports to the United States willcertainly increase. This may necessitatebalancing the negative impact of the exportson individual industrial sectors with benefitsin other parts of the economy.


Western technologies, while no panaceafor Eastern economic problems, appear tobenefit the economy of the purchaser to amuch larger degree than that of the seller(see chapters X and XI). Barriers to expand-ing this trade exist on both sides, but the im-portance of restraints on the U.S. side–tariff and credit restrictions and exportcontrols—may be outweighed by the prob-lem of Eastern export potential. Overallvolumes of East-West trade are unlikely to

expand significantly in the absence of im-proved manufacturing and marketing capa-bilities in the East, although demand forWestern technology in these and other areasis unlikely to abate. U.S. policies on the ex-tension of MFN and credits and export con-trols may affect the market share of Ameri-can firms in the Western technology sold tothe East, but will have less long-run impacton overall trade volumes than will improvedEastern capacity to export.

CHAPTER IV

The Foreign PolicyImplications of East-West

Trade and TechnologyTransfer

CONTENTS

PERSPECTIVE I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Critique . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PERSPECTIVE II. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Critique . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

PERSPECTIVE III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Thesis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Critique . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EMIGRATION POLICY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CHINA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

COMPARISON OF PERSPECTIVES . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

CASES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Oil and Gas Equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Computers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

67

6768

68

6869

71

7172

75

78

78

80

808182

CHAPTER IV

The Foreign Policy Implications ofEast-West Trade andTechnology Transfer

One of the basic issues of technology transfer to the Soviet Union concernsthe opportunities for and utility of using trade to achieve political objectives ofU.S. foreign policy. Such efforts are distinct from controls on trade designed torestrict the transfer of military-relevant equipment and technologies. The ques-tion of the political uses of trade has generated considerable controversy and atleast three major schools of thought. They divide according to whether theyview trade as, in fact, usable for achieving the political objectives of U.S. foreignpolicy toward the Communist world and, if so, whether the strategy should beone of using trade to build a constraining web of interdependence within an over-all framework of “detente” or as leverage to obtain specific policy concessions inthe context of superpower conflict.

The following analysis sets forth the logical assumptions and policy impli-cations of three different perspectives on the political utility of trade. These per-spectives are not intended to reproduce the views of any particular individual.Nor does the analysis seek to capture all the manifold detail and nuance of thepolicy debate on this question. Finally, there is no effort to pass judgment con-cerning the relative merits of the different perspectives and the policy recom-mendations that flow from them. It is hoped, however, that an identification ofthe major ways of viewing the question and the logical assumptions and implica-tions of those perspectives will help clarify what has become a highly complexand emotional debate.

PERSPECTIVE I

T H E S I S

The first perspective rests on a judgmentthat, for good or ill, trade is not an effectiveinstrument to achieve political objectives.This is the official view of the Soviet Unionand is held by a number of America’s allies,who contend that history has shown that ef-forts to obtain political concessions from thenonmarket economies through policies ofeconomic pressure or inducement will be un-successful. Consequently, countries like

Japan and France have largely decoupledtrading policy from other aspects of theirforeign policy toward the Communist coun-tries. Each trade and credit transaction isjudged on its economic merits alone. Whatdistinguishes this perspective from the twothat follow is the belief that attempts to ex-tract a political price for trade—however de-sirable the objective-will be ineffective andcounterproductive in practice. The logic andimplication of this approach is discussed inconsiderable detail in the chapters reviewing

6 7


European and Japanese trade policies (seechapters VIII and IX).

CRITIQUE

In the most general terms, this perspec-tive has the advantage of allowing economictransactions to provide economic benefitsunfettered by extraneous requirements. Thevexing policy dilemmas that inevitably fol-low any attempt to attach political condi-tions to trade are thereby avoided.

On the other hand, any opportunities touse trade to further other, noneconomic,State interests are forgone. Moreover, thereis an important asymmetry in economictransactions between pluralist and central-ized economic systems. The former tends to

judge the merits of each transaction in ma-croeconomic terms, i.e., whether it is to theadvantage of the particular corporation(s) in-volved. The latter judges the same trans-action in macroeconomic terms—its net ben-efit to the economic system (i.e., the State) asa whole. A particular business deal may wellbe to the net advantage of a specific Amer-ican company, but to the net disadvantageof the United States relative to the U.S.S.R.Finally, for a nonsuperpower with relativelycircumscribed interests vis-a-vis theU. S. S. R., any effort to use trade as a meansof altering Soviet policy may make littlesense. But for the United States, whose in-terests engage those of the U.S.S.R. along avery wide front, trade controls may be oneinstrument among many in an ongoing andunavoidable effort to influence Soviet policy.

PERSPECTIVE II

THESIS

The second perspective rests on four prop-ositions:

1.

2.

3.

4.

trade can and often does have politicalconsequences and utility;a stable cooperative relationship be-tween the United States and theU.S.S.R. is achievable and the UnitedStates has no real choice but to try tobuild such a relationship:trade tends to have a moderating effecton international relationships due inpart to the interdependencies it fosters;andthe Soviet need for Western imports oftechnology provides one of the most ef-fective means for inducing moderationin Soviet policy.

These propositions tend to be associated,in turn, with a series of assumptions and ob-servations about the Soviet Union. First,there are powerful forces tending toward alessening of the ideological fervor and revo-lutionary commitment of the regime. Amongthem are the gradual emergence of a consum-er economy; the transformation over time of

the ideology from revolutionary guide toritual incantation; the aging of the Sovietleadership and Soviet society generally; thestatus of the U.S.S.R. as a “have” nationrelative to most of the less developed coun-tries of Afro-Asia; recognition of the dangersof pursuing a radical foreign policy in thenuclear era; the potential for a complemen-tary economic relationship involving the ex-change of Soviet raw materials for Westerncapital and technology; and the existence ofseveral areas of common interest with theWest, including arms control and such areasof common concern as the prevention of nu-clear proliferation and the protection of theglobal environment.

Second, the Soviet Union is viewed asbeing in the early stages of a deepeningsystemic crisis manifested initially by eco-nomic stagnation and a failure to close thegap relative to the West in the civilian ap-plications of science and technology. TheU.S.S.R. is burdened with a chronic shortageof hard currency resulting from a seeming in-ability to develop a range of manufacturedproducts that are competitive on world mar-kets–this despite the advantages of a rich

Ch. IV— The Foreign Policy Implications of East-West Trade and Technology Transfer 69

and varied resource base and a very largepool of trained scientific and technical man-power. These shortcomings are rooted in theinappropriateness of a rigidly authoritarianpolitical and social structure for a complex,advanced industrial economy. The Sovietsystem does not permit and foster the flowsof information, the innovation, the experi-mentation, and the general flexibility andadaptability such an economy requires. As aconsequence, the Soviet economy has beenunable with its own resources to provide forthe broad modernization of Soviet life. Theproblem is greatly exacerbated by the heavyburden of military expenditures.

In this situation the Soviet regime hasthree broad options: 1) maintain or eventighten political-ideological controls in thename of Marxist orthodoxy, but at the priceof economic inferiority vis-a-vis the West,2) ease controls to stimulate economicgrowth, but at the risk of changing the politi-cal character of the system, and 3) retaincontrols, but try to escape the economic con-sequences by obtaining needed technologicaland managerial innovations and know-howfrom the West. A similar situation and set ofchoices confront the Soviet-occupied nationsof Eastern Europe.

A third assumption posits the existence ofconflicting views within the Soviet leader-ship concerning whether to adopt a generalposture of negotiation or confrontation vis-a-vis the West. This division assumes particu-lar importance given the imminent passingof the aged Brezhnev leadership and the un-certainty concerning the identity and pol-icies of his successor. In short, the nearfuture may witness a policy decision of his-toric dimensions by the Soviet Governmentregarding its relations with the West.

Based on these propositions and assump-tions, proponents of Perspective II have ad-vocated a broad U.S. strategy for dealingwith the U.S.S.R.—an approach identifiedwith the term “detente.” The basic idea is totake advantage of the Soviet need for West-ern technology and capital and of other op-portunities for interchange (e.g., tourism,

cultural and scholarly exchanges, sports,etc. ) to build what Henry Kissinger called “aweb of constructive relationships. ” Thisshould have a number of beneficial effects:

1. It should give Moscow a greater stakein the existing world order and the at-tendant “disciplines of internationallife” by integrating the Soviet economyinto the international economic system.

2. It should strengthen the Soviet con-sumer economy as a claimant on Sovietresources and as a generally moderatingfactor in national policymaking.

3. It should strengthen the hand of moder-ates in the Soviet leadership by demon-strating the opportunities for useful co-operation with the West.

4. It should provide increased opportu-nities for the penetration of Soviet soci-ety with Western products, culture, andperspectives, i.e., the greater number ofpeaceful interactions the U.S.S.R. haswith the non-Communist world, themore likely that it will become respon-sive to Western canons of internationaland domestic behavior.

5. It should, with time, make Soviet pol-icies and behavior increasingly sus-ceptible to foreign pressures.

For example, scientists who have partici-pated in exchange programs with Sovietcounterparts argue that these contacts havebeen effective in achieving a better integra-tion of Soviet scientists with the world scien-tific community. This has made it muchmore difficult for the Soviet Government torepress individuals without attracting worldattention to the fact. It has allowed Western-ers an opportunity to assist scientists offi-cially denied the opportunity to receive lit-erature in their fields or to communicatewith other scientists working in relatedfields.

CRITIQUE

There is no agreed systematic formulationof the detente perspective that can be used


to evaluate the concept. In large part theviability of detente as a strategy will dependon what is expected of it. It can be viewed asa comprehensive framework for integratingand managing the strategic, political, andeconomic dimensions of relations betweenthe United States and the Soviet Union. Al-ternatively, it may simply be viewed as aseries of specific agreements between the su-perpowers designed to ease tensions andbuild a network of mutually beneficial inter-actions, particularly in the economic area.The criteria for evaluating detente and thejudgment reached concerning its viability asa strategy will clearly vary according to thedefinition used.

For the critics of detente, the key questionis to what extent detente has served to re-strain Soviet actions. In the economic spherethe value of U.S. exports to the U.S.S.R. rosefrom $105.5 million in 1969 to $546.7 million(1972), $1.2 billion (1974), $1.6 billion (1977),and $2.2 billion (1978). Although trade is stillvery low relative to the total Soviet economyand compared to other industrial nations(see chapters III and X), there has been aclear growth in Soviet involvement in inter-national commerce. As Helmut Sonnenfeldtnotes:

Trade with the outside world has longbeen used to fill gaps that the Soviet econ-omy itself could not fill. But the volume anddiversity of this trade have steadily in-creased in recent years; the methods haveevolved from barter or straight cash deals tomore complex commercial arrangements, in-cluding considerable reliance on foreign cred-its. These latter have now risen to some $40billion for the Soviet bloc COMECON coun-tries as a whole; Soviet hard-currency in-debtedness is in the neighborhood of ten bil-lion dollars. A substantial volume of eco-nomic activity in the U.S.S.R. and otherEastern countries must now be devoted toearning hard currency to finance importsand to service mounting indebtedness.1

‘Marshall D. Shulman, Special Adviser to the Secretary ofState on Soviet Affairs, testimony before the Subcommitteeon Europe and the Middle East of the Committee on Interna-tional Relations, House of Representatives, Sept. 26, 1978.Committee print, p. 164.

Other forms of interaction, e.g., scholarly ex-changes and tourism, have shown a similarpattern of growth. However, the political im-plications of these trends are uncertain. It isdifficult to demonstrate that Soviet interna-tional behavior in the 1969-79 decade hasbeen significantly more considerate of West-ern interests than it was in the precedingdecades. The same is true of the hypothesisconcerning the moderating effect of interna-tional transactions on domestic Soviet pol-icies. In the short term, the characteristic re-action of the Soviet internal security ap-paratus is to tighten controls during periodsof international relaxation.

The most explicit agreement between thetwo superpowers concerning the politicalcontent of detente was embodied in the dec-larations of basic principles signed at the1972 Moscow summit conference and the1975 Helsinki Conference on Security andCooperation in Europe. The intent was todevelop a broad code of conductor “rules ofthe game” to which the United States andU.S.S.R. agree to adhere in their interac-tions. Such codes are designed to impose re-straints on the scope of acceptable behaviorand thereby manage the competitive aspectsof U.S.-Soviet relations. From the U.S.perspective, however, there are seriousgrounds for questioning whether subsequentSoviet policy, notably concerning Africa andthe human rights of political dissidentswithin the U. S. S. R., has been faithful tothese agreements. Other events to whichcritics point as evidence of the failure ofdetente to exert restraint on Moscow includeSoviet aid to Arab forces during the YomKippur War, Soviet approval of North Viet-nam’s disregard of the Paris Accord, Sovietsupport for the Portuguese Communist Par-ty’s attempted putsch, and most important-ly, the dramatic buildup of Soviet militarycapabilities.

Not surprisingly, Soviet spokesmen havetaken pains to disabuse proponents of Per-spective II of their belief that the U.S.S.R.can, in effect, be co-opted through trade orother economic arrangements. For example,

Ch. IV— The Foreign Policy Implications of East-West Trade and Technology Transfer ● 71

D. Gvishiani, a Deputy Chairman of the So-viet State Committee of Science and Tech-nology, has objected strongly to the proposi-tion that joint production arrangements area way to overcome political or ideological dif-ferences:

We have different socio-economic systemsand different ideologies—that is an existingreality to be reckoned with. Ideological dif-ferences between us exist and will continueto exist and we should not count on eliminat-ing them by way of developing industrialcooperation or by some other way. z

In addition to ambiguities concerning thescope of detente and doubts concerning thelessons of history, it is not always clear howdetente relates to efforts to exert pressure onMoscow. There is a theoretical tension be-

*D. Gvishiani, statement at 8th “Dartmouth Conference”held in Tbilisi, Republic of Georgia, 1974. Cited in NationalAcademy of Sciences, Reuieu’ of the U. S./U.S.S.R., Agree-ment on Cooperation in the Fields of Science and Technology,1977, p. 34.

tween the notion of building a web of coop-erative interaction and using those sametransactions to coerce Soviet policy. This isparticularly true if pressure is exerted beforesuch transactions have become well-estab-lished. Thus, the opportunities for using de-tente to leverage Soviet policy will tend to begreater after the relationship has maturedwhen, paradoxically, such pressures may be-come unnecessary.

Finally, criticism of detente focuses on therole of science and technology in U.S.-Sovietrelations. Proponents of detente argue thatthese are the most promising areas and in-struments for achieving cooperative solu-tions to common problems. Critics contendthat the Soviet leadership views science andtechnology as the key determinants of na-tional power in the modern era and hence adecisive arena of competition between Eastand West. By facilitating the transfer ofscientific and technological knowledge to theU. S. S. R., detente plays into the hands ofSoviet global ambitions.

PERSPECTIVE III

THESIS

The third major school of thought acceptsthe basic proposition that transfers of tech-nology can have political consequences, butis profoundly skeptical about the linkage be-tween simple economic interaction and pol-icy moderation. It argues that the SovietUnion’s behavior has not visibly moderatedsince it began to import Western technologyon a substantial scale and that history is fullof examples of wars and confrontations be-tween major trading partners. Proponents ofthis view contend that the Soviet-U.S. rela-tionship is, and will remain indefinitely, oneof conflict. The Soviet Union needs importsof technology to compensate for the rigidi-ties, low productivity, and lack of innovationin its economy, and, consequently, Western

transfers of technology may have the net ef-fect of strengthening an adversary. This isparticularly true if such imports are financedby credits at low rates; they then amount toa kind of foreign aid. Such assistance to theSoviets is only justified if we receive some-thing in return in the form of more congenialSoviet policies.

Any real hope for a long-term easing of theconfrontation between the U.S.S.R. and theWest will require basic changes in the pol-icies of the Soviet Government—changesthat will not come voluntarily and can be in-duced only by outside pressure. Moscow’sneed for Western technology and the creditsto pay for it offer one of the best, if not thebest, instruments available to exert suchpressure. For example, Senator Stevenson,


in arguing for amendments to the Export-Import Bank Act of 1974 that would signifi-cantly curtail the extension of U.S. officialcredits and guarantees to the Soviet Union(see chapter VII), contended that:

Credits and the withholding of credits canat times serve useful political purposes . . . .The $300 million limitation of credits to theSoviet Union for the next year will permit atighter rein on Eximbank activities. Majorproject review by the Congress, whether itinvolves loans, guarantees, or insurance,would force a more careful assessment of theoverall implications of Exim credit assist-ance and provide the Congress with a tool forexercising appropriate influence. The evolu-tion of detente, peace in the Middle East,SALT, and human rights in the SovietUnion will all influence future Congressionaldecisions as to whether a particular largeproject should be financed or the availabilityof credits continued.3

Adherents of Perspective III agree withthe proponents of Perspective II that theU.S.S.R. faces a deep-seated economic andpolitical dilemma, but they are far lesssanguine that the forces and trends shapingthe Soviet system are pressing toward amoderation of Soviet policies. They see theregime as determined to avoid such an out-come and as using the importation of West-ern technology and capital as a key elementin that effort. Perspective III agrees withPerspective II that divisions almost certain-ly exist within the senior Soviet leadershipconcerning policy toward the West and thatit is in the interest of the West to strengthenthe hand of those in the leadership that favora more moderate, cooperative posture.Where Perspectives II and III diverge is onthe best tactics for achieving such an out-come. Proponents of detente Perspective IIargue that the overt use of trade pressures toalter unfavorable Soviet policies will tend tostrengthen the hand of the Soviet hardlinerswhereas proponents of Perspective III main-

— .‘Helmut Sonnenfeldt. “Russia, America, and Detente, ’

Foreign Affairs, vol. 56, No. 2, January 1978, p. 286.

tain that Soviet hardliners are strengthenedwhenever the United States fails to vigor-ously defend its interests.

There is a variant of Perspective III thatcarries the assumption of the adversary na-ture of U.S.-Soviet relations to its logicalconclusion. It is argued that if the SovietUnion is considered to be a direct and rela-tively immediate threat to Western security,the United States and its allies should re-spond with an embargo on all trade and capi-tal flows that could strengthen Soviet capa-bilities. The objective here is not to leverageSoviet policy, but to limit Soviet power.Thus the U.S. embargo against Nazi Germa-ny was not intended to modify Hitler’s pol-icies, but to deny that regime needed re-sources. To be effective such a strategywould require close cooperation among themajor Western exporters to the U.S.S.R.Consequently, the feasibility of this ap-proach hinges on calculations concerning thepossibility of a hardening of attitudestoward the U.S.S.R.—born of disillusion-ment with detente—among the CoordinatingCommittee for Multilateral Export Controls(CoCom) governments. At the present timesuch a shift is not evident. Consequently, thepredominant tendency with Perspective IIIis to look to trade as a lever on Soviet policy.

CRITIQUE

There are very few high-technology prod-ucts that the Soviet Union wants to importin which the United States has an effectivemonopoly by virtue of the fact that theU.S.S.R. has no adequate alternative suppli-ers. It is generally agreed that the majorplausible exceptions are computers and cer-tain types of advanced oil- and gas-drillingequipment (see below). Wheat may also be inthis category, but as a primary product ex-port, it falls outside the purview of this re-port. When the United States does not enjoya monopoly, leverage is feasible only if acoordinated approach can be negotiatedamong all the major suppliers. At present,

—


the other major exporters of technology tothe East (West Germany, Great Britain,France and Japan) are generally opposed tothe use of trade to achieve political leverage(see chapter IX), although a change in do-mestic political alignments might changethat situation. Even with stronger coordi-nated actions, controls over trade in technol-ogies tend to be effective for a relativelyshort period due to the emergence of alter-nate suppliers or the domestic developmentof the controlled technology in the embar-goed State. The latter point is particularlyapplicable in the case of a large, advanced,and diversified economy like that of theU.S.S.R.

There can be no doubt that the SovietUnion’s need for certain imported technol-ogies is considerable and that the priorityassigned to those imports is high. They arerequired to overcome serious bottlenecks inan economy that is showing unmistakablesigns of stagnation. In all probability theneed for technology imports from the Westwill increase over the foreseeable future.Nevertheless, it remains true that theU.S.S.R. can probably develop and producedomestically any technology that it wantsbadly enough and cannot obtain fromabroad, although the opportunity costs forother sectors of the economy may be con-siderable as the required resources arediverted and committed. The consequencesof forgoing imports are likely to appear mostdirectly in the civilian economy, since it canbe assumed that a concentrated effort hasbeen made to avoid reliance on importedtechnologies in the military sector.

While the consequences of affecting thecivilian Soviet economy are difficult toassess, there is little evidence that theregime need fear domestic political unrest asa consequence of such costs. The drive foreconomic advance probably comes less froma need to respond to public desires for in-creased living standards than from the re-gime’s own ambition to match the economicand technological achievements of the West.Consequently, under present circumstances

it is unlikely that the importation of any par-ticular technology will be viewed as suffi-ciently critical to justify altering policiesthat derive from the Soviet Union’s basic ob-jectives concerning national security, inter-national influence, and preservation of thedomestic political system and the dominantrole of the Party. An important caveat maybe necessary with regard to Eastern Europe.Events in recent years suggest strongly thatdomestic economic conditions can give riseto serious political unrest in at least some ofthe Eastern European countries.

The calculation of the cost of acquiescingto U.S. trade pressures is presumably af-fected, perhaps decisively, by the manner inwhich leverage is exerted. Critics of at-tempts to compel changes in Soviet policyby use of legislative sanctions argue thatsuch public ultimatums inevitably raise theprice of compliance to prohibitive levels bymaking national pride the overriding issue.They contend that quiet diplomacy outsidethe public spotlight is more likely to achieveresults. A related argument questionswhether it is advisable or even legitimate forthe United States to demand changes in So-viet domestic policies—those being withinthe sovereign jurisdiction of the SovietState.

Defenders of the legislative approach re-spond that proponents of quiet diplomacyhave had ample opportunity to test that ap-proach without notable success. As for do-mestic jurisdiction, it is contended that in-ternational practice has clearly establishedthat such matters as human rights and emi-gration are the proper concern of the interna-tional community. Moreover, a long-term co-operative relationship between East andWest will become possible only if some of themore totalitarian characteristics of the Sovi-et regime are substantially modified. Thus,Soviet domestic policy becomes an appropri-ate litmus test of the regime’s intentions inits relations with the West.

To date, efforts to use technology transferfor political leverage on the U.S.S.R. have


focused on the issue of the right of SovietJews to emigrate and to a lesser extent onthe treatment of political dissidents in theU.S.S.R. and on Soviet activities in Africa,particularly the use of Cuban troops in thatcontinent’s conflicts. It is extremely difficultto rank order the policy priorities of theSoviet Union or any other State. Neverthe-less, it seems clear that at least in the two in-stances of Soviet policy regarding domesticpolitical dissent and foreign policy towardAfrica, the cost of acquiescing to U.S. pres-sure would be high from a Soviet perspec-tive. At stake in Africa is Moscow’s claim tothe rank of a great power with global inter-ests on a par with the United States. It ismost unlikely that any imported technologywould be of such value to the Soviet Unionthat it would, in effect, back away from itsclaim to global great power status to obtainit. The same is true for the handling of politi-cal dissidence where what is ultimately atstake is the basic authoritarian structureand ideological identity of the political sys-tem. It would take powerful pressures in-deed to induce the Soviet leadership toundertake so profound a change—one thatwould in a real sense constitute a politicalrevolution. This is not to say that no effec-tive pressure can be brought to bear by theWest in support of such objectives. It is tosuggest that to accomplish the desiredresults, trade leverage would almost certain-ly have to be supplemented by other pres-sures and inducements in a coordinatedallied strategy. Emigration policy, while alsoof considerable importance to the Soviet re-gime, probably ranks somewhat lower on thescale of priorities and is, therefore, presum-ably more susceptible to Western pressure.Whether enough leverage can be exertedthrough the trade sector to significantlyalter emigration policies is a question that

4A distinction must be made between “dissidence,” and“dissidents.” Whereas the prerogative to suppress dissidenceas a political phenomenon is a vital interest to the SovietGovernment, that same Government has shown some flex-ibility in its handling of individual dissidents, including allow-ing or compelling a number of the most prominent to emi-grate.

has been put to an empirical test by theJackson-Vanik amendment discussed below.

It is important to note that attempts toexercise leverage, even when successful, canhave unanticipated and sometimes costlyside effects. Marshall Shulman, Special Ad-visory to the Secretary of State on Soviet Af-fairs, has contended in congressional testi-mony that U.S. pressure on the U.S.S.R.concerning human rights, to which the ad-ministration is deeply committed, may ad-versely affect the prospect of achievingagreement with the Soviet Union in otherareas:

It is true . . . that when we make an issueof human rights, and particularly, we speakof individual dissidents, who are being ar-rested, harassed, or tried, that is a factor of[sic] the political deterioration of the rela-tionship, it affects other aspects, and per-haps it affects the degree of cooperation wecan achieve in other matters.5

Another adverse side effect of imposing po-litical conditions on trade may be to damagethe competitive position of American export-ers in world markets by jeopardizing the rep-utation of the United States as a reliablesupplier.

Even if leverage is exerted successfully,the Soviet Government may vow “neveragain, and make extraordinary efforts toavoid any subsequent need for Western tech-nology, thereby diminishing the prospectsfor successful leverage in the future. If theattempt to exert leverage fails, Soviet policywill not be adjusted to U.S. requirementsand, consequently, the technology will notbe transferred. In this event, the Sovietsmay again take steps to minimize future de-pendence while the United States incurs eco-nomic and possibly political costs from theembargo. Soviet officials have tried to givecredibility to this argument by vigorouslycontesting the morality and utility of West-ern efforts to use trade as a lever on Sovietpolicy.

5Adlai E. Stevenson III, “Views on Eximbank Credits tothe U. S. S.R., ” in U.S. Financing of East-West Trade, ed. byPaul Marer, International Development Research Center, In-diana University, Bloomington, Ind., 1975, pp. 253-4.

Ch IV— The Foreign Policy Implications of East-West Trade and Technology Transfer ● 75

The most visible recent attempt to utilizea leverage strategy is the Jackson-Vanikamendment to the Trade Act of 1974 (PublicLaw 93-618), which explicitly links U.S. tar-iff policies and export credits to the willing-ness of other nations to allow free emigrationof those desiring to leave. An unstated tar-get of the amendment is Jewish emigrationfrom the Soviet Union. The Jackson-Vanikamendment must be differentiated in onecrucial respect from the use of technology

exports for leverage as described above. Theamendment is sweeping in its scope; by fo-cusing on Export-Import Bank credits andmost-favored nation (MFN) status it puts atrisk the entire spectrum of trade between theSoviet bloc and the United States, not justthe export of a particular technology or fami-ly of technologies. Consequently, the amend-ment represents a more forceful instrumentthan the manipulation of technology exportsalone.

EMIGRATION POLICY

The question of the advisability of focus-ing leverage on Soviet emigration policy asopposed to other Soviet policy targets hasbeen much discussed. In support of the for-mer choice, the following arguments can bemade:

1. For the Soviet Government emigrationpolicy is important, but not so impor-tant as to render it immune to externalpressures.

Z. It is a relatively discrete policy, subjectto monitoring by outside observers.

3. Emigration is not an academic ques-tion; it involves real costs to theU.S.S.R. in terms of the loss of valuablehuman resources and in terms of politi-cal symbolism as significant numbers ofpersons overtly and successfully rejectthe Soviet system.

4. Conversely, the decision by many of theemigres to come to the United Statesprovides this country with a steady in-fusion of talent.

5. Support for freedom of emigration is atangible manifestation of U.S. concernfor human rights.

The two principal contrary arguments are:

1. Emigration is a domestic policy andtherefore an inappropriate target forleverage.

Z. Soviet foreign policy would be a moreappropriate target both under interna-tional law and in terms of the potentialbenefits to the U.S. national interest.

In attempting to assess the impact of thislegislation it must be remembered that U.S.attitudes are not the only factors influencingSoviet emigration policy. Additional consid-erations include the reaction of other non-Russian ethnic minority groups in theU. S. S. R., the advantage to Moscow in someinstances of permitting or even compellingparticularly troublesome individuals toleave, the strenuous objections of the SovietUnion’s Arab allies to the continued flow ofSoviet Jews to Israel, and the costs in termsof political symbolism and the loss of humanresources noted above.

The first year of significant Jewish emi-gration from the U.S.S.R. was 1965, when1,500 were granted exit permits. The numberrose dramatically in 1971 to more than14,000, and again in 1972 (31,500) and 1972(almost 35,000). The number fell sharply to20,700 in 1974 and to 13,300 in 1975. TheJackson-Vanik and Stevenson amendmentsbecame law in December 1974. Through1976 and 1977 the outflow remained at lowlevels (14,300 and 16,700 respectively) beforebeginning a marked upturn in 1978 to nearly30,000 with a projected increase to perhaps50,000 this year (1979)–the highest totalever.

These numbers have been interpreted in avariety of ways. How they are interpretedspeaks directly to the utility of Jackson-Vanik and by implication, the utility of lev-erage more generally. Two principal schools


of thought can be identified. The first beginswith the proposition that fluctuations in thenumber of emigrants reflect in large partdeliberate Government policy, i.e., the Sovi-et regime can and does turn the emigrationspigot on and off to serve its own domesticand foreign policy objectives. Instrumentsavailable for this purpose include:

1.

2.

3.

4.

interfering with the delivery by Sovietmail of the formal “invitations” fromIsrael to potential emigres;6

making the application process pro-longed and difficult,intimidating potential applicants withharsh reprisals; andmanipulating, as necessary, the rejec-tion rate of applications.

From this perspective the rise in emigra-tion in the early 1970’s can be attributed toMoscow’s desire to forestall Jackson-Vanikby adopting a relatively liberal policy onemigration. However, the actual passage ofthe amendment then put the Soviet Govern-ment under public pressure, which it defiedby sharply reducing the number of exit per-mits. The recent upturn is seen as an effortto breathe new life into detente, and perhapsmore specifically to win Senate approval ofthe SALT II agreement and forestall a fur-ther warming of U.S.-China relations.

Even among those who agree on this basicinterpretation of recent events, the questionis still open as to the impact of the amend-ment. Some argue that the amendment (bothas a threat and then as an accomplished fact)had the net effect of forcing Moscow to per-mit more emigration than it would haveotherwise tolerated—although the impactwas delayed. Others contend that theamendment served a useful purpose as longas it was only a threat, but that its actualpassage was counterproductive as indicatedby the sharp fall in emigration following itsenactment into law. Still others feel that it isas yet too early to reach a conclusion aboutthe consequences of the legislation. Jewish

‘Soviet law requires that any Soviet citizen desiring to emi-grate must receive a written invitation from relatives inanother country.

groups and Soviet specialists in this countryare divided on the issue, but Jewish activistsin the Soviet Union apparently favor thefirst interpretation.7

An alternative school of thought acceptsthe proposition that the sudden increases inemigration in 1965 and 1971 were a conse-quence of a liberalization of Soviet Govern-ment policy—due in part to the perceptionthat such an action would facilitate U.S. sup-port of detente. Since 1971, however, fluc-tuations in the level of emigration are at-tributed not to Soviet policy but to attitudeswithin the Soviet Jewish community con-cerning the desirability of emigrating.8 Thatis, the number of actual emigres monthlyand annually correlates closely with thenumber of applications submitted for exitvisas. In support of this argument are thefollowing contentions based on limited (andunconfirmed) informal surveys done withinthe Soviet Jewish community:

●

●

●

Although the Government could intheory regulate the number of invita-tions delivered to Soviet citizens fromIsrael, it has not done so. Inquirieswithin the Soviet Jewish community in-dicate that all invitations that are re-quested are eventually received.A comparison of the number of invita-tions sent and the number of personsactually emigrating is not meaningfulbecause: 1) it is common for an individ-ual to solicit and receive more than oneinvitation and 2) many of those whosolicit and receive invitations choose todefer or forgo application for an actualexit permit.The percentage of applications for emi-gration permits that are denied has re-

‘Some supporters of the amendment feel that a larger prin-ciple is at stake: human rights (of which the treatment ofSoviet Jews is a major example). Proponents argue that U.S.policy should insist that the principle remain central to theoverall U.S.-U.S.S.R. relationship, and the importance of do-ing so transcends the question of the utility of economic lev-erage, i.e., the principle embodied in Jackson-Vanik should beupheld even at the risk of a counterproductive effect in termsof the amount of actual emigration.

“See Igor Birman, “Jewish Emigration from the U. S. S.R., ”unpublished manuscript.


●

●

mained relatively low (probably lessthan 5 percent) and stable throughoutthe period.There is no evidence to attribute the1974-75 decline in emigration to any ef-fort by the Government to make theprocess of emigration more burden-some. In fact, after the Helsinki ac-cords, the fee required for emigrationwas reduced and the procedures in-volved became increasingly routinemaking entry into the process psycho-logically easier for a potential emigrant.Although emigration to Israel fell offsharply from 1974 through 1977, thiswas not true of Soviet Jewish emigra-tion to the United States, which in-creased throughout the period. Severalpossible explanations are suggested.The 1973 Middle East war indicatedthat Israel could be a dangerous placeto live. Also, it became increasinglyclear that the capacity of Israel’s econ-omy to absorb intellectual and profes-sional emigres was quite limited. Emi-gration to the United States grew onlyslowly from 1971 because it constituteda leap into the comparative unknownand because many of the first emigrantsreported difficulty in finding employ-ment during the recession of the early1970’s. However, the number began togrow as conditions in the United Statesbecame better known— particularly thefact that there was a demand for doc-tors, scientists, and other profession-als—and as a core emigre communitybecame established that could assistnew arrivals.

As far as the Jackson-Vanik amendmentis concerned, the implication of this line ofargument is that the legislation has had nosignificant impact on the level—up ordown—of Soviet Jewish emigration.

There is a cautious middle position be-tween the two extremes of asserting thatfluctuations in Jewish emigration are dueeither entirely or not at all to Soviet Govern-ment manipulation. It is based on the prop-osition that a variety of factors probably af-fect the level of emigration, including bothSoviet Government actions and attitudeswithin the Jewish community. If this is cor-rect, the observed fluctuations in Soviet emi-gration cannot be used to support or rebutarguments concerning the utility of theJackson-Vanik amendment.

At this time it is not possible to reach anydefinitive conclusion as to which of the per-spectives on Jackson-Vanik is more accu-rate. A key to doing so would be to obtain of-ficial data concerning the number of appli-cants for exit visas to enable comparisonwith the number of exit permits actuallygranted. The latter number is known but theformer is kept classified by the Soviet Gov-ernment.

The State Department seems to be of twominds on the question of whether or not thefluctuations in the level of emigration reflecta deliberate policy on the part of theU.S.S.R. Mr. Shulman has noted, however,that most of the recent increase seems tohave come from new applicants.

It is noteworthy that two Communist gov-ernments, Romania and Hungary, have suc-cessfully appealed for annual waivers of theban on MFN and Government credits underthe 1974 Trade Act. Both have assured theUnited States that their citizens are beingaccorded the right to emigrate and both havehad their performance in this regard judgedadequate by the administration and Con-gress. Whether either case has implicationsfor U.S.-Soviet relations on this issue isspeculative.


CHINA

Although policy questions regarding tech-nology transfer have focused overwhelm-ingly on sales to the U. S. S. R., during the1950’s and 1960’s similar issues arose in thecontext of U.S. and allied relations withChina. Like the U. S. S. R., the PRC wasviewed as an adversary State that posed aserious threat to U.S. security interests.Consequently, a U.S. trade embargo was im-posed against the Mainland regime. Withthe end of the Vietnam War and the NixonAdministration’s opening to China, officialperceptions changed. China was viewed lessas a threat and more as a potential weight inthe balance of power against the U.S.S.R.Perspectives on technology transfer toChina hinge heavily on which view of Chinais adopted. If Beijing is seen essentially asan adversary, then the issues surroundingsales of technology are similar to those in-volving transfers to the U.S.S.R.—althoughthe specific technologies involved and thevolume of transactions will differ significant-ly. Proponents of Perspective I on trade lev-erage have no difficulty applying it to China.Perspective II also has its China analogue,but whereas restrictions on transfers to theSoviet Union are usually advocated as a wayto exert leverage on Soviet policy, controlson transfers to China would more likely bejustified as forestalling the growth of Chi-nese power. The major potential exceptionmight be an effort to influence Beijing’s pol-icy toward Taiwan. Perspective III would berationalized and applied much as in the caseof the Soviet Union, but with a differenttechnological content because of China’smuch lower level of economic and technologi-cal development. If Beijing is viewed as

more of a threat to the U.S.S.R. than theWest, then questions of technology transferto China are posed largely in terms of theirimplications for U.S.-Soviet relations. Threebroad policy options emerge in this circum-stance:

1.

2.

3.

Technology can be sold to China in anessentially uncontrolled manner with aview to strengthening Beijing vis-a-visMoscow. Such a policy will almost in-evitably antagonize the Soviets.Sales to China can be controlled andregulated with a view to either pressur-ing or reassuring the U.S.S.R. Whetheror not this approach successfully influ-ences Moscow, it will have the effect ofmaking U.S. policy regarding exportsto China a hostage to U.S.-Soviet rela-tions. Beijing is unlikely to view suchan arrangement with enthusiasm.U.S. trade policy can be made identicaltoward the two Communist powers. Theadvantage of apparent impartiality willbe purchased at the price of forswearingany effort to use trade as an instrumentfor exploiting the Sine-Soviet rivalry toAmerican advantage. Also, it is notclear that such an approach will be trulyevenhanded because the same U.S. pol-icy may have quite different conse-quences for Moscow and Beijing. Onthe other hand, any effort to manipulatethe Sine-Soviet rivalry would be a haz-ardous and delicate enterprise and thereis serious question whether trade con-trol is a sufficiently refined instrumentor whether the information needed touse it effectively is available.

COMPARISON OF PERSPECTIVES

In the debate over U.S. trade policytoward the East, proponents of PerspectivesII and III share the belief that trade canbe used to achieve desirable changes in

Soviet domestic and foreign policy. They dif-fer as to the most effective tactics for achiev-ing the agreed end. They also tend to differin their assumptions concerning the nature

Ch. IV— The Foreign Policy Implications of East-West Trade and Technology Transfer 79

of the Soviet Union and U.S.-Soviet rela-tions.

In terms of assumptions, proponents ofPerspectives II and III see the basic charac-ter of U.S.-Soviet relations in somewhat dif-ferent terms. Proponents of Perspective IItend to emphasize the areas of common in-terest and the potential for a stable coopera-tive relationship. Adherents of PerspectiveIII are more impressed with the ingrainedconflict between the two superpowers rootedin sharp differences in ideology, social andpolitical systems, and foreign policy objec-tives and interests. A closely related as-sumption concerns the ease and extent towhich the Soviet regime modifies its percep-tions and policies in response to the actionsof other countries. Perspective II tends toview the Soviets as capable of substantiallymoderating their approach to internationalrelations if the actions of others, notably theUnited States, consistently suggest that it isin the Soviet Union’s interest to do so. Per-spective III is based on a more mechanisticmodel of Soviet policymaking. Seeing it asresponsive to internal imperatives and large-ly unaffected by U.S. actions except to theextent those actions bring power to bear suf-ficient to compel Soviet policy to take themtactically into account. An analogous as-sumption relates to the conditions of long-term coexistence between the two countries.Perspective II sees detente becoming thebasis for a long-term stable relationship asthe Soviet system evolves in a moderate di-rection, i.e., the Soviet system is seen as dy-namic and malleable over time. Proponentsof Perspective III disagree and see the onlyreal hope for coexistence in either of twostrategies:

1. confronting the U.S.S.R. with durablecountervailing power structures thatforce long-term restraint on Soviet pol-icy or

2. depriving the U.S.S.R. of the economicbenefits of detente in the hope of forc-ing the emerging Soviet economic crisisto a point of systemic transformation.

Although not necessarily following logi-cally from the two perspectives, there tendto be contrasting judgments concerning thepotential value to the U.S. economy of tradewith the U.S.S.R. and Eastern Europe. Per-spective II places a comparatively high val-ue on such trade, citing the chronicallyadverse U.S. balance of payments, concernabout a new recession, and the sales byEuropean and Japanese firms to the SovietUnion. Perhaps more important, proponentsof this perspective see a basic complemen-tarily between the Soviet and Americaneconomies that should permit the large-scaleexchange of Soviet raw materials for Amer-ican capital and technology. Adherents ofPerspective III are more impressed by thelack of hard currency available to the Sovietbloc for purchases in the West and the seem-ing inability of those countries to developthe product exports that could be used toearn such currency. Moreover, the Sovietbloc may soon be an importer rather than anexporter of the raw material most needed inthe West—oil.

In terms of policy strategies and instru-ments, Perspective II tends to emphasize in-tegration of the Soviet economy with theWest through a range of trade opportunitiesand other economic inducements. Negativesanctions would be used reluctantly, particu-larly in the short term, because they wouldjeopardize the process of weaving the fabricof interdependence. In contrast, PerspectiveIII stresses the utility of negative sanctionswith a lesser emphasis on positive induce-ments for influencing Soviet policy in thepresent and near future. Perspective IItends to adopt a limitationist view of Ameri-can power and to be skeptical of the extentto which the United States is capable of co-ercing Soviet policy. At the root of the tac-tical differences between the two perspec-tives is a sharply differing judgment con-cerning the consequences that will fOllOWfrom a policy of facilitating economic trans-actions with the Soviet bloc. Whereas Per-

80 Technology and East-West Trade

spective II sees the eventual outcome as a confronts it. Without that timely infusion ofkind of benign subversion of the Soviet sys- external resources, the Soviet regime may betern, Perspective III argues the opposite— compelled to seriously consider a basic al-that Western credits and technology will teration of the economic and political struc-provide the Soviet Union with the means of ture of the U.S.S.R.escaping the systemic crisis that currently

CASES

One means of assessing the utility of ex-port controls as instruments of politicalleverage is to examine the most plausiblecandidate technologies in some detail. It isgenerally agreed that the two technologieswith the most promise for this purpose areadvanced oil- and gas-drilling equipment andcomputers.

The purpose of the following analysis is toassess the costs that export controls on thetechnology in question would impose on theSoviet economy. This is a necessary, but notsufficient, condition for any effort to predictthe Soviet policy response to such controls.Costs are a function of such factors as theavailability of alternative Western suppliers,the extent of the U.S. lead over the Soviettechnology, the importance or value of thetechnology to the Soviet economy, the Sovi-et capability to develop the technology withdomestic resources and the time required todo so, the inherent susceptibility of the tech-nology to export controls, and the probablecourse that future innovation will take andwhat that implies for the other factors men-tioned above. Clearly, these factors willweigh differently depending on the technol-ogy in question. Consequently, conclusionsrelevant to export policy must be based on acase-by-case analysis of the technologies tobe controlled.

OIL AND GAS EQUIPMENT

There are a number of considerations thatsuggest oil- and gas-drilling technologiescould be an effective source of political lever-age. The United States retains a monopolyposition in the West on a few items of petro-

leum equipment that the U.S.S.R. needs:electric centrifugal submersible pumps,high-pressure blowout preventers, and sub-sea blowout preventer systems. Because theU.S.S.R. has already purchased most of theimportant oil production equipment it needsthrough the mid-1980’s (submersible pumps,a drill-bit plant, and gas lift equipment) theimpact of a U.S. embargo on oil equipmentwould be negligible in the short term. How-ever, although the longer term impact onproduction cannot be estimated with certain-ty, the effect on the Soviet Union of a com-plete cutoff of Western equipment and tech-nology would be serious. There are severalreasons for this. First, according to the Cen-tral Intelligence Agency (CIA) estimates,the Soviet oil industry is at a critical point inits development; i.e., production is likely topeak within the next few years. Output isnow declining in all of the major oil-producing regions except West Siberia, andproduction gains there promise to be muchmore difficult to achieve now that the giantSamotlor oilfield is reaching its peak. Devel-opment of the smaller West Siberian fields islagging. These are more remote and costly todevelop and are proving to be less produc-tive than other fields. This situation is exac-erbated by the fact that previous Soviet ex-traction policies appear to have been short-sighted, stressing maximum current produc-tion at the expense of conservation and ex-ploration.

There is reason to believe that the Sovietdomestic oil equipment industry will havedifficulty in meeting new demands; it lacksthe physical capacity and technology to si-multaneously sustain production, meet vast


new drilling requirements in West Siberia,intensify exploration in remote areas, and ac-celerate offshore production. If it is toreverse current production projections andachieve productivity gains, the U.S.S.R.must convert from turbo to rotary drilling.This will require the import, not only of addi-tional bit technology, but also of most of theassociated drilling equipment—kelly bash-ings, drill pipe, drill collars, and tool joints.In these areas, therefore, Western equip-ment could ease critical constraints on oil de-velopment. This is especially important forthe Soviet Union in view of the fact that oilaccounts for approximately half of all Soviethard-currency exports, and there is already amaximum emphasis on nonpetroleum energysources with limited opportunities for addi-tional energy conservation.

There are, however, reasons to questionhow much leverage the United States couldin practice obtain by threatening to withholdexports of oil production equipment. Al-though U.S. firms presently dominate theworld market in the kinds of equipment dis-cussed above, their position could be seri-ously eroded in the next 2 or 3 years if theU.S. Government embargoes petroleumequipment and technology to the SovietUnion. Soviet oil production would be af-fected and Soviet development costs wouldrise, but substitutes for U.S. equipmentwould ultimately appear, and the substitu-tion of equipment from other Western manu-facturers would mitigate the impact of U.S.denials. Moreover, a likely effect of withhold-ing exports will be to constrain Soviet oilproduction. It is at least debatable whetherthis outcome is desirable from the U.S.standpoint since it may hasten the emer-gence of the Soviet Union as an oil importerthereby putting more pressure on what is al-ready a tight international supply situation.

C O M P U T E R S

Another logical candidate for exertingleverage is the computer industry. As thediscussion in chapter X indicates, despite

rapid progress in recent years, the SovietUnion still lags well behind the UnitedStates in such areas of computer technologyas very large-scale integration, high-densitymagnetic disks and the precision manufac-turing techniques required to produce them.Transfer of any of the more advanced com-puters and peripheral technologies will helpthe Soviet Union upgrade its own capabilityto produce and utilize computers—a capabili-ty that is a critical aspect of efforts toreverse the lagging productivity of the Sovi-et economy. Moreover, any such computertechnology will have military capabilities,whatever the initial intended use. The latterpoint assumes particular significance giventhe difficulty of devising effective controlsagainst the diversion of exported computertechnologies to military use. Monitoring sys-tems are not foolproof and sanctions involv-ing the termination of maintenance servicesor actually reclaiming the equipment wouldhave limited effectiveness in the one caseand almost no credibility in the other. Acomputer can be modified (“lobotomized”) toreduce its capabilities as a prerequisite forexport to the U.S.S.R. However, such a pro-cedure is expensive and clearly reduces theattractiveness of the sale to the purchaser.Ironically, the computer that was scheduledfor sale to the Soviet news agency TASS hadbeen altered in this way before the transac-tion was canceled to express U.S. displeas-ure over the treatment of Soviet dissidents.

While the potential value of U.S. comput-ers to the Soviet Union would argue for theutility of that technology for political lever-age, the existence of alternative non-Com-munist suppliers argues against it. Japan, inparticular, has rapidly emerged as a poten-tially serious challenger to American su-premacy in this field. As previously noted,Tokyo has resisted any efforts to attach po-litical conditions to trade with the Commu-nist countries.

Besides the size of the technological gap,the value of computers for the Soviet Union,and the availability of alternate suppliers,the potential for U.S. political leverage willbe affected by the direction of technological


innovation in the industry. For example, twoareas that are currently attracting attentionare mathematical modelling and new archi-tectural configurations of the hardware andinnovative ways of knitting hardware andsoftware together in patterns and networksfor specialized problem-solving. On a concep-tual level each is essentially a task of appliedmathematics—one of the strong suits of SO-viet science. They are also types of innova-tion that will disseminate relatively easilythrough the scientific literature and the tech-nological marketplace. Advances in mathe-matical programing allow certain types ofcalculations to be performed with less power-ful computers. This suggests that exportcontrols on computer hardware may have adeclining utility. It is not to say that theSoviet Union will readily close the currentgap in computer technology. There are, forexample, very difficult institutional prob-lems involved in networking that may beparticularly troublesome for the Soviets.

These considerations, plus the growingcapacity of the Soviet Union to acquire, im-itate, and absorb Western technology,strongly suggest that the potential for politi-cal leverage inherent in computers is modestand probably declining. However, these con-siderations may be at least partly offset bythe high level of technological sophisticationrequired to actually produce and use soft-ware for managing the most advanced sys-tems and by the recent tendency of comput-er companies to protect software as a propri-etary corporate technology, something theyhave not done in the past. This, in turn, maybe undermined by pressures to standardizesoftware throughout the industry given thehuge costs of developing and implementingadvanced systems.

CONCLUSIONS

This complex situation does not easilylend itself to firm conclusions about the utili-ty of export controls for political leverage. Itdoes seem clear that the technological ad-vantage in oil- and gas-extraction equipmentand computers enjoyed by the United Statesrelative to the Soviet Union will continueand that Moscow will place a high value onopportunities to obtain advanced technol-ogies that will help bridge that gap. Thisshould create some leverage potential forU.S. policy. That potential is circumscribed,however, by the emergence of alternate non-Communist suppliers and the increasingrapidity with which technological innova-tions in all fields disseminate international-ly. It maybe further limited in the case of oil-drilling technologies by doubts about the de-sirability of constraining Soviet petroleumoutput. In any case, U.S. policy must be for-mulated under the assumption that, at best,American technology can maintain a fewyears’ lead over that of the Soviet Union andany opportunities for leverage will have to beexercised within that context.

On the basis of the above analysis it is notpossible to state conclusively whether eithertechnology can be used to generate enoughleverage to move Soviet policy. In short,there is no “magic” technology as far aspolitical leverage is concerned. Given thecomplexities involved it is very difficult tocalculate with any precision the costs thatcould be imposed on the Soviet Union by de-nial of any particular technology. This ele-ment of unpredictability is exacerbated bythe inherent limitations on our ability to pre-dict the behavior of the Soviet decisionmak-ing apparatus and the reactions of Sovietpolicymakers in any specific situation.

CHAPTER V

The Military Implicationsof East-West Technology

Transfer

CONTENTS

INTRODUCTION:THE C O N C E P T O F M I L I T A R Y R I S K . . . . . . . . . . .

ASSESSING MILITARY RISK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .The Case Method Approach . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .The Critical Technology Approach. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Table 13.—Categories of Military Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

85

88

8892

96

87

CHAPTER V

The Military Implications ofEast-West Technology Transfer—

INTRODUCTION: THE CONCEPT OF MILITARY RISK

All trade, and trade in technology in particular, necessarily carries with it arisk that the trade will enhance the military capability or at least the militarypotential of the trading partner. In the case of U.S. trade with the Soviet Union,it can be argued that any accretion in Soviet military capacity weighs againstthe United States in an overall worldwide balance of power. Whether the politi-cal or economic benefits of trade with the U.S.S.R. offset the military costs is amatter of judgment. In order to consider such potential tradeoff’s carefully, it isuseful to distinguish among five categories of possible military risk:

1.

2.

Technologies which not only have aclear and direct military applicationthat could have a substantial effect onrelative force capabilities, but whichalso make possible the construction ofweapons or the development of skillscurrently outside the realm of the recip-ient technical competence;

Technologies whose immediate applica-tion would advance civilian industry,but which might also be applied to mili-tary purposes in a way that would givethe recipient access to weapons or mili-tary skills that it does not now possess,including:

A. Technologies that lend themselvesto direct diversion, with or withoutmodification. An example of the formermight be the precision-grinding ma-chines sold in 1972 to the Soviet Union.It has been alleged that these machineswere instrumental in allowing the Sovi-ets to produce precision ball-bearingsneeded for the guidance system in mul-tiple independently targetable reentryvehicles (MIRVS), thereby providing

3.

them with a capability they would nototherwise have possessed at the time.A hypothetical case of diversion withmodification would arise if a large com-puter, sold to TASS or Aeroflot for aspecific civilian end use, were repro-gramed to perform military functionsand/or actually moved from one site toanother; and

B. Technologies that lend themselvesto indirect diversion, either by provid-ing hands-on training that would beotherwise unavailable (again, the exam-ple of large computers applies), or byproviding the opportunity for reverseengineering;

Technologies with clear and direct mili-tary application that could improve,simplify, or render cheaper or more effi-cient a military industrial activity al-ready within the recipient’s technicalcompetence, or that would help to move

‘See “}”:xpf~rt licensing of ,Adlranced ‘1’whnolog~.: A Ht’-kriewf, Hearing Iwfor[> the Sut)[’ormrmitttw on 1 nternationa]

‘1’rade ancl ~onlrnerce of the (’onlrnit tt~c o n I n t e r n a t i o n a l 1{t~-

Iations, U.S. I ious(j of Repros[lnt ati~.t~s, ,+\pr. ] 2, ] 976.

85


4.

Photo credit. U.S. Department of the Air Force

Left: model of the MIRV warhead that is positioned in the nose cone (circled on right) of the U.S. Minuteman Missile

existing military development activitiesahead on promising paths;

Technologies whose immediate applica-tion would advance a civilian industry,but which might be applied to militarypurposes in a military industrial activi-ty already within the recipient’s techni-cal competence, or which would help tomove existing military development ac-tivities ahead on promising paths. Thesame subgroups in #2 above apply here.An example of a civilian technologycapable of direct diversion is semicon-ductor production technology; directdiversion after modification occurredwhen the equipment of the Kama Rivertruck plant was altered to produce mili-tary vehicles. All computer sales carrywith them the danger of indirect diver-

sion, as all provide important trainingopportunities for programmers who maylater be employed in the military sector;and finally

5. Technologies that would be applied tocivilian industry, thereby releasing re-sources that might be used in the mili-tary sector. Any consumer good tech-nology is an example, as are turnkeyplants for the production of fertilizer.The latter not only make a significantcontribution to agricultural productiv-ity, but if the products of these plantsare exported, also may generate thehard currency necessary for further pur-chases of other technologies, includingthose with direct military application.

These categories and the examples that il-lustrate them are summarized in table 13.

Ch. V — The Military Implications of East-West Technology Transfer ● 87

Table 13.—Categories of Military Risk

Direct militaryDiversion from civilian use “ - – “ -

—

Nature of equipment application Direct With modification

Permits capabilities that would not otherwise ‘1‘Nuc-lear-w;apons 2A. Precision machines 2B. Advanced computerexist i n this time frame design information in hardware or software

mid-1 940’s

Improves or makes-more efficient-an existing 3.-Naval nuclear 4A. Semiconductor pro- 4B.Turnkey truck plantcapability reactor production duction technology

techniques

Frees resources for miIitary use - N/A 5A. Fertilizer production N/Atechnology, or tech-nology expandingproduction of manu -facturing goods forexport, thereby contributing to hard-currency earnings

SOURCE: Office of Technology Assessment - -

-.


The likelihood that a given technology willmarkedly improve the recipient’s militarycapacities decreases as one moves from cate-gory one to five. There is unanimity amongthe United States and its allies that technol-ogies in the first category should be strin-gently protected, and there is little argu-ment that the third category deserves pro-tection as well. Similarly, most would opposethe blockage of items falling in the low-riskfifth category, and the remainder would

Two fundamentallycan be used to restrict

agree that it is impracticable. Given the wideavailability of acceptable alternatives tomost U.S. technology, only a coordinatedpolicy of economic warfare both within andoutside CoCom(Coordinating Committee forMultilateral Export Controls) could imposesuch a blockage. There is clearly little hopefor support of such a policy in Western Eur-ope and Japan. Thus, the most difficult riskassessment lies with the dual-use technol-ogies in categories two and four.

ASSESSING MILITARY RISK

different techniquestrade involving tech-

nologies with potential military significance.In the first system, decisions are made case-by-case. Each proposed technology sale issubjected to careful analysis to determinethe possible military uses to which it mightbe put, and to decide the significance andlikelihood of these military applications oc-curring. Decisions are made on the meritsafter detailed consideration of the individualcase, using some standard of acceptable risk.The second basic approach proceeds deduc-tively. It first establishes lists of specific andgeneric capabilities that are deemed militari-ly significant and of the technologies thatare instrumental to these capabilities. Thesale of any item on this list becomes, by defi-nition, detrimental to the security interestsof the United States, and is therefore pro-hibited. The difference between these ap-proaches is largely one of basic orientation;actual licensing systems combine elementsof both. Nevertheless, the fundamental ori-entation of a licensing system towards eithera case method or a list strategy shapes itspossibilities and its weaknesses. The follow-ing pages consider these alternative ap-proaches in more detail.

THE CASE METHODAPPROACH

Ideally, a case method or ad hoc system ofexport control includes a comprehensive sys-

tem of risk assessment in which a number ofcharacteristics of the technology in questionand of the circumstances of its sales are as-certained, the importance and implicationsof each piece of information are weighed, anda decision is made on the basis of a completeunderstanding of both the technology andits probable end use. At least seven differentconsiderations may enter into this kind ofassessment:

1.

2

3.

The capabilities of the technology mustbe thoroughly understood; its varioususes must be identified; and the ease ordifficulty with which it might be modi-fied and diverted must be assessed. Thetask can be performed only by expertsthoroughly conversant with the technol-ogy and its range of applications.

For each application of the technology,the comparative capabilities of theUnited States and the recipient nationmust be assessed. This assessment in-volves determining technical leads andlags and estimating the rate of changein the differentials. In this connection,the possibility cannot be dismissed thata technology which is obsolete in theWest may still have a significant impacton the military capacity of, for instance,the Soviet Union or the People’s Repub-lic of China (PRC).

The mechanisms of transfer must beconsidered. In 1976, the Defense Sci-

Ch. V— The Military Implications of East-West Technology Transfer ● 89

4.

ence Board produced an analysis of thetransfer of technology and U.S. nationalsecurity. 2 The resulting document, com-monly known as the Bucy report, as-sessed selected areas of high technol-ogy, their impact on U.S. strategic re-quirements, the full range of mecha-nisms through which they may be trans-ferred (see chapter VI), and the effec-tiveness of current export control re-strictions. One principal finding of theBucy report (others are summarized be-low) is that the effectiveness of a tech-nology sale varies according to the rela-tionship between seller and buyer; themore active and continuing the relation-ship, the better the chance that thetechnology will be assimilated. The re-port ranks transfer mechanisms accord-ing to this criterion and concludes thatthe most effective—and therefore themost risky— transactions are the sale ofturnkey plants, licenses with extensiveteaching efforts, joint ventures, andtraining and exchanges that involveprolonged contact between buyer andseller and the provision of technical in-formation. As a rule, these should besubject to closer scrutiny and tightercontrols than less active mechanisms,like product sales, which do not usuallytransfer current design and manufac-turing technology.

Knowledge of the recipient environ-ment is required. There is a commonmisconception that technology transferis “something like a pass from a throwerto a receiver. In fact, it has more of thecharacteristics of an organ transplant,with all the attendant requirements ofcompatibility with the environment,plus the surgical (i.e., managerial) skillsnecessary to establish all the intimateworking relationships between thetransplant and the connecting parts of

‘An Analysis of Export Control of U.S. Technology–aDOD Perspective (Washington, D. C.: Defense Science BoardTask Force on Export of U.S. Technology, Feb. 4, 1976).

~ q - ~ ~ ~ ~ - “, g - -

the system.”3 The Soviet system, for in-stance, is often characterized as ineffi-cient and inflexible, and thereforeunable to make optimum use of im-ported technologies. Chapter X dis-cusses the fact that the ability of theU.S.S.R. to absorb, diffuse, and dupli-cate Western technology has been ham-pered by a system in which enterprisemanagers, who are responsible for in-troducing new technology, often haveno incentive to do so. Such impedimentsmake it less likely that the technologywill be used in a manner that producesresults similar to those achieved in thecountry of origin. Even more important-ly, the U.S.S.R.’s ability to improve im-ported technologies through domesticR&D and innovation is constrained bythe difficulties of translating new con-cepts into serial production. For in-stance, according to recent testimonyby Rauer Meyer, former Director of theOffice of Export Administration (OEA),the Western-built Volga automobileplant has not revolutionized the Sovietmotor vehicle industry; instead, theSoviets are currently conducting negoti-ations with Western firms to modernizeother car plants. Meanwhile equipmentsimilar to that used at Volga is current-ly being supplied to a tractor plant atCheboksary. Despite the restructuringof civilian R&D activities in the SovietUnion during the late-1960’s, the linkremains weak between the economic in-centives and material rewards of re-search institutions and the economiccontributions of the new technologiesdeveloped by them. It would be a mis-take, however, to extrapolate too easilyfrom the civilian to the military sector.In the Soviet Union, the military takespriority; resource allocations are madefirst to the military, regardless of short-

‘Herbert Fusfeld, Director of Research, Kennecott Copper,quoted in National Academy of Sciences, Review of theU.S./U.S.S.R. Agreement on Cooperation in the Fields of Sci-ence and Technology, National Research Council, May 1977.


5.

6.

ages elsewhere in the economy, and themilitary sector receives the best man-power and equipment. The conse-quences of the inefficiencies that perme-ate other parts of the society, therefore,are not necessarily as serious in thatsector.

The risk of diversion of a dual-use tech-nology is substantially affected by therequirements, priorities, and intentionsof the recipient. If, for instance, thetechnology is essential to meeting aneed that has a very high civilian prior-ity, the chances diminish that it will bediverted for direct military use. Largecomputers that direct oilfield oper-ations are low-risk items from this per-spective, not simply because they wouldbe cumbersome and difficult to moveand reprogram without detection, butbecause oil and gas production is ex-tremely important to the Soviets. Simi-larly, it is unlikely that equipment in-stalled in plants to manufacture drillbits will be put to any other use; the bitsare sorely needed in the Soviet oil indus-try. There is always a chance, however,that priorities may change. Risk of di-version will therefore fluctuate overtime, and for reasons not always appar-ent to Western observers.

The existence and effectiveness of tech-niques to prevent conversion of civiliantechnologies to military use must beconsidered. In some cases the techniqueis one of deterrence; while diversion tomilitary use remains possible, the likeli-hood that the United States would learnof such diversion and react by cuttingoff future technology transfers dimin-ishes Soviet incentives to divert a giventechnology. The ability to conduct on-site inspections, to monitor plant out-put, or to incorporate in the technologydevices designed to prevent reverseengineering or alteration all have thiseffect. It must be recognized, however,that no deterrent is infallible. The largecomputer installed in the Kama River

truck factory, for instance, is monitoredby the American firm that supplied it aspart of its contractual agreement withthe U.S.S.R. Periodic reports showingthe allocation of computer time aremade to the Department of Commerce,but there is good reason to believe that,if it is analyzed at all, this data (whicharrives in the form of voluminous com-puter printouts) is subject only to spotchecks. Another approach is to renderdiversion physically difficult or impossi-ble; e.g., to seal electronic componentsin a medium that will destroy the com-ponent if any attempt is made to disas-semble it. Such attempts are expensiveand according to technical experts arerarely, if ever, infallible.

7. Finally, individual sales of technologycannot always be evaluated in isolation.Sometimes the impact of a technologytransfer can only be appreciated in thecontext of a number of related sales thatmay have preceded it; the importance ofa single item may derive from its posi-tion as one of a series of items that,taken together, enhance an existing ca-pacity or provide a new one. There is,for instance, a qualitative as well as aquantitative difference between provid-ing 5 computers and 5,000; similarly, arelatively small piece of machinery mayonly assume its proper importance afterit is perceived as a link in the chain of anentire process that has been acquiredpiecemeal.

If all the preceding factors could beweighed, knowledge of the chances of a tech-nology’s enhancing the military capabilitiesof an adversary would be substantial. Butthe effectiveness of this kind of risk assess-ment, and the case-by-case decisions that itentails, is vitiated by two problems. The firstis the absence of clear policy guidelines. TheExport Administration Act of 1969 (seechapter VII) declares that it is the policy ofthe United States “to restrict the export ofgoods and technology which would make asignificant contribution to the military po-

Ch. V— The Military implications of East-West Technology Transfer ● 91

tential of any other nation or nations whichwould prove detrimental to the nationalsecurity of the United States. ” The law doesnot define “significance;” presumably this isleft to the officials who administer the licens-ing process. The Department of Defense(DOD) maintains a list of criteria to be ap-plied to the potential sale of any dual-usetechnology. These criteria form the basis ofjudgments about the probability of diver-sion taking place and being detected, and theconsequences of such a diversion:

1.

2.

3.

4.

5.

6.

Is the item appropriate in quantity,quality, demonstrable need, design,etc., to the stated civilian end use?Is there any evidence that the statedend user is engaged in military or mili-tary support activities to which thisitem could be applied?How difficult would it be to divert thisitem to military purposes?Could such diversion be carried outwithout detection?Is there evidence of a serious deficiencyin the military sector which this item, ifdiverted, would fill?Is technology of military significance,which is not ‘already available, extract-able from this item?4

The answers to these questions would pro-vide much of the information needed to makean accurate judgment of the probability ofmilitary diversion and impact of this diver-sion on the adversary’s military capacities.This information does not, however, helpthose making the decisions on export licens-ing to evaluate the “significance” of such im-pacts against the objectives of U.S. strategicpolicy. But a yardstick against which “sig-nificance” may be measured will probablynever be forthcoming.

The significance of any given improve-ment in Soviet or Chinese military capability

‘See Jonathan B. Bingham and Victor C. Johnson, “A Ra-tional Approach to Export Controls, ” Foreign Affairs, April1979, p. 889.

and potential is almost impossible to definein the abstract. An improvement in the ca-pacity to acquire a new military capabilitymay not matter unless the country con-cerned makes the effort to translate poten-tial into real capabilities. The significance ofactual military hardware depends on wheth-er a situation arises in which it can be put touse. How useful a given military capabilitymay be—whether in battle or for politicalintimidation—may depend on the way inwhich the United States structures its ownforeign policy or military objectives and thecapabilities demanded of U.S. forces. Even ifthe United States were to articulate a de-tailed array of political/military objectives,and the force characteristics necessary toachieve these objectives, doubt would re-main about the significance of incrementalimprovements in the military forces of po-tential opponents. In the absence of such aclear and explicit set of objectives, the of-ficials who administer an export-control sys-tem must to some extent rely on common-sense and conventional wisdom.

A second problem lies in the actual ad-ministration of the case-by-case approach.Limitations on the resources available to ad-minister export controls and the complexityof the procedures may make the system soinefficient as to be counterproductive. Aschapters III and VII document, industrycriticism has centered on the delays in theprocessing of export license applications byOEA. The volume of cases that must behandled, the volume of information thatmust be assembled on controversial cases,and the diversity of interests represented inthe process have resulted not only in delays,but in decisions which have been subject tointense retrospective criticism on thegrounds that military risk or foreign avail-ability were improperly assessed or thatforeign policy interests improperly out-weighed serious military implications. Ex-amples of such criticism may be found in theKama River truck plant, the Bryant grindercase, and the controversy surrounding theDresser drill-bit plant.


THE CRITICAL TECHNOLOGYAPPROACH

The recognized need both to clarify policyand to simplify and sharpen the licensingprocedure has caused Congress to endorsethe DOD investigation of the critical tech-nology approach to export control. This ex-ercise, which represents a systematic effortto confront the problem of military riskthrough a comprehensive reappraisal of theCommodity Control List (CCL) could poten-tially shift the weight of present U.S. export-licensing policy from the case method to the“list approach. ” The critical technology ap-proach grows directly from the findings andrecommendations of the Bucy report, whichmay be summarized as follows:

●

●

●

Design and manufacturing know-howare the most important elements instrategic technology control. Therefore,the categories of export that should re-ceive primary emphasis are arrays ofdesign and manufacturing know-how;keystone manufacturing, inspectionand test equipment; and products ac-companied by sophisticated operation,application, or maintenance know-how.The more active the participation of thetransmitter, the more effective the tech-nology transfer mechanism. Therefore,more active mechanisms of transfermust be tightly controlled, but productsales may be largely decontrolled sincethese usually do not transfer currentdesign and manufacturing technology.Control of product sales should stresstheir intrinsic utility.The United States should preserve itsstrategic leadtime by denying all ex-ports of technology that represent revo-lutionary advances to the receivingcountry. Transfers may be approved ifthe technology represents only an evo-lutionary advance, unless both nationsare on the same evolutionary track. Inthis case, the receiving country’s im-mediate gain from the acquisition of thetechnology should be assessed.

Current U.S. export control laws shouldemploy simplified criteria in order to ex-pedite the majority of license requests.Currently, the absence of establishedcriteria for evaluating technology trans-fers requires a cumbersome case-by-case analysis of all export applications.DOD should, therefore, develop policyobjectives and strategies for the controlof key high-technology fields that spe-cifically identify the key elements oftechnology, including critical processesand key manufacturing equipment.These key elements of technologyshould be released only to other CoComnations. Any CoCom nation that allowsthis technology to pass to any Commu-nist country should be prohibited fromreceiving any further strategic know-how.Techniques meant to discourage diver-sion of products to military applicationsare not a meaningful control mechanismwhen applied to key design and manu-facturing know-how, and should not berelied on to prevent diversion to mili-tary use.

The critical technology approach is predi-cated on the assumption implicit in the Bucyreport that “one can select the subset oftechnologies of significant military value onwhich our national military technology su-periority can be presumed to be most de-pendent.”5 It goes on to assume that this setof critical technologies will be small in num-ber and relatively stable over time; that theycan be subjected to stringent export controlsthat deny them automatically to any Com-munist country; and that the development ofa Military Critical Technology Product andInformation List, which will replace the pres-ent Controlled Commodity and CoCom lists,will allow the decontrol of many products

‘Testimony of Dr. Ruth M, Davis, former Deputy UnderSecretary of Defense for Research and Advanced Technol-ogy, before the Subcommittee on International EconomicPolicy and Trade, Committee on Foreign Affairs, U.S. Houseof Representatives, Mar. 22, 1979.

Ch. V—The Military Implications of East-West Technology Transfer . 93

and processes which currently appear on thelatter, but which are not in fact “critical.”The approach is intended both to enhancethe protection of U.S. technological leadtimeand to make the export control process sim-pler, quicker, and more predictable by elimi-nating most of the present need for case-by-case review; the goal is to protect the mili-tary leadtime of the United States with mini-mal interference with trade.

As originally conceived, the methodologyemployed by DOD in the critical technologyexercise may be summarized as follows:

1.

2.

Determinations of critical technologyareas. The first list of military criticaltechnologies was completed in January1979. It identifies 15 broad areas of ap-plied science or engineering that willserve as indicators of the fields in whichthe specific critical technologies to becontrolled will be found. The 15 areasare:—computer network technology;–large computer system technology;— software technology;—automated real-time control technol-

ogy;— composite and defense materials

processing and manufacturing tech-nology;

–directed energy technology;—LSI-VLSI design and manufacturing

technology (LSI refers to large-scaleintegration and VLSI to very large-scale integration in microelectronics);

— military instrumentation technology;— telecommunications technology;–guidance and control technology;— microwave componentry technology;— military vehicular engine technology;—advanced optics technology (includ-

ing fiber optics);— sensor technology; and—underseas system technology.

Determination of specific componenttechnologies within each of these 15areas of applied science and engineer-ing. Various degrees of progress haveapparently been made in 9 of the 15

3.

4.

5.

areas listed above. This work has beenaccomplished by Critical TechnologyExpert Groups (CTEG) composed ofvolunteers from industry working withDOD and other Government officials.CTEGS are examining such areas ascomputer networks, LSI manufacturingdesign technology, ray processors,acoustical rays, lasers, wide-body air-craft, etc., but not all of the groups havereported their findings. DOD has testi-fied that the date of completion of thisstep will be determined by the budget-ary allocation, and has made no predic-tion of when activities in all 15 areasmight be completed.

After completion of step 2 for each ofthe 15 broad areas, analysis of the mili-tary critical technologies to determinethe elements of design, manufacture,utilization, testing, and maintenancefunctions that can be subjected to ex-port controls. This step recognizes thefact that it may be impossible to fullycontrol all critical technologies becausesome mechanisms of technology trans-fer may be difficult or impossible to con-tain; e.g., information in the public do-main.

Recommendations as to which prod-ucts, technical information, or othercontrollable features of each militarycritical technology should be placed ona list of embargoed items. This step willutilize criteria that correspond to thoseemployed by DOD and listed above.They include the determination of for-eign availability; the technological capa-bility in and military reliance on thecritical technology by the potential re-cipient; and the comparison of thesecapabilities and dependencies withthose in the United States, includingthe rate of change of this comparativedifferential.

Formulation of a Military Critical Tech-nology Product and Information List ofitems not to be exported, accompaniedby a list of technology transfer mecha-

--


nisms effective for each of the criticalitems which should be subject to Gov-ernment control.

At the end of this process, DOD will pre-sumably have arrived at a list of criticalproducts and information that should bebarred from export and a list of technologytransfer mechanisms that should be subjectto Government control. Some assume thatthe United States will propose CoCom’sadoption of this list in place of its presentone and that it will also replace the existingCCL with the list of critical technologies.These changes may or may not be accompa-nied by a transfer of the main responsibilityfor export control from the Secretary ofCommerce to the Secretary of Defense.

It is by no means clear, however, that thiswill be the outcome. Since its inception in thesummer of 1976, progress on the criticaltechnology approach has been slow. HighDOD officials have, in the past, attributedthis to inadequate resources, asserting thatthere have been “no technological or institu-tional hurdles which would prevent the im-plementation of the Critical Technology Ap-proach.“ 6 This assertion is somewhat contro-versial. Discussions within DOD have indi-cated a lack of consensus on the aims andprobable results of the critical technologiesexercise. This uncertainty, as well as the con-ceptual difficulties inherent in the enter-prise, has almost certainly contributed to thedelay.

Some in DOD regard the critical technol-ogies approach primarily as an in-house exer-cise. They expect that the product will not bea new form of CCL, but rather an enhancedinternal capability for assessing the militaryimpact of dual-use technologies. A variety ofoffices within DOD perform technical as-sessments for license applications. In thepast, these offices have not always applieduniform criteria to the cases under their con-sideration.

In August 1979, those offices in DOD re-sponsible for export licensing and those en-

81bid.

gaged in the critical technology exercisewere reorganized (see chapter VII) and theiractivities centralized. This should provide anexcellent opportunity, not only for strength-ening and rationalizing the Department’srole in the export-licensing process, but fordefining with more precision the Depart-ment’s practical expectations for a criticaltechnologies list. At the least, an importantproduct of the critical technologies approachshould be refined and internally consistentguidelines for assessing the strategic capa-bilities of technologies.

It would be premature at this stage in thedevelopment of the critical technology ap-proach to speculate on the difficulties thatmay arise in attempts to implement it, or onthe possible consequences of its implementa-tion. Several observations are in order, how-ever. First, whatever the procedural out-come of the current exercise, DOD will profitfrom the detailed information it has gath-ered and the insights it has gained on themilitary capabilities of many technologies.On the other hand, it would be both mislead-ing and unwise to regard the development ofa critical technology list as a panacea to thedifficult problem of protecting U.S. militarytechnology leads. Skepticism already exists,both in Government circles and within thebusiness community, as to whether the re-vised lists will indeed be shorter than pres-ent ones; there is fear, in other words, thatreluctance to decontrol items or a broad def-inition of criticality will result in similar orlonger lists. This might further inhibit East-West trade and could also provoke objec-tions among some members of CoCom. Fromthe other side, there are fears that a criticaltechnology list will be too short, i.e., thatitems of marginal, but potentially important,military utility will be decontrolled to theultimate detriment of the United States.

It is highly likely that, whatever the out-come, the list will be criticized, either for theitems it includes or excludes. The belief thata critical technology list can ever be entirelynoncontroversial rests on the assumptionthat definitive, highly refined, empiricaljudgments can be made regarding the mili-

Ch. V— The Military Implications of East-West Technology Transfer ● 95

tary utility of a myriad of products and proc-esses. This is unlikely. In the final analysis,inclusion on such a list requires judgmentson the part of policy makers; the issues arenot purely matters of technical or scientific“fact.” Moreover, it is dangerous to assumethat the existence of a critical technologieslist can in itself obviate the case-by-case re-view. Considerations of both foreign availa-bility and end use can never be entirely elim-inated; simply because an item appears on aU.S. list of embargoed technologies does notprevent its export from abroad; and simplybecause an item does not appear on this listdoes not mean that under certain circum-stances it could not constitute a significantimprovement in the strategic position of anadversary. Finally, because the cutting edgeof technology moves so rapidly, any listmust be subject to constant review and up-date.

Those involved in the critical technologyeffort recognize these problems. One impor-tant aim of their activities is to substantiallydecrease the volume of cases that are pres-ently subjected to detailed case analysis sothat resources may be concentrated on thosecases involving difficult judgments. In orderfor this to occur, however, methods must bedevised to screen export applications to theCommunist world–not necessarily in the ex-haustive manner that pertains now, but insome way that will “catch” potentially trou-blesome cases involving technologies that donot appear on the critical technologies list,assuming that this list is generally viewed ascomprehensive without being overly inclu-sive. One might imagine a system that pro-ceeded roughly in the following manner:

1. All requests for export licenses to theCommunist world would be subjectedto an initial screening process. Thecriteria applied here would reflect theconcerns of all the executive depart-ments involved in licensing and mightask such questions as:

2.

3.

4.

5.

–Is the item on the critical tech-nologies control list? If so, presum-ably no further inquiry is necessary.If not,

– Is the stated end use plausible?—Are large amounts of training en-

tailed in the sale?–Is there any obvious military rele-

vance, even if this is not “critical”?–Have inordinately large quantities of

this equipment been exported?

The object is to raise a “red flag;” tocatch-out potentially troublesomecases. In this way, the volume of casesthat require further review should begreatly reduced and the serious “log-jam” which presently plagues the li-censing procedure substantially elim-inated.

Any case in which a red flag appearswould then be subject to a moderate de-gree of examination specifically tar-geted to answer the particular objectionraised in the first cursory screening.

Should this moderate examination notresolve the problem, an analysis similarto the intensive case-by- case reviewpresently conducted by OEA should beconducted.

In addition, random checks should bemade to ensure that the procedure isproducing the desired results. Thesemight take the form of periodicallyselecting isolated applications thatotherwise would have been grantedafter step 1 and subjecting them to thedeeper consideration of steps 2 or 3.

In cases where threat of reverse engi-neering or diversion appears to be a ma-jor problem, an analysis should be con-ducted of the procedural or technicalmechanisms that could minimize thedangers.

— -—..


SUMMARY

The process outlined above is intended asnothing more than a suggestion for a way ofthinking of export control in a manner thatcombines the case study and list approachesdiscussed here. It should be apparent thatunless both are utilized, no one formula canresolve the immensely complex issue of de-termining which technologies make “signifi-cant contributions” to the military capaci-ties of our adversaries, and no simple proce-dure is likely to soon be instituted to protectsuch technologies. The protraction of thecritical technology exercise itself indicatesthe extreme difficulty which confronts eventhe Nation’s foremost technical experts inmaking recommendations in these areas, and

should caution all observers of the folly ofexpecting magical automatic solutions tosuch complex problems. Western technologyhas undoubtedly contributed to Soviet mili-tary capabilities in the past and it will con-tinue to do so in the future, regardless of anyunilateral efforts the United States couldundertake. There is no reason to believe thatdrastic changes in DOD’s efforts in the areaof export control will materially alter thissituation. In the final analysis, the nationalsecurity of the United States is most surelyprotected by its maintenance of technologi-cal leads in those areas that have beendeemed militarily critical.

CHAPTER VI

Technology Transfer:Definition and Measurement

CONTENTS

PageDEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99

PROBLEMS OF MEASUREMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

Commercial Trade in Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....100High-Technology Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....100Industrial Cooperation Agreements . . . . . . . . . . . . . . . . . . . . . . ........102

Noncommercial Technology Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..105

Table 14.–High-Technology Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..102Table 15.–Types of Contractual Arrangements Included indifferent

Definitions of East-West Industrial Cooperation . . . . . . . ..............103Table 16.—Classification of East-West Industrial Cooperation

Agreements by Percent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..........104

CHAPTER VI

Technology Transfer:Definition and Measurement

Discussions of the economic consequences of trade in technology for boththe United States and the Communist world have been hampered by conceptualand practical difficulties in gathering and interpreting data. There is no univer-sally accepted definition of “technology,” and in many critical instances, usefuldata is simply unavailable. Any attempt to assess the economic importance ofthis trade must therefore include a discussion of the nature of technology andtechnology transfer and the ways in which they can be measured.

DEFINITIONS

Technology must be differentiated fromscience on one hand and from products onthe other. Science is the pursuit of knowl-edge, whereas technology is the specific ap-plication of knowledge to the production ofgoods and services. Science flows freelyacross international boundaries, and even ifit were possible to effectively control thisflow, the prospect of doing so raises at thevery least grave Constitutional questions.Some control of technology, however, is bothdesirable and necessary in the interests ofnational security because of the military orstrategic capabilities it may provide.

The distinction between technology andproducts is more troublesome. If technologyis broadly defined to mean the knowledgenecessary to design, create, or implement aprocess; the process itself; or any servicesrelated to the process, the problem of how totreat the resulting product remains. Oftenthis will be a “technology intensive” prod-uct, one that might be said to “embody”technology or from which the technologymay be extracted through a process knownas “reverse engineering ’’—the deduction ofthe techniques of manufacture from exami-nation of the product itself. Often too tech-

nology-intensive products have military ap-plications that cause them to pose as severea problem to national security as the designand manufacturing know-how that went intothem.

For commercial purposes, “technology”usually refers either to equipment and proc-esses that transform raw materials intogoods and services, to the training that ac-company these, or to final products like com-puters that embody high technology, Butthere is little agreement, in the UnitedStates or abroad, as to exactly which prod-ucts and process should be included in thesecategories. There are, furthermore, problemsof measurement within each category. Thecost of equipment or of the licenses for rightsto processes, for instance, may not necessari-ly reflect the value to the buyer in terms ofthe quality, output, innovativeness, andprofitability of the final product. The valueof a purchase, which includes the skills of theworkplace—the training required to operatemachines, to achieve practical familiaritywith the theoretical aspects of equipment,and to become able to adapt and extend theoperation of the equipment—is difficult toquantify. Finally, there is disagreement over

99


which products qualify as “high technologyitems.

To these empirical problems must beadded the difficulties engendered by the factthat a number of both commercial and non-commercial vehicles exist through whichtechnology of potential economic value is ex-ported to the East. Commercial vehicles oftechnology transfer include turnkey fac-tories (i.e., a factory built in the recipientcountry by a foreign firm, which is turnedover to the recipient only when it is ready to“turn the key” and start production); licens-ing (with and without training programs):joint ventures; technical exchanges; trainingin high-technology areas; sale of processingequipment; provision of engineering docu-

PROBLEMS OF

COMMERCIAL TRADE INTECHNOLOGY

The most common forms of commercialtechnology transfer are the direct sale ofproducts embodying high technology andvarious forms of industrial cooperationagreements.

High-Technology Products

The U.S. Department of Commerce re-cently attempted to isolate trade in hightechnology through the examination of ex-ports in selected categories of the StandardInternational Trade Classification (SITC).This classification scheme summarizes tradeinformation for approximately 10,000 dif-ferent items by organizing it into commoditygroupings. The Commerce study selected 25categories of products which, it contends,contain all those goods that reflect best prac-tice in critical technology sectors—machin-ery and transport equipment and profes-sional, scientific, and controlling instru-ments (see table 14). This effort is by far themost precise and comprehensive attempt to

mentation and technical data; consulting;proposals (documented and undocumented);and sale of products that embody technol-ogy. Noncommercial vehicles include visitsin both directions of students, scientists,and businessmen or managers; the use of un-classified published technical data andpatents; the reverse engineering of singlemachines or components; and clandestine ac-tivities. All of the latter modes of technologytransfer cost negligible amounts of hard cur-rency and, for the most part, have been be-yond Government control. Communiststates have made the most of these tech-niques, although they are by no meansunique in this regard. These channels oftechnology transfer have historically beenand will continue to be of great importanceto market and nonmarket nations alike.

MEASUREMENT

use trade statistics to measure technologytransfers.

There are problems with the Commercelist, however. Aside from quarrels over whatconstitutes a “high technology” good, no listbased on trade data can be sufficiently de-tailed to precisely distinguish between levelsof technology. This could be accomplishedonly through a case-by-case examination ofindividual exports in light of an accepted setof criteria defining “high technology. ” TheCommerce Department classifications aretherefore overly inclusive; they “catch”items which do not in fact embody “high”technology, if by that is meant state-of-the-art or items unobtainable in the East. Thismeans that calculations of high-technologytrade based on these categories are inflated.Second, techniques used to value and de-scribe exports at point of origin in theUnited States cannot reflect the contribu-tion of third nations. U.S. technology em-bodied in products originating from Amer-ican subsidiaries in Europe or Japan appearsin the trade statistics of these countries and

Ch. VI—Technology Transfer: Definition and Measurement ● 101

Photo credit: Bureau of East-West Trade, U S Department of Commerce

U.S.-U.S.S.R. technology transfer through the mechanism of trade fairs


Table 14.—High-Technology Items. — . — ——— .—— —

SITC

7114271177142

714371492

71517185271927195271954719927249

7291172937295272977299

734173492735173592

8611861386161

8619

Description

Jet and gas turbines for aircraftNuclear reactorsCalculating machines (including electronic

computers)Statistical machines (punch card or tape)Parts of office machinery (including computer

parts)Machine tools for metalGlassworking machineryPumps and centrifugesMachine tools for wood, plastic, etc.Parts and accessories for machine toolsCocks, valves, etc.Telecommunications equipment (except TC & radio

receivers)Primary batteries and cellsTubes, transistors, photocells, etc.Electrical measuring and control instrumentsElectron and proton acceleratorsElectrical machinery, n.e.s. (including

electromagnets, traffic control equipment,signaling apparatus, etc.)

Aircraft, heavier than airAircraft partsWarshipsSpecial purpose vessels (including submersible

vessels)Optical elementsOptical instrumentsImage projectors (might include holograph

projectors)Measuring and control instruments, n.e.s.

SOURCE: Quantlfication of Western Exports of High Technology Products toCommunist Countries, prepared by John Young, Industry and TradeAdministratlon, Office of East-West PoIicy and Planning, U.S. Depart-ment of Commerce. Project No D-41

not in those of the United States. Finally,customs valuations are determined by theprice of the sale. Price does not necessarilyreflect the full market value of the commodi-ty, however; some firms deliberately under-price an initial sale in order to break intoEastern markets.

With these reservations, and in the ab-sence of alternative superior measures, theCommerce system has been used in chapterIII to analyze U.S. and industrialized worldexports of high-technology products to theCommunist nations.

Industrial Cooperation Agreements

Industrial cooperation agreements havebecome increasingly common in East-Westtrade. In its most general sense, the termrefers to a broad charter extending over a

number of years to conduct commercial rela-tions between a Western firm and a centrallyplanned economy. Industrial cooperation in-cludes a wide variety of possible relation-ships, ranging from the sale of licenses andpatents to coproduction agreements andturnkey plant sales. The comprehensive listincorporated into table 15 summarizes thebasic mechanisms and techniques utilized inthese ventures. These frequently involve re-lationships between trading partners whichextend beyond simple sales of goods andservices, to continuous and close contactsbetween trading partners, training, and tech-nical assistance programs. It can be ex-pected that these agreements lead to consid-erable communication of technical know-howcongruent with sales of plant and capitalequipment.

Activities in this area are extremely dif-ficult to measure. Cooperation agreementsare often complex and their values particu-larly difficult to establish because manyEast-West transactions involve counter-trade rather than cash (see chapter III).

Countertrade is particularly attractive toEastern nations with scarce hard-currencyresources and a need to foster exports to theWest. But while its importance in Commu-nist countries is becoming increasingly ap-parent, little data on such agreements exist.The U.S. Department of Commerce esti-mates that in Poland, 40 to 50 percent ofelectrical products and machinery exports tothe West in the 1980’s will be part ofcountertrade agreements; and 38 percent ofSoviet trade turnover between 1976 and1980 will be generated through counter-trade. l There are no comprehensive studiesof the full range of countertrade transac-tions, although the Organization for Eco-nomic Cooperation and Development(OECD) has studied individual categories ofcontracts. 2

‘See U.S. Department of Commerce, East-West Courzter-tmde Practices: An Introductory Guide for Business, Indus-try and Trade Administration, August 1978.

‘Organization for Economic Cooperation and Develop-ment, Countertrade Practices in East-West Economic Relu-tiorzs, Paris, Mar. 23, 1978.

Ch. V/—Technology Transfer: Definition and Measurement . 103

Table 15.—Types of Contractual ArrangementsIncluded in Different Definitions of East-West

Industrial Cooperation—— — —1.

2.

3.4.

5.

6.

7.

8.

9.

10.

11.

12.

13.

14.

Sale of equipment for complete production systems, orturnkey plant sales (usually including technical assist-ance).Licensing of patents, copyrights, and production know-how.Franchising of trademarks and marketing know-how.Licensing or franchising with provision for market shar-ing and quality control.Cooperative sourcing: long-term agreement for pur-chases and sales between partners, especially in theform of exchanges of industrial raw materials and inter-mediate products.Subcontracting: contractual agreement for provision ofproduction services, for a short term and on the basis ofexisting capabilities.Sale of plant, equipment, and/or technology (l-3 above)with provision for complete or partial payment in result-ing or related products.Production contracting: contractual agreement for pro-duction on a continuing basis, to partner specifications,of intermediate or final goods to be incorporated intothe partner’s product or to be marketed by him. In con-trast to subcontracting, production-contracting usuallyis on the basis of a partially transferred production capa-bility, in the form of capital equipment and/or technol-ogy (on basis of a license or technical assistance con-tract).Coproduction: mutual agreement to narrow specializa-tion and exchange components so that each partnermay produce and market the same end product in his re-spective market area. Usually on the basis of someshared technology.Product specialization: mutual agreement to narrow therange of end products produced by each partner andthen to exchange them so that each commands a fullline in his respective market area. In contrast to coop-erative sourcing, product specialization involves adjust-ment in existing product lines.Comarketing: agreement to divide market areas forsome product(s) and/or to assume responsibilities formarketing and servicing each other’s product(s) in re-spective areas. Joint marketing in third markets may beincluded.Project cooperation: joint tendering for developmentprojects in third countries.Joint research and development: joint planning, and thecoordinated Implementation of R&D programs, with pro-vision for joint commercial rights to all product or proc-ess technology developed under the agreement.Any of the above in the framework of a specially formedmixed company or joint venture between the partnerfirms (on the basis of joint equity participation, profitand risk-sharing, joint management).

SOURCE: OffIce of Technology Assessment

Table 16 summarizes one of the most re-cent attempts to classify types of coopera-tion agreements by frequency. It shows thatin 1976 coproduction based on the principle

of specialization accounted for more than 38percent of East-West agreements. This kindof transaction involves the transfer of an en-tire production activity to a new location,usually in Eastern Europe. After coproduc-tion, the next most common agreementswere turnkey plant sales and the sale oflicenses.

Coproduction.— Under this kind of agree-ment, each partner specializes either in theproduction of certain parts of a finishedproduct, which is then assembled by one orboth partners; or in the manufacture of alimited number of articles in the productionrange, which are exchanged so that eachpartner can offer a full range of products.The technology is usually provided by one ofthe partners, but in some cases may be theculmination of joint R&D effort. Generally,coproduction and specialization agreementsalso include cooperative marketing arrange-ments. Usually the product bears the trade-mark of both partners, each of which has ex-clusivity for the market in its own area butshares the market in other countries. In co-operative agreements with the Soviet Union,the Western partner usually has priority forselling in the industrialized West, and theSoviet Union confines its sales to WarsawPact nations and possibly certain developingcountries.

The attraction of such agreements forboth the Western and Eastern partners isobvious. The Western firm may acquire rawmaterials and/or labor in the East. TheEastern country expands its repertoire ofmanufacture, its markets, and often its po-tential for earning hard currency.

Turnkey Plants.—Of all cooperationagreements, turnkey transactions are per-haps the most effective means of technologytransfer. Although technology may in manycases be purchased or leased throughstraightforward transactions in the market-place, turnkey projects afford the possibilityof acquiring whole production systems—from feasibility studies, construction, andtraining through technical assistance duringthe initial run-in period. Further, most trans-


Table 16.—Classification of East-West Industrial Cooperation Agreementsby Percent

supply of Delivery of Specialization Joint venturingTotal Iicensea plant coproduction Subcontracting and other

Survey of June 1,1976Bulgaria . . . . . . . . . . . . . . . . . . . 100.0 17.1 25.7 31.4 11.4 14.4Czechoslovakia. . . . . . . . . . . . . 100.0 27.3 — 22.7 9.1 40.9East Germany . . . . . . . . . . . . . . 100.0 — 23.5 14.2 7.1 33.8Hungary . . . . . . . . . . . . . . . . . . . 100.0 29.5 16.3 32.6 9.6 12.0Poland . . . . . . . . . . . . . . . . . . . . 100.0 21.7 24.2 32.3 6.4 15.4Romania. . . . . . . . . . . . . . . . . . . 100.0 19.4 25.5 14.2 7.1 33.8U. S. S. R.. . . . . . . . . . . . . . . . . . . . 100.0 3.2 20.4 61.5 4.7 10.2

Total CMEA countries1972. . . . . . . . . . . . . . . . . . . . . . . 100.0 28.2 11.9 37.1 7.9 14.91975. . . . . . . . . . . . . . . . . . . . . . . 100.0 26.1 21.7 33.3 6.8 12.1June 1,1976 . . . . . . . . . . . . . . . . 100.0 17.1 20.5 38.3 7.4 16.7

CMEA= Council for Mutual Economic Assistance or Comecom.aSupply of license in exchange (in part at least) for products or components

SOURCE: Economlc Commisslon for Europe, Unlted Nations

actions guarantee an ongoing relationshipwith the supplier, opening the possibility ofaccess to developing technology. The con-tinuity of these relationships is universallyregarded as the most important single ele-ment affecting the success of a technologytransfer.

Turnkey projects in their pure form, in-volving purchase of an entire installationfrom one firm or one country, are relativelyrare—at least in the case of the Soviet Union.Most often, a Communist nation contractswith many Western firms for particular com-ponents of a complex, including marketingand subsidiary services. The Soviet KamaRiver truck plant is a good example. Here,the U.S.S.R. dealt with Western firms inseveral countries, assembling its own sophis-ticated mixture of goods and services to fitits own specifications.3

Licenses and Patents.—The acquisition oftechnology through licenses accelerates in-digenous technological progress and en-hances potential export capabilities in theEast. According to one estimate, the pur-chase of a license may cause technologicalprogress in the affected field to leap by 7 to 8

‘See Harlan S. Finer, Howard Gobstein, and George D.Holliday, “KamAZ: U.S. Technology Transfer to the SovietUnion, ” in Henry R. Nau, cd., Technology Transfer and U.S.Foreign Policy (New York: Praeger Publishers, 1976).

years, compared to only 3 to 5 years with thepurchase of know-how and 1 to 2 years forcoproduction. 4 Often the acquisition of a li-cense creates requirements for other im-provements, more imports, further licenses,and the promotion of exports. Licenses maybe paid for in either currency or in productsthrough countertrade arrangements. InEastern Europe, the latter predominate.5

Licensing arrangements are varied, rang-ing from a straightforward authorization toexploit an individual patent to complexagreements on industrial cooperation. Thesemay provide for the grant of licenses forusing patents linked with the importation ofcertain capital goods; of licenses to useknow-how and technical assistance in build-ing turnkey plants or other industrial instal-lations; and of licenses to use trademarks.

It is apparent that the diversity of modesthrough which technology is transferred andthe complex interdependence of activi-ties, which are directly or indirectly involvedin the process, make it extremely difficult toaccurately measure the value of technologythat flows to the East in commercial transac-

4See Jozef Wilczynski, “License in the West-East-WestTransfer of Technology, ” Journal of World Trade LauY,March-April 1977.

5The U.S. Perspective on East-West Industn”al Coopera-tion, International Development Centre of Indiana Universi-ty (Bloomington, Ind., 1975).

Ch. Vi—Technology Transfer: Definition and Measurement ● 105

tions. No extensive statistical analysis of thetransfer function in this respect has beenmade, and available data can support onlycrude analyses of overall volumes andtrends. Any comprehensive assessment ofthe economic importance of these transac-tions would require data of a sophisticationpresently unavailable.

NONCOMMERCIALTECHNOLOGY TRANSFER

Open and regular contacts between thescientific and engineering communities ofthe United States and the Soviet Union havereceived official encouragement through anumber of bilateral agreements. In July1959, a formal agreement was concluded be-tween the U.S. National Academy of Sci-ences (NAS) and the Academy of Sciences inthe U. S. S. R.; in the same year the Interna-tional Research and Exchanges Board(IREX) began a program that sent Americangraduate students and young instructors tothe U.S.S.R. In 1972, the U.S./U.S.S.R.Agreement on Cooperation in the Fields ofScience and Technology (S&T) was com-pleted, instituting bilateral cooperative pro-grams in a number of scientific fields. TheS&T agreement is predicated on the idea ofbuilding and maintaining a world scientificcommunity through open channels of com-munication. More recently, exchanges withthe People’s Republic of China (PRC) havebegun.

The role that such contacts have in trans-ferring American technology with potentialcommercial value is the subject of consider-able disagreement.

Two recent studies of the S&T agreementsand the exchanges program by NAS have at-tempted to assess the value to both sides ofthe information exchanged in these pro-grams.’ Both concluded that exchanges with

‘ N a t i o n a l A c a d e m y o f S c i e n c e s , ReUiPti, of theU.S./U.S.S.R. Agreement on Cooperation in the Fields of Sci-ence and Technology, National Research Council, May 1977,and Reuieuf of U.S./U.S.S.R. Interacademy Exchanges andRelations, National Research Council, September 1977.

the Soviet Union were worthwhile, althoughtheir value to U.S. participants may be lim-ited by American scientists’ lack of familiar-ity with the Soviet Union’s unique style ofscience and engineering and by the lack ofSoviet candor regarding weaknesses in manyareas of its research. Both programs wereplagued by the rigidity of the Soviet bu-reaucracy (although problems with the U.S.bureaucracy seemed to rank a close second)and by erratic attendance on the Soviet side.In 1978, for example, NAS extended invita-tions to 44 Soviet scientists; only 4 partici-pated.

A review of the two studies indicates thatwhile the initial contacts provided someuseful information about Soviet research(especially in the fields of medicine, weatherforecasting, accelerated drug testing, nucle-ar fusion, magnetohydrodynamics, super-conducting magnets, and earthquake predic-tion), the primary value of the U.S./U.S.S.R.exchanges to America has been one of edu-cating the scientific and engineering commu-nity about the nature of the Soviet scientificsystem:

Not only do U.S. scientists and engineershave the opportunity of acquiring at firsthand new ideas and new perspectives fromtheir Soviet colleagues, they also becomemore familiar with the relevant Soviet scien-tific literature and are alerted to particularSoviet scientists and engineers whose futurepublications likely merit special atten-tion . . . . [The Soviets] have probably re-ceived more technical value in computertopics, in econometrics, and in managementscience than has the U. S., largely becausethe U.S. is more advanced in these areas.But the most significant value to the U.S.. . . lies in better U.S. understanding of theSoviet planning and management process,and of Soviet status and approaches in eco-nomics, management science and computerscience. 7 It is nevertheless true that theUnited States has, on the whole, taught theSoviets more than it has learned from them.The NAS expects the future balance to shifttoward greater equality.8

71 bid., Agreement on Cooperation, pp. 7, 43.‘Ibid., Interacademy Exchanges and Relations, p. 3.


According to NAS, the risk of inadver-tently communicating important technologythrough scientific exchange is minimal. TheCommerce Department’s Office of ExportAdministration regularly briefs U.S. scien-tists on topics they should not discuss in theexchange programs, and “except in certainnarrow and well-delineated fields, problemsof technology do not loom large . . . TheSoviets have not managed to translate intopractice the wealth of American technicaldata already available to them through theopen literature [and as a result] their tech-nology is unlikely to benefit greatly fromany further technical data we might disclose

except certain specific data which are propri-etary or classified. ‘g

A different cost/benefit balance may existin the student exchanges between theUnited States and the U.S.S.R. These canresult in the transfer of technology that isdifficult to quantify or even identify. Sinceabout 1972, Soviet “students,” who areusually experienced engineers, scientists,and managers of R&D establishments, haveconcentrated on study programs in theUnited States in semiconductor technology,

‘I bid., Interacademy Exchanges, p. 4; Agreement on Coop-eration p. 43.

Photo credit U S Department of Energy

American magnetohydrodynamic (MHD) technology arrives in the Soviet Unionas part of the U.S./U.S.S.R. Cooperation Program

Ch. V/— Technology Transfer: Definition and Measurement ● 107

computers, and other fields related to prob-lems of applied research. Large numbers ofChinese “scholars” are similarly beginningto appear in the West. Data reflecting thenumber of such students and the institu-tions they attend tell little of the nature andamount of the technology they carry backwith them. It has been alleged that this in-

formation carries potential military signifi-cance. As far as can be determined, however,no systematic attempt has ever been madeto quantify its value in either military orcommercial terms. Any complete assess-ment of such exchanges must weigh bothstrategic and potential commercial lossesagainst their political and cultural value.

—. .— -

CHAPTER VII

The East-West Trade Policyof the United States

CONTENTS

PageEXPORT-LICENSING CONTROLS. . . . . . . . . . . . . . . . . . . . . . ..........112

Laws and Amendments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .........112The Export Control Act of 1949 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .112The Mutual Defense Assistance Control Act of 1951. . ...............113The 1960’s—The Beginnings of Moderation. . . . . . . . . . ..............114The Export Administration Act of 1969. . . . . . . . . . . ................115The 1972 Amendments: The Equal Export Opportunity Act . .........117The Export Administration Act Amendments of 1974 . ..............119The Export Administration Act Amendments of 1977 . ..............120The Export Administration Act of 1979. . . . . . . . . . . ................122Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............126

The Administration of U.S. Export Controls: The Licensing System .......126The Commodity Control List. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ....127The Executive Agencies in the Licensing Procedure . ................130The Mechanics of the Validated Licensing Procedures . ..............131Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........136Criticism of the System . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......138

Control of NuclearExports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......143

CREDITS AND TARIFFS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ..144

The Export-Import Bank of the United States . . . . . ....................144The Commodity Credit Corporation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...148Tariffs: Most-Favored-Nation Status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..149

Table 17.–Export Administration System: Country Grouping . .................129Table 18.–Export License Applications Pending for More Than 90 Days . .........139Table 19.–Funding, Authorized Positions, and License Applications Volume .. ....140Table 20.–Export-Import Bank Exposure in Selected Communist Countries . ......146Table 21.–Communist Countries: Eligibility for U.S. Programs . . . . . . . . . .........148

Figure 3.-Sample Page of the U.S. Commodity ControlList . ...................128Figure4.-Industry and Trade Administration, U.S. Department of Commerce. . . . . 130Figure 5.-Office of Export Administration, U.S. Department of Commerce. . ......132Figure6.-Export License Application . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .133Figure 7.-Multiagency Advisory Committee on Export Policy Structure. . ........136Figure8.-Economic Defense Advisory Committee Structure . ..................137Figure9.-Age of DOD Export Control Cases (January-September 1978) ..........141Figure l0.-Age of DOD Export Control Cases (October-December1978) . .........141

— . —.

CHAPTER VII

The East-West Trade Policyof the United States

The present state of U.S. trade policy toward Communist nations reflectsthe ambivalence and dissension which, for the past three decades, have charac-terized U.S. posture toward the Eastern bloc. Much of the basic structure ofpresent programs was designed at the height of the cold war, when suspicionsabout the capabilities and intentions of the Communist world ran very deep. Theearly legislation was intended to impose a virtual trade embargo on these coun-tries. Since that time, however, three major changes have occurred: 1) the UnitedStates has lost much of its leverage with its Western trading partners and isnow unable to impose a unified trading posture within the Western bloc; 2) it isno longer possible to treat Communist nations as a monolithic bloc; and 3) therehas been an overall improvement of relations with the Eastern world. Together,these developments have led to a series of alterations in the basic policy of theUnited States, beginning with the Export Administration Act of 1969. This pol-icy, however, is implemented through an administrative structure which wasfashioned some 30 years ago. The product of years of incremental modification,this system embraces a cumbersome and sometimes confusing set of proceduresthat reflect diverse and frequently conflicting interests.

U.S. policy that has a direct impact on trade with the East can be dividedinto three categories:

1. export-licensing controls that govern the export of products or technol-ogies appearing on a list of controlled commodities, and nuclear equip-ment and nuclear fuels;

2. controls over export and import facilities that regulate the use of credits,loan guarantees, or other incentives for trade with certain categories ofnations; and

3. control over tariffs that allows the United States to levy higher rates ofduties on imports from countries to whom “most-favored-nation” (MFN)status has not been granted.

Apart from these measures, there is a range of possible legislation which ifadopted could facilitate trade with the Communist world. This includes tax, pat-ent, and antitrust law. There appears to have been little interest in Congress inreformulating U.S. tax, patent, and antitrust policy in ways that might expediteEast-West transactions. These issues are touched on elsewhere in this report(see chapters II and III).

111


EXPORT-LICENSING CONTROLS

LAWS AND AMENDMENTS

The Export Control Act of 1949

The decision to exert strict peacetime con-trols over U.S. exports to certain countriesin the name of national security marked theadvent of the modern era of U.S. foreign andnational security policy. Export controls assuch were no innovation. The Trading Withthe Enemy Act of 1917, for instance, hadgranted the President power to impose suchcontrols in time of war or, with the consentof Congress, national emergency. But untilthe end of World War II and the beginningof the cold war, the idea of continuing na-tional security controls over trade on a regu-lar peacetime basis was unprecedented. Sucha notion was premised on the thesis thattrade and other economic transactions con-stituted a “weapon” of considerable poten-tial impact; and that technology was an in-creasingly important determinant of nation-al power. The development of nuclear weap-ons provided a potent example of the mili-tary significance of technology.

The Export Control Act emphasized thedanger to U.S. national security of the unre-stricted export of materials without regardto their potential military significance anddeclared it to be the policy-of the UnitedStates to “exercise the necessary vigilance”over exports to ensure this security. Its pur-pose was to deny militarily useful exports tothe Soviet Union and its allies. The effect ofthe Export Control Act was to make export-ing a privilege and not a right, and it sig-naled a policy in which national security con-siderations took precedence over the eco-nomic advantages of foreign trade.

The Act was broadly worded. It empow-ered the President to prohibit or curtail theexport of “any articles, materials, or sup-plies, including technical data, except undersuch rules and regulations as he shall pre-scribe, ” (sec. 3(a)). Any materials or technol-ogy could come under the purview of theAct, so long as the President determined

that their export would contribute to themilitary potential of any country threaten-ing the national security of the UnitedStates. Thus, the language of the Act wasclearly consistent with the control of itemswith only indirect military utility. The Presi-dent was authorized to delegate the power todetermine which articles to control to the ap-propriate executive departments and Feder-al agencies concerned with the domestic andforeign policy aspects of trade.

Theoretically, the Export Control Act ex-tended equally to all countries. As it was ad-ministered, however, licenses were usuallyeasily obtainable for exports to Western na-tions and, from the start, Communist desti-nations were singled out for the proscriptionof exports. The early list of controlled com-modities was long and comprehensive andthe Act was rigidly enough interpreted thatitems of economic, as well as military signifi-cance, came under its purview.1 Responsibil-ity for the administration of export controlswas lodged in the Office of Export Control ofthe Department of Commerce, which hadalready operated similar controls to ensurethe availability of supplies during WorldWar II. These controls came to extend tothree categories of items: exports of com-modities and technical data; reexports ofU.S.-originated commodities and technicaldata from one foreign country to another;and U.S.-originated parts and componentsused in a foreign country to manufacture aforeign end product for export. Despite thebasic changes in policy over the next 30years (see below), the apparatus that grew toadminister these controls has survived near-ly intact to the present.

‘U.S. House of Representatives, Investigation and Studyof the Administration Opemtion and Enforcement of the Ex-port Control Act of 1949, and Reluted Acts, 87th Cong., 1stsess., October and December 1961. See also R. J. Carrick,East- West Technology Transfer in Perspective, Policy Papersin International Affairs (Berkeley, Calif.: University of Cali-fornia, 1978), p. 25.

Ch. VII—The East-West-Trade Policy of the United States ● 113

The Mutual Defense AssistanceControl Act of 1951

The Export Control Act represented theunilateral response of the United States tothe Communist threat that confronted thefree world in the aftermath of World War II.It was clear, however, that if a policy of vir-tual trade embargo was to succeed for longthe cooperation of America’s allies was vital.The need for the United States to solicit thiscooperation had become apparent at least asearly as 1947 when Congress discussed theuse of U.S. foreign aid as a lever to ensureallied accord in limiting exports to the Sovietbloc. In both the Economic Cooperation Actand Foreign Assistance Act of 1948, aid wastied to trade. In the former, the prospect ofU.S. aid was used to encourage cooperation;the latter Act made the Marshall plan hos-tage to restraint in exports to the East.These were not popular policies in Japan orin Western Europe, which not only had dif-ferent perceptions of the nature of the Com-munist threat, but which also had reliedmuch more extensively than the UnitedStates on trade with Eastern Europe.

The United States first attempted to en-force a united Allied approach to trade withthe Communist bloc in October 1951, withthe passage of the Mutual Defense Assist-ance Control Act or Battle Act (Public Law87-195). The Battle Act had a dual thrust.First, it reaffirmed the objectives of the Ex-port Control Act by clearly stating a policyin which trade was to be used as a weaponagainst the Soviet Union and its satellites.This is apparent in title II, which declared itto be U.S. policy to regulate the export ofcommodities other than arms, ammunition,implements of war, etc, “to oppose and off-set by nonmilitary action acts which threat-en the security of the United States and thepeace of the World” (sec. 201).

Even more important, however, the BattleAct formally announced the intention of theUnited States to seek multilateral coopera-tion in the implementation of this policy. Itcreated sanctions through which such coop-eration might be enjoined and provided a leg-

islative mandate for active U.S. participa-tion in multilateral organizations designedto realize the embargo. Title I of the Act em-powered the President of the United Statesto terminate all forms of military, economic,and financial assistance to any nation thatknowingly permitted the sale of U.S. embar-goed goods to a prohibited destination; i.e.,to any country “threatening the security ofthe United States. ” These embargoed goodsincluded arms, ammunition, implements ofwar, atomic energy materials, petroleum,transportation materials of strategic value,and items of strategic significance used inthe production of arms, ammunition, and im-plements of war (sec. 101). Moreover, Con-gress stipulated that the United Statesnegotiate with those countries receiving itsaid “to undertake a program controlling ex-ports of items (other than arms, etc.) . . .which should be controlled to any nation orcombination of nations threatening thesecurity of the United States, including theUnion of Soviet Socialist Republics and allcountries under its domination” (sec. 202).

Allied response to the Battle Act wasnever enthusiastic. As a 1969 House Bank-ing Committee report noted,

From the outset, few West European orJapanese statesmen or businessmen sharedthe underlying assumption, or for that mat-ter, the ultimate objective of the embargo.Only under the most intense pressure and co-ercion did Europe and Japan accede to thisrestrictive policy . . . . A chain of legislationfollowed stipulating that nations receivingU.S. aid had to conform to rules laid down bythe United States concerning exports toCommunist countries. The threats of theselaws to cut off American aid became themain bargaining weapon with which West-ern European governments were brought tocooperate in the embargo policy.

Allied differences with the United Statesrested both on policy and economic interests.Europeans simply could not accept the viewthat denying trade would put an end to com-munism or even curtail the Communist coun-tries’ development. In more pragmaticterms, trade with Eastern Europe was a


matter of no small consequence to our WestEuropean partners .. ..2

At this time, however, U.S. economic andmilitary aid far outweighed such trade ineconomic importance to Western Europe.Thus, although export controls there and inJapan would never be as severe as those inthe United States, America’s allies didevince some willingness to join in a coor-dinated trade policy. This can be seen in thefounding in 1950 of the Coordinating Com-mittee for Multilateral Export Controls, orCoCom. CoCom, which remains a function-ing body today, is an informal multilateralorganization made up of the United Statesand its principal allies. It attempts to coor-dinate the national export controls of itsmembers into a unified policy that limitsstrategic trade with the Communist bloc.The history and operations of CoCom are dis-cussed in chapter VIII.

The 1960's – The Beginningsof Moderation

By the early 1960’s, pressure from Europeand from some parts of the U.S. businesscommunity led to a major reevaluation ofU.S. export policy. Discussion in the UnitedStates over the shape and future of exportcontrols began to emphasize a search for aproper balance between the economic bene-fits of expanded trade with the East and thethreat to U.S. national security posed bythis trade. The history of export controlssince the 1960’s has been a gradual move-ment from an exclusive emphasis on thesecurity aspects of trade toward relaxationof controls. There was, however, no majorchange in policy during the 1960’s.

President Kennedy, for example, in hisJanuary 30, 1961 State of the Union address,requested greater discretion for using “eco-nomic tools . . . to help reestablish historicties of friendship” between the UnitedStates and the Eastern bloc whenever this

*Hearings on H.R. 4293 to extend and amend the ExportControl Act of 1949, Committee on Banking and Currency,1969, p. 4.

was “clearly in the national interest.”3 Inorder to facilitate any resulting trade, Ken-nedy established by executive order the Ex-port Control Review Board, a cabinet-levelbody which considered the merit of applica-tions for exports to the Communist world.

Congress, on the other hand, took no initi-ative to formulate a less restrictive policy.On the contrary, a 1962 amendment to theExport Control Act explicitly broadened thecriteria for adding items to the list of con-trolled commodities by formally includingexports of economic as well as military sig-nificance under its aegis. The language of theAct was thus altered to read that “unre-stricted exports of materials without regardto their military and economic significancemay adversely affect the national security ofthe United States. ” (Emphasis added.) Li-censes for any export making a “significantcontribution to the military or economicpotential” of nations threatening this na-tional security were to be denied. Thisamendment may not have substantially af-fected the number and kinds of commoditiesunder control; criteria for inclusion on thelist were already broadly interpreted. Butthe spirit of the amendment implies the dec-laration of outright economic warfare on theCommunist world.

In an attempt perhaps to ameliorate theeffect of this declaration, President Johnsonin 1965 created a Special Committee on U.S.Trade Relations with East European coun-tries and the Soviet Union. Its task was toexplore “all aspects of expanding trade” insupport of the President’s policy of “build-ing bridges” between the United States andthe countries of Eastern Europe and theU.S.S.R., 4 a policy which the President reaf-firmed in a State of the Union address inwhich he announced that the Governmentwas “now exploring ways to increase peace-ful trade with the countries of EasternEurope and the Soviet Union.”5 Immediate

‘Department of State, The Battle Act in New Times, 15thReport to Congress, p. 5.

4Department of State, The Battle Act Report, 18th Reportto Congress, p..49.

‘Ibid.

Ch. VIl— The East-West-Trade Policy of the United States ● 115

increases in such trade were not forthcom-ing, however. The members of the SpecialCommittee–labor, business, and financialleaders–were generally “hardliners” onEast-West relations and the committee’srecommendations did little to encourage ex-pansion. Although the committee recom-mended that the President be given discre-tionary authority to grantor withdraw MFNtariff treatment to and from individual Com-munist countries when he determined this tobe in the national interest, it also felt thattrade with Communist countries should nei-ther be subsidized nor receive artificial en-couragement.6 No basic alterations were pro-posed to the system of export controls, but itwas suggested that the role of the Depart-ment of Defense (DOD) be expanded andthat it, rather than the Department of Com-merce, become the primary agency responsi-ble for identifying strategic goods.

The Export Administration Actof 1969

By the time of the first Nixon Administra-tion, however, the policy of “economic war-fare” had come under increasing attack. Theeconomic leverage on which the Battle Actrelied had been greatly diminished by therapid reconstruction of the Japanese andWest European economies and the conse-quent reduction of their need for U.S. aid.The Battle Act, in fact, had never been in-voked to enforce sanctions. This by nomeans indicated that the export controls ofall nations receiving U.S. aid were as strin-gent as those of the United States, or thatAmerica’s allies were willing to pursue pol-icies of economic embargo. Often, the execu-tive used its waiver authority under the Bat-tle Act to countenance European exports tothe East that otherwise would have violatedthe law. During the mid-1950’s WesternEuropean exports to the Warsaw Pact na-

tions increased while the amount of Amer-ican aid to Western Europe decreased (seechapter VIII). Furthermore, American man-ufacturers had begun to complain that over-

61bid., pp. 67-69.

ly restrictive legislation placed them at acompetitive disadvantage with Japan andthe countries of Western Europe, whosetrade with the Soviet Union, the People’s Re-public of China (PRC), and Eastern Europewas expanding.

Congress was responsive to these pres-sures. In the face of the national wearinesswith the cold war and changing perceptionsof superpower relations, a burgeoning bal-ance of payments deficit, and recognition ofthe growing commercial value of an East-West trade in which the United States wasnot participating, the initiative to liberalizeexport controls began to come from Con-gress. This resulted in the passage of the Ex-port Administration Act of 1969 (Public Law91-184). This Act symbolized the attempt toachieve a new emphasis for export controls—away from a restrictive and strategic em-bargo toward a careful expansion of exports.

This is not to say that the Export Admin-istration Act had the wholehearted supportof a unanimous Congress. On the contrary,the controversies that surrounded its pas-sage are significant, for the disagreementsthat surfaced in 1969 over the future of ex-port controls have yet to be resolved. Theyreflect differing perceptions of the nature ofthe threat to the United States posed by theSoviet Union and of the ways in which thisthreat should be faced.

Extension of the Export Control Act inthe House came under the jurisdiction of theCommittee on Banking and Currency, whichoriginally reported out a bill extending theexisting 1949 legislation with only minorchanges in administration. This was consist-ent with the position of the Nixon Adminis-tration at the time. But a dissent to the ma-jority report of the committee argued for afundamental change in the law, assertingthat the basic premises that underlay theExport Control Act were no longer valid: theSine-Soviet bloc was no longer monolithic;goods withheld from the Soviet Union by theUnited States could be obtained elsewhere;and the attempts of the United States to im-pose unilateral export controls more severe


than those of its allies were divisive. Accord-ing to one Representative, the United Stateshad

. . . moved into a period in which the Con-gress should maintain a close, in-depth re-view of our export control laws with a viewto reshaping them in light of political, eco-nomic, and technological changes takingplace in Western Europe, Japan, and theCommunist countries of Eastern Eur-ope . . . . At this stage of development, theUnited States has at least as much to gain asthe Communist countries from mutual tradeand the barring of this trade today is hurtingus more than them . . . . Controls on commer-cial goods continue not only as an irritant toour allies but as a loss in business to U.S.firms . . . . The Export Control Act should beamended to include a finding that expandedtrade in peaceful goods and technology withall countries with which we have diplomaticor trading relations can further the soundgrowth and stability of the U.S. economy aswell as further our foreign policy objectives.7

Another proposed amendment would haveintroduced the criterion of foreign availabili-ty in the disposition of export license ap-plications. The President, it was suggested,should “take into consideration the availabil-ity of an export from any nation with whichwe have a defense treaty commitment in de-termining whether or not an export licenseshall be denied or granted to one of our ownexporters.”8

These minority views in the House of Rep-resentatives were consonant with the pre-vailing opinion in the Senate. In its report onthe Senate version of the export control leg-islation, the Senate Committee on Bankingand Currency asserted that since 1949, “vir-tually every circumstance which made theExport Control Act both advisable and feasi-ble has changed. ” It was no longer possibleto “impede the development of Russia byrefusing to sell goods to it, ” for the Sovietscould obtain what they desired elsewhere.

‘Representative Thomas Ashley, in U.S. Congress, HouseCommittee on Banking and Currency, Export Control ActExtension, report no. 91-524, Sept. 29, 1969, pp. 9-11.

‘Representative Gary Brown, ibid., pp. 18-19.

The competitive disadvantage suffered byAmerican businessmen and the U.S. balanceof payments deficit were added reasons foroverhauling the existing legislation. In sum,

The attitude apparent in the language ofthe Export Control Act is one of open hostili-ty, which is an accurate reflection of the pre-vailing attitude 20 years ago. The committeebelieves that it will be helpful in the attemptto reach greater understanding with Russiaand nations of Eastern Europe if the legisla-tion which deals with the regulation of ex-ports accurately reflects current attitudes.9

The minority view in the Senate, on theother hand, resembled that of the majority inthe House. At the heart of the disagreementboth within and between the two Houseswere the protagonists’ assumptions aboutthe nature and future of East-West rela-tions. Some Senators were in favor of main-taining the existing export control legisla-tion with minor administrative changes.They wrote of the proposed Senate revisions:

The proposal which would replace thepresent Export Control Act is based on theassertion that factors which brought aboutthe enactment of the Export Control Act nolonger exist. We cannot agree with such anassertion. It is suggested that we are nowliving in an era in which the Soviet Unionpresents a reduced threat to the security ofthe United States. We find no evidence thatsuch a new era has been ushered in. In fact,we consider the Soviet Union as a muchgreater threat to the security of the UnitedStates than it was when the Export ControlAct of 1949 was passed.10

The views of the majority of the SenateBanking Committee eventually prevailed inCongress and “export control” was replacedby “export administration. ” The new Act at-tempted to reconcile an encouragement oftrade with the East with the maintenance ofnational security concerns by declaring it tobe the policy of the United States both “to

‘U.S. Congress, Senate Committee on Banking and Cur-rency, report no. 91-336, July 24, 1969, pp. 2-3.

‘“Senators Wallace F. Bennett and John G. Tower, ibid., p.22.

Ch. VII—The East-West-Trade Policy of the United States 117

encourage trade with all countries withwhich we have diplomatic or trading rela-tions, ” and “to restrict the export of goodsand technology which would make a signifi-cant contribution to the military potential ofany other nation . . . detrimental to the na-tional security of the United States” (sec. 3).The Act specifically noted the negative im-pact of unwarranted regulation of trade onthe U.S. balance of payments and the imped-iment of this regulation to the efforts of busi-nessmen to expand trade. The employmentof America’s technological resources abroadwas no longer to be regarded merely as an in-strument of foreign policy and national secu-rity; in the Act, trade also became an instru-ment to “further the sound growth and sta-bility” of the U.S. economy, and Congress’intention to promote trade in peaceful goodswas clearly expressed. All language imply-ing that trade restrictions might be used topursue policies of economic warfare was de-leted. Under the Act, therefore, export con-trols became exceptions limited to threebasic purposes: to protect the national secu-rity, to protect goods and commodities inshort supply, and to further foreign policyaims as determined by the President. Thepresumption had now shifted in favor ofmore normal economic relations with theCommunist world.

In order to implement this intention, theSecretary of Commerce was authorized toundertake the organizational and proceduralchanges necessary to revise control regula-tions and shorten lists of controlled com-modities by removing items of purely eco-nomic or marginal military use; only goodsand technologies that would make a signifi-cant military contribution, were in short sup-ply, or would in the view of the President fur-ther a foreign policy aim of the United Stateswere subject to control. Exporters weregiven the right to obtain information on thecriteria for export licenses, to learn thereasons for denials or delays in grantinglicenses, and to present evidence to supporttheir applications in regulatory proceedings.Finally, the administrative agencies respon-sible for export control were enjoined to con-

sult among themselves and with affected in-dustries for information and advice on therevision of the controlled commodity lists.

The 1972 Amendments: The EqualExport Opportunity Act

The Export Administration Act expired in1972, at which time it was amended and ex-tended until 1974 by the Equal Export Op-portunity Act (Public Law 92-412). Its provi-sions reflect two problems with the imple-mentation of the 1969 Act—reviews of theunilateral and multilateral commodity con-trol lists, and the proposed consultationsamong agencies and with affected indus-tries. Although 2½ years had passed sincethis legislation was enacted, the House Com-mittee on Banking and Currency found thatthe required reviews and revisions had notbeen made and that consultations with in-dustry still left much to be desired. Ac-cording to the committee, this situationstemmed, first, from a shortage of Federalagency manpower and technical expertise re-garding the “state of the art” of many prod-ucts available both in the United States andin Europe. Second, sufficient procedures forconsultation with domestic producers whoknew the product, the competition, and the“state of the art” had not been developed.11

Although the House report voiced theseconcerns, the committee recommended ex-tension of the 1969 Act without alteration,rejecting not only amendments addressed tothese problems but also one which wouldhave declared it to be “the policy of theUnited States to use export controls to op-pose the denial by any country of the rightsof its Jewish and other citizens to free emi-gration and the free exercise of religion. ” Inthis connection, the committee expressed itssympathy in the plight of Soviet Jews, butfelt “that the amendment in question mightnot be the best approach to the resolution ofthe problem at this time.“12

“U.S. Congress, House Committee on Banking and Cur-rency, International Economic Policy Act of 1972 report no.92-1260, July 27, 1972, p. 4.

12u.s. ConWess, House Committee on Banking and Cur-rency, International Economic Policy Act of 1972, report no.92-1260, pt. II, Aug. 3, 1972, p. 2.


The amendments which would eventuallybe embodied in the Equal Export Opportuni-ty Act ultimately evolved from the report ofthe Senate Committee on Banking, Housing,and Urban Affairs, which shared the HouseCommittee’s concerns over the necessity forreview of unilateral and multilateral con-trols, and over consultation with industry.Of particular interest to the Senate was thepossible handicap the Act might pose toAmerican businessmen in competing withother CoCom countries for markets in theEast:

At this time the United States controls495 classifications of goods and technologyby multilateral (CoCom) agreement with ourAllies. In addition, the United Stateschooses to retain unilateral controls on 461classifications of goods and technology. TheUnited States is the only CoCom countrywhich controls the export of a significantlygreater number of items than those whichthe CoCom agree to control multilateral-ly . . . . Items which are available in com-parable quality and quantity from foreignsources shall be removed from unilateralcontrols unless the Secretary gives adequateevidence that such decontrol would threatenthe national security .13

The committee also found that the establish-ment of Technical Advisory Committees(TACs) would “enable the Government toutilize more effectively the technical andcommercial expertise which only representa-tives of industry affected by export controlscan provide,”14 and it recommended the cre-ation of such committees.

These proposals encountered the same op-position as had the Export AdministrationAct 3 years before. Senators Tower and Ban-nett particularly felt that the Act as it stoodwas flexible enough for a policy of expandingtrade without jeopardizing national securityinterests. They objected to the establish-ment of TACs, for instance, on the groundsthat the judgments required in export-licens-

‘3U.S. Congress, Senate Committee on Banking, Housingand Urban Affairs, Equal Export Opportunity Act and theInternational Economic Policy Act of 1972, report no. 92-890,June 19, 1972, pp. 2-3.

“Ibid., p. 4.

ing decisions were governmental responsibil-ities that industry experts were ill-equippedto make; that TACs would introduce new ad-ministrative burdens to the licensing sys-tem; that the informal consultation arrange-ments already adopted by the Departmentof Commerce were adequate; and finally,that the requirement of consultation withTACs would inhibit the Commerce Depart-ment from placing new items under control.

These objections notwithstanding, Con-gress passed the Equal Export OpportunityAct and gave legislative mandate to theviews of the majority Senate report. First,the new Act emphasized the adverse effecton U.S. balance of payments of excessive ex-port controls, particularly those which aremore restrictive than those imposed byAmerica’s CoCom allies. It directed the Sec-retary of Commerce to remove, so far as thenational security of the United States per-mitted, unilateral U.S. controls over com-modities available “. . . without restrictionfrom sources outside the United States insignificant quantities and comparable inquality to those produced in the UnitedStates” (sec. 4(b)(2)(B)). This made foreignavailability-the existence of significantquantities of comparable goods outside theUnited States–a formal reason for grantinga U.S. export license.

A second provision ensured the use of pri-vate sector expertise by requiring the Gov-ernment to consult with qualified private in-dustry experts on all licensing decisions. Toaccomplish this, the Secretary of Commercewas directed “upon written request by repre-sentatives of a substantial segment of anyindustry” that produces commodities sub-ject to export controls to appoint TACs con-sisting of representatives of U.S. industryand Government. The TACs were to be “con-sulted with respect to questions involvingtechnical matters, worldwide availability,and actual utilization of production and tech-nology and licensing procedures which mayaffect the level of [unilateral U.S. andCoCom] export controls” (sec. 5(c)(l), 5(c)(2)).Since 1972, the Secretary of Commerce hasestablished eight TACs in the following


fields: semiconductors; semiconductor man-ufacturing and test equipment; numericallycontrolled machine tools; telecommunica-tions equipment; computer systems; com-puter peripherals, components, and relatedtest equipment; and electronic instrumenta-tion.

The Export Administration ActAmendments of 197415

Consideration of the Export Administra-tion Act in 1974 occurred in the aftermath ofthe OPEC oil embargo, economic recession,and serious domestic shortages in severalcommodities. Although the discussions inboth Houses were understandably domi-nated by the issue of short supply controls,Congress also passed amendments that hadan impact on the transfer of technologythrough national security and foreign policycontrols.

In the House Banking and Currency Com-mittee, the central concern arose from thebilateral exchange agreements in science andtechnology that had been signed after the1972 U.S.-U.S.S.R. summit. As a result ofthese agreements and the Joint Commissionestablished under them, many U.S. com-panies entered into technical cooperationagreements with the Soviet Union, some ofwhich called for the exchange of pure, unem-bodied technology. Under the existing legis-lation the Department of Commerce and theother agencies of Government concernedwith export control were not informed of thedetails of these technical cooperation agree-ments until they led to application for exportlicenses. This made it difficult for the Gov-ernment to effectively discharge its exportcontrol responsibility. The Subcommittee onInternational Trade of the House Committeeon Banking, therefore, considered an earlynotification system for technical cooperationagreements. It also investigated chargesthat technical secrets that would endanger

“>’I’he material in this and the following section is drawnfrom Patricia t$’ertman, “A Brief Overview of the Amendingof the Export Administration Act of 1969, W’ith Special Em-phasis on N’ational Security and Foreign Policy Controls, ”Congressional Research Ser\ice, Feb. 8, 1979.

national security were being exported to theU.S.S.R. through the agreements. Testi-mony from expert public witnesses, as wellas from representatives of the Departmentsof Defense, State, and Commerce, dis-counted these charges. And although Gov-ernment officials testified that new report-ing requirements would give them bettercontrol of exports to protect national secu-rity, no provision on prior notification oftechnical cooperation agreements appearedin the Senate version of the bill or in the finallegislation.

As before, the amendments to the ExportAdministration Act adopted by the full com-mittee originated in the report of the SenateCommittee on Banking, Housing, and UrbanAffairs. The Senate discussions of nationalsecurity controls resurrected the twin con-cerns of prior Congresses that U.S. busi-nesses not be unduly penalized in the admin-istration of export controls and that the na-tional security not be jeopardized by thetransfer of sensitive technologies. On thesubject of the administration of licensingprovisions, the Senate proposed a new sec-tion to the Export Administration Act re-quiring that applications for export licensesbe acted on within 90 days of their submis-sion. If the deadline could not be met, the ap-plicant was to be informed of the reasons forthe delay and an estimate given of the timeneeded for decision. Other amendments re-quired the Secretary of Commerce to reportto Congress on the steps taken to expeditethe licensing process; the Departments ofCommerce, Defense, and State, as well asother appropriate agencies, to be repre-sented on TACs; and disclosure to the Houseand Senate of information on the reason forexport controls already in effect or contem-plated.

A final amendment called for review bythe Secretary of Defense of all exports to“controlled” countries (i.e., Communistcountries). The Military Procurement Au-thorization Act of 1974 (Public Law 93-365)had already mandated such a review fortechnologies developed directly or indirectlyas a result of R&D funded by DOD. This


oversight was now extended to all license ap-plications. The Secretary was empowered torecommend to the President disapproval ofany export if it would significantly increasethe military capability of a controlled coun-try. A Presidential decision to override theSecretary of Defense was to be submitted toCongress, which had 30 days in which tooverrule the President’s decision by majori-ty vote. These provisions were designed “toinsure that DOD has an adequate opportuni-ty to consider the military and national secu-rity implications of exports to Communistcountries and that the Congress has a voicein the decision in the event of White Houseand DOD disagreement.“16

The Export Administration ActAmendments of 1977

In 1977 there was no serious disagreementbetween the two Houses on the substance ofthe proposed amendments to the Export Ad-ministration Act. In both the mood wasclearly in favor of facilitating the expansionof East-West trade so far as this was consist-ent with national security. One importantarea of discussion was the issue of foreignavailability. Section 4(b)(2) of the existinglegislation stipulated that “goods freelyavailable elsewhere shall not be controlledfor export from the United States unless it isdemonstrated that the absence of controlswould damage the national security. ” Theexisting legislation allowed Presidentialdiscretion in imposing national security con-trols “regardless of the availability” (sec.4(b)(l)). The House wanted to ensure that thenecessity for control was justified, i.e., itwanted to make exemptions from control onthe grounds of foreign availability the basicpolicy of the Act. The Senate agreed, provid-ing in its bill that in the cases where “ade-quate evidence has been presented to thePresident demonstrating that the absence ofsuch controls would prove detrimental to thenational security of the United States . . .such evidence is to be included in the annual

“U.S. Congress, Senate Committee on Banking, Housing,and Urban Affairs, Export Administration Act Amendmentsof 1974, report no. 93-1024, July 22, 1974, p. 9.

report required by the act.”17 Moreover, theSenate version required the President to ini-tiate negotiations with other countries toeliminate foreign availability in such in-stances. Both of the latter requirementswere included in the enacted legislation.

In addition, the bills voted out of commit-tee in both Houses sought to alter the ideo-logical classification of countries to whichexports should be controlled. Under the ex-isting legislation the Secretary of Defensewas directed to review applications for ex-ports to “controlled” countries, i.e., Commu-nist countries as defined in section 620(f) ofthe Foreign Assistance Act of 1961. ’8 BothHouses substituted for “controlled country”the phrase “country to which exports arerestricted for national security purposes. ”According to the Senate, the previous ap-proach was both “straitjacketed” and “in-consistent, ” little serving the Nation’s in-terest in maintaining flexibility in the scopeand application of export control. It wascrucial that export control policy reflect thechanging complexion of international rela-tions, yet existing legislation foreclosed ordiminished new market opportunities inEastern Europe. At the same time, it ig-nored the possibility, however remote, of po-tential threats to the Nation’s security fromentirely different parts of the world. As theSenate observed, one of the major purposesof the amended legislation was to “promoteand encourage a continuing reexamination ofexport control policies and practices to in-sure that they reflect changing world condi-tions and the changing dimensions of na-tional security . . . The bill is intended todiminish the tendency of rigid cold warperceptions of national security to dominatethe export control process.“19

“U.S. Congress, Senate Committee on Banking, Housing,and Urban Affairs, Export Administration Amendments of197z report no. 95-104, Apr. 26, 1977, p. 29.

‘nThese countries include the Soviet Union, Albania, Bul-garia, Czechoslovakia, Estonia, East Germany, Hungary,Latvia, Lithuania, Poland, Romania, People’s Republic ofChina, Yugoslavia, Tibet, Outer Mongolia, North Korea,North Vietnam, South Vietnam, and Cambodia.

‘gSenate report no. 95-104, op. cit., p. 9.


The House similarly desired to reduce em-phasis on Communist countries as the focusof export controls, recognizing that Commu-nist and non-Communist countries alikemight vary in the extent to which they con-stituted a threat to the national security ofthe United States. But implicit in this reduc-tion of emphasis on specific countries as thebasis for export controls was the need to putgreater emphasis on the nature of commodi-ties to be exported.20 What both Housessought, therefore, was a more flexible ap-proach to export controls that would shiftemphasis from the country of destination tothe exported commodity. Both bills ex-pressed this in identical language: “In ad-ministering export controls for nationalsecurity purposes, United States policytoward individual countries shall not bedetermined exclusively on the basis of acountry’s Communist or non-Communiststatus but shall take into account such fac-tors as the country’s present and potentialrelationship to the United States, its abilityand willingness to control retransfers ofUnited States exports in accordance withUnited States policy, and such other factorsas the President may deem appropriate.“21

The President was to periodically reviewpolicy toward individual countries.

The amended Act also limited the groundson which the Secretary of Defense couldrecommend against export for national secu-rity reasons. Instead of restricting exportsof products that “significantly increase themilitary capability” of a country, it becamenecessary to show that the exports would“make a significant contribution to the mili-tary potential of such country. ” In anothersection the original language, “significantlyincrease the military capability of such coun-try” became “make a significant contribu-tion, which would prove detrimental to thenational security of the United States, to themilitary potential of such country” (sec.4(h)(l)). The import of these changes wasthat it was no longer sufficient simply to

*“House report no. 95-190, op. cit., pp. 3-4.21 Senate report no. 95-104, op. cit., p. 57; House report no.

95-190, op. cit., p. 32.

show that an export in some way contrib-uted to foreign military capabilities (presum-ably a very wide range of products and tech-nologies contribute in some way to militaryuses). The Secretary must now stipulate thatthe military impact is detrimental to thesecurity of the United States.

The 1977 amendments also embodied sev-eral procedural changes in the adminis-tration of export controls. Both the Houseand the Senate were displeased with the per-sistently slow processing of licenses for ex-port, and both proposed bills reiterated theprovision that all export licenses be ap-proved within 90 days unless the applicantwas notified in writing that additional timewas needed. In addition, the applicant wasenabled to respond fully in writing to thequestions and considerations raised by theapplication. In the event of interagencyreview of a proposed export, the applicantcould review the documentation to deter-mine that it accurately described the pro-posed export. If the export license wasdenied, the applicant was to be informed ofthe specific statutory authority for thedenial, i.e., national security, foreign policy,or short supply. (The Commerce Departmenthad been denying export licenses on the non-statutory grounds of “national interest.”) Inaddition, the Secretary of Commerce was re-quired to review the export regulations andlists in order to simplify and clarify them.Within 1 year the Secretary of Commercewas to report to Congress any actions to sim-plify the export rules and regulations.

The 1977 amendments also extendedterms of service on TACs from 2 to 4 years,instructed TACs to review multilateral aswell as unilateral controls, and the Secretaryof Commerce to report to Congress semi-annually on consultations with TACs. Butwhile the Senate bill provided that TACs beinformed of the reasons for the failure of theGovernment to accept their advice, theHouse bill stated that:

The committee notes that it consideredand rejected recommendations by industrythat the Government be required to justify


directly to the TACs any refusal to accepttheir advice. The committee views such a re-quirement as an unwarranted intrusion ofthe private sector into governmental deci-sionmaking. The committee bill preservesthe requirements that the Government beaccountable for its actions, without creatinga presumption that the Government is con-strained to accept the advice of any single in-terest group. z’

The final legislation incorporated the Houseversion.

The Export Administration Actof 1979

The 1977 amendments extended the Ex-port Administration Act until September 30,1979. But by September 1978, attemptswere already underway in the House of Rep-resentatives to produce legislation thatwould impose conditions restrictive to thegrowth of East-West trade. The TechnologyTransfer Ban Act (H.R. 14085), introducedby Representative Dornan on September 14,1978, asserted that no coherent nationalpolicy controlled the transfer of technologyto the Communist world; that actions takenby the Soviet Union, including human rightsviolations and enterprises in Africa, demon-strated that Soviet and American views ofdetente basically differed and belied the ex-pectation that increased economic inter-dependence with the West would moderateSoviet military and political objectives; thattrade with the West was being utilized bythe Communist world to acquire strategictechnology; and that current U.S. proce-dures did not adequately prevent the trans-fer of critical technology to the Soviet Union,Eastern Europe, and China nor adequatelyencourage America’s allies to do the same.The bill therefore proposed to restrict the ex-port of goods and technology that “couldmake any contribution to the military or eco-nomic potential” of any nation, which wouldprove detrimental to the national security ofthe United States.

“House report no. 95-190, op. cit., p. 16.

This language could obviously be inter-preted broadly enough to virtually embargoall trade with the Communist world. Afterthe bill died in Committee, its supportersmodified it, and in March 1979, the “ExportAdministration Reform Act of 1979” (H.R.3216), introduced by Representative LesterWolff and cosponsored by RepresentativesMiller, Ichord, Dornan, and 21 others wasreferred jointly to the House Foreign Affairsand Armed Services Committees. This billsought to assign a larger role to DOD in ex-port control proceedings by giving the Secre-tary of Defense the primary responsibilityfor identifying the types of technologies andgoods to be controlled for national securitypurposes. It furthermore mandated the for-mulation of a list of critical technologies (seechapter V) and prohibited the export of “anycritical technology or critical good to anycontrolled nation” as well as such exports toany other nation, except under validatedlicense. “National security impact state-ments” were to be required by Congress inall cases of the President’s deciding to over-rule or modify classifications of technologiesby the Secretary of Defense, or in any casesof licensing decision made on grounds offoreign availability. Congress was given thepower to overrule such Presidential deter-minations by a resolution in either House.

The major alternative to this bill in theHouse was H.R. 2539, introduced by Repre-sentative Jonathan Bingham in March 1979.This bill emphasized the importance of ex-ports to the U.S. national interest, and notedthe detrimental effects of the present “un-certain” administration of export controls tothe U.S. economy. It declared it to be thepolicy of the United States to use export con-trols to further the national security of theUnited States, but also to encourage tradewith all nations with which the UnitedStates had diplomatic or trading relations,and to restrict exports only in exceptionalcircumstances after full consideration of theeconomic impact of such restrictions. Thelegislation sought to make the process of ex-port licensing more accountable to the public

Ch. VII— The East-West-Trade Policy of the United States . 123

and to Congress, and to encourage multilat-eral cooperation in the use of export controls.

The legislation that was ultimately re-ported out of Committee, H.R. 4034, mostclosely resembled the Bingham bill. UnderH.R. 4034, the Department of Commerce re-tained the lead role in the administration ofthe export control system with the Depart-ments of State and Defense providing princi-pal supportive roles, but the working rela-tionship between the three was formally de-fined. DOD, whose responsibility lay in thenational security aspects of the export-licensing system, would continue to conducttechnical evaluations of the military implica-tions and potential military diversion of pro-posed exports. Its concurrence was formallyrequired in any changes in the commoditycontrol list. The Secretary of Defense wasalso given authority to appeal directly to thePresident on any licensing decision incon-sistent with national security. The criticaltechnologies approach was encouraged andthe Secretary required to report annually onits progress.

The State Department continued to haveresponsibility for recommending the use ofexport controls for foreign policy purposesand for representing the United States inCoCom, although authorization for partici-pation in CoCom was transferred from theBattle Act to the Export AdministrationAct. In addition, the Secretary of State wasgiven the authority to appeal directly to thePresident on any licensing decision incon-sistent with U.S. foreign policy interests.

In the hearings on H.R. 4034, a consider-able amount of testimony focused on the in-efficiency of the present system in process-ing export license applications. The bill hadprovided for a series of “suspense points”that would automatically elevate undecidedcases to higher policy levels, although thePresident was given authority to waivethese time limits in important cases for pur-poses of renegotiating with the seller or for-eign customer. The bill also provided for con-gressional veto over the intended (or ex-panded) use of export controls for foreign

policy purposes. In addition, a new form ofexport license, a “qualified general license”(see chapter II) was instituted to expeditethe licensing process by allowing exports ofcertain categories of previously licensed ex-ports, obviating repeated validated licenseapplication.

H.R. 4034 explicitly distinguished the cri-teria and procedures in the use of nationalsecurity and foreign policy export controls.National security controls were designed to

. . . prevent the acquisition or delay [theacquisition] by hostile or potentially hostilecountries of goods and technology whichwould significantly enhance their militarycapabilities to the detriment of U.S. nationalsecurity .23

This statement had clear implications forthe issues of both foreign availability and ofthe role of Congress within the licensingprocess. By their very nature, licensing deci-sions in the national security arena arehighly technical; this tends to preclude ma-jor congressional involvement; foreign avail-ability makes U.S. controls ineffective in anycase.

The bill was less precise on the use of con-trols for foreign policy reasons, the purposesof which can range from the human rightspolicy of another country; to inhibitinganother country’s capacity to threaten coun-tries friendly to the United States; to associ-ating the U.S. diplomatically with a particu-lar group of countries; to disassociating theUnited States from the policies of a repres-sive regime. Because foreign policy controlsinvolve political-as opposed to technical—decisions, congressional involvement wasdeemed more appropriate. Thus, H.R. 4034contained a provision for congressional vetoon the Presidential use of foreign policy con-trols.

On the issue of foreign availability, theHouse report noted that U.S. ability to uni-laterally deny goods and technology to the

“House Committee on Foreign Affairs, Report on the Ex-port Administration Act Amendments of 1979, report no.96-200, May 15, 1979, p. 7.


Eastern bloc has been eroded by an array offactors, including the increased competitionin the high-technology marketplace. In ac-knowledgment of this fact, the bill requiredthe Secretary of Commerce to establish acapability within the Office of Export Ad-ministration (OEA) to continuously monitorthe issue of foreign availability, utilizing inpart the Government-industry TACs andseeking a more unified CoCom response tothe foreign availability problem.

The primary legislation considered in theSenate was S. 737, introduced on March 22,1979, by Senator Adlai Stevenson and re-ferred to the Committee on Banking, Hous-ing, and Urban Affairs.24 The bill was re-ported out on May 7, 1979, with committeeamendments. Under S. 737, a new exportcontrol statute—the Export AdministrationAct of 1979—was to be established, super-seding the Export Administration Act of1969, as amended.

As with the House bill, findings and policydeclarations stressed the importance of ex-ports to the U.S. economy. Particular atten-tion was given to the minimization of “uncer-tainties in export control policy” as a meansof encouraging trade with all countries withwhich the U.S. has diplomatic or trading re-lations, except in cases where such tradewould be against the national interest.

As introduced, S. 737 had referred to the“right to export. ” The bill was amended tosubstitute the word “ability,” the intentionbeing not to denote a constitutional or other-wise legally enforceable right to export freefrom Government restriction, but rather toreinforce the strong presumption that citi-zens should be free to engage in internationalcommerce except in instances where regula-tion is clearly needed to advance importantpublic interests. Thus, the control of exportsshould be the exception and not the rule.

The bill reaffirmed the notion that exportcontrols administered for national security

Zion Apr. 23, 1970, S. 977 was introduced by Senator prox-mire at the request of the Administration. Its provisions of-fered no major reforms in the administration of export con-trols.

purposes should give special emphasis tocontrolling exports of technology (and goodsthat contribute significantly to transfer ofsuch technology) that could make a signifi-cant contribution to the military potential ofany country, detrimental to U.S. nationalsecurity, and also declared that the UnitedStates should cooperate with its allies forthis purpose. The President was required toannually review unilateral national securitycontrols and to review multilateral exportcontrols maintained for national securitypurposes every 3 years. High administrativepriority was given to the prevention of ex-ports of critical goods and technology, andthe Secretaries of Commerce and Defensewere enjoined to revise controls to ensurethey are focused on and limited to militarilycritical goods and technology.

The criteria for using export controls forforeign policy purposes as set forth in S. 737included the following:

(1) alternative means to further the for-eign policy purposes in question; (2) the like-lihood that foreign competitors will join theUnited States in effectively controlling suchexports; (3) the probability that such con-trols will achieve the intended foreign policypurpose; (4) the effect of such controls onUnited States exports, employment, andproduction, and on the international reputa-tion of the United States as a supplier ofgoods and technology; (5) the reaction ofother countries to the imposition or enlarge-ment of such export controls by the UnitedStates; and (6) the foreign policy conse-quences of not imposing contro1s.25

The President was required to reconsiderannually export controls maintained for for-eign policy reasons and to report the resultsto Congress. Thus, foreign availability wasto be assessed in both the foreign policy andnational security cases. The Department ofCommerce’s OEA would be responsible forassessing foreign availability. Review andrevision of export control lists were also re-quired.

‘Wee Senate Committee on Banking, Housing, and UrbanAffairs, Report on the Export Administration Act of 1979,report no. 96-169, May 15, 1979, pp. 5-6.


Like its counterpart in the House, S. 737instituted a qualified general license, to beused to permit multiple shipments to a par-ticular consignee or for a specified end use.Similarly, it established a timetable for ex-port license review, placing a 90-day limit onreview of a license if referral to other agen-cies or CoCom was not required, and a 180-day limit where referral was necessary.

Finally, S. 737 contained a subsection thatsuperseded the Battle Act and required thePresident to initiate negotiations withCoCom members for the purpose of reachingagreement on: 1) publishing the CoCom con-trol list, 2) modification of controls to obtainfull acceptance and enforcement by CoCommembers, and 3) adoption of more effectiveenforcement procedures.

Debates in both the House and the Senateon their respective bills underlined the twomajor themes which, since 1969, have sur-rounded the passage of and amendments tothe Export Administration Act: the threatto U.S. national security posed by the sale ofdual-use technologies to the Communistworld; and the importance to the U.S. na-tional interest of a positive trade balance andtherefore of a healthy export sector. The Actthat ultimately emerged, the Export Admin-istration Act of 1979 (Public Law 96-72),closely follows both H.R. 4034 and S. 737and therefore leans to the latter preoccupa-tion. This Act, which expires on September30, 1983, is reproduced in its entirety in theappendix to this volume. A selection of itsmajor provisions may, however, be summa-rized as follows:

. The Act finds that the ability of U.S.citizens to engage in international com-merce is a fundamental concern; thatexports contribute significantly to thenational security and well-being of theUnited States; and that over-restrictionor uncertainty in the exercise of exportcontrols can be detrimental to the inter-ests of the United States. On the otherhand, export of goods or technologywithout regard to whether they make asignificant contribution to the military

●

●

●

●

●

●

potential of recipient countries mayadversely affect the national security ofthe United States.The Act declares it to be the policy ofthe United States to minimize uncer-tainty in export controls and to encour-age trade. Export controls are to be uti-lized only after full consideration oftheir economic impacts and only to theextent necessary to protect U.S. nation-al security, to further significant for-eign policy goals, or to protect the do-mestic economy in cases of short sup-ply.A qualified general license, as proposedin the Senate bill, is established and adetailed procedure for processing ex-port-licensing applications, includingdeadlines, provisions for multiagencyconsultation, and applicant notificationand consultation is outlined. Qualifiedgeneral licenses, in lieu of validatedlicenses, are to be encouraged to themaximum feasible extent.The Battle Act is superseded and au-thorization provided for U.S. partici-pation in CoCom. The President is en-joined to enter into negotiations withother CoCom governments with a viewtoward reducing the scope of exportcontrols, publishing the CoCom listsand other pertinent documents, andholding periodic high-level meetings onCoCom policy.U.S. firms or enterprises (exceptingeducational institutions) entering intocommercial agreements with controlledcountries must now report these agree-ments to the Secretary of Commerce ifthey cite an intergovernmental techni-cal cooperation agreement and will re-sult in the export of unpublished techni-cal data.In cases where reliable evidence showsdiversion of dual-use items to militaryuse, the Secretary of Commerce is au-thorized to deny all further exports tothe end user responsible for the diver-sion until such time as it ceases.Foreign availability shall be continu-ously reviewed by the Secretary of Com-


merce in consultation with other agen-cies and with the TACs, and an officeestablished to gather information andengage in ongoing monitoring activ-ities.

● Validated licenses may not be requiredin cases where foreign availability hasbeen demonstrated, except in caseswhere this provision is waived by thePresident. In these cases, the Secretaryof Commerce must publish the detailsof the basis and estimated economic im-pact of the decision.

● The Commodity Control List (CCL) maybe indexed, i.e., annual increases in per-formance levels of items subject to con-trols identified and items automaticallydeleted on the basis of these stipula-tions.

● The President is enjoined to consideralternative actions and the followingcriteria before curtailing exports for for-eign policy purposes:—the probability that such controls

will achieve the intended foreignpolicy purpose in light of other fac-tors, such as foreign availability;

—the reaction of other countries;—the likely effect of the controls on the

U.S. economy; and–the ability of the United States to ef-

fectively enforce the controls.

Summary

The present Export Administration Act isthe embodiment of a policy of encouragingtrade with the Communist world in a mannerthat nevertheless protects U.S. nationalsecurity and allows the President flexibilityin the use of export controls to further for-eign policy aims. The fact that these aimsmay not always be entirely consistent is re-flected in the content of the congressionaldebates that have surrounded the Act sinceits passage in 1969, and in the nature of theamendments to it. These amendments havesometimes pulled in different directions—some attempting to facilitate the expansionof trade, others expressing concern at thestrategic implications of that trade. The gen-eral drift of the legislation has, however,

been toward liberalization of export controlsof goods and technologies to the East.

As the nature and quantity of the goodsand technologies permitted for export toCommunist nations have expanded and theclimate of detente has encouraged Americanbusinessmen to seek new markets in theEast, the system for the administration ofexport controls has had to contend withgrowing numbers of cases involving increas-ing technological variety and complexity. Inaddition, it has had to balance the sometimesconflicting demands of facilitating trade andprotecting national security. The followingsections describe the operation of this sys-tem and discuss the problems that it has en-countered.

THE ADMINISTRATION OFUS. EXPORT CONTROLS:THE LICENSING SYSTEM

In U.S. law, the freedom to export is aprivilege and not a right. All U.S. exportersrequire permission from the Government toship their goods. In accordance with the re-quirements of the Export AdministrationAct, the licensing system through which thispermission is granted is administered by theDepartment of Commerce, which has juris-diction over most commodities and unclassi-fied technical data. The only exceptions,which fall under the jurisdiction of otherFederal agencies, are munitions exports,which are controlled by the Department ofState; nuclear materials by the NuclearRegulatory Commission; and gold and for-eign currency by the Treasury Department.Commerce’s authority extends to the reex-port of commodities and data to third coun-tries; to the utilization of American technicaldata overseas; to the use of U.S.-origin partsand components in commodities manufac-tured abroad and destined to a third coun-try; and to exports of commodities and databy any person subject to the jurisdiction ofthe United States.

As the orientation and objectives of U.S.trade policy with Communist countries have

Ch. VII— The East-West-Trade Policy of the United States ● 127

shifted since the end of World War II, so toohave variations occurred in trade levels andin the number and kinds of items on the listof controlled commodities. But the proce-dures and institutions of the export controladministration system established over 30years ago persist. This phenomenon wassummed up in a recent Government studywhich noted:

In the aftermath of World War II, in re-sponse to problems of the Cold War, securitydefined in military terms became the overrid-ing purpose abroad—both in concept and inorganizational form. Today, the concept hassomewhat changed, but the organizationalform mostly remains. (author’s emphasis)”

The Commodity Control List

There are two types of export license—general and validated. A general license per-mits the export of certain commodities andtechnical data without the need to submit aformal application or obtain a license docu-ment for each transaction. These apply tomost commercial transactions, and approx-imately 90 to 95 percent of all U.S. exportsare shipped under their authority. The re-maining 5 to 10 percent, sent under vali-dated license, are subjected to a rigorous ap-plication process.

Technologies requiring a validated licenseare specified by the U.S. Department ofCommerce in the CCL (see figure 3). Thepresent CCL is the descendant of the lists ofcontrolled commodities that the Secretary ofCommerce, with the advice of the Secretariesof State and Defense, was first enjoined tocompile under the Export Control Act.Under the terms of this Act and Departmentof Commerce regulations, the CCL containsthose technologies, products, or commod-ities that fall into the following general cate-gories:

-“Graham T. Allison, “Overview of Findings and Recom-mendations from Defense and Arms Control Cases, in ap-pendixes: (’omission on the Organization of the Go~)ern-men t for the Conduct of Foreign Policy, June 1975, vol. IV(Washington, DC.: U.S. Government Printing Office, 1975),p. 21.

●

●

products and technical data that theU.S. Government determines capable ofcontributing significantly to the design,manufacture, and utilization of militaryhardware, or that fall under the CoComstrategic control system; petroleum and other products or commodities in shortsupply; andsome devices related to nuclear weap-ons and explosive devices; certain nucle-ar power facilities; and crime controland detection equipment, that is con-trolled for foreign policy reasons.27

Most items on the list are also on theCoCom list of controlled commodities; but atpresent 38 items are unilaterally controlledby the United States,28 according to the in-terpretation of Commerce, Defense, andState officials of the general criteria pro-vided in the law. U.S. industry, anxious toexpand exports to Communist-bloc coun-tries, is particularly critical of this fact, andas will become apparent below, much of thecriticism of the export-licensing system as awhole is directed at the composition of thelist itself.

At the present time, the CCL containssome 200 entries, many of which embodyhigh technology. These are grouped in thefollowing 10 categories:

Group Types of commoditiesO Metalworking machinery1 Chemical and petroleum equipment2 Electrical and power-generating equipment3 General industrial equipment4 Transportation equipment5 Electronics and precision instruments6 Metals, minerals, and their manufacture7 Chemicals, metalloids, and petroleum products8 Rubber and rubber products9 Misce l laneous

*’See the testimony of Rauer Meyer, Director of the Officeof Export Administration, U.S. Department of Commerce,before the Subcommittee on Domestic and International Sci-entific Planning, Analysis, and Cooperation, Committee onScience and Technology, U.S. House of Representatives, Oct.4, 1978.

‘“See the testimony of Stanley Marcuss, Senior Deput} As-sistant Secretary for Industry and Trade, U.S. Departmentof Commerce, before the Subcommittee on InternationalEconomic Policy and Trade, Committee on Foreign Affairs,U.S. House of Representatives, Mar. 7, 1979.


Figure 3.—Sample Page of the U.S. Commodity Control List

Commodity Control List—399.l CCL-1

Export Control Commodity Number GLV $ Value Limits

andValidated

Commodity Description Precees- Licenseunit ing Code Required T v Q

GROUP *METAL-WORKING MACHINERY 1

Forming Machines:

1072A Presses and specialized controls, accessories, Il.. --_-s II MC II QSTVWYZ II 1,000 11 1,000 II oand parts therefor, as follows:

(a) Presses (stabilized equipment using rams) for applying high impact energy work forces through use

(b)

(c)

(d)

(e)

of explosives or compressed gases including air;

Presses specially designed or re-designed for the working or forming of metals, alloys, or other materialswith a melting point exceeding 3,452° F (1,900o C) ;

Hydraulic presses, as follows:(1) vertical presses having a total rated force of over 10,000 tons; or(2) horizontal presses having a total rated force of over 5,000 tons;

Isostatic presses, as follows (isostatic presses are those capable of pressurizing a closed cavity throughvarious media (gas, liquid, solid particles, etc. ) to create equal force in all directions within the cavityupon a workpiece or material) :(1)

(2)

capable of achieving a maximum working pressure of 20,000 of psi ( 1,406 kg/cm2) or greater and pos-sessing a chamber cavity with an inside diameter in excess of 16 inches (40.6 cm) ; orcapable of achieving a maximum working pressure of 5,000 psi (351 kg/cm2) or greater and hav-ing a controlled thermal environment within the closed cavity, except those possessing a chambercavity with an inside diameter of less than 5 inches (127 mm) and which are also capable of achiev-ing and maintaining a controlled thermal environment only between + 176°F (+80” C) and —S1“F(–35 oC); and

Control equipment, accessories, and parts which are specially designed for the above presses.

1075A Spin-forming and flow-forming machines, II------S II MC II QSTVWYZ II 1,000 II 1,000 II Odouble support or three roller types, as follows:

(a) Horizontal spindle type designed to have and having a drive motor of 80 hp (59kW) or more; or

(b) Vertical spindle type designed to have and having a drive motor of 50 hp (37kW) or more; and

(c) Specially designed parts and accessories therefor.

Other Metal- Working Machinery:

108OA Machines and equipment, including special- l{- -- --.s II MC II QSTVWYZ [I 1,000 II 1,000 II Oized tooling and fixtures, and specially designedparts and accessories therefor, specially designed for making or measuring gas turbine blades, including butnot limited to the following:

(a)

(b)

(c)

(d)

(e)

(f)

(g)

Blade belt grinding machines;

Blade edge radiusing machines;

Blade aerofoil milling and/or grindingmachines;

Blade blank pre-forming machines;

Blade rolling machines;

Blade aerofoil shaping machines, exceptmetal removing type;

Blade root grinding machines;

(h) Blade aerofoil scribing equipment;

(i) Blade aerofoil and/or root automaticmeasuring equipment;

(j) Precision vacuum investment castingequipment;

(k) Small home drilling equipment for producingholes less than 0.030 inch (0.76mm) indiameter; and

(1) Directional solidification casting equipment.

1 See $ 370.10 for commodities which require export authorization from other U.S. Government DeDartmente and Agencies.J Report machines in “number.”

Export Administration Regulations June 1, 1978


Each entry on the CCL contains a generaldescription of the technical commodity, thecountries for which validated licenses are re-quired, and in some cases, value limitationson exports which set restrictions on the num-ber or dollar value of items that may be ex-ported.

For export control purposes, all foreigncountries except Canada, which is subject tominimal restrictions, are divided into sevenseparate country groups, designated by al-phabetic symbols (see table 17). Most Com-munist-bloc countries are included in a singlegroup, but Poland and Romaina both haveMFN status and are treated separately.Communist countries to which most trade isembargoed (North Korea, Vietnam, Cambo-dia, and Cuba) also form a distinct group.

The need for an exporter to apply for a val-idated license therefore turns both on thecommodity or data to be exported and thecountry of destination. Exporters may haveto consult the CCL for guidance on eachseparate transaction. Validated licenses arerequired for most high-technology exports toCommunist destinations and for strategicmaterials and products to all destinationsexcept Canada. The Commerce Departmentissues and updates a series of regulationsthat lay out these requirements.29

*’U.S. Department of Commerce, L’.rport AdministrationRegulations, June 1, 1978. This is a looseleaf publication thatincludes Export Administration regulations and supplemen-tary Export Administration bulletins.

Country Group O

Romania

Country Group S

Southern Rhodesia

Table 17.— Export Administration System: Country Grouping——. - . ——..——

Country Group T

North America:GreenlandMiquelon and St. Pierre Islands

Southern Area:Mexico (including Cozumel and

Revilla Gigedo Islands)

Central America:BelizeCosta RicaEl SalvadorGuatemalaHonduras (including Bahia and

Swan Islands)NicaraguaPanama

Bermuda and Caribbean Area:BahamasBarbadosBermudaDominican Republic

— —.—. —.

French West IndiesHaiti (including Gonave and

Tortuga Islands)JamaicaLeeward and Windward IslandsNetherlands AntillesTrinidad and Tobago

South America:Northern Area:

ColombiaFrench Guiana (including Inini)GuyanaSurinamVenezuela

Western Area:BoliviaChileEcuador (including the Galapagos

IslandsPeru

Eastern Area:ArgentinaBrazilFalkland islands (Islas Malvinas)ParaguayUruguay

Country Group V

All countries not included in any othercountry group (except Canada)

Country Group W

Poland

Country Group Y

AlbaniaBulgariaCzechoslovakiaEstoniaGerman Democratic Republic (including

East Berlin)HungaryLaosLatviaLithuaniaOuter MongoliaPeople’s Republic of China (excluding

Republic of China)Union of Soviet Socialist Republics

Country Group Z

North KoreaVietnamCambodiaCuba

NOTE Canada IS not Included In any country group

SOURCE U S Department of Commerce, Export Adrn/n(sfrat/on /?egu/af/ens, supplement no 1, pt 370, June 1.1978


The Executive Agencies in theLicensing Procedure

The Department of Commerce.—Export-ers seeking validated licenses must enter asystem primarily administered by the De-partment of Commerce, which works in coop-eration with the Departments of State, Ener-gy, and Defense. Its export control responsi-bilities give Commerce a somewhat contra-dictory mandate. On one hand, it is chargedwith the general promotion and encourage-ment of U.S. exports; on the other, it is re-quired to administer an elaborate system de-signed to limit certain of these transactions.

The Department has attempted to recon-cile these activities by keeping export re-strictions to the minimum necessary to ful-fill the objectives of the Export Adminis-tration Act, thus causing the least negativeimpact on U.S. trade. Jurisdictional am-biguities and conflict cannot be entirelyavoided. Reorganizations in the past fewyears have been designed to minimize theireffects, and recent discussions within theAdministration have once again raised theprospect of further reorganization. Officesresponsible for the promotion of East-Westtrade and those charged with the control ofsuch trade were once housed together in the

‘ Department’s Bureau of East-West Trade,which was established in 1972 to encourage

and facilitate the trade resulting from theU.S./U.S.S.R. trade agreement. The twofunctions have since been separated. In1977, a new Industry and Trade Administra-tion was established. It contains two parallelbureaus with functions relevant to East-West trade and its administration: theBureau of Trade Regulation, which housesOEA and is responsible for administering ex-port controls; and the Bureau of East-WestTrade, which retains trade promotion opera-tions. Figure 4 illustrates this organization.

The Department of State.–The Depart-ment of State is primarily concerned withthe foreign policy, as opposed to the econom-ic and commercial, implications of exportcontrol. Its involvement in export control isthreefold. First, State advises the CommerceDepartment on any foreign policy considera-tions arising from U.S. export license appli-cations. These foreign policy issues maycover matters as diverse as U.S. nationalsecurity, virtual embargoes on trade withcertain Communist countries, U.N. sanc-tions on trade with Rhodesia, selected re-straints on trade with South Africa, theformer embargo on trade with Uganda, andcontrols for human rights, antiterrorism,and regional stability purposes. State is alsoinvolved with nuclear nonproliferation casesand the export of hazardous substances. Sec-

Figure 4.— Industry and Trade Administration, U.S. Department of Commerce

SOURCE Off Ice of Technology Assessment


end, the State Department assumes the lead-ing role in U.S. efforts to implement multi-lateral export controls. In this connection, itrepresents the United States in all CoComsessions, including CoCom list reviews andexception cases (see chapter VIII). Third,under the Battle Act the State Departmenthas primary responsibility for the develop-ment of a list of items completely embargoedto the Communist world. This list, the Mutu-al Defense Assistance Control List, includesarms, ammunition, implements of war,atomic energy materials, and certain dual-use items.

All of these activities are handled in theOffice of East-West Trade in the Bureau ofEconomic and Business Affairs. The Office’sseven officers, two of whom reside in Pariswhere CoCom is headquartered, all have full-time responsibility for export controls.

The Departments of Energy and Defense.–The Departments of Energy and Defenseplay important roles in the system by pro-viding technical expertise and advice on na-tional security matters. The Department ofEnergy advises on energy-related exports.such as oil-extractive equipment, and re-views all cases involving nuclear materials.

As would be expected, DOD has beenheavily involved with the export control sys-tem from the outset. In 1962, the AssistantSecretary of Defense for International Secu-rity Affairs was charged with the respon-sibility for DOD’s role in the implementationof trade control policies, and subsequentamendments to the Export AdministrationAct have further delineated the role of theSecretary of Defense within the control sys-tem (see above). DOD’s task is to evaluatethe military and strategic potential of itemsunder review. This entails a complex consult-ing system within the Department that mayinvolve the technical and intelligence arms ofthe military services as well as a number ofother offices and agencies.

Until recently, responsibility for exportlicensing within DOD was diffused. Al-though the processing of applications came

under the jurisdiction of the InternationalSecurity Affairs Branch, policy functions, in-cluding obtaining technical evaluations,were carried out in the Office of the DeputyUnder Secretary of Defense for Researchand Advanced Technology. Both functionshave now been centralized in the Office ofthe Deputy Under Secretary for Interna-tional Programs and Technology. The re-organization is intended to streamline theDepartment’s role in processing exportlicense applications.

Other Agencies.– In addition to the De-partments discussed above, any other agen-cy with pertinent expertise may be asked tocontribute technical advice on individual ap-plications. Bodies sporadically involved inthe licensing process include the TreasuryDepartment, the Central Intelligence Agen-cy (CIA), the National Aeronautics andSpace Administration, and the NationalBureau of Standards.

The Mechanics of the ValidatedLicensing Procedures

Entry to the export control licensing sys-tem is by way of OEA, which receives all ex-port license applications. Figure 5 delineatesits present administrative structure. Alicense application requires detailed techni-cal information on the product or process tobe exported, the quantity to be exported,unit selling price, and total sales receipts.Details concerning the foreign buyer, includ-ing intermediate and final consignees, andon the end use of the product must also beprovided (see figure 6). In theory, the pro-spective exporter may obtain an advisoryopinion on the likely disposition of the ap-plication, and thus avoid costly pre-sale pro-motion. In some instances, however, thisprocess has been as time-consuming as theformal application itself. Furthermore, theadvisory opinion is delivered orally and isnot binding.

An application is initially received in theOperations Division where it is logged in,entered into a computerized information sys-tem, and briefly reviewed against a list ofknown or suspected violators of export con-


Figure 5.—Office of Export Administration, U.S. Department of Commerce

SOURCE. Comptroller General, Export Controls. Need to Clarify Policy and Simplify Administration, Report to the Congress, March 1, 1979, p. 34

trol laws. It then moves to one of the threeLicensing Divisions—Computers, Electron-ics, or Capital Goods and Production Materi-als. At this point the application is given acareful technical review by OEA staff. Thisreview focuses on the following items: thefunction and use of the equipment; its levelof sophistication; normal military/civilianuse in the United States and the country ofdestination; foreign availability of compar-able equipment in terms of both quantityand quality; suitability of the equipment forthe proposed end use; the known activities ofthe end user; likelihood of diversion; and theeconomic and commercial implications of theproposed export. In investigating thesepoints, the staff may draw on outside re-sources, including TACs, the Nation’s intelli-gence agencies, and the Export InformationService of the Department of Commerce.Specifically, they attempt to answer the fol-lowing questions:

● Is the item designed or intended formilitary purposes? Does it have signifi-cant military use?

●

●

●

●

If the item has both military andcivilian uses, will the transaction in-volve only the latter?Does the item contain advanced orunique technology of significance interms of the export control program’sobjectives?Is there a shortage of the item in thearea of destination that affects militarypotential?For strategically significant nonmili-tary items, can non-U.S. sources supplya comparable item or an adequate sub-stitute? What is the normal use in thecountry of destination?

After this information has been gatheredand evaluated, the request moves to the Pol-icy Planning Division where it is reviewed interms of general OEA policy. At this stagethe Division must determine whether it hassufficient data on which to base a decisionand sufficient authority to unilaterally makethat decision, or whether consultation withother Federal agencies is required. If the lat-ter, it must also determine what kind of con-sultation is called for.

—


FORM DIB-622P (REV 3-75)(FORMERLY FC.419)Form Approved OMB No. 41-R.0735

CONFIDENTIAL – Information furnishedherewith iS deemed confidential and willnot be published or disclosed except in ac-cordance with provision of Section 7 (c) ofthe Export Administration Act of 1969, asamended.

DATE OF APPLICATION

Figure 6.— Export License Application

U.S. DEPARTMENT OF COMMERCEDOMESTIC AND INTERNATIONAL

BUSINESS ADMINISTRATIONBUREAU OF EAST WEST TRADE

OFFICE OF EXPORT ADMINISTRATIONWASHINGTON D C 20230

APPLICATION FOR

EXPORT LICENSE

APPLICANT’S TELEPHONE NO.

DATE RECEIVED (Leave Blank) CASE NO (Leave Blank)

1 APPLICANT S NAME I 2 PURCHASER IN FOREIGN COUNTRY

I (If same as ultimate consignee, state “SAME AS ITEM 3”, If sameas intermediate consignee, state “SAME AS ITEM 4. “)

‘ NAME

STREETADDRESS

STREETADDRESS

CITY. STATEZIP CODE I CITY AND

COUNTRY

3 ULTIMATE CONSIGNEE IN FOREIGN COUNTRY ] 4. INTERMEDIATE CONSIGNEE IN FOREIGN COUNTRY(If none. state “NONE”, if unknown, state “UNKNOWN.“)

NAME I NAMESTREETADDRESS

STREETADDRESS

CITY ANDCOUNTRY

CITY ANDCOUNTRY

S COUNTRY OF ULTIMATE DESTINATION 6 APPLICANT’S REFERENCE NUMBER

17 (a) QUANTITY TO (b) COMMODITY DESCRIPTION AS GIVEN IN COMMODITY CONTROL

BE SHIPPED LIST (Include characteristics such as basic ingredients, composition,(c) EXPORT CON- (d) TOTAL SELLING PRICE A N DTROL COMMODITY POINT OF DELlVERY

type, size, gauge, grade, horsepower, etc. ) NUMBER AND PRO- (Indicate b’. o. B., b’, A. S., C.I.F., etc. )CESSING NUMBER

UNIT PRICE I TOTAL PRICE

TOTAL8 FILL IN IF PERSON OTHER THAN APPLICANT IS AUTHORIZED TO 9. IF APPLICANT IS NOT THE PRODUCER OF COMMODITY TO BE

RECEIVE LICENSE EXPORTED. GIVE NAME AND ADDRESS OF SUPPLIER.

NAME (If unknown. state "UNKNOWN.”)

STREETADDRESSCITY, STATE.ZIP CODE

10 END USE OF COMMODITIES COVERED BY THIS APPLICATION 11 IF APPLICANT IS NOT EXPORTING FOR HIS OWN ACCOUNT,DESCRIBE FULLY GIVE NAME AND ADDRESS OF FOREIGN PRINCIPAL AND

EXPLAIN FULLY

112 ADDITIONAL INFORMATION (Attach separate sheet if more space is needed. )

13 APPLICANT’S CERTIFICATION, — The “undersigned applicant hereby makes application for a license to export and certifies as follows: That all statements herein,and in any documents or attachments submitted in support hereof, are true and correct to the best of his knowledge and belief; and that (a) he has read the instruc-tions on the fifth copy of this application and is familiar with the U.S. Department of Commerce Export Administration Regulations: (b) this application conformsto such instructions and regulations: (c) unless Item 14 is completed, he negotiated with and secured the export order directly from the purchaser or ultimate con-signee or through his or their agents abroad. (d) all Parties to the export transaction. the exact commodities and quantities, or the exact technical data, and all otherterms of the order and other facts of the export transaction are fully and accurately reflected herein; (e) documents and records evidencing the order and other factsof the export transaction to which this application relates will be retained by him for 2 years from whichever is later. the time of (i) the export from the UnitedStates, or (ii) any known reexport, transshipment, or diversion, or (iii) any other termination of the transaction, whether formally in writing or by any other means.and made available to the Department of Commerce upon demand: (f) any material or substantive changes in the terms of the order or other facts of the exporttransaction as reflected in this applicatlon or any certification made in connection therewith, whether the application is still under consideration or after a licensehas been granted, will be reported promptly by him to the Department of Commerce; and (g) if the license iS granted, he will be strictly accountable for its use in ac-cordance with the Department of Commerce Export Administration Regulations and all terms and conditions specified on the face of the license.

Type SIGN Typeor HEREPrint

orIN INK Print

(Applicant (Same as Item 1)) (Signature of person authorized to execute (Name and title of person whose signaturethis application. ) appears on the line to the left)

14 ORDER PARTY ‘S CERTIFICATION (see § 372.6 (c) of the Export Administration Regulations ) – The undersigned order party certifies to the truth and correct-ness of Item 13 (d) above, and that he has no information concerning the export transaction that iS Inconsistent with. or undisclosed bv the application and agreesto comply with Items 13 (e) and 13 (f) above.

Type SIGN Typeor HERE o rPrint IN INK Print

(Order Party) (Signature of person authorized to sign for (Name and title of person whose signaturethe Order Party) appears on the line to the left)

This license application and any license issued pursuant thereto are expressly subject to all rules and regulations of the Department of Commerce. Making any falsestatement or concealing anv material fact in connection with this application or altering in any way the validated license issued. iS punishable by imprisonment or fine.or both, and by denial of export privileges under the Export Administration Act of 1969. as amended, and any other Federal statutes.

FOR OFFICIAL USE ONLYACTION TAKEN VALIDITY AUTHORITY RATING DV TECH

❑ APPROVED PERIODDATA

no REJECTED MONTHS END USE RE-EXPORT SUPPORT TYPE OF (Licensing officer) (No. )

~ “ ’ ” ” 1

(Date)

DOCUMENTATIONDOCUMENT LICENSE

~ t (Review officer)

NOTE:

(Date)

Submit the first four copies of this application, Form DIE-622P (with top stub attached). to the Off Ice of ExportAdministration, Room 16 17M, Domestic and International Business Administration, U.S. Department of Com-merce. Washington. D.C. 20230, retaining the quintuplicate copy of the form for your files. Remove the long car- ORIGINALbon sheet from in front of the quintuplicate copy. Do not remove any other carbon sheets. See Special Instruc-tions on back of quintuplicate. Reproduction of this form iS permissible, providing that content, format, size, and O E A FILE COPYcolor of paper and ink are the same


In theory, all applications for validatedlicenses should be subjected to a formal in-teragency review process; in practice, theCommerce Department often takes unilater-al licensing decisions, with the consent of theother agencies involved in the system, i.e.,the Departments of State, Defense, and En-ergy. This is a practical necessity: unless thevast majority of cases were decided withoutprolonged multiagency review, the systemwould be overwhelmed by the number of ap-plications to be processed. The requirementfor multiagency consideration is met, there-fore, in any one of three ways, each involvingprogressively more active and formal inter-agency consultation. These are first, a uni-lateral decision by OEA based on prior dele-gations of authority from the other agencies;second, informal consultation which is usu-ally bilateral; or third, full-scale formal mul-tiagency review.

OEA decides which of these routes to takeon the basis of internal guidelines called“policy determinations. ” A policy deter-mination establishes procedures governingthe disposition of particular categories ortypes of export applications. Policy deter-minations specify limitations or conditionsrespecting commodity, destination, and useor end uses that determine how an applica-tion decision must be resolved. In instances,therefore, where a new license applicationfalls within the technical specifications, enduse, and destination criteria previously es-tablished as acceptable for export, OEA maymake a unilateral decision without the neces-sity of actual interagency consultation. Theperformance characteristics of the productor its destination will therefore indicatewhen OEA should discuss a case withanother agency, even if it itself feels confi-dent that the export can proceed. The major-ity of cases are decided by OEA alone. Theseusually involve exports to free world destina-tions. Most exports to Communist countriesrequire some explicit consultation.

There are several kinds of informal consul-tation, but no rigid or explicit criteria governthe choice of one over another. In some in-stances, a single phone call to another agen-

cy (or, if the problem is the application itself,to the prospective exporter) may be suffi-cient. Alternatively, the Policy PlanningDivision may send a memorandum and sup-porting documents, which summarize thecase on the basis of the technical evaluationconducted in the Licensing Division, toanother agency, requesting its opinion or itsconcurrence in Commerce’s recommenda-tion. OEA may also send “waiver memoran-da. ” These outline the case and request theacquiescence of each consulting agency toCommerce’s decision on an application. Usu-ally, this concurrence is forthcoming. For ex-ample, of the approximately 12,000 memo-randa sent through the first 6 months of1976, DOD recommended denial of only 9 ap-plications that Commerce had favored. De-fense concurred in 76 Commerce recommen-dations for denial and in 6 cases for partialapproval. 30

In some cases, however, the mechanismsof day-to-day contacts among staff-level per-sonnel, bilateral agreements, and waivermemoranda cannot resolve a case, and moreextensive interagency consultations are re-quired. The applications subjected to thisprocedure nearly always involve dual-useitems—nominally civilian products or proc-esses that nevertheless have military appli-cations which could enhance the strategiccapabilities of a potential adversary. Theproduct lines most frequently involved hereinclude numerically controlled machinetools, semiconductor processing equipment,high-strength materials, high-temperaturepolymers, nuclear-related materials, com-puters, electronic testing and measuringequipment, magnetic recorders, and inte-grated circuits.

The formal interagency review processbegins with the operating Committee (OC).This is a senior staff-level group which meetsweekly and is chaired by an executive direc-tor, a Commerce employee in OEA. Every ef-fort is made to resolve interagency differ-ences informally before a case is brought be-

3oRepOrt of the president’s Task Force to InlprOVe ~XpOltAdministration Licensing Procedures (draft). Sept. 22, 1976,p. 23.


fore OC. Referral there requires careful andoften protracted consideration of the strate-gic significance of the proposed transaction,the foreign availability of comparable com-modities or data, and the licensing history ofpast applications for like or similar commod-ities or data.31 All interagency decisionsmust be unanimous.

Obviously, the most complex and contro-versial cases reach this stage. It is thesecases that cause delays in the system. At theweekly meetings, an average of 5 cases arediscussed, although the agenda may containup to 30 cases. One of the principal barriersto the consideration of more cases is the fre-quent inability of member departments ofOC to arrive with prepared agency positionson applications. This is due in many in-stances to the complexity of the proceduresfor receiving technical advisory guidancewithin these departments. Each consultingagency in the system may decide whether torefer an application to any of a number of itsown offices for technical evaluation. Thus,licensing responsibilities are not only dif-fused among executive branch agencies anddepartments; they are also diffused withindepartments. This point is further discussedbelow in the context of criticisms of the pres-ent system.

It is difficult to obtain an accurate count ofthe number of cases handled by OC. Esti-mates from senior personne132 have rangedfrom 250 to 300 cases for 1977 and 1978, butthese figures are at variance with informa-tion supplied for the public record by otherDepartment of Commerce officials. Congresshas heard testimony, for example, that dur-ing 1977 “608 transactions were submittedto the Operating Committee for formal re-

“See Arthur T. Downey, in Export Licensing of AdlwncedTec}lnoiog>v: A Reliell, hearing before the Subcommittee onInternational Trade and Commerce of the Committee on In-ternational Relations, House of Representatives, 94th Cong.,2d sess. (Yt’ashington, D. C.: U.S. Governmen~ Printing Of-fice, 1976), p. 72.

“Including Lawrence Brady, former Deputy Director, Of-fice of Export Administration, and Thomas A. Hoya, Chair-man of the operating Committee.

view. ’33 For Communist-bloc countries only,other public testimony indicated that “374[cases] required full-blown multiagencyreview within the Operating Committee, ” in1978.34 One reason for these discrepanciesmay be the fact that the lower numbers referto categories on the OC agenda, wheregroups of similar cases may be handledtogether. Be that as it may, it is clear thatonly a small percentage of validated licenseapplications actually reach the OC level. Fur-thermore, very few cases proceed beyondthis level.

Cases that cannot be resolved at the OClevel theoretically move through a series ofcommittees involving progressively higherlevel decisionmakers (see figure 7). This for-mal structure is rarely utilized, however. Un-til recently, the sub-Advisory Committee onExport Policy (sub-ACE P), which is made upof Department Deputy Assistant Secre-taries, was inactive; and even when it wasoperative, it met infrequently. For example,between 1975 and 1976, sub-ACEP met fivetimes, discussing a total of six disputedcases. It has been suggested that the groupmeet monthly, in an effort to provide morepolicy guidance for the overall system on acontinuing basis and to review unresolvedcases, but meetings remain irregular.

ACEP itself, which is composed of Assist-ant Secretaries, has not met since at least1975. Instead, issues still remaining indispute above the sub-ACEP level have beenreferred to the Cabinet-level Export Admin-istration Review Board (EARB). EARB ex-ists to assure the highest level considerationof trade control policies and actions. In 1975it met twice to discuss these policy mattersand to deal with four disputed cases.

“Testimony of Rauer H. Meyer, Director, Office of ExportAdministration, before the Subcommittee on Domestic andInternational Scientific Planning, Analysis, and Cooperation,Committee on Science and Technology, U.S. House of Repre-sentatives, Oct. 4, 1978, p 15 (typed lnanuscript}.

]’Testimony of Stanley J. Marcuss, Senior Deputy Assist-ant Secretary for Industry and Trade, Subcommittee on In-ternational Economic Policy and Trade, Committee on For-eign Affairs, U.S. House of Representatives, Mar. 7, 1979, p.8 (typed manuscript).


Figure 7.— Multiagency Advisory Committee onExport Policy Structure

SOURCE Comptroller General, Export Controls Needs to Clarify PolIcy andSimplify Administration, Report to the Congress, Mar. 1, 1979, p. 35.

Through September of 1976, the Board metonce to review policy issues and three cases.It has not met since, although it has handleda few matters via exchange of memoranda.In the event of EARB inability to resolve acase, the President is the final arbiter. Therecent proposed sales of a Dresser drill-bitfactory and a Sperry-Univac computer toTASS, the Soviet news agency, are examplesof cases decided at the Presidential level.

An applicant whose export request is re-jected at any point in the review processreceives a “negative consideration” letter.The exporter may respond formally to any ofthe reasons given for denial, and unofficialdiscussions may also continue between the

applicant and the licensing officer. In someinstances, however, the Government’s sensi-tivities about strategic or foreign policy in-terests and the exporter’s proprietary inter-ests may circumscribe forthright and frankexchanges, and the reason given for denialmay be as vague as “national security con-siderations.” This is one source of the dis-satisfaction of some parts of the businesscommunity with the licensing process.

A similar and parallel structure (see figure8) exists to carry out U.S. multilateral re-sponsibilities under the Battle Act. These in-clude the periodic CoCom list reviews andthe processing of the individual exception re-quests.

The Department of State handles inter-agency involvement in CoCom cases in amanner similar to Commerce’s administra-tion of U.S. unilateral export controls. Thatis, it relies on interagency advisory mech-anisms. In this system, the counterpart ofOC is Working Group I, and the formalhigher policy level entity dealing withCoCom matters is the Economic Defense Ad-visory Committee (EDAC). It is composed ofAssistant Secretaries from the Departmentsof State (the chair), Defense, Commerce,Energy, and Treasury. CIA acts in an advi-sory capacity.

The bulk of the workload of EDAC falls onWorking Group I, a senior staff-level inter-agency group. An executive committee,chaired by the Director of the Office of East-West Trade, provides its operational guid-ance. Cases that remain unresolved here arepassed along to successively higher policylevels and, ultimately, if necessary, to thePresident. Technical Task Groups (TTGs),composed of interagency technical expertsand the private industry technical expertson TACs, both provide input and advise ondecisions affecting CoCom list reviews andexceptions. CoCom itself is the subject ofchapter VIII.

Compliance

Efforts to enforce domestic compliancewith export controls are centered in OEA’s

.


Figure 8.— Economic Defense Advisory Committee Structure

Seni;rstaf( m G o v e r n—

SOURCE: Comptroller General, Export Controls Need to Clarify PolIcy and Slrnplify Admlnlstratiion Report to the Congress. March 1, 1979. p. 19

Compliance Division; overseas enforcementactivities are handled through the Depart-ment of State. OEA’s Compliance Divisionhas three branches—facilities, intelligence,and investigations —with personnel in Wash-ington and New York. OEA’s computerizedlist of approved applications and discrepan-cies, such as overshipments, are forwardedto the Compliance Division. Although it alsoenforces controls made for short supply andforeign policy purposes, its major efforts liein the area of strategic goods and technol-ogies. These are concentrated in five kinds ofactivities: prelicensing checks, physical in-spections of cargo shipments, postshipmentdocument reviews, general license review,and validated license comparisons. Viola-tions of export controls are punishable underthe Export Administration Act, which pro-vides for civil and criminal penalties, in-cluding fines and/or imprisonment.

The intelligence branch provides informa-tion to licensing officers on those potentialexporters singled out during a preliminary

54-202 0 - 79 - 10

screening process. This screening is accom-plished through checking all applicationsagainst the Department of Commerce’s Eco-nomic Defense List, a comprehensive indexof firms and individuals previously deniedexport privileges or listed as suspect on thebasis of allegations received by Commerce.The intelligence branch also provides in-formation at this stage on individuals orfirms that have supplied insufficient docu-mentation for their applications. In bothcases, information is gathered through coop-eration with the Department of State, the in-telligence agencies, and trade and industrysources.

Spot checks are made on cargo to physical-ly verify that the contents of shipments cor-respond to licenses. There are also reviews ofpostshipment documents: the Bureau ofCustoms verifies that every shipment over$250 is listed on an outgoing carrier’s mani-fest, a service for which it is reimbursed byOEA. In addition, OEA reviews declarationsof cargo shipped under general license and


searches for discrepancies between declara-tions and the data appearing on approvedvalidated licenses. General license reviewsascertain, through the descriptive data onthe customs declarations, whether previousshipments should in fact have been madeunder validated license. Finally, for itemssent under validated license, the Bureau ofCustoms collects information on shippers’export declarations.

The State Department administers twoprograms in foreign countries to inspectcommodities that have been licensed by theDepartment of Commerce. One, the safe-guard program, applies to computers. Itcomes under the jurisdiction of CoCom, andis implemented by industry representativesin Communist countries. The other is a U.S.program performed by U.S. overseas posts.The purpose of both programs is to ensurethat dual-use items are being used for thepurpose designated on the license. Violatorswho fall under U.S. jurisdiction are subjectto administrative and criminal penaltiesspecified in the Export Administration Act;others may be denied future U.S. shipments.It is obvious, however, that monitoringthird-party transfers of technology of U.S.origin is virtually impossible without the ac-tive cooperation of foreign states.

The safeguard program has been in effectsince 1976 and applies to those licensesgranted under a CoCom stipulation that:

Responsible Western representatives ofthe supplier will have the right to access tothe computer facility and all equipmentwherever located during normal workinghours or at any time when the computer isoperating and will be furnished informationdemonstrating continued authorized appli-cation of the equipment.35

Individual licensing agreements designatethe frequency of required inspections. In ad-dition to these inspections, the CommerceDepartment may request that U.S. officialsoverseas examine strategic commodities

“Quoted in the Comptroller General, Export Controls:Need to Clarify Policy and Simplify Administration, op. cit.,p. 55.

that have previously been licensed for exportby the United States. This usually occurs incases of suspected diversion from the origi-nal end use.

Criticism of the System

The export-licensing system has oftenbeen the object of criticism from U.S. indus-try, America’s CoCom trading partners,Congress, and members of the academiccommunity. The criticisms may be summa-rized as follows:

c

●

●

●

The system suffers from needless de-lays and an excessive amount of uncer-tainty. This is exacerbated by the cum-bersome interagency review processand the time-consuming case-by-caseapproach to applications.The diffusion of responsibility amongand within agencies results in a lackof administrative responsiveness andforthrightness in the system. This fur-ther discourages efforts by Americanbusiness to expand exports.The system suffers from a lack of ade-quate policy guidance. This results in asituation in which too much discretionis allowed to midlevel administratorsand too little influence is exerted bythose who are both technically qualifiedand attuned to both the changing envi-ronment of U.S./U.S.S.R. relations andthe vital role of exports in the U.S. econ-omy.The U.S. CCL is too restrictive. By at-tempting to control items unilaterally,it incurs the antagonism of foreign ex-porters who need reexport licenses fortechnology of U.S. origin. Moreover, theunilateral control puts U.S. business-men at a competitive disadvantage. Notonly are more products controlled thanin Western Europe and Japan, butneither the list itself nor the systemthat administers it takes adequate con-sideration of foreign availability.

Delays. —The first of these criticisms isthe most frequently heard and most univer-sally recognized. U.S. exporters testifying

Ch. VII—The East-West-Trade Policy of the United States . 139

before Congress have been virtually unani-mous in their condemnation of a system thatsubjects their license applications to longand often seemingly arbitrary delays. Casesthat are subjected to holdups—sometimes ofmany months or even several years—createserious problems for the potential exporterand may damage the credibility of Americansuppliers abroad. The law has set a 90-daylimit on the entire licensing process, from ap-plication to approval or denial; but in 1978almost 2,000 applications exceeded thislimit, about twice the 1977 figure (see table18). As might be expected, licenses involvingthe export of high-technology dual-useitems, like sophisticated electronic equip-ment and computers, to Communist destina-tions accounted for the largest portion ofthese delinquent cases. In 1975, of the 1,105delayed cases, 923 were destined for theCommunist world. In all, 957 cases involvedcomputers and electronic equipment, 827 ofwhich were for export to Communist coun-tries. Similar patterns have prevailed since.

However, delayed cases represent onlyabout 3 percent of all license applications. Itis not the number, therefore, but the visibili-ty of these cases that is disturbing. The factthat they usually represent large orders ofhigh-technology items, and that they involve

Table 18.—Export License Applications Pendingfor More Than 90 Days

—Ending period - –

Number of applications1975a . :“. .“. ... : ‘. ., . . . . . . . . . . ‘-

1 , 1 0 5Apr. 30, 1976a . . . . . . . . . . . . . . . . . . . . 294Sept. 2, 1976b . . . . . . . . . . . . . . ... . . 298Sept. 2, 1977b . . . . . . . . . . . . . . . . . . . . 454June 1978c. ., . . . . . . . . . . . . . . . . . . . . 603Sept. 1, 1978b . . . . . . . . . . . . . . . . . 645Feb. 2, 1979c . . . . . . . . . . . . . . . . . . . . . 5851976 d . . ... . . . . . . . . . . . . . . . . . . . . 6891977d . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,0321978 d . . . . . . . . . . . . . . . . . . . . . . . . . 1,988

S O U R C E S- ---

aReporrt of the president's Task Force to Improve Export Administration

Licenslng Procedures, Sept 22 1976 (draft)bOffice of Export Administration datacTestlmony of Stanley Marcuss, Senior Deputy Assistant Secretary for in.

dustry and Trade, Office of Export Administration before the Subcommitteeon International Economic Policy and Trade Committee on Foreign AffairsU S House of Representatives, Mar 7, 1979

dExport Administration Act Amendments of 1979, Report, Committee onForeign Affairs, U S House of Representatives, 96th Cong 1st sess May15, 1979, p 4

highly sensitive issues of national securityand foreign policy, make them the subject ofthe bulk of the publicity concerning exportlicenses. It is worth noting here that, incases held for national security considera-tions, the applications are requesting excep-tions for items that have serious potentialmilitary uses. The very fact that the casesare considered at all indicates a willingnesson the part of the Government to assist ex-porters and permit sales wherever possible.Obviously, the quickest response would be asimple “no.” This is not necessarily the casewhen applications are delayed for foreignpolicy reasons.

A second important point to be madeabout the delayed cases is that, althoughtheir numbers may be relatively small, theyare growing. This points to a disturbingtrend. Between the enactment of the ExportAdministration Act in 1969 and 1974, thenumber of applications received by OEA de-clined steadily—from over 145,000 to lessthan 66,000, a drop of 55 percent. This de-crease is a reflection of the liberalization ofU.S. policy toward East-West trade, and canbe attributed to the fact that items of purelyeconomic significance were dropped from theCCL, thus reducing the number of requiredvalidated license applications. After 1975,however, the downward trend in applicationnumbers ceased. The workload has sincebeen growing at an increasing rate. In 1976,OEA processed 54,359 cases; in 1977,58,967; and in 1978, 63,476. The total for the1979 calendar year is expected to exceed77,000.

A comparison of authorized funding andstaff levels of OEA with workload estimatesover the past 11 years indicates the problemfacing OEA staff (see table 19). In the past 5years, the number of authorized positionshas risen about 18 percent;36 if one assumesthat 68,000 cases will be processed in FY1979, the number of license applications willhave risen more than 27 percent during the

3’168 positions are authorized for FY 1979. OEA presentlyemploys 145 professionals and clerical personnel and is, ac-cording to recent testimony, actively seeking additional staff.


Table 19.—Funding, Authorized Positions, andLicense Applications Volume

— —— —....——Export license

Funding applicationsP o s i - – - - – — — – – – – - .Fiscal year ($000) tions Received Processed

1979 . . . . . . $ ~ , ~ j o – ‘ - -~ 1 6 8 –– - - ~ - - – – - - 6 8 , 0 0 0 *

1978 . . . . . . 5,550 162 — 63,4761977 . . . . . . 5,256 167 — 58,9671976 . . . . . . 4,626 142 — 54,3591975 . . . . . . 4,400 142 — 52,6001974 . . . . . . 4,634 114 65,883 –1973 . . . . . . 4,103 154 64,070 –1972 . . . . . . 6,111 256 78,561 –1971 . . . . . . 5,900 256 107,615 —1970, . . . . . 5,358 256 132,498 —1969 . . . . . . 5,358 272 145,369 —

“ EstimatedNOTE. After 1974 the Department of Commerce changed its method of count.

ing license applications Instead of tabulating the number of applica-tions received, it now reports the number actually processed The twomay not be Identical, as some applications are withdrawn before a deci.sion is made

SOURCE Office of Export Administration, U S Department of Commerce.

same period. Moreover, the system’s admin-istrators contend that the complexity of theissues surrounding export license applica-tions has increased tremendously since thepassage of the Export Administration Act,so that a simple comparison of workloadmeasured by number of applications proc-essed is misleading. There has also been anincrease in the number of CoCom exceptioncases, which tend to be the most complex. Tothis must be added the fact that the overallworkload is clearly growing at an acceleratedpace.

Similar or heavier workloads may befound in the other Departments involved inthe license process. The number of casesreferred to the State Department’s Office ofEast-West Trade because of their foreignpolicy implications more than doubled be-tween 1977 and 1978, rising from 1,200 to2,500, but the Washington staff level of fiveemployees has remained unchanged. Beforethe recent DOD reorganization, the Office ofStrategic Technology and Munitions Controlof DOD had a staff of three to four profes-sionals and two secretaries who were respon-sible both for coordinating and developingall DOD positions on U.S. license applica-tions, and for the Department’s contribution

to CoCom list reviews and exceptions. Theworkload of each professional employee inthe Office was enormous; in 1975 alone, ithandled 2,200 cases. This excessive work-load is one of the primary reasons for licensedecision delays.

The previous Deputy Assistant Secretaryresponsible for the licensing process inDefense did institute a “Guillotine Closure”system designed to speed-up the system. Itsgoal is to provide the Secretary of Commercewith an advisory opinion regarding the na-tional security aspects of an export licenseapplication within 30 days. The procedureoperates on the assumption that a licensecan be issued unless the technician recom-mends otherwise within a specified period oftime. Before the guillotine was put intoplace, only 72 percent of the cases handledby Defense between January and September1978 were closed within 30 days. With thesystem in-place, from October to December1978, 98 percent of the cases were closedwithin the stipulated period. In addition, theaverage time per case was reduced from 29days to 12 and the age of the most delin-quent case from 165 days to 35 (see figures 9and 10). It would appear from this that thepresent system is sufficiently flexible to re-spond to calls for increased efficiency.

In addition to the sheer volume of paper-work which comes before DOD, holdups areoften occasioned by the need to tap addi-tional technical resources in the Army, AirForce, and Navy; in Department-wide re-search laboratories and facilities; and inother Pentagon offices. For instance, in 1975virtually all computer cases were referred tothe Institute for Defense Analysis. In addi-tion, most computer, electronics, and techni-cal data cases went to the Office of theUnder Secretary of Defense for Researchand Engineering, while the Office of the As-sistant Secretary of Defense for Installa-tions and Logistics screened most machinetool and technical data cases. As the systemhas been administered, the processing ofexport control requests gets low priorityamong technical experts whose main taskslie elsewhere. Whether the recent reorganiza-

Ch. VII The East-West-Trade Policy of the United States ● 141

Figure 9.—Age of DOD Export Control Cases(January-September 1978)

$’waethllll---

I “130day.

. .-

f1. ,.:. . ’

80I

1 ’

060=z-.

“Aviqja“*days

(II A-3Sdayi

wC-I I fwaxknum 14M dajf# ‘- 4&

CLI

6s% of +3aaW am ~ “ ‘40 less t h a n *dW6 ,. .

II

: . , , ‘.

20 I< ,;.

II

o i I I I 1 I 1 I a I s 1 a I 1 I to 20 40 60 80 100 120 140 160 1

Days in DOD

SOURCE Testimony of The Honorable William J Perry, March 5, 1979,Senate Committee on Banking, Housing, and Urban Affairs

Figure 10.—Age of DOD Export Control Cases(October. December 1978)

1

m

80 - w day objective

I -’.760 -

40

. I&M tkaff 30 days

20if

o0 10 20 30 40 50 60

Days in DOD

SOURCE: Testimony of The Honorable William J Perry, March 5, 1979. SenateCommittee on Banking, Housing, and Urban Affairs

tion, described above, will alleviate this situ-ation remains to be seen, but one immediatechange will be staffing levels. The newexport-licensing program will have a staff of14 and an initial budget of $500,000.

Policy Guidance.– It is possible, however,that the quality of decisions may suffer fromattempts to speedup the system as it ispresently constituted and that fundamentalchanges are needed to preserve both the re-sponsiveness demanded by industry and thepolicy guidance and technical evaluationnecessary to protect of U.S. national securi-ty. It is here that the charges of inadequatepolicy guidance arise.

A recent Presidential Review Memoran-dum on East-West Technology Transfer(PRM 31) investigated this and other prob-lems in the present licensing system and con-cluded that the present organization shouldbe augmented. It suggested that the Na-tional Security Council (NSC), the Office ofScience and Technology Policy, and theArms Control and Disarmament Agency allbe given export control responsibilities, pre-sumably to lend policy guidance. Implemen-tation of this recommendation has begun.Representatives from the three agencies nowmay participate in OC discussions, and an adhoc technology transfer group has been cre-ated within NSC.

After its own investigation of the system,however, the General Accounting Office(GAO) has declared that it does “not believethe problems associated with diffused man-agement authority can be solved by addingmore Government agencies to the licensingprocess. This is not a regulatory activitywhich suffers from a lack of bureaucratic at-tention, and better attention, not more at-tention, is needed at the licensing level.”37

Restrictiveness of Export Controls.—Many of the companies engaged in East-West trade are multinationals. Their ex-

“ComptrolIer General, Export Controls: Need to (’lan”~yPolic>~, op. cit., p. 66.


perience in developing technology, movingpersonnel, and monitoring research activ-ities around the world has convinced themthat technology comparable to their own isalmost always otherwise available. They con-tend that the administrators of U.S. exportcontrols underestimate the degree of techni-cal sophistication in the East and ignoretechnical developments in Western countriesboth within and outside CoCom.

Many examples illustrate the availabilityof technology from multiple sources:

●

●

●

●

Hungary exhibited advanced computer-controlled machines at the 1978 mac-hine tool show in Chicago. Many of themachines that it brought to the UnitedStates would not have been exportableby U.S. firms under Export Adminis-tration guidelines.The sale of a U.S. Univac computer toTASS was stopped during the summerof 1978 for foreign policy reasons. Al-though the decision was later reversed,TASS has now signed with a Frenchcomputer manufacturer.A U.S. firm was unable to obtain alicense for the sale of an aluminum pro-duction plant. Here too, a contract wassigned with the French within a veryshort period of time.A U.S. firm was approached by the PRCregarding the sale of some electronicequipment. After preliminary discus-sions with OEA, the American firmwithdrew because it feared it could notget the necessary export licenses. TheChinese were confident, however, thatthe equipment could be obtained else-where: the PRC had a close relationshipwith a Japanese firm that could supplythe equipment and indeed had done sounder similar circumstances in the past.

Many firms also contend that U.S. exportcontrols extract high costs of complianceand discourage entry into Eastern markets.Accounting methods do not usually lendthemselves to ready identification of the

direct costs of validated license applications,but large corporations heavily engaged intrade with the East have estimated thatthey incur annual licensing-related costs ofas much as $1 million, a figure that includesthe salaries of several employees solely as-signed to deal with OEA and the intermit-tent services of numerous executives.

But, the largest costs may be indirect andunmeasurable. U.S. businessmen contendthat the current export control procedureshave resulted in suspicion toward the UnitedStates and U.S. firms–suspicions that havecaused Eastern nations to go elsewhere.Some firms report that over the past fewyears approaches to U.S. business officials inEastern nations have markedly decreased.This is attributed to the fact that the delayand uncertainty associated with dealing withthe United States has caused potentialcustomers to turn to other suppliers. Theperceptions of the potential customers areimportant. An illustrative example can befound in the case of a U.S. company that hadbeen negotiating for over a year with thePRC. If consummated, the deal in questionwould have provided the PRC with access tothe use of new communications technology,but not the technology itself. The day beforethe contract was to have been signed, a high-level U.S. Government official made a com-ment that was interpreted by the PRC dele-gation as an indication that the U.S. Govern-ment might not fully support the sale.Negotiations broke down and the PRC soonsigned with another country—an agreementthat gave them access to the same capabil-ities and to the underlying technology.

Moreover, as chapter IX demonstrates,firms in other countries can sometimes getlicense pre-approvals that eliminate a majorarea of doubt from negotiations with Com-munist countries. Differences in the adminis-tration of the export controls between theUnited States and its CoCom partners leadsome American corporations to perceive theU.S. Government as the greatest obstacle totheir international business activities.

Ch. VIl—The East-West-Trade Policy of the United States ● 143

The unilateral controls embodied in theU.S. CCL are believed to contribute to thisproblem. By reflecting unrealistic technicaldecisions for controlled items (i.e., settingtechnical parameters unnecessarily low),they allow firms in nations with differentstandards to capture business that wouldotherwise come to the United States. Finallymany companies seem to feel that the admin-istration of export controls does not suffi-ciently take into account the policing capa-bilities of the private sector. Corporationssee it in their own interest to control the un-authorized transfer of goods by requiringthat critical components be acquired fromthe original supplier.

Thus, industry argues that because ofU.S. export controls, a considerable volumeof trade with the Communist world is beingadministered by foreign subsidiaries and itsbenefits are being lost to the U.S. economy.Many of the administrative activities associ-ated with East-West trade are carried outthrough divisions, subsidiaries or affiliatesof U.S. firms located abroad. Reasons forthis lie in the affinity between Europeanbusinessmen and their Soviet-Eastern Euro-pean counterparts; the reduced operatingcosts that result from geographic proximity;and the fact that relationships between theU.S. companies and centrally planned econ-omies are closely related to their marketingefforts in Western Europe.

But U.S. executives sometimes also con-tend that companies operate in this mannerbecause it avoids much of the “aggravation”associated with the administration of exportcontrols in the United States. No body ofdata appears to be available on the extent towhich U.S. export controls motivate multi-nationals to remove their operations fromthe United States. Given the relatively lowvolume of U.S. trade with the East it isunlikely that this is often a primary con-sideration.

Recommendations for Improvement.–These criticisms have sometimes generatedtension between business and Government,and have resulted in a spate of proposals for

reform of export-licensing procedures. Find-ing that the complex system for administer-ing export controls is plagued by “vaguecriteria, insufficient funding, and low prior-ities, ” GAO has recommended, in part, that:

The Export Administration Act shouldbe amended to state that the Presidentshall consider foreign availability whenimposing export controls for foreignpolicy purposes.The President’s semiannual report toCongress should discuss in more detailthe uses and reasons for foreign policycontrols.The foreign availability clause should beadministered as a separate effort undera “foreign availability evaluator. ”A new procedure to process routinelicense requests should be establishedin OEA.A multiagency Export Policy AdvisoryCommittee should be established at anappropriate administrative level. Thiswould allow the abolition of the entireEDAC and ACEP referral structures.Export license application managementresponsibility should be centralized inthe Department of Commerce’s OEA sothat responsibility for license applica-tions is no longer diffused.Funding of technical evaluations shouldbe centralized in OEA.38

The Export Administration Act of 1979(see above and appendix) has gone some waytoward meeting these suggestions, but it hasnot instituted fundamental alterations in thelicensing system, and is unlikely to entirelystill criticism from that part of the businessworld engaged in East-West trade.

CONTROL OF NUCLEAREXPORTS

Since the Atomic Energy Act was passedin 1954, special controls have been imposedon the export of nuclear equipment and tech-nology. These are presently governed by the

‘“Ibid., p. 18, vi, 42-49.


Nuclear Non-Proliferation Act (Public Law95-242), enacted in March 1978, which estab-lished new procedures for controlling the ex-port of nuclear facilities, equipment, materi-als, and technology; and dealt with the cri-teria, organization, and procedures for con-trol of U.S. nuclear exports, both domestical-ly and abroad. Under this Act, nuclear tech-nology was added to the Department ofCommerce’s Control List, and primary re-sponsibility for the controls divided betweenthe Department of Energy, the Nuclear Reg-ulatory Commission, the Department ofCommerce, and the Department of State, de-pending on the specific materials and tech-nology being licensed. In addition, specialcontrols were placed on the export of com-ponents specially designed or prepared foruse in nuclear facilities. Components foruranium enrichment facilities, fuel-reproc-essing facilities, or heavy water productionplants may now be exported only when spe-cifically licensed for a cooperative agree-ment. Finally, the Act imposed additionalconditions for Government approval ofnuclear exports and expanded Governmentcontrol over the export of component partsfor nuclear facilities. It directs the NuclearRegulatory Commission (NRC), in consulta-tion with the Secretaries of State, Energy,and Commerce, and the Director of the ArmsControl and Disarmament Agency, to deter-mine which items should be subject to ex-port controls because of their importance in

nuclear explosions. Export licenses for thesemust be granted by NRC and only then if thefollowing criteria are met:

1. International Atomic Energy Agencysafeguards exist for the items;

2. No such item shall be diverted for anynuclear device; and

3. No such item shall be retransferredwithout prior U.S. consent.

In addition, NRC must certify in writingthat the issuance of each export license willnot result in adverse consequences for U.S.national security and defense.

The Department of Energy has primaryjurisdiction over the control of transfer ofcertain types of nuclear technology. Thiscontrol emanates from a provision of theNuclear Non-Proliferation Act, which for-bids any person to directly or indirectlyengage in the production of any specialnuclear material outside the United States,except as authorized by a determination bythe Secretary of Energy that such activitywould not be detrimental to the nationalsecurity of the United States. The Depart-ment of Energy coordinates with other agen-cies, including the Arms Control and Dis-armament Agency, in this process. Underthe legislation, if NRC is unable to issue alicense or takes too long to do so, the Presi-dent has the authority either to block or toauthorize exports.

CREDITS

THE EXPORT-IMPORT BANKOF THE UNITED STATES39

When the U.S. Government extended dip-lomatic recognition to the Socialist regime inRussia in 1933, the Soviet Union representeda vast, new, and badly needed market forAmerican exports. To facilitate the U. S.-Soviet trade that was expected in the wake

AND TARIFFSof recognition, in February 1934, PresidentRoosevelt issued Executive Order No. 6581directing the Secretaries of Commerce and

39 For a complete history of the Bank, see George Holliday,“History of the Export-Import Bank,’” in Paul Marer, cd.,U.S. Financing ofl?ast-kt’est Trade (Bloomington, Ind.: Inter-national Development Research Center, 1975).

State to organize the Export-Import Bank(Eximbank) of Washington as a banking cor-poration under the laws of the District ofColumbia. Although financing trade withthe U.S.S.R. was the acknowledged primarypurpose of Eximbank, the executive orderalso stated a general aim: “To aid in financ-ing and to facilitate exports and imports andthe exchange of commodities between theUnited States and other nations or the agen-


cies or nationals thereof. ” Ironically, it wasto be 39 years before Eximbank extendedany credit to the Soviet Union.

At first a relatively obscure institutionwith an initial total capitalization of $11 mil-lion, Eximbank has grown to participate in avariety of programs in over 140 countries.Presently it has an obligation ceiling of over$40 billion and over the past few years, hasbeen responsible for the financing of approx-imately 10 percent of all U.S. exports. Thissupport has been primarily concentrated intransportation and construction equipmentand powerplants (especially nuclear), butmanufactured goods and capital goods arealso heavily supported. Approximately 18percent of all U.S. manufactured exports and21 percent of capital goods exports havebeen financed by Eximbank.

At first, Eximbank operated without of-ficial Government support, but in 1945 it re-ceived legislative mandate in the Export-Im-port Bank Act (Public Law 79-173). Underthis Act, the Export-Import Bank of theUnited States became an independent agen-cy of the Government, its managementvested in a bipartisan Board of Directors.Four of these are appointed by the Presidentwith the advice and consent of the Senate; inaddition, the Secretary of State sits on theBoard ex officio. An Advisory Committeeconsisting of the Bank’s chairman; the Sec-retaries of State, Treasury, and Commerce;and the Chairman of the Board of Governorsof the Federal Reserve System advises onmajor policy questions. The U.S. Treasuryprovided Eximbank’s original funds by pur-chasing $1 billion of the capital stock of theBank and, in addition, by continuing at in-tervals to purchase part of its obligations.Eximbank receives no direct appropriationfrom Congress, however, although Congressdoes retain oversight control of the Bank’soperations through the exposure ceilings itestablishes on new and outstanding creditauthorizations. In addition, Eximbank mayborrow up to $6 billion directly from the U.S.Treasury to meet its short-term needs. Itmust satisfy its medium- and long-term re-

quirements through borrowing from the Fed-eral Financing Bank.

Eximbank carries out its mandate to pro-mote U.S. exports through four programs:

●

●

●

●

First, it can make direct loans in theform of dollar credits to foreign borrow-ers purchasing U.S. goods and services.These loans must be used to pay U.S.exporters and they must be repaid indollars. This program is designed tosupplement, not replace, private financ-ing; it provides credit at favorableterms in cases where private institu-tions are unwilling to assume risks andit extends credit for longer terms thanwill private lenders. Eximbank usuallydemands a downpayment of at least 10percent from the borrower. It then fi-nances part of the loan through its ownfunds and requires private financing atcommercial terms for the balance.Second, Eximbank can provide guaran-tees to private financial institutionsthat their loans financing U.S. exportswill be repaid. These guarantees arebacked by the full faith and credit of theUnited States and are designed to en-courage private lenders to extend ex-port credits, and to lower their interestcosts. They are available for medium-term transactions (181 days to 5 years).Third, Eximbank, in cooperation withthe Foreign Credit Insurance Associa-tion, a group of approximately 50 U.S.insurance companies, can insure U.S.exporters against the exceptional risksinherent in foreign transactions. Inthese cases, private insurance coversnormal risks, and Eximbank extendscoverage for extraordinary events suchas war or expropriation.Finally, Eximbank can provide incen-tives for private banks to finance U.S.exports by administering a discountloan program. Discount loans are ad-vance commitments to discount exportdebt obligations acquired by commer-cial banks. The commitment assures theprivate lender that additional funds will


be available should they be needed dur-ing the full maturity of the obligation,which is generally short term. Loans inwhich Eximbank is participating as adirect lender are ineligible for this pro-gram.

Eximbank activities in the Communistworld have had a troubled and complex his-tory. In 1934, the establishment of such aninstitution seemed desirable for several rea-sons. First, the Soviets were short of thehard currency necessary to pay for imports.Second, many U.S. private financial institu-tions were unwilling to risk providing creditto the U.S.S.R. Finally, Great Britain, Ger-many, Italy, and France had all successfullyestablished similar organizations to provideforeign trade financing. The atmosphere ofthe time was one of intense competition fordwindling world markets and the SovietUnion seemed a potentially rich prize.

The barrier to Eximbank credit at firstwas the refusal of the Soviet Government tosettle Tsarist debts to U.S. citizens. TheJohnson Debt Default Act of 1934 (PublicLaw 80-772) had prohibited the extension ofcredits or financial assistance in any form toany foreign government in default on itsobligations to the United States. In 1945,the Export-Import Bank Act expressly re-moved prohibitions on loans from Eximbankto governments in default as of April 1934.By this time, however, U.S.-U.S.S.R. rela-tions had begun their rapid postwar deteri-oration. With the exception of Yugoslavia,the Bank made no loans to the Communistworld through the cold war period of the1950’s. This self-imposed limitation was for-malized in 1964, when the Foreign Assist-ance and Related Agencies AppropriationAct (Public Law 88-634) prohibited Exim-bank from lending to or in any way partici-pating in the extension of credits to anyCommunist country, except when the Presi-dent determined that the extension of suchcredit was in the national interest. In 1964and 1966, President Johnson did make suchdeterminations as part of an effort to im-prove East-West relations, but with the ex-ception of small loan guarantees to Romania

and Hungary in 1964, little Eximbank activi-ty took place. In 1968, the prohibition of Ex-imbank involvement in trade with the Com-munist world was made absolute through anamendment to the Export-Import Bank Actthat barred, without provision for Presiden-tial waiver, the extension of Governmentcredit to any country furnishing by directGovernment action “goods, supplies, mili-tary assistance or advisors” to any nationengaged in armed conflict with the UnitedStates (Public Law 90-267). Thus, the Viet-nam War had the effect of denying Exim-bank credit to all Communist nations exceptYugoslavia.

The absolute prohibition was lifted in1971 for those countries not themselves inarmed conflict with the United States (Ex-port Expansion Finance Act, 85 Stat. 345),and once again the President was empow-ered to determine if a credit transaction witha specific Communist country would be inthe national interest. President Nixon madesuch determinations for Romania in 1971and Poland in 1972. Also in 1972, the formalinception of detente and the signing of theU.S.-Soviet trade agreement paved the wayfor a Presidential declaration in favor ofallowing Eximbank credit to the U.S.S.R.The Soviet Union finally received its firstEximbank loan in February 1973, and in thenext 15 months Eximbank exposure on theSoviet debt grew to over $460 million, anamount that supported over $1 billion inU.S. exports. Table 20 shows Eximbank ex-posure in the Communist world as of Sep-tember 30, 1978. Eximbank was one of the

Table 20.—Export-Import Bank Exposure inSelected Communist Countries

(Sept. 30, 1978)—

Country Millions of dollars

U.S.S.R. . . . . . . . . . . . . .:. . . . . . . . . . . $456.4Poland . . . . . . . . . . . . . . . . . . . . . . . . . . 228.4Romania . . . . . . . . . . . . . . . . . . . . . . . . 90.2Yugoslavia . . . . . . . . . . . . . . . . . . . . 858.9China. . . . . . . . . . . . . . . . . . . . . . . . . . . 26.4*

“Granted before 1948NOTE Exposure consists of the combined total of direct Eximbank credit, guar.

antees, and Insurance programs The bulk of this exposure IS in directloans

SOURCE Export.import Bank of the United States, 1978 Annual Report.

Ch. VII—— The East-West-Trade Policy of the United States ● 147

Administration’s major tools in detente, andthe Soviets had been quick to take advan-tage of the credits newly available to them.All indications were that the amount of thesecredits and guarantees would continue togrow rapidly. Projects already partiallyfunded by Eximbank included a $400 millionchemical complex, the $342 million tradecenter, and a $36 million iron ore pellet plant.By 1974, applications were pending for helpin financing $110 million in oil and gas ex-ploration equipment and a $50 million trac-tor factory. $1.2 billion to $1.4 billion in newcredits were projected through calendar year1977. In 1974, the issue of Eximbank creditsto the Soviets became enmeshed in a largerdebate over the future of detente and the roleof Congress in foreign policy. One focus ofthese concerns was the reaction of Congressagainst the use of subsidized credits. Testi-mony before the Senate International Fi-nance Subcommittee, for instance, made itincreasingly clear that Government-sup-ported credits could no longer be regarded asa costless way of promoting exports.40 Exim-bank loans to the U.S.S.R. had, in accord-ance with Bank policy, been provided at thehighly favorable fixed rate of 6 percent, butrapidly rising commercial rates were steadilyincreasing the export subsidy. Even afterJuly 1974, when the Bank responded tosevere congressional criticism by institutinga flexible interest rate, Eximbank’s max-imum was still below rates obtainable in theprivate sector.

The point of view that eventually heldsway in Congress was summarized by Sena-tor Stevenson:41

Both the level and rate of Exim assistance[to the U. S. S. R.] as well as the kind of proj-ects involved raise serious questions aboutthe policies being pursued. It is clear that de-tente is one of the goals. It is a goal which weall seek . . .

But it is far from certain that the UnitedStates can buy detente with credits. A gen-uine and lasting easing of tensions requiresresolution of the difficult issues which dividethe United States and the Soviet Union . . .difficult and long-standing problems whichwill not be resolved overnight and most cer-tainly will not vanish at the first sign ofAmerican cash.

Unless the underlying factors which gaverise to these problems are solved, credits areunlikely to be of much avail. What is worse,they may have the effect of boosting Sovietmilitary capability and in turn lead to a wor-sening of relations. It is significant, for ex-ample, that none of the Exim-assisted Sovietprojects to date, and none of those which areplanned, involve the export of U.S. consumergoods. Instead, all relate to capital construc-tion or the development of productive capa-bility by freeing Soviet resources for otherpurposes; the United States may be indirect-ly contributing to Russian military poten-tial.

Thus, there was concern over actual orproposed projects–chemical complexes, theKama River truck plant, oil and gas develop-ment projects, the construction of wide-bodied aircraft production facilities–whichmight have direct military possibilities. Thecompletion of such projects would be tanta-mount to financing the military productioncapability of a long-standing adversary be-fore the achievement of a permanent im-provement in relations.

Congress was also concerned that rapid in-creases in Eximbank’s financial exposure inthe Soviet Union might unwittingly increaseSoviet leverage over the United States. Thepossibility of Soviet threats to withhold pay-ment on almost a half a billion dollarsseemed an unacceptable risk. These doubtswere enhanced by the apparent lack of needfor such massive credits. West Germany hadonly recently declined to provide financingfor a $1 billion iron and steel complex inKursk, but the Soviet Union found the nec-essary cash itself. Similarly, it had agreed topay $48 million in cash to a British firm for anew plastics factory, and still found itselfwith sufficient reserves to extend $600 mil-lion in credits to Argentina for an electric


power project. With such apparent financialcapability, why should the Soviets requiremassive Eximbank assistance? An addi-tional worry was the potentially adverse im-pact of Eximbank’s worldwide activities onthe competitive position of U.S. industry.The creation of production facilities abroadcould result in the long-run export of U.S.jobs and decline of U.S. markets.

In response to these fears, Congresspassed legislation that made the use of cred-it—and the withholding of credit—a politicalweapon. First, the Stevenson amendment tothe 1974 Export-Import Bank Act put a$300 million limitation on new loans andguarantees to the Soviet Union. Within thisceiling, specific restrictions were placed onenergy-related projects, reflecting Congress’particular concern with the potential mili-tary and practical relevance of Soviet oil andgas development. A maximum of $40 millionwas set for energy exploration and research,and no Eximbank loans were to be used forSoviet energy production and transmission.Congress was to periodically review theseceilings, which could be lifted by the Presi-dent if he found it in the national interest todo so, and if Congress approved the increaseby concurrent resolution.

The effect of this amendment was mademoot, however, by the passage of the Jack-son-Vanik amendment to the Trade Act of1974 (Public Law 93-618). This resulted inthe scrapping of the U.S.-Soviet trade agree-ment and effectively terminated all creditsto the U.S.S.R. by linking trade benefits tononmarket economies to the free emigrationof their citizens. The Jackson-Vanik amend-ment is discussed in more detail below.

THE COMMODITY CREDITCORPORATION

In addition to the financial assistance pro-vided by Eximbank, credit is available to theCommunist world through the CommodityCredit Corporation (CCC), created in 1933 byexecutive order. Since 1956 this organizationhas administered an export credit sales pro-

gram designed to help U.S. agricultural ex-porters expand their sales in foreign mar-kets. During the early years of detente in the1970’s, CCC provided the Soviet Union withover $550 million in credits for the purchaseof U.S. grains. Like Eximbank credits, CCCsupport was effectively suspended by thepassage of the Jackson-Vanik amendment tothe Trade Act of 1974. The provisions of thatamendment have, however, allowed selectedCommunist-bloc countries to be deemed eli-gible for CCC programs (see below and table21). CCC makes credits available to import-ers at somewhat better terms than could beobtained elsewhere. Although interest ratesvary, they are usually slightly below equiva-lent market rates, and maturities are oftenlonger than agricultural credits offered byprivate banks.

A related program was created by theAgricultural Trade Act of 1978 (Public Law95-501). Under the provisions of this law,credit with commercially competitive repay-ment terms of up to 3 years is available tomany foreign buyers of American farm prod-ucts. Communist countries currently eligiblefor the 3-year credits—Yugoslavia, Romania,Poland, and Hungary–are also eligible for“intermediate” credit, with repayments ofup to 10 years, for the following purposes:

To finance purchases of grain for reservestockpiling under international commodityagreements or other plans acceptable to theUnited States; to finance purchases of breed-

Table 21 .–Communist Countries: Eligibilityfor U.S. Programs

(as of July 15, 1979)

Country MFN Eximbank cccU.S.S.R. . . . . . . . . . . . No No No -

East Germany ... No No NoY u g o s l a v i a . . . Yes Yes YesPoland ... . . . . . . Yes Yes YesRomania. . . . . . . . . Yes Yes YesHungary . . . . . . . Yes Yes YesBulgaria . . ., No No NoCzechoslovakia, . . . . No No NoPRC. ., . . . . No No Yes

MFN = Most-favored-nation——

CCC = Commodity Credit Corporation

SOURCE Off Ice of East-West Trade, Department of State

Ch. VII— The East-West Trade Policy of the United States ● 149

ing livestock, including freight costs; tofinance, where feasible, establishment of fa-cilities for improved handling of importedfarm products; and to meet credit competi-tion from other countries, but not to initiatecredit wars.

The Agricultural Trade Act further au-thorizes the Agriculture Department to offerCCC financing for up to 3 years on sales ofcommodities to the PRC. In a related action,the bill authorizes CCC credits up to 3 yearsto private U.S. exporters who make deferredpayment sales to currently eligible coun-tries, including China.

TARIFFS: MOST-FAVORED-NATION STATUS

Most-favored-nation status guarantees anondiscriminatory U.S. tariff rate to the for-eign exporter, i.e., a rate as low as that nego-tiated for any other American trading part-ner for any given commodity. Beginning in1934 and continuing into the postwar eraunder the auspices of the General Agree-ment on Trade and Tariffs, a series of tradenegotiations has resulted in the reduction orelimination of nearly all substantive tariffslevied on U.S. imports. Denial of MFN de-nies the potential foreign exporter any bene-fits flowing from these progressive relaxa-tions of the tariff structure. Those States towhich the United States denies MFN mustattempt to market their products under the1930 Hawley-Smoot Tariff, a system of rela-tively high tariff barriers which was con-structed after the crash of 1929 to insulatethe U.S. market.

The Trade Agreements Extension Act of1951 withdrew MFN status from all Com-munist countries except Yugoslavia. Themajor obstacle at present to the granting ofMFN to the U.S.S.R. and other remainingcentrally planned economies is the Jackson-Vanik amendment to the 1974 Trade Act.

The Jackson-Vanik amendment pro-scribes the extension of any Governmentcredits and/or investment guarantees, the

signing of commercial treaties, or the grant-ing of MFN to any nonmarket nation that:

1.

2.

3.

denies its citizens the right or opportu-nity to emigrate;imposes more than a nominal tax onemigration or on the visas or otherdocuments required for emigration, forany purpose or cause whateever; orimposes more than a nominal tax, levy,fine, fee, or other charge on any citizenas a consequence of the desire of suchcitizen to emigrate to the country of hisor her choice.

Communist nations that already enjoyedMFN—Poland and Yugoslavia-were ex-empt from these provisions. but in order forany other Communist country to qualify forMFN, credits, or commercial treaties, thePresident must submit to Congress a reportindicating that the country is not in violationof any of the above conditions, including in-formation on the nature and implementationof emigration laws and policies and restric-tions applied to those wishing to emigrate.The amendment further gives the Presidentauthority to waive its restrictions on report-ing to Congress that:

. he has determined that such waiver willsubstantially promote the objectives offree emigration; and

s he has received assurances that the emi-gration practices of that country willeventually lead to free emigration.

A majority vote (within 90 days of receipt ofthe President’s report) in either house ofCongress can veto the extension of MFNstatus or U.S. Government credits, and thePresident retains the authority to suspendor withdraw the extension of MFN treat-ment to any country at any time.

Thus far, the President has used this waiv-er authority on two occasions—for Romaniaand Hungary, which both now enjoy MFNand Eximbank eligibility. In the case ofRomania, confidential diplomatic discus-sions, which took place between senior U.S.and Romanian officials in 1975, resolved the

.

150 . Technology and East- West Trade

major emigration issues to the satisfactionof President Ford. No written assuranceswere provided. In the case of Hungary, oraldiscussions in 1978 were supplemented byan exchange of letters containing assuranceson emigration between the U.S. Ambassadorto Hungary and the Hungarian Foreign Min-ister.42

The economic importance of MFN to re-cipient countries is discussed elsewhere (seechapters I I and III), but it is important tonote that the granting or withholding of

MFN has important symbolic value in theCommunist world and may therefore affectthe political climate as well as overall tradelevels. This is true for both the PRC and theU.S.S.R. It is in this context that mediaspeculation surrounding the granting ofMFN to the Soviet Union must be under-stood. One key factor in any administrationstrategy to resume U.S. trade and tariffbenefits to the U.S.S.R. must be the natureof the recent trade agreement with the PRC,which, among other things, proposes the ex-tension of MFN. This agreement must stillbe ratified by Congress. Table 21 summa-rizes the present status of selected Commu-nist countries with respect to their eligibilityfor U.S. credit and MFN.

CHAPTER VIII

Multilateral Export ControlPolicy: The Coordinating

Committee (CoCom)

CONTENTS

PageTHE HISTORY OF COCOM. . . . . . . . . . . . . . . . . . . . . . ................153

THE OPERATIONS OF COCOM. . . . . . . . . . . . . . . . . . . . . . ............155

The CoComLists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ....155Exception Cases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..................157Enforcement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....................160

U.S. AND ALLIED VIEWS OF COCOM. . . . . . . . . . . . . . . . . . . . . . . . . . .160

United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........161West Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ....161France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..................162Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..............164

THE FUTURE OF COCOM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..166

Table 22.–U.S. Aid to Western Europe Compared to East-West Trade 1949-55 . . . . .155Table 23.–Number of Items on the CoCom Embargo List. . .....................156Table 24.–CoCom Approved Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158Table 25.—Volume of CoCom-Approved Exceptions . . . . . . .....................158Table 26.–CoCom Approved Computer Requests . ............................159Table 27.–Disposition of CoCom Exception Cases . ...........................159

CHAPTER VIII

Multilateral Export Control Policy:The Coordinating Committee

(CoCom)

THE HISTORY OF COCOM

The Coordinating Committee for Multilateral Export Controls (CoCom) isthe informal multilateral organization through which the United States and itsallies attempt to coordinate the national controls they apply over the export ofstrategic materials and technology to the Communist world. It was originallyconceived in postwar discussions between the United States, Britain, andFrance. By 1948, the U.S. Government had begun to enlist the cooperation of itsWest European allies for a coordinated embargo policy against the Communistbloc. Early negotiations on this matter were private and informal, but they werelent impetus by the events of 194$-49: the proclamation of the People’s Republicof China (PRC), the Berlin crisis, the Tito-Stalin split, and the explosion of theSoviet atomic bomb. As East-West tensions grew, the coordination of exportcontrols took on increasing importance.

Nonetheless, there was far from universalor enthusiastic agreement on the extent ofthe economic blocade that should be under-taken. After consensus had been reached bythe United States, Britain, and France onthe general direction of export controls,careful, delicate—and secret—discussionsbegan with other European nations, severalof which had doubts about the legality of theproposed embargo measures and many ofwhich were pursuing neutral policies whichseemed threatened by participation.

The formulation of the framework of theorganization, completed in November 1949,is thus shrouded in secrecy. It is, in fact,doubtful whether any written understandinghas ever existed; most likely, a “gentlemen’sagreement was undertaken, membersagreeing to follow the licensing rules laiddown by unanimous decisions among thegroup. CoCom began operations on January

1, 1950, with a membership consisting of theUnited States, England, France, Italy, theNetherlands, Belgium, and Luxembourg. Inearly 1950, Norway, Denmark, Canada, andWest Germany joined, followed by Portugalin 1952 and Japan, Greece, and Turkey in1953. Nonmembers, Western countries thatchose not to compromise their neutrality, in-clude Sweden, Switzerland, Iceland, Austria,and Finland. ] Of these, Switzerland andSweden are recognized as major alternativesources of some products and technologieson the CoCom lists. Their relations withCoCom involve an informal, albeit a some-what unpredictable, cooperation. Neitherseems desirous of allowing a sale that wouldpush its relations with CoCom members to aserious confrontation, but neither is particu-

‘Sc’L’ ( ;unnar ,.ldltJr-Karlssf Jn, 1~ ‘ei t(’r)l F,’(’onon)i(” II ‘clrf(lrc,

1;)J;.(;;, ..I ( ‘(150 ,~tll(]l I jl F’or{,igtt ]Y(’onomi(” l’oii(j {StcJ~k-holm: Alnlq\rist and Jl:iksell, 196HI.

153


larly interested in formalizing its coopera-tion. Generally, these non-CoCom countriesfavor a liberalization of multilateral exportrestraints, a view they share with importantCoCom members (see chapter IX).

Initially, the organization had two oper-ating entities, the Consultative Group (CG)and CoCom. The function of CG was to setthe broad outlines of policy and settle issuesof principle. It consisted of ministerial levelofficials or their personal representativesfrom all member countries. It was expectedthat CG would meet only rarely. In fact, itsoon ceased to operate at all, and the entiremultilateral organization has now come to beknown simply as the Coordinating Commit-tee or CoCom. Originally intended to be theoperational arm of the system, CoCom wasto implement the broad policy decisionsmade by CG. CoCom now meets in continu-ous session in Paris. Its representatives aremidlevel diplomatic and technical special-ists, who deal with the day-to-day problemsof the export control system.

During the Korean war a special ChinaCommittee (ChinCom) was established to ad-minister restrictions on trade with China andNorth Korea. For a time, these restrictionswere more severe than those that applied tothe Soviet Union and its European allies, butthis “China differential” was eliminated in1957 and ChinCom ceased to operate as aseparate entity. Now the same CoCom con-trols apply to both the Soviet Union andPRC.

Because it is an informal and voluntary or-ganization, CoCom has no power of enforce-ment. It is based neither on treaty nor execu-tive agreement. Its members have no legalobligation to participate in its deliberationsor to be bound by its recommendations anddecisions. Furthermore, its operations havefrom the outset been highly confidential andits activities, at least in Europe, attract littleor no publicity. It has been suggested that ifthis were not the case, some non-U.S. mem-

bers might be forced to withdraw fromCoCom, either because of internal domesticpressures or the incompatibility of individ-ual country domestic laws with its controls. z

The force that initially brought CoCominto being and held it together through itsformative years was the enormous economicleverage the United States could exert on itsWestern allies in the immediate aftermath ofWorld War II and the early years of the coldwar. But as table 22 demonstrates, theamount of U.S. economic and military aid tothe West began to decline seriously after1955. As it decreased, Western Europeantrade with the East was beginning to rise. In1949, the combination of U.S. military andeconomic aid to Western Europe amountedto almost $6.3 billion while the total volumeof trade of these Western European coun-tries with Eastern Europe was only about$1.8 billion. It was not until 1955 that thebalance shifted and this trade turnover ex-ceeded the amount of U.S. aid. The BattleAct (see chapter VII) had attempted to useU.S. aid as a lever to compel allied com-pliance on export controls by providing forthe discontinuance of U.S. financial assist-ance to countries that exported restrictedcommodities to Communist countries. Itssanctions have never been invoked, butwhether this was due to its success in limit-ing East-West trade or to high-level policydecisions to avoid sensitive confrontations isunclear. In any case, the increasing interde-pendence of all CoCom members with theEast at economic, political, and diplomaticlevels has by now eliminated whatever lever-age actually existed. It is significant, there-fore, that in Europe and Japan CoCom is stillperceived as a useful institution. This pointis discussed further below.

‘Richard T. Cupitt and John R. McIntyre, (’o(’orn: Ea.st-~’e.st Trade ~eiation.<, The I.i.$t ~eL~ie117 f+oce.ss, a paper pre-sented to the International Studies Association Convention,Toronto, March 1979.

Ch. V///— Multilateral Export Control Policy: The Coordinating Committee (CoCom) . 155

Table 22.—U.S. Aid to Western Europe Compared to East-West Trade 1949-55(in millions of dollars)

“ 1949 1950 1 9 5 1 1952 1953 - 1954 - 1955

Economic aid . . $6,2760 - $3,819.2 $2,267.8$1,349.1 - - - $1,264.9 - - - . 6 3 6 : 6 . . $ 4 6 4 . 4

Military aid ., . . . . . . . . . . . . . . — 37.1 604.6 1,013.9 2,866.8 2,225.9 1,541.2

Total ... ... 6,276.0 3,856.3- 2872.4 ‘ - ‘2 ,363.0 4,131 .7 2,862.5 2,007.6

Western European exports to— — —

E a s t e r n E u r o p e 832.4 653.3 745.9 742.5 790.9 973.8 1,100.1Western European imports from

E a s t e r n E u r o p e 1,011.7 812.9 1,009.8 995.4 908.7 1,039.4 1,357.9

SOURCE From Gunnar Adler Karlsson Western Economic Warfare - 1947-1967, -p. 46. -

THE OPERATIONS OF COCOM

Obtaining a clear picture of CoCom’s dailyoperations, to say nothing of assessing theireffectiveness, is complicated by the secrecywhich generally pervades the organizationand its workings. Basically, the represent-atives of CoCom engage in three kinds of ac-tivities: the development of lists of technol-ogies and products that will be embargoed,controlled, or monitored; weekly consulta-tions on exceptions to these lists; and con-sultation on enforcement.

THE COCOM LISTS

There are three CoCom lists, organized ac-cording to the technical specifications andapplications of the items contained on them:

1. a munitions list that includes all mili-tary items,

2. an atomic energy list that includessources of fissionable materials, nuclearreactors, and their components, and

3. an industrial/commercial list.

Most of the activities of CoCom emanatefrom the last of these. By their very nature,munitions and nuclear materials have clearmilitary purposes and strategic importance,and there is generally little debate over thewisdom of restricting their sale. The indus-trial list, on the other hand, contains thosedual-use items (e.g., jet engines, air traffic

control equipment, computers) that, al-though nominally civilian, have military po-tential. The technological content of theseitems is usually high.

The industrial list is subdivided into threecategories: International List I (embargoeditems); International List II (quantitativelycontrolled items); and International List III(exchange of information and surveillanceitems). List I contains those items that mem-ber nations agree not to sell to the Commu-nist bloc unless permission is specificallygranted after a request for an exception. ListII contains items that may be exported, butonly in specified quantities. Licenses to ex-port more than the quantity specified for agiven item–which may be expressed eitherin value or in number of units—require spe-cial exceptions. List III contains items thatmay be sold, but over which the exportingnation must maintain surveillance of enduse. This information as well as the fact ofthe sale must be reported to CoCom.

Most of the dual-use items that pose thegreatest problems for export controls arecontained in List I, which is divided into 10individual groupings. These conform closelyto those on the Battle Act List and the U.S.Commodity Control List (CCL):

1. metalworking machinery;2. chemical and petroleum equipment;


3.

4.5.6.7.

8.9.

10.

electrical and power-generating equip-ment;general industrial equipment;transportation equipment;electronic and precision instruments;metals, minerals, and their manufac-ture;chemicals and metalloids;petroleum products; andrubber and rubber products.

The CoCom list itself is not public in-formation, but it is virtually identical to thenational lists of controlled items publishedby some CoCom members. Furthermore, theAmerican CCL distinguishes between multi-laterally and unilaterally controlled items,and the content of the CoCom industrial listcan be inferred simply by subtracting theformer from the latter.

At the outset, CoCom controls, at least asmeasured by the number of items on thelists, were quite stringent, although never asrestrictive as U.S. unilateral controls. De-bate among and within member countries onthe relative weight that should be given tosecurity concerns and trade advantages hasbeen continuous. In order to accommodatethis debate and to keep lists current, periodiclist reviews for purposes of deletion, addi-tion, and amendment were undertaken in1954, 1958, 1961, 1964, 1967, 1971, and1974-75. Another review is presently (1979)underway. No details of the decisions madein these reviews or the debates surroundingthem are ever published. However, a com-parison of U.S. and other national lists in-dicates that the overall trend in CoCom hasbeen toward liberalization of controls.

Table 23 summarizes one attempt to esti-mate the changes in the magnitude of the listfrom its inception through the last com-pleted review. This information was com-piled from a variety of sources, includingpublished national lists and private inter-views.

As is evident from this table, the length ofthe list has fluctuated over the years, but thegreatest single alteration was the elimina-

Table 23.—Number of Items on theCoCom Embargo List

—.——— — _.List as of, Number of items-

.—— ———— ———.—November 1949 86November 1951 270January 1952 285March 1954 265August 1954 170March 1958 181July 1958 118April 1961 NAJuly 1962 NAJune 1964 1507August 1965 161March 1967 NASeptember 1969 156September 1972 151March 1976 149

SOURCE CUpitt and McIntyre. CoCom. East-West Trade Relations The ListReview Process p 23

tion of large numbers of items after the ces-sation of hostilities in Korea and some eas-ing of U.S./U.S.S.R. tensions. The changesin numbers may be attributed both to shiftsin East-West relations and to increased pres-sures from European members to decreasethe definition of strategic goods to a mini-mum in order to foster East-West trade. Thestabilization of the numbers that has charac-terized the list since this time may be inter-preted as a sign that drastic reductions areunlikely in the future. According to a 1978administration statement:

The process of considering which itemsmee t t he s t r a t eg i c c r i t e r i a ha s been r epea t edmany times over the years. As a result,changes during list reviews are now seldomdramatic. A few items are deleted and a fewnew ones added. But most of the changesconsist of modernizing the technical descrip-tions to reflect technological progress.3

The procedures by which the 1979 review isbeing accomplished include the followingsteps:

● Original proposals for items to be addedor deleted were due from member na-

‘Special Report on Multilateral Export Controls, submittedby the President pursuant to sec. 117 of the Export Adminis-tration Amendments of 1977, printed in Export Administrat-ion Act: Agenda for Reform, hearings before Subcommitteeon International F;conomic Policy and Trade, Oct. 4, 1978, p.53.

Ch. Vlll—Multilateral Export Control Policy The Coordinating Committee (CoCom) ● 157

●

●

●

tions not later than 4 months before thebeginning of the review.Counterproposals could be submittedby any member on any item for whichan original proposal was submitted,preferably 45 to 60 days before the be-ginning of the review.The review is then completed in tworounds. A draft document is distributedincorporating the proposals and coun-terproposals agreed to. If this is accept-able to the member nations, the revisedlist becomes effective after 60 days. Re-visions to this draft may be submitted iftwo countries concur on an item.Additional proposals for changes thathelp achieve consistency among theitems may also be submitted at thisstage.

The main responsibility for the U.S. con-tribution to this procedure lies with the De-partment of State, but each principal de-partment in the export control system is in-volved in developing U.S. proposals. Inter-agency Technical Task Groups (TTGs) pro-vide technical analysis and evaluation of allitems to be considered. This evaluation isbased on the following:

a laymen’s description of items to beconsidered;a comparison of U. S., CoCom, neutral,and Communist country manufacturingcapability and availability for eachitem;the potential civilian and military usesof the item and their significance, e.g.,their strategic role;the technical feasibility of controllingthe item including the possibility andease of substitution;changes in use parameters resultingfrom technological progress and therate of these changes;the present controls on design and man-ufacture of the equipment;the feasibility of reverse engineering,i.e., of extracting the technology fromthe product and the principal militaryand civilian uses of the result; and

G identification of critical technologiesand keystone equipment.

TTGs draw on both public and privatesources for their information, including theGovernment-industry Technical AdvisoryCommittees (TACs) established to provideprivate sector guidance on the implementa-tion of the Export Administration Act. Oneproblem with this procedure, however, isthat the apparatus of the review systemtends to disappear between reviews, some-times resulting in a substantial delay in gen-erating U.S. positions for the list review.

EXCEPTION CASES

Once a week, representatives of each mem-ber nation meet in CoCom headquarters inParis to consider exception requests. Theseare, in effect, petitions from firms in membercountries to exempt from CoCom control, ona one-time basis, an item that appears on theCoCom embargo list and would otherwise beprohibited from sale. Each member govern-ment reviews all such requests and recom-mends full or partial approval or denial toCoCom, which in turn advises the petition-ing nation. Decisions must be unanimous.

In the United States, exception requestsfrom other CoCom countries, as well as ap-plications for exceptions from U.S. export-ers, are first sent to the Office of East-WestTrade in the State Department. The adminis-tration of these requests is handled throughthe Economic Defense Advisory Committee(EDAC) structure described in chapter VII.This involves a multiagency review thatbegins in Working Group I with consulta-tion among office director-level represent-atives of the Departments of State (whichchairs the Group), Defense, Commerce, En-ergy, and the Treasury, with the Central In-telligence Agency (CIA) advising. If consen-sus on the application cannot be reached inthe Working Group, the request is appealedto the sub-EDAC or Deputy Assistant Sec-retary level and ultimately to EDAC itselfon which the Assistant Secretaries of each


Department sit. The criteria for grantingthese exceptions and the system for evaluat-ing the requests are the same as those ap-plied in the Advisory Committee on ExportPolicy (ACEP) structure for granting U.S.validated licenses, i.e., the case rests on thetechnical specifications of the proposed ex-port, the proposed end use and end user,availability outside CoCom, etc.

As tables 24 and 25 demonstrate, both thevalue and number of CoCom-approved ex-ceptions have risen substantially over thepast several years.

The exceptions procedure has played avariety of roles in U.S. policy toward CoCom.In the early years of the organization, U.S.acquiescence in exceptions requests was ameans of fulfilling the conditions of the Bat-tle Act without actually having to imposesanctions on Western allies. The Battle Actallowed U.S. aid to be continued to thosecountries shipping embargoed items to theCommunist bloc if a Presidential determina-

Table 24.—CoCom Approved Exceptions(from all sources, in millions of current dollars)

. ————.Year ‘- Value of except ions—-.1967 . . . . . . . .-: :-. : . . . . . . . ~. . . . . . ,: :-. ‘.-.: $11 –

1968 . . . . . . . . . . . . . . . . . . . . ... ... . . . . 81969 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 191970 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 621971 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 561972 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1241973 . . . . . . . . . . . . . . . . . . . . ... ... ... 1061974 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1191975 . . . . . . . . . . . . . . . . . . . . . . . . . . . 1851976 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1621977 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214

SOURCE: Special Report on Multilateral Export Controls, submitted by~hePresident pursuant to sec. 117 of the Export Administration Amend-ments of 1977

Table 25.—Volume o fCoCom-Approved Exceptions—————..

Year Total United–States”—— ———-.—- — .1971-75 . . . . . . . . . . . . 4,423 2,1781976 . . . . . . . . . . . . . . 884 4321977 . . . . . . . . . . . . . . 886 3581978 . . . . . . . . . . . . . . 1,035 500

SOURCE Testimony of William A Root before the Subcommittee on Researchand Development.Committee on Armed Services. U S House of Rep.resentatives, May 24, 1979

tion stated that “unusual circumstances in-dicate that the cessation of aid would beclearly detrimental to the security of theUnited States.” Exceptions granted byCoCom thus became grounds for determina-tions which in turn obviated unpopular andpossibly divisive U.S. actions against itsallies. The fact that no U.S. aid was ever ter-minated under the Battle Act, therefore, re-flects policy decisions on the part of the U.S.Government and does not necessarily indi-cate that no U.S. ally ever violated the termsof the Act by selling goods and technologyunilaterally embargoed by the UnitedStates. At the sometime, allied sales of U.S.unilaterally embargoed items were possiblydeterred by the knowledge that details of thecountries of destination, products, and val-ues would be published in the State Depart-ment’s annual Battle Act Report which pro-vides details of all Presidential determina-tions to Congress.

The character of the exception procedurehas now changed; it is the channel throughwhich export controls can be waived in favorof the requests of U.S. exporters to conductbusiness with the Communist world. Astable 25 also demonstrates, the UnitedStates itself generates approximately half ofall exception requests; at the same time, ithas the reputation of being the CoCom mem-ber most concerned with maintaining thestrictest possible embargo. Although othernations may have national control lists (seechapter IX) slightly more rigorous thanCoCom’s, the United States has the longestand strictest unilateral list. It is ironic,therefore, that since the early 1970’s theUnited States has emerged as the majorsource of CoCom exceptions requests. Onereason for this may be in the substantialworldwide technological lead the UnitedStates has in computers: computers andcomputer-related technology are among themost frequent entries on the CoCom embar-goed list, and the United States is a pre-ferred or sole supplier of many of theseitems. U.S. firms have therefore more oftenhad the occasion to seek exceptions for theseitems than have firms in other countries.

Ch. VIII— Multilateraeral Export Control Policy; The Coordinating Committee (CoCom) . 159

Table 26 shows the dominance of computersin the exception process.

The vast majority of exceptions requestssubmitted to CoCom are approved. For ex-ample, of the 1,380 cases considered in 1974,only 12 were disapproved; in 1977 of 1,087requests, 31 were rejected. The UnitedStates objected in 30 of the 31 disapprovedcases. This information for the years 1974-77is summarized in table 27.

One of CoCom’s major problems in dealingwith exception cases has been the delays in-volved in reaching decisions—delays thatoriginate most often in the United States.CoCom procedures call for a decision on anexception request 18 days after it has beensubmitted, with an automatic 2-week re-scheduling in the absence of a decision, andadditional weekly extensions at the discre-tion of the requesting member. The UnitedStates has been the major violator of these

Table 26.—CoCom-Approved Computer Requests(in millions of dollars)

Year Value ‘Percent of total

1971 .“ $ 21 2 3--

1972 . . . 66 391973 . . . . 80 5 0a

1 9 7 4 120 66a1975 . . . . . . 147 6 4a

1976 . . . . . . . . . . 123 521 9 7 7 168 63

aOmitting two exceptionally high-value cases in 1973 and one each in 1974 and1975 which would distort the figures None of the four proposed exports ac-tually took place

SOURCE Special Report on MuItilateral Export Controls, submitted by thePresident pursuant to sec. 117 of the Export Administration Amendments of 1977

procedural rules and the elaborate EDACreview process may very well preclude U.S.compliance with the time constraints.

U.S. delays in dealing with CoCom haveinvolved both exception requests initiatedby U.S. exporters and those initiated byother CoCom members. The latter categoryof cases includes not only exceptions butlicenses for the reexport of U.S. origin prod-ucts. This is the result of the fact that in U.S.export administration law, the Departmentof Commerce retains jurisdiction over theresale of goods and technologies even afterthey have been sold abroad. If, for instance,a French firm wishes to reexport an itemthat it obtained through a U.S. validatedlicense, it must apply to the Office of ExportAdministration (OEA) for a new license, justas though it were a U.S. firm.

The draft report of the President’s TaskForce to Improve Export Administration Li-censing Procedures has noted that the neces-sity to obtain CoCom approval added anaverage of 40 days to the processing time ofmost U.S. export cases.4 Delays in decidingexceptions requests submitted by other na-tions may last even longer. The General Ac-counting Office (GAO) recently examined 76test cases of CoCom exception requests sub-mitted to the United States in 1977 andfound not only that the United States is theperpetrator of inordinate delays, reserving

‘Report of the President’s Task Force to Improve ExportAdministration Licensing Procedures (draft), Sept. 22, 1976,p. 112.

Table 27.—Disposition of CoCom Exception Casesa

——————————Year Approved Disapproved Withdrawn Pending——By number1974 . . . . . . . . . 1,243 (-) 1 2(o) 16(-) 1 09(-)1975 . . . . . . . . . 1,646 (-) 22(o) 36(-) 94(-)1976 . . . . . . . . . 884(432) 36(0) 36(7) 101(1 8)1977 . . . . . . . . , 836(358) 31(0) 44(5) 176(55)

By value (dollars in millions)1976 . . . . . . . . . $162 (71) $24(0) $187(1) $73(7)1977 . . . , . . . 214(55,2) 1 9(0.03) 9(0.03) 74(20.5)

Total

1,380 (567)1,798 (798)1,057 (457)1,087 (419)

$446 (79)317 (76)

. —. - . -————— ——a U.S. cases are in parentheses

— . —

SOURCE Cupitt and McIntyre CoCom East-West Trade Relations p 26

——


opinion on more requests than other mem-bers and for longer periods, but that the U.S.CoCom delegation is often unable to explainwhy the system takes so long. It concludedthat “the elaborate U.S. review process isn’tdesigned to provide a response within the re-quired time frame; indeed, some U.S. exportcontrol officials are not (even) aware of thesedeadlines.”5

Delays not only fuel the criticisms of U.S.exporters, but subject the United States toantipathy from abroad. Foreign govern-ments and businessmen have attributed de-lays by the United States in deciding theirexception requests to a number of motives.These range from allegations that the U.S.Government is attempting to provide a com-mercial advantage for U.S. business by hold-ing up the competition, to recognition of thefact that the cumbersomeness of the U.S. ex-port control system itself is responsible forthe tardiness with which the United Statesprocesses the requests. In neither case arefriendly relations promoted within CoCom.This subject is discussed in greater detail inthe concluding sections of this chapter.

ENFORCEMENT

Because no CoCom decision is legallybinding on a member nation, all its decisionsmust be unanimous. Given the informal na-ture of the organization and the sensitivityof the issues with which it deals, however, lit-tle is known and less is publicized about theextent of overt or covert violations of CoCom

‘Comptroller (;eneral, E.tpc>rt (’on trols: .~’e(d to (’luri[v POl-

io! cJfl(/ .Simplif]’ .4 cff?lirzi.strc~tioft, \lar. 1, 1979, p. 11.

rules by members. Violations of individualsand firms can only be punished by nationallegislation; in the United States violationsby other member countries are dealt with, ifat all, out of the public eye in high diplomaticcircles.

CoCom provides for the possibility that acountry may determine that it must proceedwith a particular export even in the face of anegative CoCom decision by allowing “na-tional interest exceptions. ” These have beenused very sparingly. According to a well-informed State Department official, theyhave been invoked about 12 times over thepast 30 years, with each case having its ownunique history and characteristics. It is farmore common for problematic cases never toappear before CoCom at all, either becausethe Government determines that there is noneed to submit them or because it prefers todeal with other member governments direct-ly at the highest political levels. This oc-curred, for instance, when Great Britain firstproposed selling Harrier jets to the PRC.

Language differences and the complextechnical nature of same exports complicatethe issue of compliance but, undoubtedly,covert exports do leak through the CoComnet. Although it is impossible to quantifythe extent of this problem, there is a wide-spread perception among U.S. businessmenthat CoCom regulations are not appliedequally within all member countries. Anoften cited example is the sale of Frenchsemiconductor technology to Poland, a tech-nology transfer that has probably alreadybenefited Soviet efforts to manufacturesemiconductors and that could not havetaken place under U.S. export controls.

US. AND ALLIED VIEWS OF COCOM

Like any multilateral organization,CoCom is subject to the strains occasionedby the differing perceptions and interests ofits sovereign members. But CoCom’s unoffi-cial status makes it particularly vulnerableto internal tensions. U.S. businessmen fre-

quently remark on the “laxity” of exportcontrols in other member nations, andcharges of deliberate evasion of CoCom re-strictions by firms in other countries are notuncommon. But America too is the subjectof often heated criticism from its partners.

Ch. VIII—— Multilateral Export Control Policy: The Coordinatlng Committee (CoCom) c 161

As part of an investigation of the differingexport control policies of major U.S. allies(see chapter IX), OTA has also assembled in-formation on the attitudes of businessmenand Government officials in West Germany,France, and Japan toward the utility ofCoCom and America’s role in it. The follow-ing discussion is necessarily impressionistic;no attempt was made to question a statis-tically significant sample of officials or in-dustrial representatives in either the UnitedStates or abroad. The uniformity of responseencountered, however, indicates that thegeneralizations that follow represent, if notevery point of view, at least widely sharedopinions.

UNITED STATES

Chapter VII has discussed the fact thatmany U.S. firms feel that they are under acompetitive disadvantage in their dealingswith the East. Not only does the export-licensing procedure sometimes subject themto excessive delays in the fulfillment of theircontracts, but there is a widespread percep-tion that the domestic control policies ofAmerica’s major CoCom allies are signifi-cantly more liberal and more flexible thanthose of the United States. This is borne outin OTA’s own studies of the export controlpolicies of West Germany, France, Britain,and Japan that appear in chapter IX.

But the operations of CoCom are also dis-criminatory in the eyes of some U.S. execu-tives who believe first, that the policies ofother members give their industries advan-tages over the United States; and second,that CoCom regulations are not equally orconsistently applied among all the membernations. Although American businessmenperceive the need for controls of militarilysignificant items, they contend that Euro-pean and Japanese interpretation of this‘‘significance is much more liberal thanthat of the United States. This allows for-eign firms to export to the Communist worlditems that U.S. exporters may not sell, Inthe view of U.S. business, the result is thatthe Communist nation gets the technology,

and the United States loses the sale. In addi-tion, France, Japan, and West Germany arementioned frequently as “unfair competi-tors” because it is thought that firms thereoften manage to evade or avoid CoCom regu-lations. Evidence for these allegations is usu-ally circumstantial or anecdotal, and thecharges may well be unfounded. Neverthe-less, a significant number of highly placedU.S. executives appear to believe that firmsin other Western countries consistently floutCoCom regulations, and that this often oc-curs with the active or passive connivance ofthe Governments involved.

Sources in several U.S. Government agen-cies have privately expressed similar views,but documentation of CoCom violations bymember governments is universally re-garded as highly sensitive material. Thecommon position expressed by U.S. Govern-ment officials is that, given its informalnature and the constraints under which itoperates, CoCom works surprisingly well.Problems between governments have tradi-tionally been worked out quietly at very highpolicy levels, and this practice should con-tinue. Attempts to formalize or significantlystrengthen the organization are generallyregarded as unwise, for they would almostcertainly be resisted. As the following sec-tions indicate, this apprehension was amplyconfirmed in discussions with individuals inother member countries. The impressiongained is that pressure for any majorchanges in the organization might precipi-tate its demise.

WEST GERMANY

West German officials agree that CoComis a necessary and useful organization, in-asmuch as it prevents the export of strategictechnology to Communist nations. No one inBonn questions the need to embargo exportsof military technology. Moreover, some offi-cials feel that, were it not for CoCom, theJapanese would be less vigilant about pre-venting strategic technology exports to theEastern European nations–Tokyo does notfeel threatened by such distant countries.


The Germans also support the principle ofcoordinating Western export policies in amultilateral organization. Despite the ap-proval of CoCom’s aims, however, there iswidespread feeling that CoCom must be re-formed and made less cumbersome, thatthere must be more genuine equal competi-tion on the industrial list, and that this listmust be modified to take into account con-siderable technological progress withinEastern Europe.

The most frequent criticisms expressedwere not of CoCom itself, but of the Ameri-can role in CoCom, in particular the delaysinvolved in reexport licenses, and inconsist-encies in U.S. policy. The reexport-licensingprocess is often unpredictable because notonly are the American national export con-trol lists more restrictive than the CoComlists, but licenses can be denied for ad hoc po-litical reasons, which may be incomprehen-sible abroad. Officials cited with some bewil-derment, for instance, President Carter’sdecision in July 1978 to deny Sperry-Univacan export license, and his subsequent re-versal of this policy in April 1979, suggest-ing that these developments do not help thefunctioning of CoCom.

Moreover, there is a general feeling inBonn that the various agencies of the Amer-ican Government that deal with licensingquestions are uncoordinated, further exacer-bating the problem of delays and unpredict-ability and giving the impression of lack ofpolicy direction, and that the American cri-teria for granting licenses are unclear. Re-gardless of the accuracy of these percep-tions, the predominant view in West Ger-many seems to be that the American listsshould be brought more in line with theCoCom lists; the license-granting procedurein Washington rationalized; and the criteriafor making decisions on reexport licenses notbe determined by the current state of humanrights in the U.S.S.R.

Another German concern is the futuretreatment of the PRC within CoCom. Thereis a fear that if there is a new “China dif-ferential, ” this time to China’s advantage,

CoCom may well disintegrate. This is basedon the feeling that, in order for CoCom to bea viable organization, all Communist coun-tries must be treated equally. By the sametoken, therefore, there should be no differen-tial for Eastern European countries (for in-stance, Romania) within CoCom, becauseany technology exported to Eastern Europemay find its way to the U.S.S.R. Germanspokesmen emphasize that they favor morediscussion in CoCom of these issues. Finally,there is a general belief that German cor-porations, out of purely commercial motives,often act as unofficial watchdogs to ensurethat controlled technology is not exportedby a company from another country that hasevaded CoCom rules. Thus, there are mech-anisms other than CoCom for ensuring thatthe latest technology does not leak to theEast, not the least of which is the Westerncompanies’ concern not to create potentialcompetitors for their domestic markets inthe U.S.S.R. This is an argument that hasalso been made by U.S. firms. As chapter IIIdemonstrates, however, it is not indisput-ably clear that such “enlightened self-inter-est” always does protect domestic industryfrom economic, let alone strategic, repercus-sions.

German officials agree that if CoCom wereto be made a formal organization it wouldprobably collapse, because other members(notably the French) would not agree toacknowledge it publicly. If CoCom had to beratified in national parliaments, the embargopolicy would have to be openly discussedand justified, which would be counterproduc-tive to its effectiveness. Thus, to the Ger-mans at least, CoCom must remain informal.

FRANCE

Despite often vociferous criticisms madeby French officials, the attitude towardsCoCom in Paris is not uniformly negative.One CoCom official characterized it as a“useful organization because it acts as abrake on technology transfer. ” Most offi-cials agree that it works as a “gentlemen’sclub, “ and that, in view of its unofficial

Ch. VIII—Multilateral Export Control Policy The Coordinating Committee (Co Corn) ● 163

status, it functions rather well. No Govern-ment official questions the need to controlweapons exports to the Communist nationsfor reasons of national security; the bulk ofthe criticism of CoCom arises from its at-tempts to limit dual-use technology exports,particularly in light of the current industriallist reviews.

Apart from the more general problem ofcomplying with American-inspired controls,French spokesmen make a variety of othercriticisms of CoCom. It is, according tosome, a cold war vestige, which is “againstthe spirit of detente. ” Moreover, they claim,it is politically counterproductive to have amultilateral strategic embargo directedagainst the U.S.S.R. More specifically theFrench regard the whole CoCom procedureas overly burdensome with far too many de-tailed technical discussions. The generalFrench preference would be to change thesystem and make CoCom a loosely struc-tured framework organization with generalguidelines, avoiding case-by-case discus-sions of specific license requests. This wouldgive the individual members of CoCom moreautonomy within the organization and makeit more acceptable. As one spokesman said,“We want to be able to judge for ourselvesabout how to protect France from the Rus-sians.

Like the Germans, French officials areconcerned about how CoCom will deal withChina in the future, but in general theU.S.S.R. is a more important market forFrance than is China. There was some criti-cism of Britain’s eagerness to sell “defen-sive” Harrier jets to China, since the differ-ence between offensive and defensive planeswas considered to be academic. There was ageneral feeling that it would be counterpro-ductive to give China special treatment inCoCom, because this would make a mockeryof the security interests that the organiza-tion is supposed to protect.

Most French officials feel that there is alarge element of commercial rivalry that in-fluences CoCom decisions. As one spokes-man put it, “When the real interests of a

country are concerned, CoCom doesn’t mat-ter. ” While other CoCom members citeFrance as the most frequent violator ofCoCom regulations, French officials denythis charge and claim that other countriesfind ways of avoiding CoCom regulations—especially Great Britain. In addition, ac-cording to some French spokesmen, Ameri-can multinational corporations use their sub-sidiaries in Europe to produce goods that areexported to Communist nations with Euro-pean credit support and are not affected bythe more stringent American national exportcontrols.

Since much French technology is of Amer-ican origin, French corporations are oftendependent on American reexport licenses. Afrequent complaint is that U.S. corporationshave a double advantage–they can avoidAmerican credit restrictions by exportingthrough European subsidiaries, while theU.S. Government can delay French exportsthrough the reexport license system, therebygiving American corporations a competitiveedge. Moreover, a Soviet predispositiontowards American technology is thought toenhance the lead of U.S. firms. In light ofthese perceptions, it is perhaps surprisingthat there was so much French criticism ofPresident Carter’s initial decision to denySperry-Univac an export license for the Tasscomputer. The French, after all, profitedfrom this decision when the contract even-tually went to a French firm.

Some officials also claim that CoCom canbe used by those whose products are lesshighly developed to prevent other membersfrom gaining commercial leads. For instance,if Japan has a monopoly on a state-of-the-artpiece of technology and wants to export it,another CoCom member may object togranting the Japanese CoCom permission toexport the product. When that country itselfhas developed the technology, however, itmay reverse its position. Thus the Frenchfeel that there is much hypocrisy in CoCom:“If I do not have what you have, I shall pre-vent you from selling it until I acquire theproduct too. ”


Finally, the French agree that commercialrivalry can be one of the best guaranteesagainst exporting the most sophisticatedtechnology to the U. S. S. R., and a more effec-tive deterrent than CoCom. The threat of po-tential competition is a built-in economic in-centive for corporations to guard againstselling the U.S.S.R. the latest technology,and will cause them to carefully watch com-panies in other countries. There is thereforea self-regulating international mechanismbased on commercial interest, which can de-tect violations of CoCom regulations. How-ever, the motives for this vigilance are pure-ly commercial; French corporations are notgenerally concerned about the security as-pects of technology exports.

According to all those interviewed, theopinions expressed here represent the cur-rent consensus of interested parties, and anew government, whether leftist or rightist,would not implement fundamentally differ-ent policies with regard to the transfer oftechnology to Communist countries. The de-sire to secure French jobs through exportsand to maintain good relations with Commu-nist nations is shared by all elements of thepolitical spectrum.

JAPAN

Japan has historically evinced a willing-ness to adhere to CoCom and to incorporatethe CoCom list of embargoed goods into itsown list of licensed exports. This policy canbe traced in part to the forces that propelledJapan into CoCom at the outset. The role ofU.S. aid in Japanese postwar economic re-covery, the importance of the American po-litical and military “umbrella” for Japanesesecurity, and the psychological dependencebred by the trauma of wartime defeat lefttheir impression on successive JapaneseGovernments until well into the 1960’s.Each followed the American lead in basicmatters of foreign policy, sometimes underother pressure, sometimes not. Such factorswere reinforced by legitimate security con-cerns on the part of the Japanese, given theabsence of a peace treaty with the Soviet

Union; ongoing political disputes with theU.S.S.R. over the Northern Territories andfishing grounds; and relations with the PRC,which were erratic at best.

But it is by no means certain that Japanwill continue to accept CoCom constraintson its trade with the U.S.S.R. and China.The expansion of trade with both the SovietUnion and the PRC since 1968, the Nixon“shocks” of 1972, and the diplomatic rap-prochement with China in 1978, have prob-ably weakened many of the forces that ledJapan to initially adhere to the CoComsystem.

Another important consideration is thestrong Japanese “policy sentiment” againstexporting arms, nuclear weapons, or any-thing of obvious military significance. Suchsentiments, rooted as they are in the post-war psychology of leaders and masses alike,are reinforced continually by eminentlypragmatic considerations. The Asian na-tions, which in 1977 accounted for fully one-third of Japan’s export market and over one-half of its sources of imported commodities,would react economically as well as political-ly to any signs of revived Japanese milita-rism or other elements of a “Greater EastAsia Co-Prosperity Sphere.”’ The point hereis simply that CoCom or no, Japan probablycannot afford to export obviously militarilyrelevant products. Further, the “unilateral’”controls imposed on any export mix by thecharacteristics of Japan’s own history maymitigate whatever opposition to CoCom re-strictions of exports otherwise exists.

A case can also be made that CoCom isuseful to Japan in a variety of ways thathave little to do with U.S. perceptions ofsecurity. It fits well with Japan’s efforts todevelop a policy of “even-handedness” indealing with its two powerful Communistneighbors. In the event of pressure fromeither (more likely from the Chinese) forJapan to sell ships, aircraft, or machinerywith clear strategic significance, the CoComlist provides a handy rationale for a refusal.

Second, the Japanese still have genuinepolicy interests that lead them to tread wari-

Ch. Vlll—Multilateral Export Control Policy The Coordinating Committee (CoCom) . 165. .

ly so far as the Soviet Union is concerned. Ifanything, to judge from Prime MinisterOhira’s statements on the eve of his visit tothe United States in May 1979, political con-cern over the U.S.S.R. military posture inthe Far East is becoming increasingly pro-nounced among the Japanese leadership.The Northern Territories have taken on in-creasing strategic as well as economic im-portance in the eyes of both parties to thedispute. Thus, despite their principled refus-al to use trade for political leverage, succes-sive Japanese Governments have resistedthe kind of long-term trade commitmentsthat the Soviets have been urging on them.Further, according to Soviet sources, theJapanese have been dragging their heels inimplementing an intergovernmental agree-ment on scientific and technical exchanges.The agreement was signed in 1974, but notimely steps were taken to implement it.

In the last resort, CoCom arrangementsmay be maintained, primarily because thereis no effective domestic political coalitionpushing for their elimination. The historical-ly pro-Soviet stance of the Japanese Com-munist Party is now balanced by the anti-Soviet posture of the Japanese Socialists,and Japan’s enormous quasi-public corpora-tions present a consensual front regardingtrade policy—at least as far as can be de-tected by the outsider. There is no Japaneseequivalent of the public debate on East-Westtechnology transfer that has occurred in theUnited States.

But other factors may be at work under-mining the CoCom consensus from the Japa-nese perspective. Japan’s economic recoveryhas generated new areas of economic compe-tition between itself and other Western na-tions, especially in areas where U.S. goodsand technology have been predominant (e.g.,large computers). It is possible that the Jap-anese will be increasingly disposed to inter-pret American behavior in CoCom as moti-vated more by economic considerations (i.e.,preserving U.S. markets in the East) than byintelligible security-strategic calculations.Meanwhile, growing Western protectionismagainst Japanese goods and import restric-

tions now arising in Western Europe mayrender the Communist bloc increasingly im-portant as a market for Japanese exports.

In terms of domestic economic forces, thedepressed state of Japan’s shipbuilding in-dustry may have already inclined certainJapanese firms to push for a relatively moreliberal approach on the part of the JapaneseGovernment towards the export of vesselswith possible military application. Japanesefirms as a whole have made a major contribu-tion to the aggregate of the Soviet merchantfleet, as well as contributing to increases inthe mean size of its vessels (one indicatorof a successful modernization program). AsAmerican naval strategists have frequentlynoted, a major ingredient in Soviet strategicthinking in the area of naval warfare is provi-sion for rapid conversion of its merchantmarine to military purposes. Under such cir-cumstances, controversies over naval ex-ports may become more frequent.

Such factors, when combined with a di-minished American presence in Asia (the re-turn of Okinawa, the withdrawal from SouthVietnam, the reduction of the military pres-ence in South Korea) and Japanese rap-prochement with the Chinese may sooner orlater yield a situation in which traditionalAmerican arguments regarding the need forbolstering security arrangements againstCommunist States in all areas, includingtrade, will ring with decreasing conviction onJapanese ears. At the same time, growingJapanese self-reliance in defense mattersmay engender an increased R&D effort to de-velop a homegrown weapons technology andan adequate production base. Western ex-perience in this area has shown that undersuch circumstances the impulse to recoup in-vestments through the sale of related prod-ucts, abroad as well as at home, subsequent-ly becomes quite strong. How compatiblethis impulse might be with CoCom restric-tions remains to be seen.

All the same, it is far too early to speculatethat the balance will shift decisively in thedirection just described. A number of coun-tervailing factors still operate and their com-

166 Technology and East- West Trade

bined impetus promises to maintain theCoCom arrangements, including Japaneseparticipation, intact. Whether or not suchforces are adequate to sustain any U.S. at-tempts to formalize the consensus is a sepa-rate question. The first such factor is thecomparatively small proportion of Japanesetrade with the Communist countries. Al-though the absolute amount has been grow-ing steadily, the percentages have remainedgenerally stable at a low level (see chapterIX).

In sum, the future of the Japanese posi-tion on the subject of export controls, whilelaced with a number of uncertainties andcontradictions, still shows no firm evidenceof a collision course with American policy asit stands today. By the same token, there ap-pears to be little or no sympathy for the ideaof tighter controls over either end productsor technology.

THE FUTURE OF COCOM

Any assessment of CoCom must acknowl-edge its surprising longevity. Despite its in-formal status and the increasingly divergentinterests of its members, it has functioned—and functioned with reasonable success—fornearly 30 years. If many nations regard thecontinuance of CoCom with little enthusi-asm, there at least appears to be similarly lit-tle enthusiasm for its dismemberment. Inthe face of the military risks that might ac-company its disappearance, CoCom is toler-ated.

But it is undeniably the predominant U.S.interest in CoCom that holds it together, andit has become an increasingly controversialorganization in the last decade, its purposeand methods questioned. The preceding dis-cussion has explored some of the importantissues and strains within CoCom. It is usefulto summarize the current state of debatewithin the organization in order to considerthe directions it may take in the future.

Japan, Germany and, with more ambiva-lence, France continue to accept CoCom as anecessary and useful organization for thecontrol of military exports to Communist na-tions.’ Even if there were no CoCom, they

‘) While 1+’rance only reluctantly concedes its membership,several F:uropean officials reported that Italy is mwn morereticent about admitting that it is in CoCorn-although thePresident of CoConl is Italian. The fact that the Italian Com-munist Party recei~ed just under one-third of the vote in thelast general election may not be unconnected to this reti-cence.

would restrict armament exports for na-tional security reasons.

On the question of nonmilitary technol-ogies, however, there is more skepticismabout U.S. motivation and the efficacy ofCoCom. None of the foreign countries inves-tigated has an explicit technology transferpolicy toward Communist nations; in none isEast-West technology transfer a matter ofpublic debate. There is a general feeling thatno Western country has a monopoly on anyform of technology; there are always alter-native suppliers for Communist nations. Of-ficials in each country argue that if they arenot allowed to sell a technology to theU. S. S. R., it will purchase the equivalentelsewhere. Furthermore, given the lack of acoordinated Western technology transferpolicy, the perceived impossibility of arriv-ing at a general agreement in the West onwhich nonmilitary technologies should becontrolled, and CoCom’s inability to invokesanctions against violators, the overall in-clination is to export most nonmilitarytechnologies to the East.

This, according to U.S. businessmen, isthe point at which official U.S. policydiverges from that of its allies–to the detri-ment of the interests of the U.S. economy.The United States has always maintained awider interpretation than its allies of mili-tary significance, and has at times at-tempted to control a large range of items

Ch. VIII— Multilateral Export Control Policy The Coordinating Committee (CoCom) . 167

because of what might seem very indirectmilitary implications. (For a complete dis-cussion of the gamut of military relevance,see chapter V.) So long as these differencescontinue, U.S. firms will be prohibited fromexporting items that, in Europe or Japan,would raise no national security problems.

Further, most European officials agreethat there is no satisfactory all-purposedefinition of technology that can be appliedto export controls in a realistic operationalway. U.S. attempts to shift the emphasis ofcontrol from end products to design andmanufacturing know-how have led otherCoCom members to object that their Gov-ernments lack the legislative authority tocontrol the sale of “know-how,”’ as opposedto equipment. The general view is that onecannot separate technology from the prod-uct and that attempting to switch from endproduct to technology control will aggravateCoCom’s problem.

Some businessmen in Europe remainskeptical about the value of the end-usestatements and safeguards demanded byCoCom. It is difficult to take action against aCommunist end user who violates the signedconsignee statement, and even harder todetect possible diversions of equipment fromcivil to military use. Many businessmenwould prefer a less elaborate system withfewer safeguard obligations. An Americanofficial discussing these problems admittedthat end-use statements may have limited ef-fectiveness, but said “it makes us feel good”to receive the signed end-use letters. More-over, there is a general agreement that thereare various ways for corporations to evadeCoCom through American multinationalsubsidiaries in Europe and through thirdcountries, although it is obviously impossi-ble to fully document these evasions.

Both the Europeans and Americans ac-cuse each other of hypocrisy in CoCom. TheEuropeans claim that, on the one hand, theUnited States upbraids them for not beingvigilant enough in their export control, forbeing too crassly commercial, and for notconsidering political factors enough in their

export policies; on the other hand, America,which possesses the most advanced technol-ogy, submits more exception applications toCoCom than any other country. Moreover,cases such as that of the TASS computer in-evitably lead to charges of U.S. commercialmotivation in first holding up an exportlicense and then granting it after corpora-tions in other countries have been deterredfrom pursuing it. American officials pointout that while the Europeans criticize theUnited States for its overly political attitudetowards East-West technology transfer,they profit commercially from its more re-strictive East-West trade policy by securingorders that might otherwise have gone toU.S. firms.

The skepticism about the degree to whichone can or should control the transfer oftechnology to Communist nations is rein-forced by other lingering suspicions ofAmerican motivation in Western Europe. Abrief discussion of two separate cases–the1962-63 North Atlantic Treaty Organization(NATO) pipe embargo and a West Germannuclear powerplant deal—highlights theseconcerns.

In November 1962, the United States at-tempted to impede the completion of theFriendship oil pipeline from the U.S.S.R. toEastern Europe by preventing its allies fromexporting large-diameter steel pipe to theSoviet bloc. The pipe embargo order waspassed in NATO because the United Statesknew that the British would not agree to it inCoCom. Several instructive points emergedfrom this attempt to prevent export to theU.S.S.R. Washington was able to prevail onthe West German Government to force sev-eral German corporations to cancel alreadyconcluded deals for the sale of pipe. This nat-urally caused an outcry in the German busi-ness community. However, since the UnitedStates did not have as much political lever-age over its other allies as it did over Bonn, itwas unable to prevent Great Britain, Italy,or Japan (which, of course, was not inNATO) from selling similar pipe to theU.S.S.R. Britain, in particular, chose to ig-


nore the NATO directive. Ultimately, notonly did the U.S.S.R. find alternativesources of supply for pipe, but the embargoinduced it to step up the development of itsown pipemaking capacity. The completion ofthe Friendship pipeline was delayed by onlya year as a result of the embargo. Moreover,there was a strong suspicion in most Euro-pean capitals that the real American motiva-tion for the embargo was not fear of enhanc-ing Soviet military capabilities, but ratherthe wariness of U.S. oil companies about theU.S.S.R. dumping cheap oil on the WestEuropean market. Whatever the truth ofthis allegation, and it may well have been ut-terly unfounded, it made a powerful argu-ment. The net result of the pipe embargo wasdamage to U.S.-West European relationsand only a marginal effect on the Sovietability to complete an oil pipeline that sup-plied Red Army troops in Eastern Europe.

The pipe embargo has not been forgottenin Western Europe and the issues it raisedremain important to the perceptions ofWestern Europeans of the utility of exportcontrols and of the U.S. role in them. Thebasic themes that recur are the suspectedhypocrisy of the United States, its overzeal-ousness in enforcing stricter controls thannecessary, and the basic ineffectiveness ofsuch controls in preventing the acquisitionof technology or technical capacity in theCommunist bloc.

Similar issues resurfaced in 1973, whenWest Germany and the U.S.S.R. settled theeconomic aspects of a major project in whichthe West German Kraftwerkunion wouldbuild a $600 million, 12,000 megawatt nucle-ar powerplant in Kaliningrad. The Sovietsundertook to supply West Germany withelectric current from this plant. Both theUnited States and Britain raised objectionsto the deal in CoCom in January 1975, claim-ing that the issue at stake was inspection ofnuclear facilities by the InternationalAtomic Energy Agency: the Soviets hadnever agreed to onsite inspections as part ofthe nuclear nonproliferation treaty. TheUnited States also raised doubts about the

security aspects of selling nuclear technol-ogy to the U.S.S.R. West Germany, how-ever, claimed that the Soviets already pos-sessed nuclear power technology. The situ-ation was complicated because West Ger-many imports enriched uranium from theUnited States, and it feared that Washing-ton might embargo exports of uranium toWest Germany as a means of preventing thedeal.

In March 1976, the West German Govern-ment announced that the Kaliningrad proj-ect had been abandoned because of insuper-able difficulties. The ostensible reason wasthe failure of West Germany and theU.S.S.R. to agree over electricity suppliesfrom the plant to West Berlin. However,there was much speculation that the realreason for the cancellation of the deal wasAmerican objections in CoCom.7 Moreover—and here similarities to the 1962 pipe em-bargo case are clear–there was speculationthat the real reason for U.S. objection wasnot fear of enhancing Soviet nuclear capabil-ities, but commercial rivalry. Westinghousehad outbid the German Kraftwerkunion(jointly owned by Siemens and AEG-Tele-funken) in reactor sales to Spain and Yugo-slavia, and was reportedly also interested inthe Soviet deal. It is equally obvious, ofcourse, that if CoCom prevented the sale,Westinghouse stood less chance of sellingnuclear reactors to the U.S.S.R. in thefuture. Nevertheless, whatever the truth ofthe matter, it is significant that Americanmotives in CoCom were still perceived asdominated by an interest in controlling com-mercial competition rather than retardingSoviet technological development and pro-tecting Western security. Some have evenargued that the CoCom procedure consti-

‘1 lanns-Diet.er ,Jacobsen, “Die h;ntwick]ung der W’irLschaft-Iichen Ost-W’est 13eziehungen als P r o b l e m der W’esteuro-paeischen und At.lantischen Gerneinschaft, ”” .’$tiftung kl’i.s-senschuft und hlitik ( E benhausen, 1975), p . 70; SimoneCourteix, “Le Comite de Coordination Des Echanges Est-Q u e s t (CoCom),” Annuaim de I’URSS et de %3.s SociaiistesEuropeens, pp. 1-7. German Government and business offi-cials, in interviews, disagreed about whether CoCorn hadgiven final approval for this project.

Ch. VIII— Multilateral Export Control Policy: The Coordinating Committee (CoCom) 169

tutes a forum for intra-Western commercialespionage by providing market opportunityinformation.

These charges may have been politicallymotivated and entirely unfounded. It is sig-nificant, however, that U.S. behavior haspermitted this kind of interpretation, al-though recently Europeans seem increasing-ly willing to attribute U.S. recalcitrance anddelays to the complex and time-consumingU.S. export control procedures rather thanto sinister commercial reasons.8 This may ormay not be regarded as a positive step inU.S. relations with its CoCom partners.

In a larger context, many European offi-cials question the utility of embargoes ingeneral, and of the CoCom embargo in par-ticular. Some argue that the most effectiveembargo against the U.S.S.R. would be anembargo of wheat as opposed to technology.The Soviets cannot produce wheat if there isa bad harvest, but they can always manufac-ture equipment, however primitive.9 Dis-agreements about the effectiveness of em-bargoes depend not only on one’s evaluationof the U.S.S.R. ability to absorb and dif-fuse technology (see chapters IV and X).They once again invoke the problem of defin-ing national security and determining howdirectly useful to the military sector a tech-nology must be before it is considered “sig-nificant. ” In addition, some argue that, wereit not for CoCom, the U.S.S.R. today wouldbe a more formidable antagonist militarily,and that it has made most of its technologi-cal breakthroughs by obtaining Westerntechnologies. A counterargument holds thatit is better to create interdependenciesthrough the export of technology to theU.S.S.R. than to force it to become moretechnologically self-sufficient through a stra-tegic embargo. According to this view, tech-nology transfer to the East is a factor forstability to be balanced against the poten-tially destabilizing economic effects of a con-

tinued complementary trade structure be-tween East and West. 10

If there were no CoCom, would things bedifferent? In Europe and Japan, the generalanswer appears to be “yes, but not much. ”Government officials in West Germany,France, and Japan insist that they wouldhave their own national controls on the ex-port of military technology. Granted, theabsence of multinational controls mightmean that some military hardware wouldleak through to the Communist countries. Inaddition, European governments wouldprobably lessen controls on industrial ex-ports that contain dual-use technology.Most important, the value of regular andcontinuous channels of communication be-tween exporting nations would be lost. How-ever, given the problems of trading withCommunist nations and their lack of suitableexports to pay for Western imports, the eco-nomic limits to East-West trade would act asa barrier to any great increase in technologyexports to Communist nations (see chapterIII). Businessmen in all countries agree withthis assessment. Even if export restrictionswere removed, they say, the problems of sell-ing to the U.S.S.R. would limit the amountof technology exported. One computer exec-utive gave as an example of this problem aSoviet offer to have his firm build a comput-er in Sverdlovsk. Even if there was noCoCom, he claims, the logistical problems ofdealing with the Soviet bureaucracy and in-stalling machines in the provinces woulddeter him. Thus, there are economic deter-rents to East-Wrest technology transfer thatexist regardless of the political environment.

In sum, so long as the Soviet Union isperceived as presenting a threat to Westernsecurity, there will be general agreement inWestern Europe about the need to embargoexports of directly military technology.However, the question of the transfer of


dual-use technology may become more con-troversial. The crucial issue to the future ofcontrolling technology for national securitypurposes will therefore center on the ques-tion of the ultimate contribution of suchtechnologies to Communist military andstrategic capabilities. It appears that Amer-ica is at present more seriously concernedthan its CoCom allies over this problem. Cer-tainly, the German approach to detente issomewhat different from that of the UnitedStates, as the recent U.S.-West German dis-agreements at the Belgrade followup to theConference on Security and Cooperation inEurope showed. In the current internationalclimate, exports of technology are seen asgood business in West Germany, beneficialto the economy, and helpful to West Germanforeign policy inasmuch as they promote abetter atmosphere in relations with Commu-

nist nations. They are not portrayed as a po-tential threat to national security; indeeduncertain U.S. leadership is perceived bysome as a greater security danger than thetransfer of technology. The French and Jap-anese take a similar view, and go even fur-ther in divorcing technology transfer frompolitical considerations. The fact remains,however, that CoCom has remained a viable,albeit imperfect, institution for some 30years, weathering disagreements among itsmembers over both practice and policy. TheUnited States may continue to depart fromits partners, but in the absence of attemptsto drastically alter the organization or ofevents that dramatically affect allied foreignpolicy, there is little reason to expect muchchange in CoCom-if it is unlikely to adoptmore stringent restrictions, so too is itunlikely to disappear.

CHAPTER IX

The East-West Trade Policiesof America's CoCom Allies

CONTENTS

PageWEST GERMANY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ....173

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...................173Economic Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............175Political Factors . . . . . . . . . . . . . . . . . . . . . . . .....+... . ................177Trade in Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............179Export Control Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........181Credits and Tariffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..............184

FRANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..............185

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................185Economic and Political Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185Trade in Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............186Export Control, Credit, and Tariff Policy . ............................187

THE UNITED KINGDOM . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ...189

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....................189Economic and Political Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ....190Trade in Technology, Export Controls, and Credits . ....................190

JAPAN . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....................192

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .....................192Economic Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .................192Political and Foreign Policy Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194Trade in Technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........,.196Export Control Policy. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..........198

SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........201

Tab1e 28.—Russo-German Trade Percent of Total Russian Imports and Exports ....173Table 29.–West German Trade With Communist Nations, 1970 and 1978 . ........176Table 30.–French Trade With CMEA Members, 1970-’76. . .....................186Table 31.–United Kingdom Trade With the U.S.S.R. . . . . . . ....................190Table 32.–Japanese Trade With the U.S.S.R. East Europe, and the PRC–1978. . . .193Table 33.–Postwar Development of Japanese-Soviet Trade . ....................194Table 34.–Japanese Machinery Exports, 1978, by Region . . . . . . . . . . . . . . . . . . . . . . 197Table 35.–Soviet Imports of Machinery and Equipment From Japan, the United

States, and West Germany, 1977 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .197

Figure ll.-Regional Distribution of West Germany’s Trade With the East, 1978 ...176

CHAPTER IX

The East-West Trade Policiesof America’s CoCom Allies

East-West trade has always been more important to Western Europe andJapan than to the United States. Economic and political imperatives in other Or-ganization for Economic Cooperation and Development (OECD) nations havecombined to create a generally favorable attitude toward trading with the Com-munist world, an atmosphere that prevails today in both government and busi-ness circles. It has also carried over to Western European and Japanese views onexport controls and technology transfer. Indeed, while the issue of technologytransfer to Communist nations is a matter of controversy in the United States,such debate is virtually nonexistent in Japan and most West European coun-tries; they accept trading with Communist countries as a more or less normalpart of foreign economic policy. For a variety of reasons, America’s Europeanand Japanese allies do not necessarily share its concern over the economic andsecurity problem raised by trade and technology transfer to Eastern Europe, theU.S.S.R., and the People’s Republic of China (PRC). This fact has relevance tothe debate within the United States over East-West trade and technology trans-fer policy.

WEST GERMANY

INTRODUCTION

Current West German policies towardstrading with the East are best understood intheir historical context.

Germany has been transferring technol-ogy to Russia for well over a century. Thelong historical tradition of Russo-Germaneconomic interdependence is characterizedby the German export of machinery in returnfor imports of Russian raw materials. Table28 demonstrates the degree to which the twoeconomies were oriented towards each otherprior to World War I.

Bilateral trade was always more impor-tant for Russia than for Germany, and afterthe Bolshevik Revolution, the Soviet Gov-ernment continued to seek German machin-ery imports. In fact, there was considerable

Table 28.— Russo-German Trade Percent of TotalRussian Imports and Exports

Russian imports Russ Ian exports

1858-62 28% 16%1 8 6 8 - 7 2 44 241914 47 29

SOURCE: Juergen Kuczynski and Grete Wittkowski. Die Deutsche russischeschenHandelsbeziehungen in den ietsten 150 jahren Berlin: 1947 pp. 24-25.

German-Soviet clandestine military coopera-tion. Although the volume of trade betweenthe two countries declined after the Naziscame to power, German-Soviet economic co-operation continued until the 1941 Nazi in-vasion of the U.S.S.R. After the War, for po-litical reasons. West German trade was


largely reoriented away from the East, butthe historical legacy of close economic tieshas profoundly affected present German at-titudes towards trading with Russia. De-spite the cold war, many West German busi-nessmen look on the U.S.S.R. and EasternEurope as natural and desirable markets fortheir manufactures.

The German business community haslong favored trading with Communist coun-tries and separating political from economicrelations with the U. S. S. R., but early post-war West German Governments did not takethis view.2 Prior to the election of ChancellorWiny Brandt in 1969 and the inauguration ofa new Ostpolitik, German Governments ledby the Christian Democrats (CDU) lookedupon trade with the East as a primarilypolitical problem: since trade with the Eastwas relatively unimportant economically, itshould be controlled and used to promoteWest Germany’s political goals. The mostimportant of these was the reunification ofGermany under a Western system or, failingthat, a strengthening of East Berlin’s tieswith Bonn. Governments of West Germanyunder Chancellors Adenauer, Erhard, andKiesinger attempted to implement linkagestrategies, making trade conditional onSoviet political concessions on the Germanquestion. Both negative linkage or tradedenial (the predominant form of leverageprior to 1969) and positive linkage or tradeinducement were attempted, but these pro-duced only marginal compromises, and nosubstantial Soviet political concessions. )

‘In 1954, a survey by Gabriel Almond found that, on thequestion of trade with the F;ast,

1 [ remains Interes[ In~ [ hat the husiness cwmmunitj in (;cr.man\ i+ rcia [ II elj untrw arc ot L h e priorit~, of p{)lit ical fa~’tors i n(’t~n~nlunlst pohc:.nlaking, onl> go~wmnwnt oificials and s o m eItwcitm ot t)u~lnt+~ prt~s+ure-~roup< stwm [o wit, t h i s p o i n t . k’m 01I ht~ indu+t r-la lists, tn en i n [ tw largest estahlishnwnts. art, aw are ()!i[, ‘1’ht>]r [ hlnklng ahou t [ ht~ p(wsihilit ]tw ot [he (’omrnun is[ marketI< cit~nlinti t td 1)1 +Implt,, ap(di [ ic’al economic calcula [ ion.

See Gabriel Almond, “’f’he Politics of German Business, ” inHans Speier and W’. Phillips Davison, eds., tl’e.st Germanl.eader.s)tip and F’oreign Polic>’ (E\fanston, Ill., 1957), p. 237.

‘For a fuller discussion of the policy of linkage in W’est(;efman-Soviet relations, see Angela Stent Yergin, 4“1’he Po-Iit ical E c o n o m y o f M’est-Gernlan-So\iet R e l a t i o n s ,1955-1 9’73” (unpublished Har\’ard Uni\’ersit~’ Ph.D. disserta-tion, 1977).

As early as 1952, however, an organiza-tion of businessmen was created to promoteand coordinate East-West trade. Known asthe Ostauschuss der deutschen Wirtschaft,or Eastern Committee, the group was spon-sored by the powerful Federation of GermanIndustry, and charged both with furtheringtrade with the Communist countries andwith representing West German business onthat subject before the Government. The Os-tauschuss has always had a semiofficialcharacter; it has nevertheless disagreed pub-licly with some Government attempts to re-strict trade. It remains today an importantorganization for furthering East-West trade,although some German firms claim it haslost momentum in recent years. The Ostau-schuss favors technology exports toEast, but it also supports strict Germanherence to the Coordinating CommitteeMultilateral Export Controls (CoCom).

Adenauer in particular felt that sinceU.S.S.R. was West Germany’s political

thead-for

thean-

tagonist, it was wrong in principle to sell itany products that could enhance its militarycapacities. Until 1963, the various Adenaueradministrations used political and securityarguments against trading with Communistnations, claiming that such trade was dan-gerous and economically unimportant. Thatpart of the business community engaged intrading with Eastern countries counteredwith economic arguments in favor of trade,holding that it was economically beneficialfor German industry and could even havepositive political consequences, by creatingdesirable interdependencies and giving theU.S.S.R. a stake in the stability of the West.

The clash between Government and indus-try over exporting to Communist nationspeaked in the late 1950’s, although as late as1963 Chancellor Adenauer upbraided thoseGerman businessmen exporting to the Rus-sians for their disloyalty to the German re-unification cause. Soon after erection of theBerlin wall, he also criticized the UnitedStates for selling wheat to the U. S. S. R.: “Ican’t stand any more of this wretched talk ofdetente. ”

Ch. IX— The East-West Trade Policles of America's Cocom Allies ● 175

In the mid-1960’s, the Erhard and Kiesin-ger administrations retained a basically re-strictive attitude towards trade with theCommunists, but attempted to use it to in-duce greater polycentrism in Eastern Eur-ope. Thus, they offered more favorable creditterms to Eastern Europe than to the SovietUnion. The business community was largelyopposed to this policy, favoring the totalseparation of trade and politics.

After Will Brandt’s election, the SocialDemocrats (SPD) took over the formulationof Osthandel (trade with the East) policy. Ingeneral, they favored a depoliticization oftrade and eschewed negative linkage, al-though they were not averse to employingpositive linkage strategies and offering eco-nomic incentives in return for relativelyminor political concessions. Since 1969, theGerman Government and the business com-munity have converged in their desire toseparate trade and politics. Whereas previ-ous Governments intervened to hinder East-West trade (e.g., by preventing the grantingof credits, or by canceling specific orders),present ones frequently act to facilitate it. Inseveral of the biggest deals involving the ex-port of technology to the U.S.S.R. (for in-stance, the Kursk deal, described below) theGovernment has pressured the Soviet Gov-ernment to accept terms favorable to Ger-man corporations. Since 1952, the Ostau-schuss has consistently favored trade withCommunist nations while warning againstexaggerated expectations. During the lastBrezhnev visit to Bonn, the business com-munity was noticeably cooler than the Gov-ernment towards the 25-year economicagreement signed by Brezhnev and Schmidt.Ironically, the business community is some-times now more skeptical than the Govern-ment about the value of increasing tradewith Communist nations, including the bene-fits to German employment.

As the West German Government has re-laxed its political restrictions on trade withthe Eastern bloc, the U.S. Government hasbeen moving in the opposite direction. As aresult, the United States and West Germanydisagree with increasing frequency over the

politics of East-West trade. The reaction of aGerman Government spokesman to theJackson-Vanik amendment illustrates theprevailing German attitude toward U.S. ef-forts to use trade for political purposes indealing with Communist countries:

A policy like the one Congress thoughtwas right or like what our own opposition oc-casionally recommends, cannot only fail toachieve the desired goal, but can even makeit more difficult.4

ECONOMIC FACTORS

West Germany is heavily dependent on for-eign trade, which accounts for 30 percent ofits gross national product (GNP). A healthyexport sector is a vital component of itseconomic viability. Since West Germany isfar more heavily trade dependent than is theUnited States, it tends to favor exportsregardless of the destination. West Ger-many’s postwar economy was built on Chan-cellor Erhard’s implementation of the Sozi-ale Marktwirtschaft (social market econ-omy) theory, designed to create a truly com-petitive market. In the 1950’s, exports ofmanufacturers and engineering goods 1edthe way to remarkable economic growth, andGerman officials and businessmen generallyassume that exports of technology are neces-sary for continued economic growth. Thisapplies to exports to the East.

In 1978, total West German trade withCommunist countries (excluding East Ger-many and including China, North Korea, andMongolia) amounted to over 30 billionDeutschmarks (DM) (roughly $15 billion,see table 29). This was 5.7 percent of totalWest German foreign trade. Trade with EastGermany, which West Germany considers“inner-German trade, ” rather than foreigntrade, came to 8 billion DM. The U.S.S.R.

4.11’CI( Y’ork Times, Jan. 18, 19’7.5. The W’est (;ermans hatesucceeded, behind the scenes, in securing the emigration ofabout 60,000 ethnic (ierrnans per year from the U.S.S.R. andh;astern h;urope. In 1978, 58,000 emigrated: 36,000 from Po-land, 12,000 from Romania, 8,500 from the U. S. S. R., 900from Czechoslo\’akia, and 500 from elsewhere. After theJews, ethnic (;ermans are the largest group allowed to emi-grate from the U.S.S.R.


Table 29.— West German Trade With Communist Nations, 1970 and 1978(million DM, figures rounded off)

—1970 “-

Total ‘Import “ - - ‘ E x p o r t “Balance

U.S.S.R: : .“. . . . . : - 2,800 1,254 1,546 + 2 9 2-

Poland. . . . . . . . . . . 1,402 744 658 - 8 6Czechoslovakia . . . . . 1,785 727 1,058 + 331Hungary . . . . . . . 1,012 490 522 + 32Romania . . . . . . . . . . . . 1,302 580 722 + 142Bulgaria. . . . . . . . . . . . 477 237 240 + 3East Germany. . . . . . . . 4,548 2,064 2,484 + 420China. . . . . . . . . . . . 1,001 389 612 + 223

Total . . . . . . . . . . . 14,327 6 , 4 8 5 - – -7 , 8 4 2 + 1,357

SOURCE: Statistisches Bundesamt Statistiches Jahrbuch fuer die Bundesrepublic Deutschland -

Der Bundesminister fuer Wirtschraft, Der Deutsche Osthandel zu Beginn des Jahres 1979Der Bundesminister fuer Innerdeutsche Beziehungen. Die Entwicklung der BeziehungDemokratischen Republik, 1969.1976

was Germany’s single most important Com-munist trading partner ($5-1/2 billion totalturnover), representing 39 percent of itsOsthandel. Poland followed at 16 percent,Hungary and Czechoslovakia at 11 percent,Romania and China at 9 percent’ (see figure11). West Germany is also the most impor-tant Western trading partner of the Commu-nist countries and represents 21 percent ofall OECD exports to Communist nations.6

Today West Germany is the leading capital-ist trading partner of the U. S. S. R., Bulgaria,Poland, and Hungary. Indeed, it is Hun-gary’s second largest trading partner, afterthe U. S. S. R.’ Manufactured goods consti-tute 89 percent of Germany’s exports to theEast, while 50 percent of its imports are ofraw materials. Trade with all of these coun-tries is conducted under bilateral tradingagreements, and West Germany grantsmost-favored-nation status to all Commu-nist countries, within limits imposed by theEuropean Economic Community (EEC).From the point of view of the German econ-omy, overall dependence on trade with Com-munist countries is small. Nevertheless, cer-tain sectors of the West German economy(e.g., the steel industry) are quite dependenton exports to the East, and technology

.—1978 ‘-

Total Import Expor t – B a l a n c e

11,707 -- 5,406 6,301 + 8954,732 2,086 2,646 + 5603,178 1,357 1,821 + 4643,487 1,293 2,194 + 9012,983 1,214 1,769 + 5511,032 314 718 + 4048,820 4,066 4,754 + 6882,723 734 1,989 + 1,255

38,662 16,470 22,192 + 5,722.—

zwischen der Bundesrepublli Deutschland und der Deutschen

transfer to the East also provides substan-tial employment in certain industries. TheSoviet Union and Eastern Europe are thelargest export market for the West Germanmachine-tool industry; approximately one-third of machine-tool exports from West

Figure 11 .—Regional Distribution ofWest Germany’s Trade With the East, 1978

Turnover in percent

3.4 ”/01.1 “/0

BulgariaOther

5Der B u n d e s m i n i s t e r fuer Wirtschaft, Der Deutsche Os-thandelzu Beginn des Jahres 1979 (Bonn, 1979), p. 26.

‘Ibid., p. 16.‘I bid., pp. 4-10.

Ch. IX— The East-West Trade Policies of America’s Cocom Allies ● 177

Germany go to Communist nations, andEast-West technology trade is a significantemployment guarantor for medium-sizedmachine-tool firms. Ten percent of Germaninvestment goods exports go to EasternEurope and the U. S. S. R., and some largefirms, Salzgitter for example, are fairly de-pendent on trade with Communist nations tokeep their workers employed. Indeed, to theextent that Osthandel is still debated inWest Germany, Government statementsemphasize its positive economic aspects.During the 1976 election campaign, the op-position CDU criticized the Government forgranting overly generous credit to Commu-nist nations. The Government’s replystressed the importance of trade with theEast to domestic employment. It claimedthat Osthandel provided 300,000 jobs, andwas vital for West Germany’s continuingeconomic health. Interestingly, it was left tothe business community, and particularlycompanies engaged in trade with Commu-nist countries, to point out that importsfrom the East could have a negative effecton employment.8

In opposition to this historic trade de-pendency and regardless of the politicalclimate, a number of economic factors act asdeterrents to greater technology transferfrom West Germany to the Communist na-tions. The central problem limiting tradewith the Communist countries, as one Ger-man official put it, is simply that the Rus-sians and Eastern Europeans cannot pay.The chronic shortage of hard currency in theEast, combined with the Soviet and EastEuropean insistence that trade be bilateral,means that Eastern trading partners mustfind noncurrency means of paying for theirWest German imports. Although Eastern-bloc countries would like to export machin-ery to Germany, the West Germans are stillunwilling to buy such manufactures in largequantities: they are of inferior quality and

pose a potential competitive threat to do-mestic products. The lack of suitable EastEuropean and Soviet imports thereforeplaces substantial limitations on West Ger-many’s exports of technology. Additionally,since the German Government does not sub-sidize interest rates on credits, the Sovietsprefer to deal with nations from whom morefavorable credit terms are available. Suchcredits do, however, provide one means offreeing hard-currency to pay for additionalGerman imports. In some Eastern Europeannations, German corporations are able toenter into joint ventures, giving them 49-percent ownership, but the U.S.S.R. does notpermit any foreign investment in Sovietenterprises.

Given these problems, the most viableform of West German-East European eco-nomic relations has been the use of compen-sation agreements. Under these the Sovietsand East Europeans pay for their imports ofGerman technology with products producedfrom German machinery and equipment.The West Germans see limited benefits insuch countertrade, however, and are reluc-tant to respond to Soviet and East Europeaninitiatives to expand this kind of business.9

Together, these built-in economic con-straints inhibit a massive expansion in WestGerman trade with the East. Moreover, theneed to protect German domestic productionhas given rise to import restrictions. Thesefurther limit the amount and kind of EastEuropean goods that can be imported to payfor West German exports.

POLITICAL FACTORS

A variety of political factors, some ofthem contradictory, also affect West Ger-man trade with the East. Most important isWest Germany’s desire to maintain and im-

‘The head of the West German Eastern Committee (Ostau-schuss) of the Federation of German Industry replied to Gov-ernment claims by arguing, “If you calculate that way, youmust compare the jobs which are secured through trade withthe East with those that are threatened through importsfrom the Eastern bloc.”’ See W’rit.schufts{{ oche, Oct. 1, 1976.

‘For a German discussion of the limits of compensationdeals and the advantages of cooperat ion, see MatthiasSchmi t t , Industn”elle Ost-B’est Cooperat ion (S tu t tga r t ,1974).


prove relations with East Germany. Inner-German relations are a key factor determin-ing West Germany’s differentiated technol-ogy transfer policies toward Eastern Eur-ope, the U. S. S. R., and the PRC. Prior to1969, West Germany predicated its econom-ic relations with East Germany on the de-clared aim of achieving German reunifica-tion. This goal has shifted somewhat sincethe Brandt Ostpolitik and the 1972 basictreaty between West and East Germany. Inthis treaty, Bonn gave de facto, but not dejure, recognition to East Berlin. Althoughthe East Germans count their trade withWest Germany as foreign trade, Bonn doesnot. To do so would be to imply recognitionof East Germany as a legitimate foreigncountry. Inner-German trade comes under aspecial category; imports from East Ger-many are called “supplies,” and exports to itare called “deliveries.” Inner-German tradeis today more highly politicized than WestGerman trade with other Communist coun-tries; its chief stated aims are to improve po-litical contacts between the two countriesand to facilitate greater family reunificationand a more favorable environment in Berlin.West Germany uses technology transfer aswell as other forms of trade to facilitategreater inner-German contacts. Thus, inner-German economic relations are a special andunique category in West German export con-trol policies towards the Communist coun-tries.

Inner-German relations have largely de-termined West Germany’s political and eco-nomic relations with other Communist coun-tries, and at various times Bonn has imple-mented different trade policies toward East-ern Europe. In the mid-1960’s, a “bridge-building” policy was designed to encourageEast European independence from Moscowby offering Eastern Europe (excluding EastGermany) special economic incentives, in-cluding easier credit terms than those avail-able for the U.S.S.R. This policy proved po-litically counterproductive when the Sovietsbegan to resist Western encouragement ofpolycentrism in Eastern Europe, and afterthe invasion of Czechoslovakia, Bonn altered

its policy so as not to alarm Moscow. East-ern Europe remains an important market forWest Germany, and differences remain ineconomic policies toward Eastern Europeand the U. S. S. R., but Bonn no longer viewsits trade with Eastern Europe as an instru-ment with the express political purpose ofcreating greater independence from Mos-Cow. “)

Today, the economic and political aspectsof Osthandel are generally perceived as mu-tually reinforcing rather than as a specificsource of leverage. West German policies re-garding technology transfer to Communistcountries reflect Bonn’s desire to promotebetter relations with East Germany and therest of Eastern Europe, while ensuring thatthe U.S.S.R. complies with the 1971 Four-Power Agreement on Berlin. Bonn prefers todeal with the U.S.S.R. only on matters ofbilateral foreign policy; it eschews publiccriticism of Soviet domestic policies. TheGerman goal of encouraging greater civilrights in the U.S.S.R. and Eastern Europe ispursued by carefully offering the U.S.S.R.certain political and economic incentives outof the public eye. This policy has led to U. S.-West German disagreements over PresidentCarter’s human rights policy. In ChancellorSchmidt’s words, “As regards human rights,we on this side of the Atlantic—and that in-cludes my Government—are on the wholemore reserved in our approach than theUnited States.’’11 The German approach isbasically that of Egon Bahr, special assist-ant to former Chancellor Winy Brandt,whose policy for dealing with the East was“change through rapprochement, ” as op-posed to change through confrontation.Bonn views technology transfer to the Eastas one of several means of improving rela-tions with the U. S. S. R., which, it hopes, willeventually ease the inner-German situation.

“’Jf’est Germany does differentiate between East Euro-pean countries in its arrangements for the emigration ofethnic Germans. I t gives large-scale credits to Poland for the35,000 or so Polish Germans who emigrate every year, butdoes not have this arrangement with other East Europeancountries.

1, I nter~,iew in ~-)i{> Zeit, J U]Y ~ 1, 1 g’7~.

—

Ch. IX— The East-West Trade Policies of America's Cocom All!es . 179

According to one German official, it is ad-vantageous to Germany to assist throughthe export of technology in the constructionof a Soviet industrial infrastructure. A moreindustrialized Soviet Union, so the argumentgoes, is less likely to be interested in war.Some in Germany feel that purchases ofWest German technology give Soviet leadersan increasing stake in peace and the eco-nomic status quo, thereby discouraging ag-gression. Proponents of this view favor in-creasing technology exports to the U.S.S.R.and ensuring its development as a highlytechnological society. Not all German of-ficials agree, however.

Germany continues to place the effective-ness of the North Atlantic Treaty Organiza-tion (NATO) at the center of its foreignpolicy. ” Bonn’s concern with the security ofthe Western alliance therefore tempers its in-clination to use technology transfer as areward and incentive for good Soviet behav-ior; West Germany recognizes the need tocomply with American security goals and toavoid sales of militarily useful technologies.Most German firms dealing with the Eastalso accept the necessity of export controlsand the need to comply with CoCom. Thus,there is a fairly comfortable modus vivendibetween business and Government on ques-tions of technology exports to the East. Butdifferent concepts of national securitywithin the Atlantic Alliance create contra-dictory pressures influencing West Ger-many’s technology transfer policy towardsthe Communist nations. Its Wespolitik de-mands a restrictive stance toward technol-ogy transfer, while its Ostpolitik suggests amore flexible use of trade to promote politi-cal moderation.

West Germany has been wary of any sig-nificant rapprochement—either political or

IJFor a general sur~ey of (;errnany’s position, see AngelaStent Yergin, ‘‘ Soviet -W’est German Relations: Finland iza -tion or Normalization’?’” in George (iinsburgs and Al\in Z.Rubinstein, eds., .$or ‘iet b’orcigrl Polic,s I’t)tlarcl II”P,s t[’rr) Eu r-

OI)C ( New York: Praeger Publishers, 1978), pp. 102-133.

economic—with the PRC. Although WestGermany has sold technology to China,Eastern Europe and the U.S.S.R. remain farmore important both politically and eco-nomically, and West Germany is wary ofplaying the “China card” for fear of reper-cussions in Europe. The recent heightenedWestern interest in the PRC has led to con-cern in Germany that other Western nationsmay begin to differentiate among Easterntrading partners, giving China preferentialtreatment, West German Government offi-cials stress their even-handedness in deal-ings with all Communist countries. The guid-ing German principle is that one should notexport to Czechoslovakia (or even Yugosla-via) any technology that one would not ex-port to the Soviet Union; there is no guaran-tee that technology sold to any EasternEuropean country will not find its way to theU.S.S.R. The German Government appliesthe same logic to China. It favors a consist-ent East-West export control policy. More-over, since trade with both China and theU.S.S.R. remains a marginal portion of WestGermany’s foreign trade from the point ofview of the Ostauschuss, German exporterscould well increase sales to both China andthe Soviet Union. Discriminating against orin favor of either makes no economic sense.

TRADE IN TECHNOLOGY

Most officials claim that West Germanydoes not have a technology transfer policytowards the Communist nations. It does co-operate with other Western nations inCoCom, but apart from these multilateral ex-port controls, the German administrationhas not developed clear, national guidelineson West-East technology transfer. Rather, aseries of German laws and procedures com-prise in aggregate an operating system forregulating the export of technology to Com-munist nations, and the technology transfersystem therefore defines, rather than re-flects, policy,

Interviews with Government and busi-ness officials in Bonn and Frankfurt revealthe absence of a generally accepted defini-


tion of technology; as in the United States,most agree that the concept lacks precisedefinition. On the whole, international tech-nology transfer is considered “part of thegeneral process of diffusion by which theknowledge of, and use of, new products andprocesses passes from one production unit toanother. 13 Most officials differentiate be-tween technology and machinery in theory,but many have found it impossible to distin-guish between software and hardware on apractical level, since technology is oftenembedded in equipment. Those officials whohad read the Bucy report were somewhatskeptical of the feasibility of implementing itin CoCom.

West Germany is the largest single West-ern supplier of advanced technology to theSoviet Union. In 1977, for instance, 34 per-cent of the Soviet imports of high technologycame from West Germany, as did 29 percentof its imports of manufactured goods. Japanwas the next largest supplier, providing 17percent of the U.S.S.R.’s high-technologyimports and 20 percent of her importedmanufactures. Germany is the second larg-est supplier of high technology to China, fol-lowing Japan. In 1977, 15 percent of Chinesehigh-technology imports came from WestGermany, as did 16 percent of its importedmanufactures. 14

West Germany exports a variety of tech-nologies to the U. S. S. R., with machine toolsand petrochemical plants leading the field.One-third of West Germany’s machine-toolexports go to Communist countries. 15 Otherlarger scale exports are of mechanical engi-neering, electrotechnical, optical, and capitalconstruction goods.

The most notable example of recent WestGerman technology transfer to the U.S.S.R.is a giant steel complex being constructed at

‘ ‘Philip I{anson and Heinrich l’ogel, “Technology TransferBetween East and Wrest: A Review of the Issue,”’ O.steuropa}t’ir-t.schuft, Februar~’ 1978, p. 97.

“John P. Young, “Quantification of W’estern Exports ofHigh Technology Products to Communist Countries, ” U.S.Department of Commerce, pp. 15-16

“>John Dornberg, “Trade J$’ith the East Bloc is CausingSome Concern, ” [nternationul Heruld 7’ribune. Apr. 19, 1977.

Kursk by a consortium of German firms(among them, Slazgitter, Krupp, Korf Stahl,Siemens, AEG, and DEMAG), originallyslated to cost more than 5 billion DM. Al-though recently reduced in size, the Kurskplant represents the largest single deal in thehistory of East-West trade and will be theworld’s largest steel complex based on thedirect reduction method. Under the terms ofthe agreement, the Soviets will sell back toWest Germany iron ore pellets made at theplant.

Other large-scale German-Soviet deals in-volve the building of the new Sheremetyevoairport at Moscow, construction of severalpetrochemical plants and automobile facto-ries, exports of energy technology, and col-laboration on nuclear energy research. InEastern Europe, among other projects, WestGermany is supplying passenger jets to Ro-mania, and constructing coal gasificationplants in Poland and petrochemical plants inHungary.

The Germans operate most often throughturnkey projects, although the sale of li-censes is growing.16 West Germany has soldlicenses for waste incineration to Czechoslo-vakia; know-how to make bus engines, colorTVs, washing machines, chemicals, and win-dows to Hungary; production technology forhigh-pressure safety-valves, concrete mix-ers, and shoe products to Poland; and know-how for axis-blowers for nuclear power sta-tions, furnaces for sulfur burning, her-bicides, electrical equipment, and wedgepresses to the U.S.S.R.

Private agreements between Germanfirms and the Soviet State Committee on Sci-ence and Technology (SCST) are also becom-ing increasingly common. Siemens, Ger-many’s largest computer manufacturer, hasconcluded an agreement with SCST to estab-

“lAccording to E. C. I?. Secretariat, “General Aspects ofEast-West Licensing, ” b’astern Business Magazine, vol. 3,No. 1, the United States and the United Kingdom are theworld’s two greatest technology-exporting countries, with 30to 40 percent of world trade in hcenses.

Ch. IX— The East- West Trade Policies of America Cocom Allies ● 181

lish a Center for Automation in Moscow.This is the first joint East-West scientific in-stitute in the U .S.S.R., and Siemens hopes tofacilitate its computer exports through it.While Siemens does not compete with Amer-ican corporations in the large computer field,its smaller computers and microprocessorsare competitive with American products.Yet computers represent less than 1 percentof German exports to the East, and Germa-ny exports only a fifth as many computers tothe Communist world as does the UnitedStates. About 6 percent of Siemens’ comput-er exports currently go to the U. S. S. R.;Hungary and Czechoslovakia are more im-portant markets at present. Despite thedesire to expand computer sales to the East,when President Carter vetoed the Sperry-Univac computer sale to TASS in July 1978,the German Government discouragedSiemens from bidding for the contract.

German officials point out that Soviet in-transigence on the Berlin issue continues toinhibit their exports of high technology tothe U.S.S.R. For some years, the Sovietshave delayed signing of a West German-U.S.S.R. agreement on scientific cooperationbecause of West Germany’s insistence thatWest Berlin be included in its provisions.The absence of an agreement now meansthat Germany has less State-financed tech-nological cooperation with the Communistworld than do other Western countries. Al-though German officials believe that theBerlin issue will eventually be resolved andthe agreement signed, they point out thattoday France is more likely than Germany toexport high technology to Communist na-tions. German exports will remain largelycomposed of machinery.

from China are mainly textiles and primaryproducts. Two-way Sine-German trade roseby 49 percent in 1978, to $1-1/2 billion, andWest German exports to China rose by aspectacular 72 percent over 1977. Germanbusinesses are now discussing cooperationwith the Chinese in the energy and nonfer-rous metal areas where, in exchange for tech-nology, China will export raw materials. Ger-man exports to China now include large-diameter pipe, machinery, electrotechnicalequipment, trucks, ships, and chemical prod-ucts.17 A $4 billion deal involving the sale ofWest German coal mining equipment andthe training of Chinese personnel was recent-ly concluded,’” and another $14 billion con-tract has been discussed. If it is concludedthe German Metalgesellschaft will supplythe Chinese Ministry of Metallurgy with 22plants for nonferrous metal industry, jointlyexplore iron ore deposits, and market oresand processed materials.19 But while manyGerman businessmen welcome the potentialof the vast Chinese market, Government of-ficials and the Ostauschuss warn of exagger-ated expectations for trade with China. TheChinese, they argue, are reluctant to incur acrippling debt; moreover, they prefer to ac-cept credits in dollars rather than inDeutschmarks. 20

EXPORT CONTROL POLICY

The legal framework under which exportsof technology to the Communist world takeplace in West Germany differs markedlyfrom that of the United States. Exports areunrestricted under German law, althoughthe administration may recommend excep-tions to the Bundestag (Parliament).21 Ger-man exports are governed by the 1961 lawon foreign trade and payments (Aussenwirt-schaftsgesetz or AWG ), supplemented by a

In the last year, German trade with thePRC has grown faster than its trade withany other Communist country, and the ques-tion of technology exports to China is be-coming more important. Germany today isChina’s third largest trading partner afterJapan and Hong Kong. German imports

‘7Der Bundesminister fuer W’irtschaft, op. cit., pp. 11-12.‘Hh’inancial If’ime,v, Sept. 27, 1978.“’Ibid., Nov. 15, 1978.“}l~ltl(l~l.vhlutt, Ilec. 29/30, 1978.‘]’I’his section is based on Russell Baker and Robert Bohlig,

“’l’he Control of F;xports: A (’ornparison of the I.aws of theUnited Sta~es. Canada, ,Japan, and the h’ederal Republic of( ;ermany, In terna til)tlal I.at!>er. \’ol. 1, No. 2, 1 9 6 7 , p p .163-191.


foreign trade ordinance. Although the Feder-al Government has authorization to controlexports of commodities and technical data(sec. 5-7, AWG) in the interests of nationalsecurity, the Bundestag may cancel theserestrictions within 4 months of their promul-gation. This gives the legislature immediateand compulsory review of all foreign traderegulations issued by the West German Gov-ernment. The working presumption of thelaw is that exports should remain uncon-trolled except where special circumstancesrequire use of standby statutory controls.This approach runs directly counter to U.S.export control policies, which require specialapproval for virtually all exports to Commu-nist nations (see chapter VII).

Section 7 of AWG cites national securityand foreign policy as criteria for restrictingtrade, but the AWG regulations encouragethe granting of licenses for restricted goodsunless it can be conclusively proven that theexports will injure Germany’s economic orpolitical security. The details of license re-quirements are found in periodic supple-ments to Annex AL of the Foreign Trade Or-dinance of 1961. (The latest full list datesfrom December 1976, and the latest extrasupplement from December 1978. )

The first three control lists–covering mu-nitions, atomic energy, and “other strategicgoods’ ’—are essentially the CoCom lists, orthe International Strategic Lists. The Ger-man Government recently added three itemsnot covered under CoCom to the nationalatomic energy and industrial list—heavy-water containers, installations of fuel ele-ments for nuclear powerplants (which theGerman Government tried unsuccessfully toadd to the CoCom international atomic ener-gy list), and rocket installations. The fourthlist largely covers nonindustrial goods, likebotanical plants, alcohol, and raw materials,controlled either because of Common Marketregulations or because they are in short sup-ply in Germany.22 AWG also restricts the ex-port of certain kinds of technical data, and of

‘J For the latest list of goods subject to export licensing, seeBeiiage zurn Bli/t(ivsutlz(~lg(~r, No. 246, Dec. 30, 1976.

documents concerning the manufacture ofgoods on the International Strategic Lists.

The German system of export licensingfor technology sales to Communist nations iswell-organized, and information on the pro-cedures is readily available to businessmen.A company wishing to export a controlleditem to the East applies to the Bundesamtfuer gewerbliche Wirtschaft (BGW or Minis-try of Industrial Economy) in Frankfurt.BGW is empowered to grant licenses that donot need CoCom permission, and 30 to 40percent of all applications are decided in theMinistry. Once the application is complete, ittakes only about 3 weeks for the Ministry togrant a license. Applicants must promise inwriting that the products will be used onlyfor the stated purposes. For instance, whenthe Soviet Academy of Sciences purchased aSiemens computer, it had to sign an end-userstatement regarding its use. German corpo-rations must also include assurances thatthe products will remain in the country towhich they are exported. Officials admit,however, that technology may reach Com-munist nations via neutral non-CoCom coun-tries like Austria, Switzerland, and Sweden.Bonn has few means of preventing this.

BGW refers about 60 percent of all licenseapplications to the Ministry of Economicsfor further consideration. The Ministry ofEconomics cooperates with the Ministries ofForeign Affairs and Defense in decidingwhether the application should be broughtup in CoCom. The criteria for decidingwhether a license should be granted inter-nally or should go to CoCom relate to possi-ble strategic use, end use in general, whetherother corporations or countries have alreadysold the item to Communist countries, andthe character of the technology embodied inthe product. German cases in CoCom requireabout 3 months for a decision, unless Ameri-can reexport licenses are required. In thiscase, they may take up to 2 years.

The Foreign Ministry’s most important li-censing criteria are political, but do not in-

Ch. IX— The East-West Trade Policies of America's Cocom Allies ● 183

elude the use of export control as a reactionto short-term political developments as inthe United States. President Carter’s denialof a license to Sperry-Univac in response tothe Soviet dissident trials in 1978 promptedthe West German Foreign Ministry to pub-licly state that Germany would never linkexports to domestic developments withinthe Soviet Union. There is, in fact, no legalway for Bonn to deny export licenses forsuch reasons. The Government is bound byAWG to grant licenses unless it can showthat there is a real national security dangerinvolved in the export. However, the ForeignMinistry may deny export licenses if itjudges that the export of a particular prod-uct could exacerbate international conflictand threaten German security. For instance,Germany once exported small handguns to aCommunist country. These were intendedfor sports use only and were permitted underCoCom regulations. When very similar gunslater appeared in terrorist hands in the Mid-dle East, the German Government refused,despite repeated requests, to grant any moreexport licenses for this type of weapon. Ger-man firms can sue the Government if theyare not satisfied that their export license de-nial was based on a threat to national secu-rity. Another political criterion for exportlicense decisions is the German Govern-ment’s desire to maintain equivalent tech-nology export policies toward both the PRCand the Soviet Union. Germany does notwant to exacerbate tensions with theU.S.S.R. by adopting a more lenient stancetoward China.

Because West Germany’s trade with EastGermany is considered domestic inner-Ger-man trade, it is not covered by AWG.Rather, it is regulated by a special legal sys-tem. The highly sensitive nature of inner-German relations makes it extremely diffi-cult to elicit information on technologytransfer between East and West Germany.Here, export control more closely resemblesAmerican law than the West German foreigntrade law: exports are forbidden unless ex-pressly permitted, and CoCom regulationsapply to East Germany. Thus the system of

granting export licenses is the same for EastGermany as it is for the rest of the Commun-ist world. There have periodically been pro-posals to differentiate in export license-granting procedures as between East Ger-many and other Communist countries, butthese suggestions have so far been rejected.

Inner-German technology transfer issometimes controversial among West Euro-pean nations because, according to the 1957Treaty of Rome, East Germany receives thesame tariff privileges as does West Ger-many, making it the de facto 10th member ofthe Common Market. East Germany is con-sidered part of the West German domesticmarket; it is not treated as a foreign country,and therefore the EEC common external tar-iff does not apply to West German importsfrom East Germany.23 other EEC membersperiodically complain about East Germany’sprivileged treatment, but Bonn has thus farsucceeded in retaining this special status.Inner-German trade, like Germany’s tradewith other Communist countries, consistslargely of the exchange of West Germanmanufactures for East German primaryproducts.

There are periodic charges that high tech-nology finds its way to the Communist na-tions via inner-German trade because ofloopholes in the intricate system. GermanGovernment officials deny these allegations.They assert that technology is unlikely toslip through to East Germany because thereis less technological cooperation with EastGermany than with any other Communistnation. Moreover, East Germany is the mosthighly developed Communist society, wellable to produce its own technology. Thequestion of inner-German technology trans-fer remains a matter of debate. and harddata on the issue are difficult to find. TheEast German press ignores the subject oftechnology transfer, but defends trade withWest Germany in general.

‘I+’or a cfeta ilwf discussion of F;ast (;ernlan~! status in t hc~C o m m o n ILlarket, sw Si~har[ Nehrirtg, “I)er Sonderstatusdes I nnw-deutschen I {andt~ls ”” (’l’he Spt’c.ial Status of’ 1 nner-(;erman ‘1’rade), It i/”t.sf//f//’l(t//(t/,\t, 1 !)T? X1,1., pp. 6111-637.


CREDITS AND TARIFFS

West Germany’s credit regulations differfrom those of many Western countries. Al-though commercial interest rates havetended to be lower than other countries, theWest German Government does not subsi-dize interest rates on official credits. An Eco-nomics Ministry spokesman states, “WestGermany is unlikely to set up an institutionsimilar to the Eximbank (Export-ImportBank) unless competition from other West-ern countries forces us to. ”

In general, therefore, West German offi-cial credits are no more competitive thanthose of other NATO countries. This givesrise to frequent East European complaints.Nevertheless, Government-guaranteed,long-term commercial bank credits are readi-ly available to Communist countries. An in-teragency Government committee meets bi-monthly with representatives of bankingand industry to discuss export credit deci-sions. West German banks sometimescharge lower than the current market rate,but in such cases companies charge the pur-chaser higher prices and reimburse thebanks for the difference between the marketrate and the rate of interest charged. Giventhe healthy state of the German export econ-omy, and West Germany’s continual tradesurplus with Eastern nations, there is littlepressure from business to facilitate moreEast European purchases.

In 1977, German banks and firms ex-tended a total of $11 billion in credits toCommunist nations; of these, two-thirdswere bank-to-bank credits that did notqualify for Federal insurance. The Sovietdebt to West Germany is currently about$2.8 billion, and the total East Europeandebt is about $8 billion, or a quarter of theCommunist countries’ total debt to the

West .24 In addition West Germany hasgranted East Germany an annual interest-free “swing’ credit—meaning that eitherside can use it—of 850 million DM.

Compensation deals now constitute about15 percent of West German trade with Com-munist nations. In May 1978, Brezhnev andSchmidt signed a 25-year agreement on eco-nomic cooperation which envisages a broad-ening of trade relations and cooperation. z’)

Given Communist lack of hard currency, it islikely that the number of compensation dealswill increase in the future.

While West Germany still restricts someimports, particularly textiles, to protectdomestic industries, it has gradually liberal-ized its import restrictions on Communistgoods. Only 7 percent of imports from theEast are restricted–mainly textiles, steel,glass, ceramics, and leather goods. Importrestrictions do not apply to the minimaltechnology imports from Communist na-tions. The Soviets export only a tenth asmuch technology to West Germany as theWest Germans export to Russia. TheU.S.S.R. has sold West Germany some steeltechnology and Hungary has sold pharma-ceutical technology. Another example isSalzgitter’s purchase from the U.S.S.R. andEast Germany of a licensed process to pro-duce low-density polyethylene.” TheU.S.S.R. has also sold at least 18 licenses toWest Germany for metallurgical, chemical,and electronic products.27 Despite these verylimited technology imports from Communistcountries, West German-COMECON tech-nology transfer is, according to one Germanofficial, essentially a “one-way street. ”

“LP Monde, Aug. 112, 1976.“ )For the text of the “Agreement on Developing and Deep-

ening Economic Cooperation, ” see .Sotfiet A’euss, May 9, 1978.“Leslie Colitt, 4’P;ast-West I.icensing Turnaround, ” F’inan-

cia[ ‘Times, Apr. 30, 1976.“John W. Kiser 1 II, “Report on the Potential for Technol-

ogy Transfer From the Soviet Union to the United States’”(unpublished), October 1977.

—

Ch. IX– The East-West Trade Policies of America's Cocom Allies ● 185

FRANCE

INTRODUCTION

France’s approach towards East-Westtrade and technology transfer is determinedby its overall foreign policy stance: a strongdesire to be independent, sovereign, and freefrom American hegemony; a preference fordiversifying international links as much aspossible, irrespective of the ideological andpolitical character of other nations; and anaversion to mixing politics and economics,particularly where doing so would interferewith France’s goal of maximizing foreignpolicy options. Technology transfer to Com-munist nations is not a political issue inFrance; indeed, relations with the U.S.S.R.arouse little controversy within the country,while relations with the United States are afar more delicate and contentious subject,particularly given the strength of the FrenchCommunist Party. The question of adheringto American-based export control policythrough CoCom arouses much more dis-agreement in Paris than the issue of whatshould be sold to Communist countries. Thegeneral French approach is to support andincrease trade with Communist nations inany goods and by all possible means; toeschew the use of economic levers in the pur-suit of political goals; and to maximize theeconomic and political benefits to Francewhich can be gained from East-West eco-nomic exchanges.

ECONOMIC AND POLITICALFACTORS

France, like West Germany and Britain,enjoys an export-oriented economy, and itshigh level of trade dependence influences itsattitudes towards trading with Communistnations. The French Government viewstrade with the U.S.S.R. and Eastern Europeas “normal’ ’-’’just like our trade with theUnited States, ” according to a Foreign Min-istry official. Trade links with the PRC arenewer and less well-established. The Frenchare primarily concerned with diversifyingtheir exports as much as possible, and wel-

come Communist markets for their trade ex-pansion potential. They also view trade withthe East as an important employmentsource. Although trade with the U.S.S.R.and Eastern Europe forms only 4 percent oftotal French trade, officials point out thattrade with Communist countries has keptalive some branches of French industry. Sixyears ago, the medium-sized machine-tool in-dustry was struggling to survive; since thenexports to the U.S.S.R. have revived ma-chine-tool production and enabled the indus-try to reorganize more efficiently.

One official also claims that trade withCommunist countries is a stabilizing factorfor the French economy, since the Easterncountries with their countercyclical marketsare secure even in times of economic crisis inthe West. (This is a debatable point. Seechapter II I.) In global terms, France’s com-parative trade advantage lies in its consumerproducts, but there is relatively little de-mand for these in Communist nations.French exports to the East are primarily in-dustrial goods. The main drawbacks of East-West trade for France lie in the lack ofsuitable Eastern imports and the difficultiesraised by compensation deals.

France, therefore, faces many of the sameeconomic problems in its relations with theU.S.S.R. and Eastern Europe as do its Euro-pean allies and the United States. It is thepolitical aspects of French trade with Com-munist countries, not the economic factors,which distinguish French policy towardstrade and export control.

The political determinants of French ex-port control policy reinforce the economic de-terminants, and both point towards encour-aging East-West trade. Since de Gaulle’s1966 overtures towards the Soviet Union,France has sought to establish a “specialrelationship” with Russia, and has consist-ently tried to improve France-Soviet rela-tions. According to official spokesmen,French national security is enhanced by im-proving economic and political relations with

54-202 0 - 79 - 13

—


the U. S. S. R., and to this extent economicsand politics are linked. France has historical-ly accorded top priority to its relations withthe U.S.S.R. (as opposed to the rest of East-ern Europe), and it is more concerned withFrance-Soviet trade than with economic rela-tions with other Communist nations. Polandcomes next in economic and political im-portance.

TRADE IN TECHNOLOGY

France has been losing relative impor-tance as a trading partner for the Commu-nist countries, moving from third largestcapitalist trading partner of Communistcountries in 1970 to fourth in 1976, afterGermany, Japan, and the United States.28

French trade with the Communist worldamounted to $5.3 billion in 1976. Nearly 90percent of this was with the Council for Mu-tual Economic Assistance (CMEA) nations,the most important of which are theU.S.S.R. and Poland (see table 30).

France is the Soviet Union’s third mostimportant source of Western technology,supplying 11 percent of Soviet high-technol-ogy imports, and 14 percent of its manufac-tured imports in 1977. It also ranks thirdamong Western exporters of technology to

‘mLe Courier des Pays de L’Est. Mensuel D’Informationsklconomiques, LC Commerce de lu b’rance A tIQC Ies Pa.vs deL’Est en 19701976 pp. 7-8.

China, supplying 14 percent of China’s high-technology imports in 1977, but only 2 per-cent of its manufactured imports.29

Technology plays a relatively importantrole in French exports to the East, althoughthe French Government does not have an of-ficial definition of technology. Some officialsdefine technology as know-how, exclusive ofmachinery; others say one cannot separatetechnology and equipment; still others seemto apply different definitions of technologyto different circumstances. The share ofmachinery in French exports to the U.S.S.R.is significantly higher than in exports toother countries. Fifty percent of French ex-ports to the U.S.S.R. are of machinery; 30percent are of semifinished products. Themain technologies sold to the Communist na-tions are turnkey plants for chemicals andgas-lift equipment (which uses computers);computers; and metallurgical, industrial,and petrochemical equipment.

In April 1979, Giscard d’Estaing andBrezhnev signed a 10-year economic accorddesigned to invigorate France-Soviet tradeduring the 1980’s. The treaty provides fortripled bilateral trade and emphasizes in-dustrial cooperation agreements and long-term deals. These cooperative projects in-

/~John p. Young, op. cit., PP. 1 5-16“

Table 30.— French Trade With CMEA Members, 1970-76(in millions of dollars)

—. .—— —1970 1976-—-- —...—

Export Import Balance Export Import Balance

CMEA . . . . . . 647,640 452,640 + 195,000 2,735,400 1,995,840 + 739,560Bulgaria ~ 47,760 18,960 + 28,800 102,240 49,920 + 52,320Hungary . . . . . . . . . . . . . 46.680 27,120 + 19,560 129,360 98,520 + 30,840Poland . . . . 81,240 67,920 + 13,220 749,880 429,840 + 320,040East Germany . . . . . . . 59,640 42,240 + 17,400 214,680 187,680 + 27,000Romania. . . . . . . . 82,080 53,280 + 28,800 258,360 206,040 + 52,320Czechoslovakia . . . . . . . . . . 57,120 39,720 + 17,400 161,640 108,480 + 53,160U.S.S.R. . . . . . . . . . . . : : : : : 273,120 203,400 + 69,720 1,119,240 915,360 + 203,880

Total Communist countries. . . . . . .——

‘$734,520 $535,440 + $199,080 $3,143,760 $2,210,160 + $933,600

CMEA = Council for Mutual Economic Assistance—

SOURCE Organization for Economic Cooperation and Development Statistics


elude new sources of energy, energy-savingequipment, electronic products (includingcomputers), machinery and machine tools,and metals, chemicals, and petrochemicalproducts. The agreement further specifiesthat French companies and banks will takepart in building industrial complexes in theU.S.S.R. and that similar Soviet institutionswill participate in projects in France. TheFrench companies providing equipment, li-censes, and credit for factory construction inthe U.S.S.R. will be partially or totally reim-bursed in products manufactured by theseSoviet industries.30

In the first 6 months of 1979, $340 millionworth of new France-Soviet contracts weresigned, the key ones in high-technologyareas. Meanwhile, in 1978 the French com-pany Technip won one of the biggest singleSoviet orders placed in a Western country, a$213 million contract for gas-lift installa-tions to improve oil recovery levels in West-ern Siberia.31 Another major new contractwon by Thompson-CSF will supply $100 mil-lion of telephone equipment to the U.S.S.R.32

Under the most publicized France-Soviethigh-technology deal, a group of French com-panies will sell a computer and ancillaryequipment to the Soviet news agency TASS.The $20 million contract involves an Iris 80computer from CII-Honeywell Bull SA, an-cillary equipment from three subsidiaries ofThompson-CSF SA, and programing andsoftware from Steria (Societe de Realizationsen Informatique et Automatique). Althoughthe 1980 Olympics will be a major user of thesystem, it will not be fully operational until1981. 33 This order originally went to theAmerican firm Sperry-Univac, but in July1978, President Carter vetoed the license ap-plication as a sign of U.S. displeasure withSoviet dissident trials. In the wake of thisaction, and following U.S. guidelines, boththe German and British Governments dis-couraged firms from bidding for the deal. 34

‘(’ b’inanciul Times, Apr. 30, 1979; Le Alonde, May 2, 1979.“b’inaneiul Times, Apr. 27, 1979.“~’inunriul 7“ime.<, Apr. 4, 1979,“Ea.st-Ll’e.st Trude Are[(.s, Apr. 4, 1979.“Le.s li’chos, Aug. 18, 1978.

The French corporation won the contractbefore President Carter decided to reversehis decision. The French Government op-poses the practice of subjecting technologyexports to short-term political interference.

EXPORT CONTROL, CREDIT,AND TARIFF POLICY

France enjoys good cooperation betweenbusiness and Government on questions ofSoviet and East European trade. The Gov-ernment encourages industry through subsi-dized credit and other policies, and the De-partment of Industry maintains close con-tacts with businessmen on East-West is-sues. Government and business also appearto have worked out a viable modus vivendifor licensing technology exports. Accordingto a computer industry spokesman, firmshave learned to write applications for exportlicenses that are virtually certain to be ap-proved. More skeptical observers claim thatthe French Government turns a blind eye toviolations of export license application pro-cedures, particularly where end-use state-ments from Soviet organizations are con-cerned. In any event, industry and Govern-ment appear harmonious over these ques-tions. The French Communist Party, work-ing through various companies, encouragestrade with Communist nations, and severalprominent Communist businessmen are en-gaged in East-West trade.

France’s ambivalent attitude towards theUnited States in general, and towards U.S.attempts to limit technology exportsthrough CoCom in particular, complicatesits export control policy. As one spokesmanput it, “We can’t always align ourselves withWashington–we would not have a foreignpolicy if we did that. ” This gives rise toparadoxes. Officials point out that France iseven more concerned about Soviet militarystrength than is the United States: Paris isgeographically more vulnerable to Moscowthan is Washington. On the other hand,French export control policy is greatly af-fected by France’s general aversion to com-plying with U.S. demands. Unlike Britain


and Germany, staunch supporters of NATO,France is only a marginal member. In 1966,after resisting American efforts to integrateNATO forces, France removed its troopsfrom NATO. Presently it participates onlyselectively in military and related activities.The French are also sensitive about admit-ting that they belong to CoCom; officialspokesmen even claim it is not known public-ly that France is a member. The great secre-cy surrounding France’s relationship toCoCom testifies to the extreme sensitivity ofthe whole subject of allied cooperation ontechnology exports to Communist coun-tries.35 officials indicate that France alone isthe best judge of its security interests, an at-titude that applies equally to relationshipsin both NATO and CoCom. While Franceshares with Germany and England a basical-ly favorable predisposition toward East-West trade, it resists U.S. attempts to con-trol technology exports.

The domestic legal framework governingtechnology transfer is elusive. While no lawsstate the rules on export licensing, variouspieces of information suggest how the sys-tem functions. Products for which export li-censes are needed appear on export controllists published periodically by the Ministryof Economics and Finance in the Journal Of-ficiel de la Republique Francaise.36 An inter-ministerial committee establishes the cri-teria for items requiring export controls. Thelists are essentially the three CoCom lists.France has few, if any, unilaterally con-trolled items, and only about 8 percent of ex-ports to Communist nations need licenses.37

‘> Although it is housed in a section of the U.S. Embassy inParis, CoCorn is not listed in the Paris telephone directory–neither under its name nor in the street directory.

‘(’See Ministere de L“Economie et de Finances, “Avis auxImportateurs et aux E x p o r t a t e u r s relatif aux p r o d u i t ssoumis, au control de la destination finale, ” Journal offi”cielde la Republique l’rancai.se, July 14, 1977, for the latest list.Curiously, the first export list was published in this journalon Dec. 31, 1961. The question of how French businessmenknew prior to 1961 for which goods they required licenses re-mains unanswered.

‘7Le Monde Diplornatique, September 1978. However, Pro-fessor Marie Lavigne, author of this article, cites a U.S.source, explaining that it is impossible to obtain French in-formation on these figures.

Unlike the other systems under review, theFrench process of export licensing beginswith customs officials, to whom firms need-ing licenses submit applications and copiesof contracts. If customs officials decide thatthe license application requires CoCom ap-proval, they send it to the Ministry of Indus-try, which sends it in turn to the Ministry ofForeign Affairs. On more sensitive items,the Ministry of Defense may also become in-volved. No regular interministerial commit-tee comparable to those in Britain and WestGermany exists to deal with sensitive tech-nology licensing applications. Nevertheless,if the CoCom representative in the Ministryof Foreign Affairs requires further consulta-tion, an unofficial committee of intergovern-mental advisors can be summoned to discussthe case. The CoCom representative fromthe Ministry of Foreign Affairs also presentsthe French position before CoCom, signs thelicense application after approval, and sendsit through the Ministry of Industry to cus-toms, which notifies the firm. From the com-panies’ point of view, therefore, the export-licensing system begins and ends with cus-toms.

France appears not to require formalthird-country statements (promising thatthe technology will remain in the country towhich it is sold and not be exported to thirdparties) prior to licensing, as do Britain andGermany. Soviet and East European end-user statements are required, however.

The French Government facilitates the ex-port of technology to the East by providinggenerous credit supports and other financialfacilities. Medium-term credit insurance (upto 3 years) is available in France from theCompagnie Francaise d’Assurance pour leCommerce Exterieur (COFACE), a quasi-public agency under the supervision of theFrench Government. COFACE providesEast-West trade credit insurance with bothcommercial and political risk coverage for 8to 95 percent of the credit. A few large com-mercial and investment banks provide thebulk of export credits for East-West trade.The most prominent of these are the CreditLyonnais and the Societe Generale, both


large nationalized banks, and the Banque deParis et des Pays Bas. A corporation seekingto finance trade with Communist countriesusually deals directly with one of the con-tracting French banks and then withCOFACE. After it has secured COFACEcredit insurance, it has access to FrenchGovernment-supported refinancing facilitiesthrough the Banque Francaise du CommerceExterieur, a publicly chartered bank whosecapital is held by the Banque de France (theCentral French bank) and various otherbanks.

France charges all-inclusive rates on Gov-ernment-supported export credits.38 In thisit differs from other major Western tradingpartners of Communist countries. For the1974-79 period, for example, the France-So-viet intergovernmental agreement stipulatesthat France grant the U.S.S.R. a $3 billioncredit at interest rates ranging from 7.20percent to 7.55 percent (depending on thevalue of the projects) to facilitate Soviet pur-chases of French machinery. Similar agree-ments exist with other Communist coun-tries.” There is, therefore, ample credit sup-port available for exports of French technol-ogy to the East.

Like Germany, France has felt the lack ofsufficient and suitable East European im-ports to balance its exports. Only a few

‘“E’or a more detailed discussion of French export creditsupport, see Suzanne F. Porter, Ea.st-11‘es f Trade F’ina ncin~r.A n in (ro(lu(t[)r}f (;uide, U.S. Department of C o m m e r c e(Washington, IJ.C.: (government Printing Office, 19’76).

“’See lx courier (ie.v Pa>IA cie L ‘E.st, October 1978, No. 222,pp. 1 ~-~ 1, for details of credit agreements with other socialistcountries.

French import controls cover Eastern goods,and these are mainly on textiles and shoes.No import controls exist on Communisttechnology, perhaps because very littleSoviet or East European technology is pres-ently imported. In 1971, after the U.S.S.R.criticized France for not buying enough of itsfinished goods, a French company calledGisofrac was established to promote Sovietmanufactured imports. Supported by theGovernment and the three nationalizedbanks, Gisofrac deals exclusively withSoviet, not French, exporters. The directorof the company admits that the results so farhave been disappointing. On some occasions,the Soviets have been unable to supply ma-chines in the quantities ordered. France im-ports a small number of Soviet Lada automo-biles and it has also acquired some Soviettechnology, including a recooling system(purchased on license), a press (the price ofwhich was considered by some to be toohigh), and some petrochemicals. The prob-lems of inferior Soviet quality limit the at-traction of these products for the Frenchmarket. France and the U.S.S.R. have amutual credit agreement, but until now veryfew Soviet credits have been used to financeSoviet exports to France.40 A France-Sovietintergovernmental commission has formedworking groups to resolve some of theseproblems, but for the moment Soviet tech-nology exports are only a marginal part ofFrance-Soviet trade.

“’interview with Paul Nouailhac, (;isofrac, hla} 30, 1979,Paris.

THE UNITED KINGDOM

INTRODUCTION

The British attitude toward technologytransfer to Communist nations more closelyresembles the West German than the Frenchapproach, although the British share theFrench view that trade and politics are twoseparate activities which should be linkedtenuously, if at all, While the Germans have

revised their views of the political dimen-sions of Osthandel, the British have fairlyconsistently separated their economic fromtheir political relations with Communistcountries. This stance has caused occasionalfriction in British-U.S. relations. But theUnited Kingdom not only values its member-ship in NATO; it also prizes its close rela-tions with the United States. As a result,


Britain is not averse to cooperating with theAmerican-inspired export control policytoward Communist nations.

ECONOMIC AND POLITICALFACTORS

The economic and political determinantsof British technology transfer policy to Com-munist countries are somewhat differentfrom those of West Germany and France.Britain, too, is an export-oriented economywith a high trade dependence, and trade withCommunist countries is viewed as a guar-antor of employment. Consequently, theUnited Kingdom favors technology transferto Communist nations for domestic econom-ic reasons. Nevertheless, there is also someconcern about the negative employment ef-fects of imports from the East and about theproblems of countertrade. British-Soviettrade suffers from the same economic re-straints as do German-Soviet and France-So-viet trade; the predisposition to trade withthe East is modified by the difficulties of theCommunist nations in paying for these im-ports.

Because there is no problem equivalent tothat of the two Germanies in British foreignpolicy, London’s trade with the Easterncountries is less influenced by political goalsthan is that of Bonn. Moreover, the con-straints limiting Germany’s China policy donot apply to the United Kingdom. For someyears, in fact, the United Kingdom has beenactively engaged in the transfer of technol-ogy to China, and it intends to continue thispolicy. National security considerations,therefore, place only limited restraints onBritish technology transfer. However, givenBritain’s perception of its “special relation-ship” with America, its economic interest inexpanding all forms of trade can conflictwith its political goal of maintaining a rela-tionship with the United States.

TRADE IN TECHNOLOGY,EXPORT CONTROLS,

AND CREDITS

Total United Kingdom-Soviet trade in1978 amounted to $2.2 billion (see table 31).Major exports were of machinery, chemicals,and nonferrous metals, and the primary im-ports were petroleum products and nonme-tallic minerals.

Britain’s technology exports to the Eastare primarily petrochemical plants, machinetools, transport equipment, gas pipeline,polyethylene plants, methanyl plants, sec-ondary recovery for oil, and glass fibers. Ex-ports of energy technology are expected toincrease as the United Kingdom develops itsNorth Sea oil reserves. Some British energytechnology is also being exported via U.S.multinational subsidiaries in Britain, andBritish credits are used for these exports.Sale of turnkey plants is the predominantform of technology transfer, although licensesales are also important. Britain is not aslarge a supplier of high technology to Com-munist nations as West Germany, however.In 1977, the United Kingdom supplied theU.S.S.R. with 2.2 percent of its high-technol-ogy imports and 6 percent of its manufac-tured imports.41

Table 31.— United Kingdom Trade With the U.S.S.R.(in million pounds sterling)—— ——

1972 1978Imports. . . . . . . . . . . . 218.7 688.2Exports. . . . . . . . . . . . 90.3 423.1

Total . . . . . . . . . . . . 390.0 1,111.3

Balance . . . . . . . . . . . – 128.4 – 265.1

SOURCE Department of Trade, London

“John P. Young, op. cit., p. 15.

Ch. IX— The East- West Trade Policies of America Cocom Allies . 191

The British definition of technologystresses the software concept: it includestechnical data, expertise, information, andpatents, and not merely equipment, machin-ery, and other hardware. However, controlsare regarded as most practical in the case ofhardware. Indeed, the British generallyregard the Bucy report recommendations oncontrol of “know-how’” as too restrictive andunworkable. One former British delegate toCoCom argues that end-use statements onsoftware do have value. This official ex-presses the hope that the Bucy recommenda-tion should not “herald a change in Westernpolicy and practice. “42

Technology transfer to Communist na-tions is regulated by the export of goods(control) order, supplemented by a Consoli-dated List of Goods Subject to Security Ex-port Control, which includes all those goodsrequiring export licenses when sold to Com-munist nations. The lists contain three sec-tions: the Munitions List, the Atomic Ener-gy List, and the Industrial List. These close-ly parallel the German lists, and contain theitems on the CoCom lists. In addition, Brit-ain prohibits the export of certain goods fordomestic reasons.43 The licensing systemfunctions on the exceptions principle. Li-cense applications are handled by the De-partment of Trade, which discusses the li-cense requests with an interdepartmentalcommittee. About 1,000 license applicationsare processed every year, and the averagetime required for a decision is 1 month. Themajor criteria affecting these decisions areCoCom considerations, national security,and the possibility of technology diversion

1(R. J. Carrick, k’a.~t- 14’est Technology Transfer in Perspec-tive (Berkeley, Calif.: University of California Policy Papersin International Affairs, 1978), pp. 42-43.

“See Consolidated List of Goods Subject to Security Ex-port Control, Trade and )ndustry (London, Apr. 30, 1976).

to Communist nations via third countries.These are balanced against the effect on do-mestic employment.

The British Government encourages in-dustry to consult with the Department ofTrade before submitting license requests, sothat by the time the applications are madethe outcome is usually assured. The BritishGovernment has, however, been known toturn down licenses for which CoCom approv-al has been granted. There is an appeals pro-cedure for licenses that are denied. After theBritish Government has approved thelicense, it goes to CoCom and, if the productembodies American-originated technology,to the United States. In 1978, a series of in-terdepartmental meetings investigated theeffectiveness of controls on the export oftechnology to third countries, and decidedthat they were effective.

The British Government subsidizes inter-est rates for credits to Communist countries,and guarantees credits granted by commer-cial banks through the Export Credit Guar-antee Department. In an attempt to boostUnited Kingdom-Soviet trade, in 1975 Brit-ain offered the U.S.S.R. a $2 billion creditline for the purchase of British technologyover a 5-year period at an interest rate ofabout 7 percent—a rate lower than that paidby Britain itself for money borrowed over-seas.44 The U.S.S.R. has been very slow totake up these credits, and Britain still main-tains a large trade deficit with the SovietUnion. Given Britain’s economic problems,its major concern regarding East-West tradeis on the import, rather than the export, side.

“Christopher S. W’ren, “Britain to offer So\iet $2 Billionin Trade Credits,’” IVeu’ York Tirne.s, Feh. 18, 1975; hle]~vnk$”estlake, “Where Cri t ics of Russian Trade Credits (10N’rong, ” Times, Mar. 4, ~ 975.


JAPAN

INTRODUCTION

The volume and policy framework ofJapan’s trade with the Communist world de-rive more from commercial than from politi-cal factors. Though small in terms of Japan’soverall foreign trade, business with the Eastoperates under liberal Government policies.Export controls reflect purely economic con-cerns: balance of payments, the stability ofthe yen, the growth of the Japanese econ-omy, and the development of its foreigntrade. Singularly absent from the theory andpractice of Japanese foreign trade and tech-nology transfer are strategic and nationalsecurity, or political concerns (e.g., humanrights). Nonetheless, Japan has traditionallycooperated with the United States throughCoCom on matters of export control.

ECONOMIC FACTORS

Japan’s dramatic postwar developmentwas facilitated both by cheap labor and bythe prudent use of imported technology toboost productivity. As Japan’s economicmiracle emerged and domestic industry de-veloped its own technologies, the country’sdependency on imported raw materials andenergy grew. To balance such imports,Japan has looked increasingly to foreignmarkets for finished goods and consumerproducts, machinery, and technology. Giventhe limited markets for consumer goods inChina, the Soviet Union, and–to a lesser ex-tent—Eastern Europe, the Japanese are in-creasingly likely to emphasize machinery ex-ports to those areas.

Japan is the world’s second largest petro-leum consumer (after the United States) andthe largest importer of crude oil. In the mid-1970’s, its purchases accounted for 16.7 per-cent of the international oil market, com-pared with 13.4 percent for the UnitedStates. Furthermore, Japan is heavily de-pendent on both OPEC and what the Japa-nese call the “umbrella of the majors:” 72percent of its oil imports, 43 percent of its re-fining operations, and 47 percent of its

distribution network is in the hands of thelarge multinational oil companies. Japaneseoil imports from the Middle East require amonth in transit in supertankers of 100,000tons, and cost 1,000 yen per ton to transport.

These considerations provide a powerfulincentive to seek alternative suppliers ofpetroleum. China and the Soviet Union bothoffer such sources to Japan, albeit with anumber of unresolved questions about theCommunist nations’ own future energyneeds and their ability to quickly and eco-nomically bring new oil reserves into produc-tion. If such questions could be resolved, oilimported from the U.S.S.R. would requireonly 2 days in transit aboard smaller tankersin the 25,000- to 50,000-ton range, and wouldcost only an estimated zOO yen per ton totransport, exclusive of transportation fromthe Soviet oilfields to port.45 Soviet oil wouldalso provide the Japanese with some protec-tion against supply interruptions caused byunrest in the Middle East, sparing them thetraumas they endured during the 1973-74embargo.

In the now-moribund Tiumen oil develop-ment project, the U.S.S.R. promised Japan amaximum of 25 million tons of oil a year at acost of $1 billion, with delivery scheduled tocommence in 1980. Soviet behavior, how-ever, indicated that any such deal would befraught with political and strategic difficul-ties—as when, in March 1974, the Soviet sidesuddenly shifted its plans from a Tiumen-Nakhodka pipeline (to be built with Japaneseassistance) to a request for Japanese aid inbuilding the BAM (a second Trans-Siberianrailroad) in order to ship the oil by train.46

“ )John P. Hardt, George D. Holliday, and Young C. Kim,M’e.stern Investment in Communist Economies (Washington,D. C.: Government Printing Office, 1974), p. 45; Roger Swear-ingen, ‘The So(’iet Union and %.st - Pl”ar ,Jupun: Escalating(’hallenge and Response (Stanford, Calif.: Hoover Institu-tion, 1978), pp. 121-128.

‘(’Gerald I.. Curtis, “’I’he Tyumen Oil Development Projectand Japanese Foreign Policy Decision -Making,” in Robert A.Scalapino, c d . , T h e b’oreign ~~licy of Modern <Japan

(Berkeley, Calif.: University of California Press, 1977), pp.157-158.


Meanwhile, the Chinese have persistentlyoffered “oil without strings” to Japan.Shipments have grown in relative terms butremained small in absolute quantity in com-parison to the Soviet proposal: 1 million tonsin 1973, 4.9 million tons in 1974, and about 8million tons in 1975. The Chinese apparentlyfeel that the provision of “oil for the lamps ofJapan” (and Japanese factories) is advan-tageous to them politically as well as eco-nomically. Among other things, it can serveto mute Japanese enthusiasm for an “energyalliance” with the U.S.S.R. Thus, Chinese oilexports to Japan have risen steadily even asPRC exports in other areas have diminished,and the 1975 quoted price per barrel, world-wide inflation in oil prices notwithstanding,was 70 cents lower than in the previousyear.47 But the fact remains that Chinese oilis heavy, with a high wax and sulfur content,and is generally difficult and expensive torefine, especially by comparison with thelighter crude the Soviet Union can provide.Coal, which provided roughly one-sixth ofJapan’s energy needs in 1972, is almost two-thirds imported. In the mid-1970’s, Japancould import coal from Siberia for $3 per ton,compared with $18 a ton for U.S. coal.48

Lower costs, transportation savings, and theguarantee of long-term, stable suppliesthrough imports from either the U.S.S.R. orthe PRC will continue to make such nationsattractive as trading partners. Japan ex-tended $150 million in bank credits to theU.S.S.R. in 1974, in return for which Japanwill receive 104 million tons of coal between1979 and 1998. Approximately one-seventhof these credits will be returned to Japan forthe purchase of consumer and manufacturedgoods.

Japan has also recognized the SovietUnion as an important source of the otherraw materials required by Japanese indus-try. In 1975, the U.S.S.R. provided 20 per-

cent of Japan’s lumber and cotton imports,21 percent of its potassium salt imports, 26percent of its nickel imports, 29 percent ofits asbestos, and between 40 and 80 percentof all precious metal imports. The SovietUnion ranked third in importance as a sourceof iron ore, chromium, and copper respec-tively, and fourth in terms of coking coal.For Japan, each of these commodities falls inan area of high import dependency (in manycases, 85 to 100 percent) .49

Given the critical nature of these rawmaterials for Japanese industry, it is safe tosay that the U.S.S.R. is more important as asupplier to Japan than Japan is to the SovietUnion, despite the recent achievement of atrade balance favorable to Japan. In fact, thevolume of Japanese trade with the Commu-nist world is relatively small. In 1977, Chinaand the U.S.S.R. ranked 10th and 11th, re-spectively, among Japan’s export markets,and 11th and 13th among the sources ofJapanese imports. This trade is growing,however. Trade figures for 1978 (see table32) reveal that exports to the PRC rose by 47percent and those to the U.S.S.R. by 26 per-cent over the previous year. Similarly, im-ports from China rose by 32 percent from1977 to 1978, although imports from theU.S.S.R. remained virtually unchanged.

Table 32.—Japanese Trade With the U. S. S. R.,East Europe, and the PRC—1978

(in thousands of dollars)

‘Della-rs ‘- Percent -

—— —————ExportsU.S.S.R. . . . . $2,253,840 ( + 26.2%. 1977)PRC. . . . . . . . . . . . . . . 2,613,736 ( + 47.20/., 1977)East Europe. . . . . . . . 616,318 ( - 17.0°/0, 1977)

Total . . . . . . . . . . . . $5,837,935 ‘ - ( + 30.970, 1977)

ImportsU.S.S.R. . . . . . . . . . . . $1,318,765 (+ 0.6°/0, 1977)PRC. . . . . . . . . . . . . . . 1,809,000 ( + 32.2% 1977)East Europe. . . . . . . . 212,291 (+ 9.1%, 1977)

Total . . . . . . . . . . . . $3,473,793- ‘ - - ( + 15.7% , 1977)SOURCE Summary Report Trade 01 Japan, no 11. November, 978, p 68 Data

for’ January-November 1978, period only

“Ibid., pp. 169-170.‘nSir John Crawford and Saburo Okita, eds., Rati Materials

and Pacific Economic Integration (Vancouver: University ofBritish Columbia Press, 1978), p. 218. qgHardt, Ho]liday, and Kim, op. cit., P. 44”


Seen in their historical context, thesefigures indicate that while the relative im-portance of Japanese-Soviet trade has notincreased markedly since World War II, theincrease in absolute terms has been phe-nomenal, reflecting the remarkable overallgrowth of the Japanese economy and foreigntrade. Table 33 summarizes Japan’s postwartrade with the Soviet Union.

Japan’s trade with Eastern Europe has re-mained small and largely stagnant. Polandand Romania are Japan’s two major EastEuropean trading partners, but trade withthem between 1977 and 1978 either in-creased only marginally (Poland 1.1 percent)or actually declined (Romania, minus 16.6percent). Japan reportedly hopes to remedythis situation with a major breakthrough incomputer exports to the Eastern Europeantelecommunications market. Its major com-petitor here would be Britain.

Japan appears to be in a better positionthan Germany, Britain, and the UnitedStates to circumvent the problem of severelimits in the Communist nations’ ability topay for imports. Given the nonmarket coun-tries’ preference for bilateral deals involvingcounterpurchase, barter, or buy-back ar-rangements, the Japanese sogo shosha (all-round trading companies) have an un-matched natural affinity for compensationnegotiations that stems from a long historyof multifaceted, multilateral business andtrading arrangements.50 Japanese tradingcompanies possess worldwide marketing

Table 33.—Postwar Development ofJapanese-Soviet Trade

(in thousands of U.S. dollars)

Year Exports Imports Total Balance1946 . . . $ 24 $ 0 $ 24 + $ 241950 . . . 723 738 1.461 – 151960 . . . 59,976 87,025 147,001 – 27,0491970 . . . 340.932 481,038 821,970 - 140,1061975 . . . 1,626,200 1,169,618 2,795,818 + 456,5821978 . . . 2,502,195 1,441,723 3,943,918 + 1,060,472

SOURCE Japanese.Soviet.East European Trade Association, Tokyo, Japan,1979

networks, and have the financial ability toengage in triangular or “switch” trading(whereby Japanese firms sell the ruble cred-its they have earned to a third country orcompany at a markup), as well as the abilityto dispose of a wide variety of unrelatedproducts. The Japanese have also shownthemselves sensitive to the importance ofstructural arrangements in East-West trade.In recent times, major Japanese tradershave modified their organizational frame-works (especially where the sales functionwas geared primarily to handle a single item)in order to better manage the kinds of multi-dimensional projects demanded by East-West trade.51

POLITICAL AND FOREIGNPOLICY FACTORS

Taken by themselves, a number of politi-cal, strategic, and foreign policy aspects ofthe Soviet-Japanese relationship might beexpected to affect Japanese policies on tradewith and technology transfer to the Commu-nist world. That they are not the major de-terminants of Japanese policies and prac-tices in these areas can be attributed to theprimacy of economic factors and to Japaneserecognition of the fact that “linkage” be-tween its trade and foreign policy objectivescannot be carried out successfully. Japansimply does not have the cards to play in atrade-and-foreign-policy poker game withthe Soviet Union. Economic and political re-lations with the U.S.S.R. are therefore keptclearly separated.

The Soviet Union presents Japan withseveral irksome diplomatic problems. Mostimportant, perhaps, is the insistence of theSoviets on retaining the Northern Territo-ries, a group of Japanese islands captured inthe final days of World War II. In fact, theU.S.S.R. and Japan have never signed a for-mal peace treaty, because neither side hasbeen willing to yield on the Northern Ter-ritories issue. Fishing rights have been

‘“Raymond Mathieson, Japan Role in Soviet EconomicGrouth: 7’ransfer of Technology Since 1965 (New York:Praeger Publishers, 1979), p. 29, pp. 236-237.

51 J a p a n I n t e r n a t i o n a l T r a d e O r g a n i z a t i o n (JETRO),Japan’s Plant Exports, No. 11, (Tokyo: JETRO, 1977), pp.13-14.

Ch. IX— The East-West Trade Policies of America Cocom Allies 195

another source of Japanese-Soviet dispute.In this area the Soviets have clearly and con-sistently held the upper hand. Annual nego-tiations over catch quotas, and the recentimposition of Soviet sovereignty over waterswithin 200 miles of its coast, have slowlyeroded Japanese competitiveness with thegiant and technologically advanced Sovietfishing industry.

Numerous public opinion surveys have in-dicated that the U.S.S.R. is “the most dis-liked” country among the Japanese public.Indeed, in 1978, anti-Soviet feeling ran asstrong as at anytime during the past 15years, with 40 percent of all respondents list-ing the U.S.S.R. at the top of the list of na-tions they most disliked.52

China, by contrast, has fared much better,with only about 10 percent of the 1978 sam-ple listing it as “the most disliked” (and with15 percent describing it as the “most liked, ”in contrast to less than 5 percent for theU. S. S. R.).” Moreover, with the exception ofa brief reversal during the height of theGreat Cultural Revolution, Japanese publicopinion has tilted increasingly towardsChina. For whatever it is worth in terms ofits actual influence over the making of Japa-nese foreign policy, public opinion does notseem to regard the Communist bloc homoge-neously as a “security threat, ” and is unlike-ly to be sympathetic to a campaign to re-strict exports on those terms.

Unfortunately, there is no comparable in-formation on the general attitudes of Gov-ernment and foreign policy elites. Never-theless, American Japan-watchers and Japa-nese scholars agree that the Japanese de-fense and foreign policy establishments viewthe U.S.S.R. as the chief military threat toJapanese security. But if Japanese strategicand diplomatic vulnerability has affectedtrade and technology transfer policies, theeffect appears to be more to encourage thandiscourage trade. As a nation defenseless on

‘L[’{jreign oi]inicjn .!’c)IP.s: [ ‘.,?. lntcrnutionul (’(jntn2unica-tion A,qcJfIc>I, h! ay 7, 1979, p. 4 (figure 2).

‘11 bid., p. 2 (figure 1).

all sides, Japan pursues a strategy of “beingfriends with everybody” and maintaining anevenhanded stance in the Sine-Soviet con-flict. Reflecting the great importance ofeconomic needs, a 1974 White Paper on For-eign Trade prepared by the Ministry of In-ternational Trade and Industry (MITI)noted that to ensure stable supplies of essen-tial resources, Japan would be required topursue a policy of “orderly imports” and“diversification of import markets.’” Amongother things, this meant deepening inter-changes with the Communist bloc as well aswith Latin America and Africa.54 Similarsentiments were expressed by Mr. Hatoya-ma, Minister of Foreign Affairs, in a speechto the Diet in October 1977. According to thestrategy he outlined for Japanese-Sovietrelations in the coming year, Japan would (a)strive to develop relations across a numberof fronts (economic, cultural, political) simul-taneously, but (b) would insist that any long-term relations depend on a peace treaty anda settlement of the territorial issue.55

Practical experience effectively precludesthe Japanese from accepting the idea of con-trols or embargoes on technology transfer onpolitical or general foreign policy grounds.Such a stance is reinforced by the fact thatthe “leverage-through-linkage” strategy hasits critics on the Japanese scene. Japanesescholars and officials alike have arguedvariously that the Japanese need to take theinitiative in increasing Soviet trust in theirintentions, that issues such as the return ofthe Northern Territories should be subor-dinated to pragmatic trade considerations,and that the overwhelming military might ofthe U.S.S.R. makes linkage an impracticalploy. Others see increased trade and otherexchanges as one way to halt the “spiralmodel of insecurity and conflict” that hasbeen at the root of Japanese-Soviet relationssince at least the end of the 19th century.From these perspectives, Japanese demon-strations of “good faith” and “reliability”

“Crawford and oki[a, pp. 170-171.‘‘k~pewh h? lt~’ltiro tt~itoj~an)a, Alini.s ter of b’orc~i,qn .4 fftl irs

(Tokyo: Foreign I’rt>ss (’enter, oct. 3, 1977).

——


through trade, they feel, can serve to alterprevalent attitudes and to create a morefruitful atmosphere for political negotia-tions.

On occasion, controversy internal to theJapanese Government has arisen over theissue of linking or not linking trade andeconomic cooperation with foreign policyconsiderations. A case study of the now de-funct (for economic, not foreign policy, rea-sons) Tiumen oil project reveals that certainofficials in the Foreign Ministry did favor alinkage strategy vis-a-vis Japanese partici-pation in Siberian development, while MITIand the Ministry of Finance were adamantlyopposed to the idea. In the end, the oppo-nents of linkage (including then-ForeignMinister Ohira) carried the day.56

Nor is there any evidence that officials inthe Japan Defense Agency (JDA) see athreat to Japan’s security as a result of thetransfer of Japanese technology to theSoviet Union. Unlike the U.S. Department ofDefense, JDA appears to be a captive ofother bureaucratic interests, centered chieflyin MITI, Foreign Affairs, and Finance. Itsposition papers, at least until quite recently,failed to reflect an independent agency view-point. In fact, according to some sources,they were drafted outside the confines ofJDA, though bearing its imprimatur. In anyevent, though a recent JDA paper called forincreased R&D expenditures for domesticproduction of defense equipment, there is nomention of the strategic ramifications oftechnology transfer, economic competitionwith the Communist bloc, or the military im-plications of foreign trade.57

Japanese defense and foreign policy spe-cialists who are concerned about the Sovietmilitary threat view a continuing defenserelationship with the United States as theirbest defense. They see a substantially lowerlevel of security threat from China. Indeed,Japanese officials have suggested that Japa-nese technical assistance to aid in China’s

modernization and industrialization makes apositive contribution to Japanese securityby reducing the possibility of domestic up-heavals and foreign policy radicalism.

This view would also appear to coincidewith Japanese public opinion. According to aDecember 1978, poll by the Japanese PublicSurvey Opinion Organization, most Japa-nese see “domestic political order” (47 per-cent) and the “state of the economy” (33 per-cent) as more critical to Japan’s securitythan military measures or defense per se (14percent) .58

TRADE IN TECHNOLOGY

Determining the share of Japanese tradethat can be categorized as “technologytransfer” is difficult. In 1976, machinery ac-counted for 40 percent of Japan’s exports tothe Soviet Union and 11 percent of its ex-ports to China, in terms of dollar value.Among exports to all nations, Japanese ma-chinery represented slightly under a third oftotal value. But Japanese machinery exportsappear to be rapidly expanding. By 1978,machinery represented 64 percent of all Jap-anese exports, and 35 percent of all exportsto Communist-bloc countries (including 4?percent of exports to the Soviet Union and20 percent of exports to the PRC) (see table34). This expansion can be at least partly ex-plained by the fact that Japanese industrialoutput and export product lines have beenaffected by increasing competition fromabroad, as other Asian nations (such asKorea and Taiwan) have gained the advan-tage of cheap labor in labor-intensive indus-tries like ceramics and textiles. Thesechanges have led the Japanese to developnew export lines in machinery, technology-intensive goods, and metals.

However, by using the U.S. CommerceDepartment’s definition of “high-technologyitems” (see chapter VI) Japan is a relatively

“Curtis, pp. 163-164.“Japan Defense Agency, The Defense of Japan (Tokyo:

JDA, 1976), p. 128.‘8Research Memorandum: U.S. International Communica-

tion Agency, Apr. 27, 1979, p. 7.

Ch. IX— The East-West Trade Policies of America Cocom Allies ● 197

Table 34.—Japanese Machinery Exports,1978, by Region

(in thousands of U.S. dollars)

Machinery Machinery asexports All exports

0/0 of total

IW nations $27.144,870 $37,268,971 72.8LDC. 22,158,104 37,017,595 59.9Communist bloc 1,817,140 5,181,217 35.1U . S . S . R . 952,194 2,012,288 47.3PRC. : 460,546 2,311,332 19.9East Europe. 310,269 554,815 55.9

T o t a l $51.120,220 $79,467,933 64.3

SOURCE Summary Report Trade of Japan, no 10 October 1978, PP 128-29(table 10) Data available for January October 1978, only

insignificant source of technology to theU. S. S. R., which purchased only about 18percent of its Western machinery and equip-ment imports from Japan in 1977 (as op-posed to 28 percent from West Germany and9.4 percent from the United States, see table35). The Japanese led the competition (WestGermany, France, Britain, and the UnitedStates) only in Soviet imports of calculatingmachines (including computers), special-purpose vessels, and optical instrumentsbetween 1972 and 1977; and ranked secondas suppliers of valves; batteries and cells;tubes, transistors, and photocells; opticalelements; and image projectors. Japan sup-plied the Soviet Union with none of the fol-lowing high-technology items, which couldbe viewed as strategically or militarily sensi-tive: aircraft turbines; nuclear reactors; tele-communications equipment; electron andproton accelerators; aircraft; and aircraftparts. In the area of oil-refining equipment,however, Japan far outstripped all competi-tion. In this category it supplied 87 percentof the Soviet Union’s imports from Westernsources, although this only amounts to 36percent of total Soviet oil-refining equipmentimports. Other categories of technology-in-tensive imports in which Japan was an im-portant Western supplier include power-gen-erating and electrical equipment (with 40.6percent of imports from Western sources);chemical industry equipment (2 I percent);excavation equipment (36 percent); and com-pressor equipment (19 percent).

Plant exports comprise the dominantshare of technology transfer by the Japa-

Table 35.—Soviet Imports of Machinery andEquipment From Japan, the United States,

and West Germany, 1977

‘0/0 of alI0/0 of all M&E imports

M&E imports M&E imports from West

Japan . . 684.9 6.0 18.3United States. 350.8 3.1 9.4West Germany. 1,041.6 9.1 27.8

SOURCE Summary Report: Trade of Japan. no. 10 October 1978 pp. 128-29(table 10) Data available for January-October 1978 only

nese, with license and patent exports playingonly a minor role. Japan’s plant exports tothe rest of the world totaled $6.5 million in1976, an increase of about one-third over theprevious year, even though total exportsgrew by only one-fifth. Chemical plants rep-resented about 40 percent of the value oftransferred technology, and plants to manu-facture heavy electrical equipment alsofigured prominently. The Communist blocranked first among regional customers forJapanese plants (purchasing almost 30 per-cent of the total), with the Middle East sec-ond, and Latin America third.

In many cases, the Japanese have provenparticularly adept at importing technologies,improving on them, and exporting the newgeneration to both Communist and freeworld countries. For instance, in 1968, ToyoEngineering obtained basic patents for anammonia production process. In a year thefirm’s alterations led to a 30-percent increasein output. Mitsui and Co. then sold the proc-ess to the Soviet Union.59

Two recent Japanese economic forecasts,one developed by the prestigious JapaneseEconomic Research Center (JERC) and oneby MITI, predict that technology will be-come an increasingly important componentof Japanese exports in the next 5 years.60

Specifically, these studies foresee the follow-ing changes in Japanese output and exports:

● 1985 machinery exports, especiallyproducts related to new technology and

‘gJapan International Trade Organization, op. cit.eOKiyo~hi Kojima, Japan and a Neu~ World Economic Order

(Boulder, Colo.: Westview Press, 1977), pp. 130-136.


●

●

●

●

commodities incorporating electronics,will be 22 percent above 1975 levels;exports of plant construction materialwill increase;exports of finished chemicals, petro-chemical products, plastics, iron andsteel will decline;the share of value-added, “knowledge-intensive” products in the chemical in-dustry’s output will rise; and1985 exports of precision instrumentswill increase 15.7 percent above 1975levels.

In general, then, the Japanese economy isexpected to continue its current move awayfrom labor-intensive, low-productivity indus-tries—which will emerge increasingly in thedeveloping countries and will find a growingJapanese import market–towards knowl-edge-intensive industries dependent on highvalue-added per unit of raw material andlabor. Since the Soviet capacity to absorbimports of finished products and consumergoods is somewhat limited, Japan can be ex-pected to continue seeking Soviet marketsfor other Japanese exports–particularlythose in which Japanese technology is em-bedded–to counterbalance imports of Sovi-et raw materials.

At the same time, according to JERC,China will pursue a course of economic devel-opment that will closely parallel the earlierJapanese experience. China, like early post-war Japan, will rely heavily on low-paid butplentiful and highly motivated labor, a highdegree of capital formation, and extensiveimports of technology. This pattern wouldmake China an increasingly important mar-ket for Japanese technology exports. Thisattractive market can be expected to rein-force Japan’s already-liberal stance towardtechnology transfer to Communist nations.

EXPORT CONTROL POLICY

The basis for Japanese export controls isprovided by the foreign exchange and for-eign trade control law enacted on December1, 1949. It presumes that trade development

is desirable and that trade with all nations,including Communist countries, should bepermitted without controls except under cer-tain circumstances relating primarily tofiscal considerations. This principle of “ex-port freedom” is secured by article 47 of thelaw, as modified by the provisions of article48. Licenses may be required for export atthe discretion of the Government, dependingon the goods involved, the designated recipi-ents, or the mode of payment. The latter pro-vision allows the Government to exercise au-thority over sales involving payments otherthan “standard measures of financial settle-ment” or cash.61 It is under this provisionthat the executive branch—or, more pre-cisely, MITI—is authorized to regulate thetransfer of technology to other nations.

The law itself, however, contains no men-tion of the control of goods or technology foreither military or political reasons. Nor is itspecific regarding either the areas or thecommodities for which controls are to be in-voked. Substantive limitations are containedonly in a Government export trade controlorder, of which 89 variants have been pro-mulgated between June 1950, and June1977.62 The order is altered from one to eighttimes a year, depending on changes inJapan’s domestic economic situation, itsbalance-of-payments positions, or shifts ofJapan’s national list. The latest availablevarient of the order contains 204 items. Thefew items that are not derived from CoComare included for reasons of domestic shortsupply, to prevent dumping, or to improvequality control.

“Area restrictions” figure only marginallyin the order’s control provisions. They arenot applied to Communist states per se, forthe latter are lumped together with marketeconomies under a broad designation “AreaA.” “Area B“ restrictions apply only tothose countries for which there are special,non-CoCom, embargo provisions (e.g., Rho-desia) and to others (e.g., Iran, Iraq, Nigeria)

“Baker and Bohlig, op. cit., pp. 163-191.“Ibid., pp. 174-1 76; Export Control: Export Trade Control

Order (Tokyo: MIT1, 1978), n.p. (pt. I I-B).

Ch. IX— The East-West Trade Policles of America’s Cocom Allies ● 199

with whom Japan has special balance-of-payments problems.

Both the law and the various orders oper-ate in an atmosphere best characterized as a“presumption of license” rather than a “pre-sumption of denial. ” In contrast to theUnited States, Japan has never introduced aso-called “blanket clause” whereby restric-tions pertain unless or until a general licenseis established or validated. 63 Indeed, article 2and article 47 of the law foresee the eventualremoval of export restrictions entirely bymeans of a periodic review of each order andthrough administration of both the law andorders according to minimal rather thanmaximal standards. 64 Currently (1979), cer-tain additional steps in this direction appearto be under consideration. One involves a re-drafting of the 1949 law by MITI so as tofurther reinforce the presumption-of-licenseprovisions and to eliminate any vestiges ofan atmosphere of restriction.

Explicit provisions for the regulation oftechnology per se are conspicuous by theirabsence in the law, the orders, and Japanesediscussions of export controls. As notedabove, such transfers can be regulated legal-ly according to the provisions pertaining tomethods of payment. But all interviewsstrongly suggest that they are not. It ap-pears, rather, that Government officialsstrongly believe (and businessmen concur)that restrictions on the flow of technologyare best left to the normal operation of com-mercial forces, i.e., to the desire of firms toretain a competitive advantage. They alsosuggest that the economic rather than secu-rity aspects of export regulation are firmlyfixed in the minds of both those adminis-tering the law and those subject to it.

It should be noted here that the restric-tions contained in the law and the orders ap-ply only to Japanese firms located on Japa-nese territory and not to foreign subsidi-aries, branches, or Japanese-based multina-tionals. There is no concept of extraterri-

“’I bid., p. 174.“I bid., p. 171: Export (’on troi, op. cit.

toriality in Japanese trade law—or in Japa-nese law in general for that matter, exceptfor serious criminal cases. Violation of ex-port controls is a criminal offense, with sanc-tions of up to 3 years in prison and a mini-mum fine of 300,000 yen (about $1,500 at thecurrent exchange rate). If, however, the priceof the item involved “times three” exceedsthe value of the minimum fine, the penalty isautomatically trebled. Although the law con-tains no formal provisions for the Govern-ment to revoke a firm’s export privileges,MITI’s legal authority to exercise “admin-istrative guidance” in granting licensesmeans that it can de facto indefinitely delayan offending firm’s export privileges.

The licensing process in Japan operates onconsensus between business and Govern-ment. It is not an adversary procedure, andit provokes few complaints, if any, from Jap-anese businessmen. Most Japanese-Sovietand Sino-Japanese trade passes through thehands of the 14 or 15 “all round trading com-panies” (the sogo shosha).65 Thus, in com-parison to the United States where large andcomplex deals involving the exchange ofmultiple products by trading conglomeratesare more common in validated license deci-sion cases than individual contracts signedby relatively small firms, there are probablyfew licensing instances that must be handledby the Japanese Government.

The setting in which the Japanese licens-ing process operates differs from that in theUnited States in other ways. Since its re-sumption following the 1956 agreements,Japanese trade with the Soviet Union has al-ways taken place within the framework ofintergovernmental trade compacts. Since1966, these have provided comprehensive, 5-year projections of all aspects of trade ex-changes. Not coincidentally, these also corre-spond to the time frames provided by Soviet5-year plans. The original initiative for these

“Yataro Terada, “System of Trade Between Japan andEastern Europe, Including the Soviet Union, ” Lau and Con-temporary?’ Pro blem.v, 37, 3 (summer 1972): 434-435; Alex-a n d e r K. Young, Th~ .so~ro Sho.shu: ,Japan Alu[ti-,1’a tionu[Trading (’ompanies (Boulder, Colo.: J4’estview Press, 1979),pp. 195-221.


agreements came from the Soviets and, since1968, the U.S.S.R. has tried unsuccessfullyto get Japanese negotiators to commit them-selves to trade agreements stretching over15 to 20 years. Until the 1971-75 trade agree-ment, each trade “plan” also included a listof products to be exchanged and estimatesof the volume or monetary amounts in-volved. For subsequent agreements, no esti-mates of amounts have been supplied, andthe annual breakdowns of both products andamounts have been suspended. The list ofitems, however, has been retained. The1971-75 trade agreement listed some 300separate items for export and import, with asupplemental schedule of items provided tocover the “coastal trade” of the Soviet FarEast.

The Japanese do not regard these agree-ments as legally binding, but they nonethe-less affect licensing operations in importantways, as summarized below:

1. A priori agreement on what can andcannot be traded exists. Hence, in-stances of conflict between Governmentand business (and instances of denial)are extraordinarily rare.

2. The lists are useful to Japanese com-panies seeking trade as a means of iden-tifying favorable market opportunitiesin the U.S.S.R. They also shape thelong-term planning of production andimmediate production decisions of firmsinvolved in import-export exchangeswith the U.S.S.R. In point of fact, thequantities actually traded usually sur-pass the levels provided for in theagreements. Both sides use the itemlists and designated quantities in theirannual trade reviews to determine if“trade on a regular basis, ” the catchphrase of every agreement, is in fact oc-curring.

3. The lists are credited with “greasingthe wheels” of the licensing bureauc-racy.

4. Japanese business is protected by theagreements against Soviet dumping.66

“Terada, op. cit., pp. 432,433.

The licensing process itself is character-ized by extensive informal consultation be-tween MITI and the exporting firm evenbefore negotiations with a Communist for-eign trade organization commence. Com-panies brief MITI on the trade and paymentprovisions, returning for further consulta-tion at successive stages if the packagealters. For exports to non-Communist na-tions, such a review process apparently oc-curs only when Japan Export-Import Bankcredits are involved.

In effect, therefore, a system of thoroughpreliminary clearance operates. The licens-ing process is expedited by the flexibility ofthe Soviets. If they do not think that alicense will be forthcoming, they do not seektrade agreements. There is no evidence ofSoviet pressure in cases where a license hasbeen denied. At a second stage, the Japanesefirm brings the negotiated package back toMITI for approval of credit and paymentsprovisions, which will also likely involve theMinistry of Finance and the Export-ImportBank. At the present time, about half of allJapanese-Soviet deals involve exporter cred-its. The other half involve buyer’s creditsthat depend on loans from the Export-Im-port Bank to the Foreign Trade Bank of theU.S.S.R.

By law as well as practice, export licensingremains largely the prerogative of MITI. Nointeragency boards or committees are in-volved. The Ministry of Foreign Affairs ap-parently plays an occasional consultativerole, being contacted to “hear its views, ”while the Ministry of Finance is involved ona more regular basis.

Issues of conflict rarely surface in the li-censing process. When there are differencesof opinion within MITI or strong communi-cations by one of the other ministries, thenMITI convenes an informal “committee,”which is usually made up of members fromthe economic agencies (Ministry of Finance,Export-Import Bank, Economic Planning)and Foreign Affairs. Only when bank-to-bank loans are at stake is the conflict likely

Ch. IX— The East-West Trade Policies of America's Cocom Allies ● 201

to be referred to the Cabinet and Prime Min- (Japanese Parliament) or the public at large.ister. Although notification of completed con-

tracts is published in an official gazette, in-formation about license approvals or denials

There are no provisions for public account- is not. There has been no discussion of theability in the licensing process. The Govern- issue of export controls, technology transfer,ment is not required to bring instances of ap- or licensing procedures in the Diet duringproval or denial to the attention of the Diet the past few years.

SUMMARY

A number of factors, both economic andpolitical, serve to create differences betweenthe United States and its CoCom allies inEast-West trade and export control policy.Our major Western trading partners–WestGermany, France, Britain, and Japan–areall far more heavily dependent on foreigntrade; West Germany, for example, derivesnearly one-third of its GNP from interna-tional commerce. Similarly, trade with theSoviet Union, China, and Eastern Europeprovides economic benefits of far greaterrelative importance to our CoCom allies thanit does to the United States.

While the value of technology exports tothe U. S. S. R., Eastern Europe, and the PRCis not large as a percentage of total German,British, French, or Japanese foreign trade,such exports do provide critical support ofkey sectors within each nation’s economy.Jobs, markets, foreign exchange, and bal-ance of payments are all at stake, and theseeconomic factors clearly influence the pol-icies and practices of our CoCom partnerswith respect to the transfer of technology toEastern-bloc nations. In general, it can besaid that Germany, France, and Britain tendeither to see their economic and political in-terests as harmonious or to separate eco-nomic interests from any conflicting politicalfactors, and in either case to base their East-West technology transfer policies primarilyon economic factors. To the limited extentthat trade with the East is used for politicalleverage, the linkage tends to be positiverather than negative—that is, trade is usedas an inducement to political accommo-dation, and not as a weapon for punishment.

Japan’s economic circumstances differsomewhat from those of the European na-tions, but the Japanese situation also en-courages East-West trade and technologytransfer. Highly dependent on imports ofraw materials and energy from both theSoviet Union and China, Japan relies heavilyon export markets that are shifting increas-ingly away from consumer goods and towardtechnological items. The Communist nationsprovide attractive markets for technologyexports. Furthermore, problems in Soviet-Japanese relations are submerged by theseeconomic interests, partly because Japanlacks the strategic and diplomatic strengthto use foreign trade as a diplomatic playingcard, and partly because the Japanese Gov-ernment sees trade with the U.S.S.R. as atool for lessening tensions between the twonations.

The CoCom nations’ generally favorablestance regarding trade with and technologytransfer to the East is reflected in the easewith which export licenses are granted. Theexport control systems employed by WestGermany, France, Britain, and Japan alloperate on the presumption that exportsshould be permitted in all cases except thoseinvolving items with clear and exclusive mili-tary value. A cooperative relationship be-tween business and Government appears toexist in each of our allies’ export control pro-grams, making it possible for licenses to begranted swiftly and easily. In most cases, atime-consuming scrutiny by Government of-ficials is not considered necessary before per-mission to export technology is granted.

54-202 0 - ?9 - 14


Nonetheless, all four CoCom allies adhereto CoCom’s policies and regulations with re-spect to exports that might jeopardize West-ern security. Even France, a nation that inrecent years has pursued a foreign policypointedly independent of United States in-terests, has found it expedient to followCoCom guidance in regulating exports to theEast. Each nation maintains a list of embar-goed exports or items requiring special per-mission for export, and in most cases the na-tional lists largely coincide with CoCom lists.In at least one instance involving nuclearpowerplant components, West Germany hastaken an even stricter stance than CoCom inadding items to its list.

The major constraint on West Europeanand Japanese transfers of technology toCommunist nations stems from the inabilityof the purchasing nations, particularly theU. S. S. R., to arrange for payment. The SovietUnion suffers both from a shortage of hardcurrency and from a lack of exports attrac-tive in Western markets. Consequently, thesale of Western technology must frequentlybe based on buy-back agreements that in-

volve future payment in imports of productsproduced with the exported technology. TheCoCom nations generally provide theU.S.S.R. with favorable credit termsthrough subsidized interest rates, and evenGermany which does not offer lower officialrates is generous in the amount of officialcredit available to the East.

In summary, our West European andJapanese allies and trading partners per-ceive East-West technology transfer as partof a larger picture involving trade in general,rather than as an issue in its own right. Likeother aspects of export policy and otherfeatures of diplomatic relations with Com-munist nations, the sale of technology to theEast is dealt with through a relativelyroutine weighing of national economic andpolitical costs and benefits. Germany,France, Britain, and Japan have weighedtheir interests and determined that they arebest served by a technology transfer policythat is generally liberal, yet remains withinthe boundaries of the strategic requirementsof Western security.

CHAPTER X

Western Technology inthe Soviet Union

CONTENTS

PageTHE HISTORY OF WESTERN TECHNOLOGY IN

THE SOVIET UNION. . . . . . . . . . . . . . . . . . . . . . ..................205

THE NATURE OF THE SOVIET ECONOMY. . . . . . . . . . . . . . . . . . . . . .209

The Communist Party. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ...........209The Government Apparatus. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........209Economic Planning. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .............209

DECISIONMAKING ON FOREIGN TECHNOLOGY.. . . . . . . . . . . . . . .211

Institutions Involved in the Acquisition of Foreign Technology. . .........211State Apparatus and Technology Acquisition . . . . . . . ...............211The Communist Party and Technology Acquisition . ................215

TECHNOLOGY ACQUISITION AND PLANNING. . ................216

Criteria and Priorities for Technology Purchases . . . . . . . . . . . . . . . . . . . . .. .217

THE ROLE OF WESTERN TECHNOLOGY IN THESOVIET ECONOMY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .219

Absorption and Diffusion of Western Technology . . . . . . . . . . . . . . . . . . . . .. 219The Economic Impacts of Western Technology . . . . . . . . . . . . . . . . . . . . .. ..225

Chemicals ... ... ... ... ... ... ... ... ... ... ... ... a s . . . . . . . . . . . . . 227Machine Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229Motor Vehicles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .......230Oil and Gas . . . . . . . . . . . . . . . . . . . . . . . . . . . ..+...... . .............237

CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........240

Table 36.–Western and U.S. Computer Sales to the U.S.S.R., 1972-77 . ...........234Table 37.–First Production of Comparable Soviet and Amercian Computers . ......237Table 38.–Soviet Imports of Western Oil and Gas Exploration and Extraction

Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ..............239Table 39.–Breakdown of U.S. Oil and Gas Equipment Sales to the U.S.S.R . ......239

Figure 12. –U.S.S.R. Council of Ministers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. ...213Figure 13.-Organizational Structure of Operational Management of Foreign Trade .214Figure 14.-Composition of Soviet Imports From the Industrialized West, 1977 ....216

CHAPTER X

Western Technology inthe Soviet Union

THE HISTORY OFTHE

WESTERN TECHNOLOGY INSOVIET UNION

Debates in the United States over the national security implications of bol-stering the Soviet economy through the sale of advanced technology are of rela-tively recent origin, but the desire to profit from Western technological ad-vances vastly predates both the cold war and the creation of the Soviet State. Inthis sense, Western technology transfer to the U.S.S.R. has had ample prece-dent; foreign technology and capital infusion have played a relatively large rolein Russian economic growth for the past 300 years. From Petrine times until thepresent, Russian statesmen have attempted to compensate for domestic inabili-ty to generate competitive innovation by importing know-how from abroad. Themotivation for this interest in technical and economic progress has varied, andtechnical advance, economic growth, and military power have all been closely in-tertwined. Successive heads of both the Russian and Soviet Governments haveemphasized the necessity of competing with the advanced states of Europe notonly in terms of domestic standard of living, but also in terms of nationalsecurity.

The first systematic and nationwide at-tempts at modernizing the Russian Statethrough Government edict occurred duringthe reign of Peter the Great (1682-1725).During his tenure, the number of manufac-turers and mining enterprises quadrupled.Western impact in this period was felt morethrough the transfer of know-how, ideas, andpeople than through the transfer of hard-ware. The main thrust of the Petrine eco-nomic reforms directed toward the develop-ment of an efficient, modernized Russianarmed force that could match those ofPoland and Sweden, Russia’s major Euro-pean adversaries. The almost continuousstate of war, punctuated by periodic inva-sions of the Russian homeland, made the de-velopment of a modern navy and munitionsindustry seem crucial to the survival of theTsarist State.

The State bureaucracy under Peter I,remolded along Western lines, was the primemover in the development of key military-related sectors of the economy. This estab-lished a pattern which was to persist untilthe October revolution. Growth in the newarmaments, metallurgy, shipbuilding, andtextiles industries was encouraged by guar-anteed demand for their products from theGovernment sector. The State, in turn,strictly regulated the quality of the product,demanding standards comparable to Ger-man and Dutch industry. In 1702, Peter ini-tiated a drive to induce foreigners to settle inRussia. This was intended to be a spur to in-novation; Russia was importing both thenecessary know-how and what the Tsar re-garded as superior Western cultural traits.

Peter attempted a deep and comprehen-sive Westernization of Russia, but it was

205


based on narrow premises. While a relativelycompetitive military sector was establishedby the middle of the 18th century, the struc-ture of the new industries precluded ongoinggrowth and innovation in the absence ofState influence. Manufacturing was basedon serf labor, and there was no impetus todiscover labor-saving and capital-intensivemodes of production. Product quality andquantity in those industries wholly depend-ent on the State were in many cases deter-mined by administrative decree, but lowquality in the private sector was tolerated inthe absence of alternatives. Finally, raisingthe proportion of foreigners in the intelli-gentsia was an insufficient first step towardthe comprehensive educational system nec-essary for permanent increases in workerproductivity and domestic innovation.

The 18th and early 19th century moderni-zation drives depended for the most part onState resources as their motive force, but, bythe end of the Crimean War, it was clear thatthis technique could not support industrialdevelopment on a par with that in WesternEurope. It was not until Count SergiusWitte became Minister of Finance in 1892that Government financial policy deliber-ately focused on industrial development.Witte stabilized State finances, returned theruble to the gold standard and borrowed ex-tensively abroad. At the same time, he chan-neled a great deal of foreign capital into theexpansion of the railway system, thus lend-ing an added impetus to growth.

Witte was a disciple of Frederick List,whose ideas on tariff protection for develop-ing industries had helped to industrializePrussia. The result of these policies was asurge of industrial growth unprecedented inRussian history, and based essentially onprivate initiative. Between 1892 and 1903,when Witte left office, the annual rate of in-dustrial growth consistently exceeded 8 per-cent.

During this period, the major vehicle oftechnology transfer was the import of for-eign machinery. Its role in the modernizationprocess was considerable: in 1912, only 55percent of the ruble value of all machinerysold in Russia was of domestic origin, and

imports of agricultural machinery increasedfrom 6 million to 50 million rubles from 1895to 1914. Foreign investment in the last Tsar-ist period was particularly important in themining, metallurgy, textile, and chemical in-dustries.

The success of the October revolutionended the period during which economicgrowth was nurtured by private initiative.According to Lenin, the industrial growth ofthe prerevolutionary era was based on theexploitation of the masses by the capitalistclass and had fostered backwardness in theRussian worker. The Soviet task was to re-build through State control a society as pro-ductive as the most advanced Western na-tion. Western assistance remained vital tothis enterprise.

Lenin’s New Economic Policy, which cameinto effect after 1921, had as its centralmechanism of technology transfer the grant-ing of concessions to Western entrepreneurs.Technical assistance contracts, the employ-ment of foreign engineers and experts in theU. S. S. R., and the dispatch of Soviet expertsto training positions in the West were alsoutilized.

Over 200 concessions were made to for-eign firms between Lenin’s death and thefirst 5-year plan. While Soviet literaturedowngrades the contributions of foreigntechnology transfers accomplished throughthis medium, it is clear in retrospect thatmuch of the rapid growth of the 1920’s wasdependent on foreign operative and technicalskills. The Soviets at this time made little orno attempt to develop completely new mech-anisms of domestic productions; even ex-perimentation was limited and soon aban-doned. They concentrated on acquiring newproductive processes from the West, train-ing politically reliable engineers, and estab-lishing basic and applied research institutes.

By the end of the 1920’s the Soviets wereconvinced that they had found a more effec-tive mode than the pure concession or thejoint venture for the transfer of Westernskills and technology. After 1928, technical-assistance agreements and individual workcontracts with foreign companies, engineers,skilled workers, and consultants replaced

● 2 0 7


the pure and mixed concessions. Under thesearrangements the capitalist firms could nolonger claim a share of ownership. In addi-tion, the control of technology transfer oper-ations lay totally in the hands of the Soviets.Existing concessions were closed outthrough taxation, breach of contract, harass-ment and, in some cases, physical force. 1

In their place, in the summer of 1929,many wide-ranging technical-assistanceagreements were concluded with foreignfirms. These were to be of specific, limitedduration. The units designed and begun be-tween 1929 and 1932 were some of thelargest in the world, so large in fact that inmany cases contracting Western firms hadnot previously dealt on a similar scale. De-sign and layout of these complexes camemostly from America, with Ford, GeneralMotors, Packard, General Electric, and U.S.Steel contributing heavily. And althoughnearly a half of the installed equipment wasGerman, it was very often manufactured inGermany to American specifications.

For 2 years there was an unparalleled infu-sion of foreign technology in the form ofskilled labor, technical data, and equipment.Although most of the engineers were goneby 1932, they left behind designs based onWestern models which contributed to a largeincrease in manufacturing capacity. Until1941, production increases in most Soviet in-dustrial sectors were the result of the in-stallation and expansion of the Westernplants acquired in the massive transferswhich took place during this brief period.

Stalin had used the threat of war to initi-ate the new era of industrialization and col-lectivization in 1919. First priority wastherefore given to the military departmentsof the new works, and many plants built inthis period simultaneously produced civilianand military equipment. After World WarII, the most significant vehicle of technologytransfer was the stripping of German indus-try. It has been estimated that at least two-

I Anthony Sutton, 14re.stern Technology and Sol~iet Eco-nomic DeL’elopmen t, 1930 to 1945 (Stanford, Calis., 1977), pp.20-26.

thirds of the German aircraft and electricalindustries, most of the rocket production in-dustry, several automobile plants, severalhundred ships, and a host of military equip-ment were transferred en masse to theU.S.S.R.

In the late-1950’s, the Soviets turned theirattention to technology transfer in indus-tries where the German acquisitions hadbeen slight–the chemical, computer, ship-building, and consumer industries. Duringthis period, the U.S.S.R. began a massivecomplete plant-purchasing drive. Between1959 and 1963, at least 50 complete chemicalplants were bought for chemicals not previ-ously produced in the U.S.S.R. In addition, alarge ship-purchasing program was initiatedin order to expand the Soviet merchant fleet.

In sum, whatever the role of technologytransfer in the contemporary Soviet econ-omy, it is clear that Western technology haslong been looked on as a way to overcome do-mestic economic shortcomings. These im-ports have played a major—and continu-ous—role in both the Russian and SovietStates. In this sense, Soviet efforts to obtainimported technology are neither surprisingnor new. In addition, throughout both Rus-sian and Soviet history such transfers ofknow-how and capital from the West havebeen conscious tools of State economic andmilitary policy. The centralization of eco-nomic decisionmaking, particularly as it re-lates to the selection and use of foreign tech-nology, has been practiced in Russia for atleast 300 years.

Equally normal, however, has been greatvacillation in the ways in which foreign ex-porters and technicians have been treated.While Western-Soviet trade has had a longhistory, this history has been characterizedby periodic State-imposed deteriorations oftrading conditions and by a conspicuous lackof predictability in commercial contacts. Onthe basis of the historical evidence, at least,there is no reason to expect that increasedsales of technology to the U.S.S.R. will muchenhance the opportunities for Western ex-ports of manufactured goods.

Ch. X— Western Technology in the Soviet Union 209

THE NATURE OF THE SOVIET ECONOMY

THE COMMUNIST PARTY

No market mechanism officially operatesin the U.S.S.R. Instead, economic decisionsconcerning allocation of resources and ratesof expansion of different sectors are madeadministratively, and basic economic policyformulation is one of the principal functionsof the Communist Party.

The Party exercises control and supervi-sion over the economy in a number of ways.Many branches of the Government reportdirectly to Party organs. The State PlanningCommittee (Gosplan), for example, reportsdirectly to the Politburo (Executive Commit-tee) of the Party.2 At lower levels, buildingprojects are first submitted to the Partybefore being submitted to the appropriateGovernment office. At the enterprise level,the Party organization both mobilizes work-ers to fulfill the plans and monitors the activ-ities of enterprise managers.

The most potent tool used by the Party todirect the economy is the nomenklatura sys-tem. The nomenklatura is a comprehensivelist of appointments under Party control. Itnominates individuals to all important postsin the State, industry, and army. As a result,although only about 6 percent of the Sovietpopulation belongs to the Party, nearly allagricultural or industrial managersty members.

THE GOVERNMENTAPPARATUS

are ‘Par-

The State apparatus administers the de-tailed planning and organization of the econ-

‘P. Gregory and R. Stuart, Souiet Economic Structure andPerformance (New York, 1975), p. 118.

omy. The Soviet economy operates under aministerial system in which individual enter-prises belonging to a particular branch of theeconomy (petrochemicals, metallurgy, etc. )are subordinated to a single ministry. Thereare three types of ministries: the all-unionministries run the enterprises under theircontrol directly from Moscow, and theseenterprises are not answerable to regionalauthorities; the union-republic ministrieshave offices both in Moscow and the repub-lics; and the republic ministries direct enter-prises in their own republics. The heads ofthese ministries are either members of theCouncil of Ministers of the U.S.S.R. or of theother republic Councils of Ministers.

ECONOMIC PLANNING

Coordination of ministry activities is doneprimarily by Gosplan, the principal planningagency.3 While only a limited number of com-modities are centrally planned and distrib-uted by Gosplan, the planning process is ex-tremely complex.

The first step in this process is for the Par-ty to establish priorities, in the form of out-put targets, for the upcoming plan period.These targets are sent to Gosplan, whichtentatively formulates a detailed set of out-put goals and determines the resources re-quired to produce them. These goals or “con-trol figures” are sent down through the plan-ning hierarchy to the individual enterprises.At this point, enterprises and ministries for-mulate their own input estimates for Gos-plan’s output targets. Gosplan must recon-cile the two. Should demand for a particularcommodity input exceed supply over the

‘Ibid., p. 119.


economy as a whole, Gosplan may decide toreduce demand, to draw on stocks, or to im-port. After it has arrived at this “materialbalance, ” Gosplan submits the plan to theCouncil of Ministers for approval and/ormodification. The finalized targets are thencommunicated down the hierarchy to indi-vidual firms.

This system of material balance planningis cumbersome and slow; it stresses quanti-tative output goals and requires the mainte-nance of a vast bureaucracy. While it strivesfor consistency (equating outputs to inputs),it has proven incapable of achieving optimal-ity, i.e., the most productive resource mix fordesired production levels. On the positiveside, material balance does permit the Gov-ernment to channel growth in high-prioritysectors while maintaining strict control overthe economy.

The monetary counterpart of each enter-prise’s input and output plans are financialplans. These facilitate planner control overenterprise operations to the extent that devi-ations from the financial plan signal devia-tions from the physical plan. This control isreinforced by the fact that all legal interfirmtransactions, with the exception of certaininvestment allocations and foreign trade, arehandled by the State Bank (Gosbank), whichis the sole center for settling of accounts.

Each year, Gosplan formulates and theCouncil of Ministries approves an invest-ment plan for the entire economy. The plan iscarried out by “project-making” organiza-tions in charge of investment planning at theenterprise level, and its implementation issupervised by Gosplan and the ministries.Thus, decisions to expand enterprise capaci-ty are made outside the enterprise itself. In-vestment choice in the U.S.S.R. is hamperedby the inefficiencies that arise from the re-luctance of planners to rely exclusively onprofitability criteria, and from overly taut in-vestment planning.

Soviet enterprises operate on an independ-ent “economic accounting” system. This isoften taken to mean that they operate tomaximize profits. The system guarantees,

however, only that enterprises have financialrelations with external organs such as Gos-bank and that their operations are evaluatedin terms of value indicators using officialprices. Under this system, future productiontargets bear no relation to profits.4

The plan, formal and informal constraints,and the managerial incentive structure havemade gross output the most important indi-cator of enterprise performance. A manageris rewarded primarily for rapid expansion inphysical output in a given planning period,irrespective of poor performance in otherareas. Managers therefore tend to avoidchange, expecting negative impacts from in-novation in process or products.

These factors, which inhibit incentivesand may result in misallocation of invest-ment funds, are endemic to the Soviet sys-tem of economic organization. Even where ameasure of local decisionmaking power ex-ists, such decisions must conform to thewishes of the central planners, who performwithout necessarily according priority toissues such as prices or profits.

The declining rate of economic growth inrecent years has lent impetus to attempts toreform the Soviet economy. In 1965, PremierKosygin submitted a plan designed to re-duce the number of enterprise targets setfrom above and, most important, to replacegross output by “realized output” (sales) asthe primary indicator of the success of anenterprise. Further, profits were to be an im-portant source of funds for decentralized in-vestment by enterprise managers and wereto be used as a source of funds for bonuspayments to workers. These changes were tobe phased over 5 years.

The period since 1971 has witnessed a re-versal of official attitudes toward the solu-tion of basic economic problems. Ratherthan relying on economic “levers” at theenterprise level—the basis of the Kosyginreforms—attention is being increasinglydirected toward improving planning meth-ods and increasing control over enterprises

‘Ibid., pp. 179-230.

Ch. X— Western Technology in the Soviet Union ● 211

to improve economic performance. Empha- nology are therefore more likely to comesis is now on new planning methods such as from technological infusions from the Westperspective planning, automated plan calcu- than from domestic R&D.lations, automated information retrievalsystems, and new organization methods.

One of the major motivations of the 1965reforms and of the later modifications tothem was the continuing reluctance of man-agers to introduce new technology and raiseproduct quality. The subsequent recourse tomore centralized administrative techniquesmeans that those features of the economythat deterred innovation in the past continueto exist.’ Major innovations in Soviet tech-

‘)See Gertrude Schroeder, “Recent Development in SovietPlanning and Incentives,’” in .~ot’iet Economic Prospects forthe .’$e[’entie.s, Joint Economic Committee, 1973.

In conclusion, while modest attempts atreform have been undertaken in the Brezh-nev era, the basic problems of economic in-centive in the innovation process have not,in the final analysis, been seriously ad-dressed. The economic reforms of 1965 havebeen so modified as to dilute their effect. Inlieu of emphasis on economic “levers” asspurs to innovation, reorganizational and ad-ministrative solutions have met with littlesuccess. Western technology continues to beimportant to future Soviet economic growth.

DECISIONMAKING ON FOREIGN TECHNOLOGY

INSTITUTIONS INVOLVED INTHE ACQUISITION OF

FOREIGN TECHNOLOGY

Decisions concerning the purchase of for-eign technology, like any other economicdecision in the Soviet Union, take placewithin the framework of a system of centraleconomic planning. A brief catalog of themajor institutions involved in this processsuggests the variety of the interests in-volved in such purchases and the complexityof the process itself. These actors fall intotwo major categories, the State and theCommunist Party apparatus.

State Apparatus and TechnologyAcquisition

The Council of Ministers.–At the top ofthe Soviet Government organization is theCouncil of Ministers of the U.S.S.R. Thisbody is the formal repository of all State au-thority. As such, it is the theoretical locus ofadministrative responsibility for trade mat-ters. In practice, however, decisions are usu-ally taken in ministries and agencies thatoperate under the Council and are rubber-stamped at the highest level. To administer

the massive Soviet economy, the Govern-ment relies on the operation of a variety ofgeneral and specialized bodies.

Gosplan.–Gosplan, the State PlanningCommission, is the central Government’schief agency for conducting the work of gen-eral economic planning. Part of its work con-sists of import planning, which is conductedby Gosplan’s own Department of ForeignTrade. The primary responsibility of thisDepartment is to integrate foreign trade intothe national economic plans. In addition,Gosplan is responsible for planning R&Dand innovation. This work is carried out in aseparate Department for the ComprehensivePlanning of the Introduction of New Tech-nology into the National Economy.6

Gostekhnika.–Known in the West as theState Committee on Science and Technology(SCST), this organization bears primary re-sponsibility for the coordination of R&Dwork throughout the economy.7 It is chiefadvisor to the central Government on na-tional technological policy. Part of the latter

‘See Joseph S. Berliner, The Inno[fation Decis[on in Societ~ndustq~ (Cambridge, Mass.: MIT Press, 1976).

‘Ibid.


function consists of developing strategies toacquire Western technology and integrate itwith domestic R&D capabilities. SCST par-ticipates in negotiation for the acquisition ofsophisticated technology from the West,often providing technical expertise.

U.S.S.R. Academy of Sciences.—Thisbody consists of about 600 members whobear the responsibility for supervising thegreater part of scientific research work in theU.S.S.R. The Academy’s jurisdiction in-cludes about ZOO scientific establishmentsemploying some 30,000 scientists. Throughits Administration of Foreign Affairs, theAcademy not only monitors scientific devel-opments in the West, but plays an active rolein scientific exchanges. While the Acad-emy’s primary concern is basic research, it isobliged to submit proposals to SCST con-cerning applied R&D leading to innovation.

Military Industrial Committee of theU.S.S.R. Council of Ministers.–The exist-ence of this committee has never been offi-cially confirmed, but it is probable that itholds primary responsibility in the Statestructure for the coordination of all activitiesin the area of armaments production. Whilethe role of the Military Industrial Committeein technology acquisition is unclear, it un-doubtedly participates in decisionmaking ontechnology purchases.

Ministries. –The central administrationcould not possibly directly supervise each ofthe 43,788 industrial enterprises that fallunder the Soviet system of central planning.An intermediate level of administration istherefore provided by ministries, which areinterposed between enterprises (or produc-tion associations) and the central and repub-lic Governments.

Ministries are organized by branch andthose dealing with the economy are differen-tiated by product (e.g., Petroleum Ministry)(see figure 12). A major function of the eco-nomic ministries is to formulate and imple-ment technical policies in relevant sectors.This function is accomplished through theMain Technical Administration of each min-

istry. Each ministry also includes a Depart-ment of Foreign Affairs.

Different economic ministries are involvedin acquisition decisions to the extent thatforeign technology can be incorporated intotheir sectors. At present, the extractive in-dustries, chemicals, and machine tools areespecially active in foreign trade.

The Ministry of Foreign Trade adminis-ters all Soviet trade; no foreign trade oper-ations can be processed outside of its struc-ture. The Ministry encompasses dozens ofimport-export foreign trade associationsorganized according to product category.These associations act as intermediaries be-tween relevant Soviet ministries and foreignfirms and are empowered to sign contracts.They are governed by boards which are com-posed of specialists of the associations andrepresentatives of the relevant ministries.

Administrative decisions in the Ministryof Foreign Trade are made through the coop-eration of three internal divisions:

1.

2.

3.

The trade-political administrations.These are divided by region. A separatetrade-political administration exists fortrade with the United States, while asecond administration deals with allother capitalist countries.Functional administrations for plan-ning, currency, legal matters, etc.Administrations for single commoditygroups. A separate administration ofthis type exists for machinery andequipment imports from capitalistcountries. The relationship of these ad-ministrations to their import-export as-sociations is shown in figure 13.

Other Agencies. –There are many otherGovernment agencies involved in some por-tion of the process of technology acquisition.The Ministry of Finance participates in thedevelopment of hard-currency plans and ad-ministers their implementation. The Vnesh-torgbank, or Bank of Foreign Trade, is sub-ordinated to the State Bank. It gives creditto all Soviet organizations for foreign trade


\

mco.-%.-;am

n>


in rubles and deals with clients in hard cur-rency. The All-Union Chamber of Commerceprimarily arranges exhibitions and contactsbetween foreign firms and Soviet organiza-tions.

Within the Soviet R&D establishment, or-ganizations exist which in many cases adaptWestern technology purchases and advancesin applied research to domestic production.Research and development institutes (underindividual ministries) specialize in appliedresearch in a specific technological area.Once a new product or process has been de-veloped to a point where it is thought readyfor commercial application, it is handed overto engineering-design organizations, whichmark out the details of materials, grades,sizes, shapes, and other technical specifica-tions of the final product and the precisemachinery, assembly quality control, andother production arrangements for manufac-turing it. If reverse engineering of a Westernproduct is possible, these organizations willhave the expertise to accomplish it. Thereare over 2,000 such organizations in theU.S.S.R. subordinated to various ministries.

In addition to the organizations listed, anumber of other segments of the State struc-ture intercede in the process of technologyacquisition. In particular it is clear that theMinistry of Defense is not only concernedwith Western technological achievements,but may have a deciding voice in individualimport decisions. The precise structure ofthe relationship between the Ministry of De-fense and the negotiations conducted by theMinistry of Foreign Trade is not, however,known in detail.

The Communist Party andTechnology Acquisition

All levels of Soviet administration—in-cluding that of the Communist Party—may

provide inputs in the process of foreign tech-nology acquisition. In the most generalsense the Government, including the plan-ning bodies, exercises detailed control overplanning and purchase of technology, andthe Party bureaucracy avoids direct involve-ment in practical decisions once broad policygoals have been met. The relationship be-tween State and Party in technology acquisi-tion is, however, ambiguous and varies notonly with time but with the political sen-sitivity of a given purchase. Under the pres-ent regime, Party organs ordinarily exercisea veto over initiatives made by the statebodies while eschewing contact with repre-sentatives of Western firms.

In addition to its functions of policy for-mulation and monitoring of administrativeoperations, the Party bureaucracy exercisesultimate control over technology acquisitionas it would over any other Government func-tion, through its absolute control of person-nel in the State structure. All officials con-cerned with technology acquisition are care-fully screened not only by State but also byrelevant Party organs.

The influence of Party organs is not con-fined to the national level. Party structureson the republic and provincial levels oftenhave considerable input in technology acqui-sition. This is particularly true in the case ofconstruction of facilities to house new equip-ment and machinery. Local Party organiza-tions are directly responsible for monitoringconstruction of all plants in their regions.Their inability to organize such efforts hasoften proved to be a major barrier to swiftimplementation of Western technology pur-chases.


TECHNOLOGY ACQUISITION AND PLANNING

There are indications that the role offoreign technology transfer in the foreigntrade planning system as a whole is beingreevaluated. At present, import decisionsare made as part of annual planning cycles,and foreign trade is often utilized as a meansof filling short-term planning shortfalls. Theresult of this is that, as figure 14 demon-strates, the vast majority of Soviet importsfrom the industrialized West have consistedof non-technology-intensive manufacturedgoods, and agricultural and other primaryproducts. Attempts to more fully integratecurrent and prospective foreign trade plansinto national economic plans are likely to re-sult in a greater proportion of hard-currencyexpenditure devoted to more productivehigh-technology imports.

The acquisition of technology from theWest is accomplished in two general stages.First, hard currency is allocated among sec-

Figure 14.—Composition of Soviet ImportsFrom the Industrialized West, 1977

tors. Secondly, individual purchases aredetermined through the participation of min-istries, their production associations, re-search institutes, and engineering-designbureaus. In sensitive cases, detailed deci-sions are formally made by higher levels ofadministration.

Both the distribution of hard currency andconcrete purchases are accomplished eitherin the framework of the 1- and 5-year plansor through irregular (ad hoc) decrees ofrelevance to single industrial branches orenterprises. From year to year the allocationof hard currency—the primary quantitativedeterminant of imports—is basically pre-served across sectors. Changes in particularpriority targets or drastic reductions in thehard-currency stock do, however, periodical-ly alter these proportions. World marketprices quoted in hard currencies are utilizedfor export-import operations with the West.

As is true of all aspects of Soviet planning,hard-currency allocations are determined onthe basis of level achieved—every year theallocation is marginally increased as com-pared to the preceding year (subject to high-level changes in national economic prior-ities).8

Engineering-design bureaus, which pro-ject new construction or modernizationneeds, determine which particular types ofWestern technologies can be used. They pre-sent to their ministries specifications ofneeded equipment and know-how. Ministriesthen send drafts of their requests to Gosplanand the Ministry of Foreign Trade.

If these requests are within the limits ofthe hard-currency plan, they are routinelyapproved and included in the trade plan. Butthis is usually not the case. Ministry re-quests often exceed the hard-currency allo-cation. Such discrepancies are resolvedthrough bureaucratic negotiation between

primary products3.90/0

SOURCE Off Ice of Technology Assessment

“Igor Birman, “From the Achieved Level, ” Souiet Studies,xxx (2).

Ch. X— Western Technology/n the Soviet Union ● 217

ministries, SCST, local Party organs, etc. IfGosplan cannot resolve the discord, it isusually settled by a Deputy Chairman orChairman of the Council of Ministers and, inthe most crucial cases, by the Politburo ofthe Party.

National economic plans specify onlylarge purchases of Western technology. Inaddition, ministries are allocated limitedamounts of hard currency with which to dealdirectly with the associations of the Min-istry of Foreign Trade. In recent years somelarge enterprises engaged in the productionof goods for export have similarly been per-mitted relatively small amounts of hard cur-rency to be used at their own discretion forthe purchase of capital goods.

Flexibility in planning is achieved throughirregular decrees, issued every 3 to 7 yearsby the Central Committee of the Party andthe Council of Ministers for each branch ofthe economy. Such decrees often plan shiftsin the distribution of hard currency amongsectors and are very concrete in nature, ex-actly itemizing equipment and technology tobe imported. They are incorporated into sub-sequent national plans.

Decisionmaking on individual technologypurchases is based on a coordinated systemof collecting and processing Western scien-tific and technical information. This is super-vised by SCST. Nearly all R&D bodies—inparticular the engineering-design bureaus—and many large enterprises collect relevantinformation. In addition, each ministry in-cludes at least one Institute of Scientific andTechnical Information, one of the functionsof which is to process available Western sci-entific and technical data

Under this system, Western technical lit-erature is translated, published, and madeavailable to relevant specialists in a relative-ly short time. Specialists who are sentabroad are required to report on Westerntechnological achievements. Soviet intelli-gence services also engage in scientific andtechnical espionage.

As a buyer of Western technology, theU.S.S.R. actively encourages trade fairs andother exhibitions in which foreign firms maybring their most advanced and salable prod-ucts to Moscow. While such exhibitions areaccepted practice in overseas marketing, it iscommon Soviet practice to attempt to obtainas much detailed technical and operationaldata as possible on desired products withoutactually concluding purchase agreements.

The Soviet system of information gather-ing on Western technological developments,while not ideal, guarantees that the Sovietnegotiator is relatively well-informed andcognizant of both the technical specifica-tions and availability of a given product indifferent Western markets.

CRITERIA AND PRIORITIESFOR TECHNOLOGY

PURCHASES

Writing in 1941, Soviet economist D.Mishustin summarized the basic aims ofSoviet technology acquisition from theframework of import policy:

The basic task of Soviet importation is touse foreign goods, and first of all machinery,for the rapid accomplishment of the plans ofsocialist construction and for the technicaland economic independence of the U. S. S.R.9

Then, as now, one of the fundamentalgoals of Soviet import policy in general wasto improve the technological base of produc-tion with the help of foreign technologywhile at the same time carefully avoidingdependence on those imports.

In the Brezhnev era the concept of com-parative advantage has been added to thedominant theme of technical and economicindependence:

In the final analysis, the purpose of for-eign trade is the procurement of importedgoods and services a) which are not produced

‘IL), hl ishustin, L’nc.qhna>!a Torgo[l>ta SS&’R ( N 1O S C O W,194 1), p. 6.

54-202 0 - 79 - 15


within the country at all, b) are produced, asa result of whatever temporary reasons, ininsufficient quantity and c) whose produc-tion within the country is more expensivethan their purchase on the foreign market. 10

After hard currency is distributed sec-torally in the planning process, a number ofcriteria based on these general policies oftechnical independence and economic advan-tage are utilized to make individual purchasedecisions. These criteria are not entirelyeconomic. Since the middle of the 1960’s,Soviet economists have attempted to deter-mine the economic benefits of import choicesthrough the use of foreign trade efficiency in-dices. These are formulae that provide ameasure of the cost to the national economyof producing a good for export relative to theforeign exchange received abroad, or of theforeign exchange expended abroad in pur-chasing a good or technology relative towhat it would have cost to produce the gooddomestically. ” Thus far, such attempts havebeen singularly unsuccessful, and there is atpresent no reliable method of measuring for-eign trade efficiency at the disposal of deci-sionmakers. At the heart of the problem liesthe insulation of the Soviet price systemfrom world markets and the failure of inter-nal prices to reflect relative scarcity. In lieuof reliable economic evaluation of technologypurchases, Soviet buyers simply attempt tominimize hard-currency cost within the con-text of a shifting set of preferences and prior-ities.

The first of these is military. All other fac-tors being equal, those types of technologythat directly or indirectly enhance militarycapabilities are given first priority. Whilemany Soviet purchases do not, in fact, em-body any military potential whatsoever, it istrue that some transfers of an ostensibly

‘“G. Smirrmv, “K Voprosu Ob Otsenki Economicheskoi Ef-fektivnosti Vneshnei Torgovlyi SSSR, ” in Voprosy Ekono-rniki, No. 12 (1965), p. 94.

‘lSee I.awrence J. Brainard, “Soviet Foreign Trade Plan-ning’” in Souiet Ecvnom>f in a Neu’ Perspective, J o i n tEconomic Committee, 1976.

purely civilian nature have been given higherallocation priority due to their potential con-tribution or convertibility to military use.

A second factor involves a general prefer-ence for disembodied as opposed to em-bodied technology, i.e., know-how as op-posed to products. The transfer of disem-bodied technology may require a relativelyhigh domestic contribution of R&D, but buy-ing large amounts of hardware generallyraises hard-currency costs. Since an individ-ual ministry is allocated a fixed sum of hardcurrency, whenever possible it will attemptto minimize the cost of Western inputs whilemaximizing relative domestic inputs in thedevelopment of a given innovation.

Third, purchases of technological com-plexes are preferred to purchases of singleitems or processes, so long as the hard-cur-rency cost is not prohibitive. Such system-atic transfers ensure the swiftest and mostproductive utilization of foreign technologypurchases.

Another element in setting technologypurchase priorities is that preference be af-forded those products and processes thatcan be easily duplicated for production in theU.S.S.R. This tendency stems from the de-sire to minimize increasing dependence onWestern technology.

Finally, an increasingly important criteriafor technology purchases involves their usein export industries. Since the generation ofhard currency (and further imports) is direct-ly dependent on export potential to theWest, increasing priority has been given toprojects producing goods for Western mar-kets. It is impossible to definitely rank thesecriteria in order of their importance in thedecisionmaking process. The factors influ-encing the choice of an individual technologypurchase are often ambiguous and prioritiesvary according to situation. It is clear, how-ever, that a lack of definitive economic for-mulae for import decisions allows for the in-fluence of noneconomic–e.g., military –fac-tors in the decisionmaking process.


THE ROLE OF WESTERN TECHNOLOGY IN THESOVIET ECONOMY

ABSORPTION AND DIFFUSIONOF WESTERN TECHNOLOGY

A recent study of Soviet technologicallevels done under the auspices of the Univer-sity of Birmingham (England),12 found thatin most of the industries it examined—arma-ments, nuclear, electric power, metallurgy,machine tools, computers, and chemicals—the technology gap between the U.S.S.R.and the West has not diminished substan-tially over the past 15 to 20 years, either atthe prototype/commercial application stagesor in diffusion of advanced technology. TheBirmingham study further concluded thatSoviet growth has been largely based on out-put using traditional technology. For exam-ple, the study points out that even thoughthe higher technology sector of petrochemi-cals has grown relative to the chemical in-dustry overall and dominates the total in-dustry output, petrochemical products aremanufactured with older, proven technol-ogies.

This pattern of growth, a result of slow ab-sorption and diffusion of new technology,can be seen in the areas in which Soviet in-dustry has performed best. The U.S.S.R.'smost productive technological developmentscame in industries that were based on well-established technology, with advances com-ing primarily from successful scaling-up ofexisting technology. Advances in the metal-lurgy, power generation, and power trans-mission industries, for example, are theresult more of engineering than of innova-tion in processes.

The pattern of better performance of thoseindustries that are not based on rapidlychanging technology is part of the reasonbehind the apparent shift in the technologyimport policies of the U.S.S.R. over the pastdecade. As the Soviet economy expanded

during the early postrevolutionary years,and again following World War II, the in-dustries most needed to support growthwere traditional ones such as metallurgy,machine-building, machine tools, and theenergy sector. The growth was produced byrelying on slowly changing technologies,limited but sometimes essential imports offoreign technology, and massive increases inthe supply of labor and capital.

This chapter has already shown that tobring about the rapid industrialization of theeconomy envisioned by the first 5-year planwhich began in 1928, the U.S.S.R. turned tolarge imports of machinery and equipment.Prior to this period, such imports had aver-aged only about 0.3 billion rubles per year;during the next 5 years, they rose to an aver-age of 1.4 billion rubles per year. Followingthe end of the first plan, imports of machin-ery and equipment dropped back to an aver-age of 0.3 billion rubles per year. 13 Relationswith Western firms supplying technologywere designed to be short-lived, with the aimof minimizing Soviet dependence. This aimalso guided the country’s overall import andexport policy.

The fear of relying on a potential adver-sary was one reason for the Soviets’ strongdesire to minimize dependence on the Westfor technology and products. In time, suchtechnology transfers were also limited byconstraints imposed by Western export con-trols.

The Soviets began to copy prototypes ofequipment that they had been able to obtainfrom the West. The ultimate failure of thispractice, coupled with an inability to rely ondomestic innovation, has led to severalchanges in import policies during the pastdecade: an apparent shift toward greater re-liance on Western technology; a willingness

‘JR. Amman, J. I’vl. Cooper, and R. W’. Davies, cd., TheTechnological I.e(ei of .Yo(’iet Industr?’ (New Haven, Corm.:Yale Uni\’ersity Press, 1 977).

‘‘George Ho]liday, “The Role of M’estern Technology in theSoviet Economy,’” in l.~sue.s in li’ast- 1! ‘es t {’commercial Rela-tions, Joint I+~conoic Committee, January 1979, p. 47.


to permit—in fact encourage–long-termagreements involving large volumes of for-eign exchange with Western firms supplyingtechnology; and in some cases, limitedchanges in Soviet management practices.

Although the Soviet Union is not willingto open its economy to full interdependencewith the West, more extensive use of West-ern technology is no longer feared. At thesame time, the West has also liberalized itsconstraints on export control. In the UnitedStates, for instance, the Export Administra-tion Act of 1969 as amended has reduced thelist and raised the permissible performancecharacteristics of controlled items (see chap-ter VII).

Soviet technology transfer policy is alsostrongly affected by the country’s growthpolicy, which has been revised. The SovietUnion no Ionger enjoys vast pools of under-utilized labor that could be mobilized foreconomic growth by transfers from the agri-cultural sector to industry or by increasedlabor participation rates of women. Accord-ing to the Central Intelligence Agency’s(CIA) projections, the Soviet Union will ex-perience a sharp decline in the rate of expan-sion of its labor force in the 1980’s to lessthan 1 percent per annum by 1982.14 Otherfactors, such as the distribution of popula-tion, will further strain the amount ofgrowth that can be obtained through largerlabor inputs.

This labor constraint also comes at a timeof decreasing productivity of capital inputs.Furthermore, an increasing share of Sovietcapital investment is now going by necessityto agriculture, the consumer goods indus-tries, and other sectors that do not directlyincrease the productive capacity of the econ-omy. As a result, increases in labor produc-tivity are expected to account for up to 90percent of all growth in industrial output,and virtually all growth in the agriculturalsector.

“Central Intelligence Agency, So[’iet Economic Problemsand Prospects: 1977, p. ii.

Technological improvement is to be thebasis of planned increases in Soviet laborproductivity. Industries based on traditionaltechnology are becoming less importantrelative to those based on sophisticated,rapidly changing technology. These includethe organic chemical, electronics, and com-puter industries. More traditional sectors,such as oil and gas and machine tools, arebeing modernized with technology from theelectronics industry: computer numericalcontrol for precision machine tools, com-puter analysis of seismic data, and auto-matic control of hydrocarbon production.

The growing importance of new technol-ogy, and the increasing importance of in-dustries that are experiencing rapid ad-vances in technology, coincides with a con-tinuing weakness in the Soviet economic sys-tem’s capacity to absorb and diffuse tech-nology. The U.S.S.R. problems in this areaincrease the need for importing technologyfrom the West, since the transformation ofdomestic innovation into new technology isoften slow. On the other hand, the sameproblem reduces the effectiveness of im-ported technology. The problem lies not somuch in the quality of Soviet basic research,nor in the level of theoretical knowledge, butrather in the system’s inability to turn theo-retical knowledge into prototypes, and evenmore importantly, to move rapidly from pro-totypes to large-scale industrial production.The reasons for this lie in such factors as in-sufficient incentive, poor organization, andthe rigidities that result from central plan-ning.15

In the West, innovation and new technol-ogy development are encouraged by a desireto beat the competition and thereby maxi-mize profits and cut costs. Rewards for firmsthat innovate successfully, and competitivepressures felt by those firms that do not in-novate or at least duplicate new technology a

1 sDavid Granick, so~,jet IntroductionA Depiction of the Process, StanfordJanuary 1975.

of Neu’ Technology:Research Institute,


short time after a competitor does so, pro-vide sufficient incentive to ensure Westerncapabilities for development, absorption,and diffusion of new technology.

Large research institutes are responsiblefor R&D in the U. S. S. R., but such instituteslack incentives to consider adequately thepractical application of their work. Plannersdetermine the direction that scientific in-quiry will follow in research institutions.They are encouraged to develop ideas thatqualify as innovations, but not to apply theideas to the production process. Separate in-stitutions, called Engineering Design Orga-nizations, have responsibility for applyingnew technologies, but their successes do notreflect as favorably on the research insti-tutes as does the propagation of additionalnew ideas, whether practicable or not. Re-search and development receive the greatestemphasis, followed by application engineer-ing and—with the least concentration offunds and effort–product development. Inthe West, the emphasis is reversed.

A number of other factors at the enter-prise level also inhibit the introduction ofnew technology. The use of new processesand the development of new products in-volve risks; since not all attempts are suc-cessful in the West, the risks must be mini-mized and the rewards for success maxi-mized in order to promote such efforts. TheSoviet system works in reverse, maximizingrisk and minimizing reward. Success for aproduction enterprise in the U.S.S.R. ismeasured primarily in ability to exceed theoutput quota set for the year, although re-cent reforms permit limited consideration ofother factors in determining bonuses forworkers and plant managers. The risk of try-ing a new technology or product is great,since an unsuccessful effort is bound toresult in failure to meet the plant’s outputgoal for the year. Even if the innovation ismoderately successful, the increased outputonce the new equipment is operating maynot be sufficient to offset the loss of outputduring conversion. The benefits of very suc-cessful efforts are short-lived, because whilea jump in output due to the introduction of

new technology will surely result in bonusesfor managers during the first year, they willjust as surely result in a jump in the plant’soutput quota the following year.

In the West, managers often try severalnew technologies before finding one that pro-vides sufficient long-run benefits to justifythe cost of all the experimental efforts.Similarly, managers find that new processesoften require several years to work the“bugs” out of the system. The ability tojudge a new technology on its return over along period of time, and the willingness to ac-cept the fact that most innovations willprobably not prove to be successful, are ma-jor advantages of the Western competitivesystem over the Soviet model.

Cost reduction is a major incentive for in-novation in the West. In the U. S. S. R., on theother hand, even otherwise successful in-novations often produce unacceptably highoverall costs due to the rigidities of centralplanning. A Soviet plant seeking to employ anew process often must rely on other plantsto supply related new equipment, and mayfind the necessary equipment unavailable. Inthe latter case, the plant may be forced todevelop the equipment on its own at relative-ly high cost. Similarly, a Soviet plant begin-ning to produce a new product does not havethe right to determine the price at which thenew product will be sold. This means thatthe centrally determined price may not coverthe plant product development and produc-tion costs.

The rigidities of central planning lead toanother problem which tends to inhibit thediffusion of technology. In the U.S.S.R. ex-tensive use is made of vertical integration ofproduction facilities. This minimizes theenterprise’s dependence on outside suppli-ers. While this structure does encourage afirm to develop equipment and technology tomeet its own needs, it also leads to a lack ofstandardization and to the inefficient pro-duction of equipment in small quantities.Furthermore, this horizontal independencemeans that new technology is less likely to


be transferred to other plants that mightbenefit from it. ”

In theory, the Soviet Union should have adistinct advantage over the West in the dif-fusion of technology, since new technologiesdeveloped in the U.S.S.R. are State propertyrather than trade secrets, and should be free-ly available to any enterprise able to usethem. In practice, however, communicationamong Soviet production enterprises is poor,and there may be long delays in the publica-tion and dissemination of information aboutnew developments. The slowness of journalsto publish research papers and report otherdevelopments may result in a great deal ofduplicated effort. It has been reported thatthe average time between submission of apaper and its publication in the importantSoviet journal “Electrochemistry” was asmuch as 2½ years, and individual articleshave been delayed as long as 4 years.17 Coop-eration and communication among plantswithin the same industry, and between orga-nizations in different industries, are seri-ously inadequate.

The factors mentioned above all inhibitthe introduction and diffusion of new tech-nology throughout the Soviet economy; as aresult, the share of total output in theU.S.S.R. due to the introduction of newmethods or new products is lower than thecomparable share for other industrializedcountries. When performance is measuredsolely in terms of increased output, there islittle incentive to change the form of the out-put. This leads to production of unchangedequipment over a long period of time, ofteneven after better equipment has been devel-oped.

Other forces also encourage U.S.S.R. en-terprises to continue using outdated produc-tion equipment. Because of shortages of

“John Hardt and George Holliday, “Technology Transferand Change in the Soviet Economic System, ” Issues in East-West Commercial Relations, Joint Economic Committee,January 1979, p. 74.

“M. Perakh, “Utilization of Western Technological Ad-vances in Soviet Industry, ” in East-West TechnologicalCooperation (Geneva: NATO Colloquium, 1976), p. 179.

equipment and the lack of direct connectionbetween the cost of production and the costof the final product, depreciation rates forSoviet equipment are set very low by West-ern standards. In the West, out-dated ma-chinery is taken quickly out of productionand replaced by newer equipment that willlower production costs. High depreciationrates for equipment encourage these shifts,as does a strong market for secondhandequipment. No such secondhand market ex-ists in the U. S. S. R., so the equipment con-tinues to be used at the plant. As a result,the replacement rate for Soviet equipment inmost industries is much lower than in cor-responding industries in the West.

Many of these same problems reduce theeffective introduction of new technology im-ported into the U.S.S.R. from abroad. Thisseems to be particularly true for thosetechnology transfers that require applicationof Soviet design and manufacturing engi-neering to the imported technologies and canbest be seen in U.S.S.R. attempts to dupli-cate Western technology based on trade pub-lications, product literature, plant tours, per-sonal conversations, etc., or the import of asmall number of product units to serve asmodels or prototypes for Soviet production.As previously noted, the U.S.S.R. also main-tains an extensive collection of Westernjournals, some of which are systematicallytranslated into Russian.

While the use of Western equipment asprototypes for production of new technologyreduces the need for Soviet R&D, it still re-quires significant application of domestic ef-fort, particularly in terms of developing pro-duction methods. For rare pieces of equip-ment or products that can be dismantled soas to uncover production techniques by ex-amination, “reverse engineering” is relative-ly simple. With more sophisticated products,such as integrated circuits or petrochemi-cals, however, reverse engineering is muchmore difficult and impractical.

One of the highest cost components in in-novation in the West, and one of the greatadvantages of the competitive market sys-


tern over central planning, is the determina-tion of which products and processes willeventually prove to be economically andtechnically viable. In the West, the marketsystem makes this selection based on effi-ciency and profitability, thus screening outinnovations that are not worth further devel-opment. The work done on products andprocesses that never reach the final stage ofcommercial introduction and acceptance isas much a cost of technological advancementas the work done on successful innovations.Marx considered this process to be a majorflaw in the capitalist economy–a wastefulmisallocation of resources. The innovationengendered by this method of selection, how-ever, tends in the long run to more than com-pensate for its real costs. Thus, by concen-trating their efforts only on those new prod-ucts or processes that have already beenscreened by the Western market mechanism,the U.S.S.R. is able to avoid the cost offollowing infeasible or uneconomical ideas.

According to East European officials, anaverage of 5 to 7 years elapses between thebeginning of efforts to copy a Western prod-uct and successfully readying it for produc-tion in worthwhile quantities.18 This time-lag means that the copied equipment is oftenoutdated, at least in Western terms, by thetime it is used. This period may, however, beshorter than the time it would have taken forthe U.S.S.R. to develop the product com-pletely on its own.

But the U.S.S.R. is increasingly interestedin obtaining from the West technology of thetype that is difficult to copy without assist-ance. The Soviet desire and willingness toseek more active forms of technology trans-fer is enhanced by the rate at which Westerntechnology is advancing in such leading in-dustrial fields as petrochemicals, electronics,and precision instruments. In the past, if thetechnology embodied in a piece of equipmentcould be duplicated within a few years, theU.S.S.R. could remain only slightly behind

the level of technology being used in theWest. Now, where technology is advancingrapidly, keeping up with the West is moredifficult, and there is pressure to increase thespeed with which technology is importedfrom abroad, assimilated, and diffused.These circumstances also encourage greateremphasis on more efficient selection of tech-nology imports.

Studies by Western specialists have notedseveral factors that make Soviet technologyacquisition less efficient than it could be.One frequently voiced criticism is the lengthof time it takes for the Soviet Union, once adecision has been made to import certainequipment or technology, to decide whichnation and firm will supply it, and then to ac-cept delivery and get the equipment set upand into working order. One study has com-pared the time required for the U.S.S.R. toaccomplish this with the average time re-quired in the West in the chemical andmachine-tool sectors. It found first, that theU.S.S.R. required about twice as long to signa contract for a particular need as wouldhave been the case in the West. This was dueto several factors. Initial inquiries from theSoviet Union were frequently vague, and theform of the final order was often differentfrom the original specifications. The studyconcluded that vagueness at the initial stageprobably results from a genuine lack of Sovi-et knowledge or decision on what will be thebest choice, rather than from any deliberateattempt to make the process more difficult.

Second, the Soviets require much more ex-tensive documentation than other countries.While some of this may be attributed to alack of trust on the part of Soviet trade of-ficials, there is no doubt that the additionaldocuments ultimately make it easier for theU.S.S.R. to assimilate and possibly dupli-cate the technology being provided.

Third, there is no direct contact betweenthe supplier of technology and the final user.This is an important source of delay in theacquisition process. The supplier must workwith the Foreign Trade Organization which


handles that type of equipment, and commu-nication between the supplier and user takesmuch longer and is subject to greater possi-bilities of misunderstanding than would bethe case in the West. Inexperience in the in-stallation, operation, and maintenance ofcomplex equipment, along with poor man-agement and planning, frequent shortages ofadequately trained personnel to learn tooperate and repair equipment, and problemswith the quality of raw materials or other in-puts to be processed with the new equip-ment, are additional factors that lengthenthe time between equipment delivery andproper startup. ”

Delays, the desire to reach certain produc-tion levels within a set period of time, andthe inability of Soviet industry to supplysufficient equipment to meet those goals, arealso important factors in the Soviet decisionto import machine tools and chemical equip-ment. Once a decision to import is made, theuser typically seeks the best equipmentavailable. This leads to the purchase ofequipment with performance characteristicsthat exceed anything the U.S.S.R. is itselfcapable of producing.

The Soviet Union seems to be increasinglyaware of the need to use foreign trade andtechnology acquisition to improve its eco-nomic performance. Foreign trade is nolonger viewed as a necessary evil; in fact,there is a growing awareness that the de-mands of Western markets can have a posi-tive effect on the quality of goods producedfor export, and thus on the level of quality inthe entire economy. Some of the hard curren-cy earned by an enterprise’s exports is beingreturned to the enterprise, providing an in-centive to improve the technology used bythe plant, as well as the means by which theenterprise can afford to import additionalWestern technology .’” Importing Westerntechnology has become more attractive dur-ing the 1970’s, as Western suppliers havecompeted for the Soviet market, as long-term credits have been made increasingly

l“l)hilip IIanson and T’Y1. R. }Iill, unpublished manuscript.“’l{olliday. op. cit., p. 55.

available, and as Western firms have becomeincreasingly willing to accept product buy-back provisions as a means of financingtechnology imports.

The increased attractiveness of technol-ogy transfer, coupled with the U.S.S.R.’sgrowing need, has resulted in more pur-chases of machinery and equipment from theWest, together with the use of cooperationagreements and other arrangements withWestern firms and countries to promotetechnology transfer. The CIA and othersources have estimated that as much as 10to 12 percent of total Soviet investment inmachinery and equipment has come fromabroad during the 1970’s. While purchasesof equipment from the West have increasedrapidly, purchases of licenses have beengrowing quickly as well; according to Sovietofficials, license purchases are expected toincrease even faster than equipment pur-chases. 21

The U.S.S.R. has signed Government-to-Government cooperation agreements withmost countries of the West since its initialagreement with the United States in 1972.Some 150 authorized projects are eitherunderway or planned on the basis of thesetechnology agreements with the UnitedStates. A number of American, West Euro-pean, and Japanese firms have also signedprivate cooperation agreements with theState Committee for Science and Technol-ogy. These cooperation agreements havebeen concentrated in high-technology areassuch as electronics, computers, instruments,and various types of engineering.

But while the U.S.S.R. has expanded thenumber and variety of technology transfermechanisms available to it, the most effec-tive form of technology transfer, the jointventure, has not been permitted. Joint ven-tures with Western interests have been usedin Yugoslavia since 1967, in Romania since1971, and in Hungary since 1972.

~)Z. Zeman, “East-West ‘1’echnology Transfers and TheirImpact in Eastern Europe, ” in East- 14’e.st 7’ethnological(’oop<~ration, op. cit., p. 171.


It is very difficult to estimate the actualimpact of Western equipment and technol-ogy on the performance of the Soviet econ-omy. The available information does noteven permit an accurate determination of theshare of Soviet capital equipment that comesfrom the West, although most specialistswho have studied this problem estimate theshare to be between 4 and 6 percent. This lowlevel is the combined result of the shortageof hard currency in the U. S. S. R., the Sovietpolicy of wanting to avoid excessive depend-ence on the West, and Western export con-trols.

In sum, however, a general picture ofSoviet import policies and their effectivenessmay be drawn. The U.S.S.R. has had a longhistory of systematically utilizing Westerntechnology to compensate for domestic eco-nomic shortcomings. The present systemthrough which decisions regarding importedtechnology are made is incompletely under-stood in the West, and is characterized by itscomplexity and slowness. The prioritizationof technology for import seems to be domi-nated by the availability of hard currencyand the potential economic and military im-pacts of the technology, but no consistentand universally applicable set of criteria hasemerged. The Soviets are well-informed,however, about Western technologies underconsideration and their selections usually re-flect careful evaluation of the properties ofthe technology relative to their specificneeds.

The absorption and diffusion of Westerntechnology in the U.S.S.R. have been re-tarded by structural features of the Sovieteconomy and the rigidities inherent in cen-tral planning. The Soviets appear to beaware of these defects and may attempt tocorrect them with further purchases ofWestern management and other know-how.Meanwhile, the economic impact of importedtechnology is not as great as it might havebeen on a Western nation purchasing on asimilar scale.

THE ECONOMIC IMPACTS OFWESTERN TECHNOLOGY

Several factors affect the degree of eco-nomic benefit to be derived from the pur-chase of any technology. Obviously the ini-tial selection is important. In situationswhere the availability of hard currency posesrestraints on the amount of technology thatcan be acquired, a Communist country can illafford to make a poor choice—either in termsof the industry or sector singled out as liableto benefit from Western technology, or in theselection of a particular machine or processfrom all those available in the West. The cri-teria that ideally govern this choice includefundamental investment decisions (thechoice of capital versus labor-intensive tech-nologies); the sophistication of available do-mestic technology relative to the importedtechnology; the indigenous capabilities ofthe country’s R&D sector; and the availableinfrastructure.

A Western technology may prove econom-ically beneficial in several ways. First,assuming the existence of the necessaryinfrastructure, including trained manpower,the productive capacity of an industry maybe enhanced. Even if no diffusion of thetechnology occurs, this may be a net gain tothe economy. Of course, in the absence of in-frastructure, the new technology may pro-duce a net loss in macroeconomic terms. Thisis the case with “resource-demanding’ tech-nologies, i.e., those that require substantialcapital or labor inputs before they becomeoperative.

Second, the economic benefits of the tech-nology may be enhanced if it can be used toincrease productivity in other industrial sec-tors, or if the technology embodied in im-ported equipment can be replicated in equip-ment produced by the domestic economy.Such diffusion requires certain capabilities


in the domestic R&12 sector, yet this alone isnot sufficient to close a technology lag orgap. The true test of the effectiveness oftechnology transfer is not only whether im-ported technology can be diffused at a tech-nological level comparable to that of theWest, but if it can also be the basis of domes-tic R&D efforts to upgrade it. It is only whenimported technology can be fully absorbed inthe economy—and improved on—that tech-nology gaps can be reduced.

It is generally true that innovations in theSoviet economy have followed their intro-duction in the West. This impression is sup-ported by a number of studies, some of themconcentrating on a single industry, otherstaking a broader perspective and attemptingto measure the effects of technology transferon Soviet productivity, income, and techno-logical level.

The impact of Western capital equipmenton Soviet economic performance appears tobe much larger than the small Western shareof total capital stock would suggest. Thedecision to import technology and equip-ment is based on the judgment that it willproduce better results than if that moneywere spent on domestic equipment. Thus,theoretically at least, the worth of a givenunit of imported equipment has a greater ef-fect on economic performance than the sameunit’s worth of the domestic equipment forwhich it is being substituted.

Whether all import decisions are madewith net productivity as the deciding factoris, however, open to question. Import deci-sions are based partly on noneconomic cri-teria, and the Foreign Trade Organizationnegotiating a purchase often does not knowthe grounds for the decision or the net effectof the purchase on the industrial sector. Thisis not only due to a lack of communicationbetween organizations responsible for put-ting any new process into production, butalso to the administered price system whichdoes not reflect relative scarcities. Withinthe Council for Mutual Economic Assistance

(CMEA), a growing body of literature on theuse of foreign trade indexes, which would ad-dress this problem, has appeared. But suchindexes are not used extensively and provideonly one of many kinds of information onwhich import decisions are based. It must benoted, however, that in spite of the Soviets’inability to determine precisely the profit-ability of proposed technology imports, theyhave rarely had to make decisions on proj-ects of marginal value. Owing to the rela-tively small volume of trade, the Sovietshave had their choice of transactions inwhich productivity gains were clearly high.

An econometric study conducted jointlyat the Stanford Research Institute andWharton School constructed an input-out-put model of the Soviet economy (SovMod),which attempted to determine the effect ofthe growth in equipment and technology im-ports from the West between 1968 and 1972on Soviet overall economic performance.22

The study concluded that if Western exportsduring this period had stayed at 1968 levels,the Soviet Union would have had an in-stalled stock of Western equipment that was20 percent below the actual 1973 level, andthat Soviet growth during this period wouldhave dropped from 32.1 to 29.6 percent. Thisconclusion implies that Western equipmentaccounted for approximately 2.5 percent ofthe U.S.S.R.’s rate of growth during thisperiod, or several times the share of thisequipment in Soviet capital investment.

Studies like this are controversial, how-ever. The assumptions on which the model isbased have been questioned and other re-searchers have reached significantly dif-ferent conclusions using the same data. Ithas been contended, for instance, that theexistence of significant differences betweenthe productivity of Western and Soviet capi-tal equipment is not supported by statisticalanalysis. 23 This finding implies that the con-tribution of Western equipment to the per-

“See Herbert Levine and Donald W. Green, “Implicationsof Technology Transfer for the U. S. S.R., ” in li’a.st-u’est 7’ech -nologicul Cooperation, op. cit.

“Philip Hanson and M. R. IIill, unpublished manuscript.


formance of the Soviet economy is not sig-nificantly different from the contribution ofSoviet equipment. More than anything else,the conflicting results obtained from thesemacroeconomic approaches point to the wis-dom of reverting to the study of the actualeffect of Western equipment and technologyon the capacity of individual sectors of theSoviet economy. A disaggregate approachin which each industry is examined individ-ually to determine what equipment and tech-nology has been transferred, how well andhow quickly it has been absorbed and dif-fused, and what changes there have been incomparative levels of technology, may bemore productive and accurate. It must benoted that such information is very difficultto obtain even in the West, where access toinformation is relatively free. The details as-sembled here must necessarily be taken aspartial and impressionistic. This report willconcentrate on two in-depth examinations ofthe industries in which Western technologyis most important—the oil and gas equip-ment industry, and the computer industry.This will be preceded by brief discussions ofthe other Soviet industries that have re-ceived significant attention from researchersconcerned with Western technology trans-fer; they are chemicals, machine tools, andmotor vehicles.

Chemicals

The Soviet chemical industry has beenlong and heavily dependent on the West as asource of both technology and productivecapacity. The subsectors of the chemical in-dustry in which technology has remainedfairly traditional–basic inorganic chemicalsand the production of phosphates and po-tash fertilizers—have performed relativelywell. But performance in petrochemicals andnitrogenous fertilizers has lagged consider-ably. In the latter two areas, modern tech-nology in the West has changed rapidly inways that have allowed a significant expan-sion of plant size at reduced productioncosts. The Soviet chemical industry has beenunable both to duplicate the technology andto keep up with the constant development of

new processes and products in the petro-chemical field. The demand for Westerntechnology in these areas is significant, notonly for this reason, but also because theseare areas in which the U.S.S.R. has sought torapidly expand output. These two factorshave combined to demand large expend-itures of foreign currency for turnkey plantsthat will provide modern technology andrapidly expand the industry’s productivecapacity.

In the late 1950’s and early 1960’s, whenthe U.S.S.R. initiated its drive to importtechnology in chemicals, the Soviet chemicalindustry seemed likely to remain about 10years behind the West in a number of areas.It was then taking 6 to 7 years to import andabsorb technology that was already about 3or 4 years old in the West. In recent years,however, the chemical industries of the Westhave experienced excess capacity and therate at which new plants and equipmentemploying the latest technology have beencoming onstream has slowed considerably.The chemical engineering companies thatprovide new technology and equipment havenot slowed their innovations, and have beenselling their latest technology to anycustomers in the market for new capacity.As a result, some of the new plants beingbuilt in the U.S.S.R. incorporate technologythat is as advanced as that coming onstreamin the West.

But despite significant contributions fromWestern plants, the Soviet chemical indus-try continues to lag considerably in the in-troduction of new products and technol-ogies, and the output profile of the industryremains biased toward the production ofchemicals based on older and simpler tech-nologies.

In the case of plastics, for example, therehas not been a single documented instance inwhich the U.S.S.R. first produced a majorplastic material; in fact, the U.S.S.R. isusually the last industrialized economy tobegin commercial production of each major


group.24 In synthetic fibers, total productionin the U.S.S.R. between 1955 and 1973 ex-panded at a more rapid rate than in Westerncountries, but it took 11 years for syntheticsto increase from 10 to 33 percent of allchemical fibers produced, while in the UnitedStates, Japan, Britain, and West Germany,this diffusion of new technology took only 5to 8 years.25 Even when synthetic fibersreached a significant share of total chemicalfibers, output was dominated by those syn-thetics based on older technology.

These impressions were confirmed in theCIA’s recent report on the sale of turnkeyplants to the Soviet chemical industry andthe share of Soviet chemical output ac-counted for by Western plants.26 This study,based on a survey of more than 100 turnkeychemical plants purchased from the Westbetween 1971 and 1977, concluded that theSoviet Union depends heavily on Westernchemical technology. The U.S.S.R. placedorders for slightly more than $3.5 billionworth of turnkey chemical plants between1971 and 1975, and ordered an additional $3billion or more during the following 2 years.The study concluded that these imports didnot lead to a noticeable advance in the levelof overall plant technology in the U.S.S.R.Although since plants ordered as early as1971 have only been in place for a few years,the effect of technological diffusion fromthem may only begin to show up over thenext several years. The study also concludedthat gains in overall efficiency and productquality have come more slowly and at great-er cost than Soviet planners had anticipated.

The value of Western plants ordered be-tween 1971 and 1975 equaled an estimated20 to 25 percent of total Soviet investment inchemical industry equipment during thatperiod, an amount that may have been high-er than planners had in mind. When domes-tic and East European equipment supplierswere unable to meet commitments, the

24 Amman, Cooper, and Davies, op. cit., p. 275.‘51 bid., p. 53.“Central Intelligence Agency, “Soviet Chemical Equ@-

ment Purchases From the West: Impact on Production andForeign Trade, ” October 1978.

U.S.S.R. was forced to increase orders fromthe West in order to meet planned outputgoals. The East European chemical industryhas concentrated in the more traditionaltechnology areas of basic chemicals and fer-tilizers. Soviet output based on plants fromEastern Europe is significant for severaltypes of chemicals, with 20 percent of sul-furic acid output, 25 percent of ammonia out-put, and 40 percent of urea production in1975.

In comparison, the CIA estimated thatplants supplied by the West accounted in1975 for 40 percent of the Soviet output ofcomplex fertilizers, 60 percent of polyethyl-ene production, and 75 to 85 percent of poly-ester fiber output. In addition, they wereresponsible for 72 percent of new ammoniaproduction capacity to come onstream from1971. to 1975, and 85 percent of the sched-uled new ammonia capacity for 1976-80.Some plants supplied by Eastern Europealso incorporated some Western technologywhich was thereby transferred to theU.S.S.R. indirectly.

The largest share of chemical plants sup-plied to the U.S.S.R. from the West camefrom Italy (26.4 percent), followed by France(22 percent), West Germany (17.5 percent),the United States (14.3 percent), and Japan(14 percent). The prominence of WesternEuropean nations is largely explained bytheir willingness to accept product buy-backprovisions in payment,

All Soviet orders for U.S. plants camewhile the U.S.S.R. had Export-Import Bank(Eximbank) credits available, but technologyhas also been supplied by American multina-tional firms with subsidiaries in countriesthat provide the U.S.S.R. with competitivefinancing. This means that although Ameri-can chemical firms supply the technology,the United States does not receive the eco-nomic benefits of major equipment ordersand is unlikely to do so until Eximbankfinancing is once again available to theU.S.S.R.

The CIA conjectures that the U.S.S.R.has had only limited success in attempts to


copy Western chemical technology, althoughit is still possible that the new ethyleneplants being built by the U.S.S.R. might in-corporate some features of larger ethyleneplants that have been supplied by the West.The increasing complexity of modern equip-ment not only makes it more difficult for thetechnology in the equipment to be copied,but also makes it increasingly difficult todetermine the origin of a given technology.

Technology transfer in the chemical sectorhas also been felt indirectly in other sectors,particularly agriculture. A recent study byPhilip Hanson of the University of Birming-ham attempted to measure the economic im-pact of Western technology in the Sovietmineral fertilizer industry by first estimat-ing the increased fertilizer output that couldbe attributed to Western plants, and then es-timating the increased agricultural outputattributable to expanded supplies of thesefertilizers. Hanson concluded that between1970 and 1975 the Soviet Union achieved ap-proximately 4 billion rubles of additionalagricultural output by using fertilizer plantsimported from the West and installed be-tween 1960 and 1975, at a cost of approx-imately 2 billion rubles.27

All studies of the Soviet chemical industryconclude that the problems experienced bythe U.S.S.R. are in developing technologyand bringing it into industrial production inareas where technology is changing rapidly,where there must be close communicationbetween research and production work, andwhere the number of unsuccessful experi-ments is high compared with the limitednumber of successful innovations. In thefuture, the Soviet chemical industry mayneed to choose between continued relianceon Western technology and turnkey plantcapacity, or scaled-down targets for produc-tion growth, concentrating on increasesbased primarily on current technology.

Machine Tools

The Soviet Union has the largest stock ofmachine tools in the world; in the early1970’s, its inventory of metal-cuttingmachine tools was about one-third largerthan that of the United States. Sovietmetalforming equipment also outsizes thecomparable U.S. stock. When measured interms of performance and capability, how-ever, even Soviet specialists have admittedthat American machine tools exceed theirSoviet counterparts .2’

Demand for machine tools still far exceedssupply in the U.S.S.R. This is due in part tothe inefficient use of existing equipment.Soviet machine-tool output is dominated byrelatively simple, general purpose machines,which are more easily built than the morecomplex equipment that machine-tool usersincreasingly demand. More than 60 percentof Soviet machine tools have been mass-pro-duced with few design changes over manyyears. 29 In contrast, most machine tools inthe United States are specialized modelsdesigned for a specific purpose and built insmall quantities according to the needs ofeach customer.

The shortage of specialized machine tools,combined with the need for many plants tobe self-sufficient, means that specializedmachine tools built in the U.S.S.R. are oftendesigned and produced by the users them-selves. In these circumstances it is relativelyunlikely that any machine-tool innovationswill be diffused through the industry asrapidly as they would be if a regular ma-chine-tool supplier had produced the innova-tion. The user-builder has no incentive to de-ploy new technology elsewhere.

Studies of the machine-tool industry con-cur that traditional Soviet machine tools—drills; lathes; boring, grinding, milling equip-ment; and transfer lines—do not differ sig-

“Philip Hanson, “The Impact of Western Technology: ACase-Study of the Soviet Mineral Fertilizer Industry, ” pre-sented at the Conference on Integration in Eastern Europeand East-Yt’est Trade, Bloomington, I rid., October 1976.

‘sAmman, Cooper, and Davies, op. cit., p. 122.“’James Grant, “Soviet Machine Tools: Lagging Technol-

og and Rising I reports,”” unpublished paper, p. 25.


nificantly from those used in the West,although Western models often perform bet-ter in terms of operating speed, tolerances,or durability. The greatest difference be-tween Soviet and Western technology lies inthe area of advanced machine tools, such asnumerically controlled equipment. Due totechnological lags in the Soviet electronicsindustry in the 1960’s, Soviet numericallycontrolled machine tools began to fall in-creasingly behind the Western technology.In 1968 the Ministry of Machine Tools andthe Ministry of the Aviation Industry–thelatter an important user of numerically con-trolled equipment—decided to step up pro-duction. As a result, output of these machinetools in the U.S.S.R. jumped from 200 unitsin 1968—about 7 percent of U.S. produc-tion—to about 2,500 in 1971, exceeding thelevel of American output.30

This rate of growth was made possible byassistance from the West. Since 1968, theU.S.S.R. has signed agreements with firmsin Japan, France, and West Germany. At thesame time, Soviet cooperation with EastEuropean enterprises in this field has also in-creased. East Germany has been a leader inthe development of computer numerical con-trol having shown models at the LeipzigFairs as early as 1972.3’ Computer numericalcontrol, which first appeared in the UnitedStates in the late-1960’s, allows a great dealof flexibility and precision. There are no in-dications that the Soviets have been able toimprove on this technology, however.

Furthermore, even with these boosts, anddespite lengthy effort, the U.S.S.R. has ex-perienced a great difficulty in trying to copyWestern gear-cutting and grinding technol-ogy. This may be an indication that the So-viet Union will continue to find it difficult toraise the productivity, reliability, and levelof precision of conventional machine tools,and will have problems keeping abreast oftechnological development in sophisticatedmodels .32

301 bid., p. 20.~lAmman, Cooper, and Davies, OP. Cit., P. 190.“Grant, op. cit., p. 38.

The latter have been restricted by West-ern export controls, but during the past fewyears, as export regulations on advancedmachine tools have been liberalized, theshare of advanced machine-tool imports hasrisen.

Motor Vehicles

The Ford Motor Company first helpedprovide technology and equipment forSoviet automobile plants at Gorky andMoscow in the 1920’s; since then, theU.S.S.R. has continued to look to the Westfor assistance with motor vehicle produc-tion. The initial contract signed by Fordcalled for the company to transfer any newtechnology developed during the 9 contractyears, yet the U.S.S.R. chose not to in-troduce the V-8 engine developed by Fordduring this period, electing instead to staywith older and somewhat simpler technol-ogy. Soviet specialists reportedly recognizedlimits to their technological capabilities andthe problems they might have in absorbingnew technology .33 These problems have per-sisted. Adequate R&D facilities have neverbeen established in this field and the Sovietshave difficulty keeping abreast of techno-logical innovations.

Although the stock of trucks in Westerneconomies is usually several times smallerthan that of private automobiles, until adecade ago Soviet vehicle output was domi-nated by trucks. Owing to lack of productioncapacity, Soviet planners very early on re-stricted private ownership of automobiles.In the late-1960’s, however, in response to aplan to increase worker incentives throughmajor concessions to consumers, the deci-sion was made to rapidly increase the pro-duction of cars.

In order to accomplish this, the SovietUnion’s automobile industry received amassive infusion of Western technology. It

“John Hardt and George Holliday, “Technology Transferand Change in the Soviet Economic System, ” in Issues inEast-West Commercial Relations, Joint Economic Commit-tee, January 1979, p. 71.


contracted with Fiat for a huge automobileplant at Tolgliatti . The Italians coordinatedthe selection and integration of technologyfrom various sources. Some $550 million inWestern equipment, primarily machinetools, were purchased from the West for theplant, with additional Soviet investment, in-cluding plant construction, coming to atleast another $1 billion. ”

Fiat was also asked to provide a largenumber of technicians and to train others inItaly. Ultimately 2,500 Western techniciansassisted in equipment installation, training,and startup, and 2,500 Soviet technicianswere trained in Italy .35 This direct personalcontact was instrumental in reducing theproblems of absorbing the new technology.

One important test of the U.S.S.R.’s abili-ty to absorb and diffuse the Fiat and otherWestern technology would measure im-provements in the technology employed atthe Tolgliatti plant and duplications of thetechnology at other plants. Significantly, theU.S.S.R. has twice chosen to renew the con-tract with Fiat, first in 1970 and again in1975. It would appear from this that thetechnology employed at the plant has notbeen significantly improved upon by theSoviets and that further Western importsare needed. Moreover, in the Soviet motorvehicle industry, as in most other industries,output increases more from the expansion ofexisting plants than from the construction ofnew ones. The technical level of the ex-panded plant tends to be similar to that ofthe original plant, leading to growth, but lit-tle modernization.36

A desire for new production technology,and for a rapid expansion in capacity, led toa second major project involving the trans-fer of Western technology to the Sovietmotor vehicle industry in the past decade. Inbuilding the huge Kama River truck plantwith assistance from the West, the U.S.S.R.had hoped to entice a Western truck manu-facturer to provide the same leadership that

“i bid.. p. 6H.“’I bid., p 7’7“)1 bid., p. 75.

Fiat had for the Tolgliatti plant. But noWestern firm was willing to act as generalcontractor. This was probably due to a num-ber of factors, including the size of the proj-ect and awareness of the difficulties ex-perienced by Fiat in dealing with the Sovietsystem. At the time, the U.S. Secretary ofDefense opposed having an American com-pany act as contractor for a plant capable ofproducing vehicles that might eventually beused for military purposes. The U.S.S.R.therefore served as its own general contrac-tor, selecting firms to supply the major com-ponents of the plant, who then chose subcon-tractors in turn.

Problems at Kama River appear not tohave resulted from the choice of major sup-pliers, but from poor coordination and in-tegration of technologies from differentsources. This is a frequent problem and ap-pears to be a major reason behind Sovietwillingness to spend so much of its hard cur-rency for Western turnkey plants. TheU.S.S.R. is as much in need of expertise in in-tegrating technologies and systems into effi-cient, highly automated plants as it is inneed of new technology.

These industries—chemicals, machinetools, and motor vehicles—have been themost dependent on technology and produc-tion capacity of Western origin. AlthoughWestern technology has made crucial contri-butions in all three, it has neither eliminatedSoviet lags with the West nor apparentlymuch aided domestic abilities to absorb, dif-fuse, and improve on the technology. TheSoviet computer industry has also been tech-nologically dependent on the West, butWestern export controls and corporate in-terests have limited the computer produc-tion capacity that could be imported by theU.S.S.R. The question of technology trans-fer has become vital in the Soviet oil and gasequipment industry, due to Soviet needs andthe state of energy supplies worldwide.These two industries are reviewed in depthbelow, in discussions of the comparativelevel of technology in these industries, theextent of technology transfer from the West,the predominant forms that these transfers


have taken, and the overall impact of West-ern technology transfer on industry per-formance.

Computers37

To an increasing extent, the computer in-dustry plays a key role in the overall plan-ning, development, and capabilities of theSoviet economy. Because of the usefulnessand interchangeability of computer systemsin both civilian and military applications, thequestion of technology transfer is relevant toU.S. policy for both economic and securityreasons.

The United States is presently the leadingdeveloper of computer technology, a positionit has held since the early 1950’s. For foreignproducers, American dominance in the in-dustry has meant not only extensive contactwith American products and services, butalso problems of competition from Americanfirms in overseas markets. Restriction ofAmerican inroads by competing Stateswould, in practical terms, have meant de-priving themselves of the advantages thataccess to American technology could offer.

During the early years of the developmentof the U.S.-dominated international com-puter community, the U.S.S.R. remained ata distance. This choice reflected both Sovietdesire to develop an indigenous capabilityand a narrow perception of the potentialvalue of computers. In the late-1950’s, how-ever, the Soviet view of the computer beganto change. Beyond its capabilities in themilitary sector, computer technology wasnow seen as crucial to low-level data process-ing and industrial process control.

The Soviets thus discovered that somecontact with Western computer producerswas necessary to develop a domestic com-puter industry suitable to the needs of theireconomy. While they possessed significant

“See Seymour E. Goodman, “Soviet Computing and Tech-nology Transfer: An Overview, ” in World Politics, vol. XX-XI, No. 4, July 1979, pp. 539-570.

Photo credits: Control Data Corporation

Soviet computer equipment displayed in a recent trade fair

domestic potential for hardware R&D, theychose to utilize the Western market mecha-nism to weed out those new processes andtechnologies that were not viable. This pol-icy was particularly useful in the computerindustry, with its rapid rate of technical in-novation. Thus it is not surprising that theSoviets developed a close relationship withthe Western world in this industry.

The Soviet-U.S. computer technology gaphas grown over the years. In 1951, the firstSoviet stored program electronic digitalcomputer became operational, less than ayear after its American counterpart. Themachine was put into serial production only2 years later, again less than a year behindthe United States. These early successessuggested a substantial indigenous com-puter capability.


There was little transfer of technologyduring this period, despite a certain similari-ty between Western and Soviet hardware.Technical literature was the major vehiclefor what little interaction took place.

Unlike the United States, the SovietUnion did not have a well-developed busi-ness equipment industry, nor an establishedorganizational structure of user support.Close interaction between the designers andfinal users of equipment is typical withmarket-oriented firms like IBM; such rela-tionships are virtually nonexistent in theU.S.S.R. This interaction is vital in the com-petitive and fast-changing business equip-ment market, and it provided a crucial ad-vantage to U.S. firms in developing new andusable technology.

The Soviet military could have divertedsufficient resources into the computer in-dustry to close the widening gap with theUnited States in the early 1960’s; apparentlyit chose not to do so. While the Sovietsfollowed the basic pattern of Western tech-nical achievement, the pace of innovation inthe U.S.S.R. fell far behind. It produced nomajor new practical contributions and itbuilt functional equivalents of some Westernproducts long after they had originally beenintroduced.

The Soviets began to change their atti-tude toward the computer in the early1960’s, when recordkeeping and data-proc-essing tasks required the production of anupward-compatible series of computers.Such a system consists of a sequence of in-creasingly powerful computers that havebeen designed so that programs and datarun on a smaller machine can also be run onthe larger ones. The first Soviet attempt toproduce such a series came in 1965. The U.S.functional counterpart to this machine hadappeared in 1960. Here the U.S.S.R. initi-ated its policy of minimizing technologicalrisk by using a proven U.S. system as amodel for its own efforts.

In 1966-67, the Soviets began working onanother upward-compatible series of com-puters, which attempted to copy the archi-

tecture of an IBM system that had appearedin 1965. The attempt was abandoned afterthe production of several machines.

In its next attempt, however, the U.S.S.R.organized a cooperative effort with five otherCMEA countries–Bulgaria, East Germany,Hungary, Poland, and Czechoslovakia–allof which had computer industries. East Ger-many enjoyed access to IBM technology.

The fruits of this collaboration, the Ryadcomputers, began appearing in late-1972.They are not reverse-engineered from theIBM model; rather, they are functional du-plications. The Soviet-led consortium re-quired as long to design the Ryad com-puters, put them into production, and adoptthem to IBM operating software as it tookIBM to design, produce, and place the orig-inal family in operation. In spite of this, theRyad system represents a significantachievement. It gives the U.S.S.R. and East-ern Europe a much improved indigenouscapability for the production of computers,and has provided extensive experience in thedesign of computers based on foreign mod-els. Ryad computers are still not produced atthe rate at which IBM produced the originalline, nor is the performance of the Ryadequipment strictly up to the standards of theIBM models. Nevertheless, U.S.S.R. andEast European satisfaction with this pro-gram is indicated by the decision to moveahead with Ryad 2, also based on IBM mod-els. By early 1977 most of these new modelswere well into the design stage, and the firstprototypes of some models began appearingin 1978.38

The Ryad 2 program will concentrate onincreased production of higher quality pe-ripheral equipment, an area of significanttechnology lag and a source of past com-plaints by customers in the U.S.S.R. Thecore memory capacity for most Soviet com-puters is relatively small compared with theoperating speed of the central processing

‘“N. C. Ila\’is and S. k:. (;oodman, “rI’he So\riet BIOC’S LJni-f ied System of Computers,”” in (’omputing Surl~e.v.s, J u n e1978, pp. 109-110.

54 -202 0 - 79 - 16


unit, thus limiting system capabilities. It ishoped that core storage for Ryad computersin this new series should at least be doubled,if not quadrupled. 39

The U.S.S.R. also cannot match the Westin the quality and availability of magnetictapes and disks. IBM introduced the firstmagnetic disk in the early 1960’s, permittingthe storage and readier availability of vastquantities of information compared to tape.The first Soviet computers to use disk stor-age may have appeared as early as 1970, butit was not until 1973 that such equipmentregularly appeared with any models .40

Large memory capacities and input-out-put devices are important for a variety ofdata-processing applications. A larger pro-portion of Soviet input continues to be of thepapertape and cardreader types, varietiesthat are being progressively phased out inthe West. Soviet output devices, such asprinters, plotters, and graphic displays, alsoleave much to be desired compared withWestern systems. Much of the best Eastern-bloc input-output equipment is produced inEastern Europe rather than in the U. S. S. R.;a number of models are produced underlicense from Western firms. Soviet softwarecapabilities have been limited by each of theabove-mentioned factors. By making use ofthe IBM operating system for the Ryad com-puters, the U.S.S.R. was able to gain accessto software which required only minor modi-fication for use on Ryad hardware, comparedwith what would have been involved in de-veloping such software independently. De-signing its own software is a major Sovietgoal, yet it is questionable whether suchcopying aids this process.

Application programs tell the computerhow to process data that is entered. Prob-lems with hardware have held back applica-tion software development in the U. S. S. R.,despite recent improvements. The lag be-tween Soviet and Western software capabil-ities, as in other areas, has systemic origins.

“’Amman, Davies, and Cooper, op. cit., p. 386.““Da\ ’is and Goodman, op. cit., p. 98.

The Soviets lack the Western motivation tolook for more efficient and less expensiveways to accomplish given tasks.

Calculating the precise value of computersshipped from the West to the U.S.S.R. is dif-ficult, due to the nature of Western andSoviet trade data. Neither provides break-downs into categories for computers, andcase-by-case information about sales islimited. One report, based on detailed tradedata for each Western country that suppliescomputers to the U. S. S. R., has produced thefigures shown in table 36. Several industryexperts believe these figures to be mislead-ingly low, particularly as regards productstransferred by American firms via theirWestern European subsidiaries. These salesare not completely accounted for in Depart-ment of Commerce statistics. Orders placedin 1977 and later indicate that the downwardtrend observed in 1977 has been reversed,and 1978 U.S. data show a near return to therecord 1976 levels.

The commercial interests of Western com-puter manufacturers and export controlshave together strictly limited the transfer ofmanufacturing technology to the U.S.S.R.Only one Soviet plant order–for purchase ofa Japanese facility for production of mini-computer memory devices—has been re-corded. In addition, Romania and Poland(and perhaps other East European nations)have purchased Western licenses for produc-tion of several computers and peripheralequipment.

Table 36.—Western and U.S. Computer Sales tothe U. S. S. R., 1972-77

(in millions of dollars)

Sales from Total sales fromUnited States the West

1972 ., . . . ... $ 4.1 $ 16.11 9 7 3 4.0 15.71974 : : : : : : 3 7 2011 9 7 5 9.4 28.31976 17.2 41.61977 : : : 5.7 28.3

1 9 7 2 - 7 7 t o t a l . $441 $1501

SOURCE IRD, Inc. The Market for Computers in the PRC and the USSR (NewCanaan Corm January 1979)

Ch. X— Western Technology in the Soviet Union ● 235— .

Although the Soviet Union has not ac-quired any licenses, some of the productiontechnology obtained by Eastern Europe islikely to have been made available to it. TheU.S.S.R. has thus derived its greatestbenefits from importing computer systemsto provide models of new technology to aidthe Soviet computer R&D sector and pro-vide capabilities otherwise unavailable. Ex-port controls prevent the U.S.S.R. from im-porting the most advanced Western comput-ers, although some sales have given themunits with better reliability, software, and in-put-output capabilities than the best Sovietmodels.

Except for 1977, the 1970’s have seen anupward trend in Soviet purchases of comput-ers from the West (see table 36). Most com-puter sales are of systems costing severalmillion dollars each. Users of large Westerncomputer systems in recent years have in-cluded reservation systems for Intourist andAeroflot, analysts of seismic data for geo-logical prospecting, controllers of large in-dustrial enterprises (particularly in themotor vehicle sector), and systems for inven-tory control and management. All these ap-plications involve handling and managinglarge amounts of data. Soviet computers areless well-suited to such work in terms ofmemory and input/output capabilities, andthe software required to perform such func-tions is frequently unavailable in theU.S.S.R. The purchase of these systems maysometimes be motivated as much by the de-sire to gain access to software as to hard-ware. The most important factor in a pur-chase decision, however, is generally thedesire of the end-user management to obtainan entire system that, with a minimum ofrisk, will safely, effectively, and reliably ad-dress applications problems.

Scientific institutes and Governmentplanners also buy Western computers toobtain good computer capability. Thesesmaller sales receive much less press cover-age than the headline-making orders formillion-dollar computers. But as plannersand scientific users have become more awareof the many uses to which computers can be

put and given higher priority to the purchaseof Western equipment, such sales havegrown in importance.

Turnkey plants imported from the Westalso frequently include computers or sets ofcomputers as part of the process controlsystem. Almost without exception, theU.S.S.R. has insisted that plants importedfrom the West contain the latest processcontrol and automation equipment. Whilethis request may be partly motivated by thedesire to obtain the embodied technology, itis also a reflection of the U.S.S.R. acuteshortage of skilled operators for many in-dustrial sectors; such automation is seen asan efficient means of reducing the labor re-quirements of new plants.

Because of its desire for maximum feasi-ble self-sufficiency in such a strategic field,the U.S.S.R. cannot be expected to become avery large customer of Western computers.The Soviets will continue to rely on Westernimports to meet certain needs. Such pur-chases may even reach a level several timeshigher than that of the past, but computerneeds will compete with needs for otherequipment and materials. Imports will tendto be restricted to those cases where the costof doing the work without a computer is ex-ceptionally high.

In addition to these constraints on theSoviet side, Western export license restric-tions inhibit West-to-East computer sales.Often, the sales that are prohibited are thevery ones which the U.S.S.R. desires most,i.e., they are sales of systems with thosecapabilities that the U.S.S.R. finds it mostdifficult to produce domestically. If exportrestrictions were eased, it is likely that thepurchase of these systems would be of suffi-ciently high priority that hard currencywould almost certainly be allocated for them.Under these conditions, the volume of suchimports would probably rise sharply.

Computer sales to the U.S.S.R. tend to bewon by those firms that are most aggressivein pursuing the Soviet market. Thus, themarket share for American computers ismuch lower in the U.S.S.R. than in other


markets around the world. The Japanese,like the Americans, have not yet pursued theSoviet computer market vigorously, but theWest Europeans–particularly the Britishand French—have long sought involvementin the market.

The United States does enjoy a distinctadvantage over competitors in the quality ofits computer technology. This advantage ispartially offset, however, by the strongdisadvantage of uncertainty and delay dueto export control. Only the United Statesfails to provide its companies with early in-dications that a license can or cannot be ob-tained. Only the United States will block asale for political rather than strategic rea-sons. The United States takes longer thanany other nation to approve a license, andregularly enforces stricter licensing regula-tions than those set by CoCom. As a result,American firms are sought as supplierswhen they are able to provide productsmarkedly better than those available fromJapan or Western Europe, but not as suppli-ers of first choice when all else is equal. Thedifficulties experienced by American com-puter exporters lead to much of their busi-ness being handled out of Europe, since atleast some of the problems are then avoided.

In many industries, the amount of time re-quired for delivery is a factor in the selectionof a supplier. American computer manufac-turers should compete very well with suppli-ers from other Western countries in this re-gard, since U.S. firms often have more ex-perience in putting together custom-de-signed systems. This potential advantage isfrequently more than offset, however, by theregulatory delays a U.S. supplier may face.Even if the license is ultimately approvedwithin a reasonably short time, the initialuncertainty of the outcome of the licensingprocedure can chill the negotiations betweenan American computer supplier and theU.S.S.R. and can impose higher costs on thesupplier, the Soviet Foreign Trade Organiza-tion negotiating the contract, and the Sovietuser waiting for delivery of the equipment.

Financing is a factor only in those casesinvolving sales of computers for process con-trol. The United States sells very few proc-ess control computers. The selection of turn-key plant suppliers is highly dependent onfinancing and on the willingness of the sup-plier to accept buy-back contracts for prod-ucts produced at the plant. In both regards,the United States is at a disadvantage.Often, even though a plant is based on U.S.technology and incorporates an Americanlicense, it is financed and equipped by aJapanese or Western European firm. In sucha case, the computer for process control, likeall the other equipment for the plant, willcome from the country that is supplying thecredits for the plant. All U.S. turnkey plantsthat have been supplied to the Soviet chemi-cal industry during the past few years re-sulted from orders that qualified for Exim-bank credits, which have since been disal-lowed. No further chemical turnkey plants–and no process control computers for Sovietchemical plants—have been purchased fromthe United States since then.

It is difficult to assess the impact ofWestern computer sales on the economicperformance of the U.S.S.R. The effect ofany computer is difficult to measure in quan-titative economic terms, but one can identifythose areas of the Soviet economy that havebenefited the most from Western computers.Western computers have had a strong im-pact on the motor vehicle manufacturing sec-tor, as British and, more recently, Americancomputers have been used to control produc-tion processes at a number of plants. West-ern computers have also become importantfor the analysis of seismic data, thus bene-fiting the identification of oil and gas re-serves. Other sectors of the economy thathave benefited include the chemical indus-try, from both the process control computersin imported turnkey plants, and the Minis-try of the Chemical Industry’s purchase ofseveral computers to assist in the design ofnew chemical plants. Gosplan has received


some Western computers, but has not usedthem with optimum efficiency. The greatestbeneficiaries of Western imports have prob-ably been scientific organizations, partic-ularly those involved with nuclear physics.

In conclusion, virtually all major devel-opments in Soviet computer technologyhave first taken place in the West. TheU.S.S.R. has been a follower rather than aninnovator in the computer technology field.Once a new technology has appeared in theWest, the U.S.S.R. has usually succeeded inreproducing the technology domestically, al-though the timelag between Western and So-viet introduction of similar technologies hasnot diminished over time (see table 37).

As long as the U.S.S.R. continues in therole of follower, the technological lead of theWest is assured. Even if the difficulties ofmoving swiftly through development stagesinto actual production of hardware aresolved, the Soviets will still face difficultiesin diffusing and effectively using the hard-ware they produce. Such problems do notlend themselves to ready solutions.

Oil and Gas

The U.S.S.R. is the world’s leading pro-ducer of oil, and one of the largest suppliersof natural gas. Most of the equipment used

Table 37. —First Production of Comparable Sovietand American Computers

—Similar Date ofSoviet appearance in Lag

American computer model the U.S.S.R. (in years)——-— . ——————I B M 6 5 0 , Ural 1 1955 1I B M 7 0 2 , Ural 4 1962 7IBM 1620, : : Nairi I 1964 4IBM 7094 . . . . . . . BESM-6 1966 4IBM 360 series ES series 1972-3 6-8

Soviet lag in entering successive generations of computers

First Second Thirdgeneration generation generation

First Soviet computer 1952 1961 1972 —

First American computer 1946 1957 1965Lag (in years) 6 4 7

— — . ———aComparison of dates of first American commercial Installation and first Soviet

lndusrial production

SOURCE M Cave Computer Technology in The Technological Level ofSovief Industry, Amann Cooper and Davies eds (London 1977)

for exploration, drilling, and extractioncomes from within the U. S. S. R., with its rel-atively strong oil and gas equipment indus-try. The bulk of Soviet reserves of oil and gasis located in relatively shallow and very largefields, making it possible to reach high pro-duction levels without the most advancedtechnology.

But the Soviet concentration on theseshallow deposits reflects the country’slimited geological prospecting capabilities,which make the exploration of deeper re-serves difficult. Recently, the U.S.S.R. hasshown interest in acquiring more advancedWestern prospecting equipment, such as so-phisticated seismic mapping equipment andfield units to assist in the recovery andanalysis of seismic data. A number of com-puters have been sold to the U.S.S.R. to pro-vide this analytical capability.

The turbodrill has long facilitated signifi-cant advances in the productivity of Sovietdrilling. About 85 percent of Soviet drillingwas done by turbodrills in the early 1960’s;since 1970, the share has stabilized near 74percent. Turbodrill technology was attrac-tive because it permitted the industry to usepipe and tool joints which were readily avail-able, while reducing breakdowns and in-creasing speed. Unfortunately, however, thedrill loses effectiveness when deeper drillingis required. The high drill speed required forefficient use of the pumps that run the drillresults in comparatively short drill-bit life,so the deeper the well, the more time lost inreplacing bits. The power transfer to the bitalso becomes less effective when used withjet bits. Finally, while good for drilling inhardrock formations, the drill is far less ef-fective in soft formations. The Soviet oil andgas equipment industry has addressed theseproblems by providing improved designs fornew turbodrills, rather than by increasingproduction of rotary drills, which are mostcommon in the West, even though as early as1960 some planners recommended develop-ment work on rotary drills .4*

“Robert Campbell, Trends in the So[’iet 0/1 and Gas Zndu.s-trv {Baltimore, Md., 1976), pp. 20-22.


A 1977 CIA study of the Soviet oil indus-try pinpointed the inefficiency of Soviet drill-ing as a major reason for probable problemsin meeting future production goals.42 TheCIA estimates that the U.S.S.R. will need 50percent more drilling rigs by 1980 to meet itsdrilling targets. The U.S.S.R. hopes, how-ever, to reach its increased drilling goals pri-marily through improved rig productivity.

The quality of Soviet drill bits has alsobeen blamed for poor drilling performance.The U.S.S.R. recently agreed to purchase aturnkey drill-bit plant from U.S.-based Dres-ser Industries to help remedy this situation.

Soviet technology for wellhead equipmentis reasonably good, although better wellheadequipment is reportedly needed when the oilor gas being extracted is particularly cor-rosive or under very high pressure. Therehas also been a lag in the U.S.S.R. develop-ment of multiple completion equipment.This equipment permits a number of produc-ing wells to exist on the same structure.

Soviet oilfields are being depleted rapidlybut with a relatively poor rate of recovery.The Soviet economic system, with its pro-duction quotas and demands for immediateresults, is one reason why fields in theU.S.S.R. are exploited quickly. Soviets in-ject water into wells on about 80 percent ofU.S.S.R. fields to increase immediate pro-duction rates. This practice, known as sec-ondary recovery, increases field pressure andthe flow rate of the well, and may increasethe ultimate field recovery. According to theCIA, however, this method may also reducethe field’s long-term production potentialand result in a serious fluid-lifting problem.Centrifugal pumps must be installed topump out the water and oil; while the SovietUnion produces such pumps, their capacityand service life do not match that of theequipment produced in the United States.

Alternatively, secondary recovery mightinvolve the injection of detergents, poly-mers, steam, or carbon dioxide instead of

“See Central Intelligence Agency, The So[iet Oil Industry,April 1977; and The So[!iet Oil Industry: A SupplementaryAnal}lsis, June 1977.

water. To learn more about these methods,the U.S.S.R. has increased its testing of suchprocedures and has imported equipment andmaterial from the West.

Soviet experience and technology lag farbehind that of the West in all phases of off-shore work. The U.S.S.R.’s offshore drillingand production has been limited largely toactivity on fixed platforms in shallow coastalwaters of the Caspian and Baltic Seas, withonly limited experience in jack-up drilling.The Soviet Union has avoided work furtheroffshore because of technological difficultiesand much higher production costs. TheU.S.S.R. buys a larger share of its offshoreequipment from the West than for any otherphase of the oil and gas industry. U. S. S. R.-built equipment can only be used in limitedwater depths and for relatively shallowwells. The U.S.S.R. also lacks experience insubsea completion equipment, which is atthe forefront of current Western technology,in underwater storage and transport, and inother advanced phases of offshore activity.

An offshore development project off Sak-halin Island, north of Japan, has producedthe most active joint cooperation to date be-tween the U.S.S.R. and the West. Japan isthe U.S.S.R.’s principal partner in the proj-ect, although Gulf Oil plays a small part in it.In exchange for providing the technologyand financing the exploration, the Westernpartners are assured a share of any resultingoil or gas production. The U.S.S.R. experi-ence in this project will help it in further ef-forts to expand offshore drilling and produc-tion.

A similar arrangement will permit thejoint development of gas onshore in Yakutia,in Eastern Siberia. For this project, Japa-nese and two American firms hold sharesamounting to 50 percent of the project, withthe U.S.S.R. retaining the other 50 percent.The progress on this project has been slow,largely because Eximbank financing for theAmerican share of the cost is unavailable,and because sufficient gas reserves at thesite to justify the project have yet to beproven. If successful, the project will entail


the construction of a pipeline to theU.S.S.R.’s Pacific coast, a distance of some3,100 kilometers. The U.S.S.R. claims onetrillion cubic meters of reserves exist atYakutia.

The Yakutia project will require sizablequantities of Western technology for theconstruction of the pipeline, and for drillingand extraction under extremely cold condi-tions. To exploit the field on its own, theSoviets would face much higher costs in bothtime and money, and time may be the criticalfactor. To meet increased production goals,the U.S.S.R. needs both increased suppliesof equipment that is in short supply, and bet-ter technology. If the United States restrictsthe sale of certain types of equipment ortechnology, it is likely that the U.S.S.R. willseek it from other Western sources (see chap-ter IV).

The difficulties of measuring the amountof equipment and technology sold by theWest to the Soviet oil and gas explorationand extraction sector is shown by the widediscrepancies between Soviet data andWestern estimates, as shown in tables 38and 39.

The Soviet-supplied data in table 38 ex-cludes pumps, but this omission does not ful-ly account for the discrepancies between itand CIA figures. The problem is furthercompounded by a third source, the NewYork-based consulting firm of Frost andSullivan, whose recent study contained thefollowing figures for U.S. sales of oil and gasexploration and extraction equipment to the

Table 38.—Soviet Imports of Western Oil and GasExploration and Extraction Equipment

(in millions of dollars)

Purchases from - Total purchasesUnited States from the West

1972 ., ... ... .-. . ‘- ‘$-4.6‘- ‘- $ 19.4 –

1973 . . . . . . . ., 4 3 23.51 9 7 4 5 9.01975 : : : : : 49.5 150.11976 . . . . . . 406 22651977 . . . . ... 29.3 1210

NOTE These figures do not include turnkey manufacturing equipment ‘SOURCE Vneshnaya Torgovlaya (Soviet Trade Data) category 128

Table 39.—Breakdown of U.S. Oil and GasEquipment Sales to the U.S.S.R. (1972-76)

(in millions of dollars)—— ——— . . — —— -.—.—-—— — - -

Category Value.. —...——— ——Pipelines, ., “ ~ $304S u b m e r s i b l e o i l p u m p s : 148Offshore and refining equipment 49O t h e r 49

T o t a l $550

SOURCE Central In tell Intelligence Agency The Soviet 0il Industry A- SupplementalAnalysis June 1977

U. S. S. R.: $3.7 million in 1973, $28.5 millionin 1974, $10.9 million in 1975, and $34.0 mil-lion in 1976. The CIA data covered ordersplaced as sales, while the other two sourcesrecorded actual deliveries. Subsequent in-vestigation has shown that the CIA figurefor submersible pumps was high by about$50 million, partly because of an order thatwas never filled.

It can be said with certainty that since1976, the volume of Soviet orders for West-ern oil and gas equipment has risen signifi-cantly. There has also been a shift towardturnkey projects, either for plants to pro-duce equipment or materials required by theindustry, or for full-service contracts withfirms to provide all equipment needs for anentire project. A recent order to a U.S. firmto supply gas equipment for wells in West-ern Siberia is an example of the latter.

The U.S.S.R. clearly realizes that it mustimport this equipment and technology to in-crease production of oil and natural gas atrates that meet domestic needs and allow itto sell surpluses to Eastern Europe and tothe West, thereby earning hard currency.The sale of oil and gas has accounted for ap-proximately half of all Soviet hard-currencyearnings in recent years. These earnings areused for financing continued imports ofWestern grain, equipment, and technology.

Failure to meet oil and gas productiongoals would involve extreme costs in the lossof this earning power. But, if the U.S.S.R.were extremely concerned about its futureoil and gas production, it would be logical forit to permit greater involvement of Western


firms in joint production projects to speedup development of reserves. Instead, theU.S.S.R. has chosen for the present to con-centrate on acquiring equipment and tech-nology beneficial to the long-run productioncapabilities of the country, with special em-phasis on technology that requires only rel-atively short leadtimes to produce increasesin output of oil or gas.

The selection of equipment and technol-ogy suppliers for the Soviet oil and gas in-dustry is based on a number of factors, in-cluding financing and the kind and quality oftechnology. The oil and gas industry, as amajor earner of hard currency, receives avery high priority when it comes to the allo-cation of foreign exchange for imports.When the technology offered by differentsuppliers is relatively the same, financingterms may determine the chosen supplier. Inmost cases, however, differences in technol-ogy will provide the basis of the choice.When a multinational firm can have equip-ment produced in a country that will providebetter financing than the United States, thepackage becomes more attractive to theU. S. S. R.; American firms have done this anumber of times.

The Carter administration decided inmid-1978 (during and presumably because ofthe Soviet dissidents’ trials) to place alloilfield equipment on the Commodity Con-trol List. This action may have affected So-viet perceptions of American firms as reli-able suppliers. Although no sales of oil andgas equipment have been denied licensessince the order was given, in some cases theU.S.S.R. may have decided not to pursue ne-gotiations with American firms to avoid thepossibility that the license might be blockedfor political reasons.

In other cases involving equipment suchas seismic prospecting instruments or com-puters used to analyze seismic data, thestricter controls placed on American suppli-ers are more than offset by the superiorAmerican technology, which ensures thatthe American firm is the most likely choiceas supplier.

In summary, the U.S.S.R.’s pattern ofrelying on Western technology to rapidly in-crease its capabilities in offshore operationsand secondary recovery suggests that theprimary interest of the U.S.S.R. in importingthis equipment and technology is more togain the productive capacity which theequipment represents than to obtain the op-portunity to duplicate new technology. Forthe most part, oil and gas equipment im-ported from the West has not been inte-grated with Soviet equipment, partiallybecause equipment purchases have primari-ly included complete units. This approachallows the U.S.S.R. to achieve the greatestpossible productive capacity with the equip-ment it imports. The recent shift toward im-ports of turnkey plants will, however, in-crease the U.S.S.R.’s exposure to Westerntechnology, and may speed the rate at whichthis equipment is absorbed by the Soviet in-dustry.

It is still too early to tell how efficientlythe U.S.S.R. will absorb most of the equip-ment and technology it has imported for oiland gas development. It may be expectedthat the rate of active oil and gas technologytransfer between the West and the U.S.S.R.will increase inSakhalin Island,advance.

CONCLUSIONS

the future, particularly asYakutia, and other projects

Western technology has made a marked eralizations, however, either concerning ag-impact on each of the Soviet industrial sec- regate economic effects of Western importstors considered here—chemicals, machine or motivations for importing Western tech-tools, automobiles, computers, and oil. Gen- nology are misleading. There are two basic

Ch. X— Western Technology in the Soviet Union . 241

rationales for importing foreign industrialtechnology and/or products: 1) such itemscould not, under any circumstances, be pro-duced domestically and 2) it is economical toimport rather than to produce domestically.But the role of imports in each particular in-dustry is markedly different. Thus, a sophis-ticated and useful approach to sectoral im-pact of imports must recognize that betweenthese two points lie a range of rationales forindividual import decisions in any given sec-tor. Motivations for foreign imports areclosely associated with the capabilities ofdomestic industry. The range of categoriesof imports relative to domestic productivecapacity is as follows:

1.

2.

3.

4.

5.

technology and/or products that cannotbe domestically developed or producedat any cost;technology and/or products that can bedeveloped or produced domestically atgreat cost in time and resources, andthe lack of which create bottlenecks inother productive processes;technology and/or products that can bedeveloped at great expense in time andresources, but do not create bottle-necks;more productive versions of technologyor products similar to those alreadyavailable in the U. S. S. R.; andtechnologies that can lead to capacityincreases in products equivalent tothose available domestically or prod-ucts providing marginal economic re-turns.

This range of choices may be regarded as acontinuum, and the rationale for individualimports from the West may fall anywherealong it. Given the decision by Soviet plan-ners to increase production in all the sectorsunder consideration, those imports that fallin the initial categories will be most benefi-cial in an economic sense. But products oftechnologies that the Soviets are incapableof producing at any cost are extremely rare.Most analysts have concluded that only timeand commitment separate the Soviets fromany given advance otherwise available tothem through imports. At the opposite end

of the spectrum, it is highly unlikely that im-port decisions are often made for cases ofmarginal returns, both because a wide rangeof more productive processes are alwaysavailable in the West and because of Sovietpropensity to avoid expending hard curren-cy on cases of doubtful return.

The relative role of Western imports in in-dividual sectors may be determined bywhere in the range of import types purchasesof Western products and processes cluster.In the chemical industry imports are gener-ally used as a vehicle to acquire new equip-ment and processes that could be producedin the U. S. S. R., but at great R&D cost.Chemical output is also central in capacityincreases in other crucial sectors—agricul-ture in particular. Imports in the chemical in-dustry tend to occur in the higher range ofimport choices; equipment and processes ac-quired are consequently crucial to plannedgrowth in the industry.

While imports in the automotive sectorare made at all levels of the choice range,large imports tend to be made both for pro-ductivity and capacity increases. The So-viets are perfectly capable of producing au-tomobiles with domestic technology, butWestern imports increase the speed, efficien-cy, and overall capacity of their industry.

In the area of machine tools, productivityand capacity increases also appear to be themajor factors behind imports. In this sectoras well as in the oil industry, a relativelystrong domestic industrial base exists. TheSoviets have, however, planned large capaci-ty increases in both. The fastest and most ef-ficient way to accomplish this goal isthrough imports of Western capital, whichtransfer Western technological advance inaddition to adding to capacity.

Soviet computer imports fall into thehigher range of import types; R&D costs inthis industry would be immense in theU.S.S.R. This is due both to the speed withwhich innovations are developed and the factthat they are often motivated by the needsof the user. A centrally planned economy isparticularly unsuited to high levels of in-


novation in this industry. Soviet practicehas been to wait for major innovations to beproven viable in Western markets before at-tempting to incorporate them into its ownproduction.

In conclusion, the impact of Western im-ports differs significantly across sectors,both from a qualitative and quantitative

point of view. There can be no doubt thateconomic benefits have accrued to all the in-dustries under consideration as a result ofimports from the West; the process by whichthis has been accomplished is complex anddiffers from industry to industry. It is clearthat any policy aimed at affecting the eco-nomic impact of Western technology in theEast must be tailored to achieve specific ef-fects in specific industries.

CHAPTER XI

Western Technology in thePeople's Republic of China

CONTENTS

PageTHE HISTORY OF TECHNOLOGY IN CHINA. . . . . . . . . . . . . . . . . . . .245

Prerevolutionary Development . . . . . . . . . . . . . . . . . . . . . ................245Postrevolutionary Technology Policy . . . . . . . . . . . . . . . . . . . . . ...........248

PRESENT TECHNOLOGY ACQUISITION POLICY . ...............254

THE NATURE OF THE CHINESE

THE STRUCTURE OF ECONOMIC

DECISIONMAKING ON FOREIGN

ECONOMY . . . . . . . . . . . . . . . . . . . . 259

DECISIONMAKING . . . . . . . . . . .264

TECHNOLOGY . . . . . . . . . . . . . . . .265

THE ROLE OF WESTERN TECHNOLOGY IN THECHINESE ECONOMY. . . . . . . . . . . . . . . . . . . . . ...... .............272

Computers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ............273Oil and Gas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ................277

CONCLUSIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ........283

Table 40.–China’s Foreign Technology Budget, 1978-85 . ......................257

Figure 15.-China: Balance of Trade, 1950-76. . . . . . . . . . . . . . . . . . . . . . . . . . . .. ....257Figure 16.-China: Technology Import Decisionmaking Procedure . ..............266

CHAPTER XI

Western Technology in thesPeople’s Republic of China.

THE HISTORY OF TECHNOLOGY IN CHINA

PREREVOLUTIONARY DEVELOPMENT

During the past 300 years, technological progress flourished in WesternEurope and North America while China languished. That China was for so longbypassed by technological progress is one of history’s great ironies, for fewcountries can match its long-term record of inventiveness and technological so-phistication. There are many familiar examples of Chinese inventiveness includ-ing gunpowder, paper, and the compass. To these may be added many diverseartifacts and techniques, including oil refining, the chain-drive transmission, thesegmental arch bridge, iron casting, the differential gear, deep drilling, thepiston bellows, and the stirrup.* The sophistication and richness of early Chi-nese civilization staggered all who came into contact with it.

This outpouring of sophisticated tech-niques and devices resulted in significantchanges in productive, military, and com-mercial activities. The introduction of newcrop varieties and new strains of establishedcrops had enormous repercussions, allowingthe settlement of frontier areas to the Southand permanently shifting the demographiccenter away from the former heartland of theYellow River basin. ’ Use of the compass,along with fundamental innovations in ship-building and sailing techniques, led Chinesenavigators perhaps beyond the Arabian Pe-ninsula. Improved roadbuilding techniquesand bridges of every description knitted theempire together and put every major city inregular communication with the imperialcapital. In sum, traditional China wentthrough many changes as new technologies

‘ Sw .Jwph Nwdham, “Science and China Influence onthe W’orlci in Raymond I)aw son, ed., Y’/z ( f.{,,<rtl{? of ( ‘Ain~/

11.ondon: Oxford [Jni\wrsit~r Press, 1964).‘Ho Ping-ti, ,?tuclic? in I}te !){)piilatic)rl f)~ (’}linu, l:{(i8-19:i’)

((’amhridge, hl a s s . : I+ar\’ard [Jni\ersity P r e s s . 1959), pp.169-’76; 1 8:1-92.

elicited responses in productive efforts andadministrative capabilities. This occurreddespite substantial inertia created by estab-lished cultural and bureaucratic structures.

But while technological development pro-vided a secure foundation for the governingelite and the civilization they created, newways of doing things did not alter customarysocietal and political arrangements. In sharpcontrast with the history of Europe, techno-logical changes were not associated with fun-damental changes in the social order or therise of new classes that could threaten theexisting order. Merchants remained politi-cally and culturally subordinate, and Chi-nese cities remained firmly under the controlof the existing Mandarin elite.

The traditional cultural and political sys-tem demonstrated a remarkable resilience inthe face of extensive technological changes;the Confucian culture was deemed more val-uable than the products of a new technology.Moreover, the cultural hegemony of Confu-

245


cianism helped to retard technological prog-ress; the mental patterns fostered by thestudy of the Confucian classics were at con-siderable variance with those appropriate tothe continuous development of new ways ofdoing things. Although there was not alwaysoutright hostility to technology, active in-volvement in technological matters fittedpoorly with the dominant culture. It induceda reluctance to become involved with innova-tions of any sort, particularly those that cen-tered on the improvement of menial exist-ence.3

The literary and bookish nature of theelite culture in China stood in clear contrastto the empirical, practically oriented spiritnecessary for the development of new tech-nologies. The content of Confucian philos-ophy was not conducive to a spirit of con-quering nature through the application ofnew devices and techniques. The primaryconcern of the scholar and the putative roleof the official centered on learning the cor-rect principles of human relationships, andusing these principles for the maintenance ofharmony, both between man and man, andman and nature. In contrast, technologicalchange by its very nature disrupts existingrelationships and dissolves harmony. What-ever the practical benefits of technologicalchange, the disruption of the existing stateof affairs could hardly be applauded by thetraditional official who had been schooled inConfucian philosophy.

In sum, therefore, the main inhibitingcause (for the lack of development of scienceand technology) was the intellectual climateof Confucian orthodoxy, not at all favorablefor any form of trial or experiment, for in-novations of any kind, or for the free play ofthe mind. The bureaucracy was perfectly sat-isfied with traditional techniques. Sincethese satisfied its practical needs, there wasnothing to stimulate any attempt to go be-yond the concrete and the immediate.’

When stimulation to technological ad-vance did come, it came in the form of a pro-found external threat. Technological stagna-tion was never absolute in China, but it wasmost sharply revealed when the Westernpowers attempted to extend their influencethere. From the point of view of the West inthe 18th and 19th centuries, China was poor,ignorant, and backward. It was China’s mis-fortune to be in a period of dynastic declineduring the time that an aggressive West(and later, Japan) bolstered by formidabletechnological prowess, was extending its in-fluence across the seas. The technologicalstagnation that afflicted late traditionalChina might have continued were it not forthe intervention of the West; indeed, it canbe argued that the shock of Western andJapanese domination was essential if Chinawas to rejuvenate. But China’s inferiority toforeign powers left an enduring sense of pow-erlessness and debility; the development oftechnology became an indispensible part ofefforts to regain a modicum of security andindependence, especially relative to those na-tions that took part in its subjugation andhumiliation.

The application of new technologies wasessential to this endeavor. This in turn ne-cessitated a greater receptiveness to ideas,processes, and materials that had been de-veloped elsewhere. But nagging doubts at-tended the effort to transform China’s tech-nological order: could foreign products andtechniques be adopted without their bring-ing a profound dislocation to Chinese cul-ture? The answer was negative. Achieving arapprochement between imported modernityand indigenous patterns of life proved dif-ficult; technological progress could not bepursued in disregard of the cultural conse-quences. China’s recent history can thus beseen as the search for “modernization withpride. ”5

3See Liu Ta-chung, “Economic Development of the ChineseMainland, 1949-1965” in Ho Ping-ti and Tang Tsou, eds., Chi-na “s Hen’tage and the Communist Political System (Chicago,Ill.: University of Chicago Press, 1968), pp. 134-5.

4Etienne Balazs, Chinese Civilization and Bureaucracy(New Haven and London: Yale University Press, 1964), p. 22.

‘See Joseph Levenson, Confucian China and Its ModernFate: A Trilogy (Berkeley and Los Angeles, Calif.: Universityof California Press, 1968).

Ch. Xl— Western Technology in the People’s Republic of China . 247

The evident military superiority of the im-perialist powers jarred the Chinese rulingelite into the realization that some adjust-ments would have to be made, and that theforeigners would have to be met by equiva-lent military strength. No serious ideologicalobstacles stood in the way of this; even themost conservative Confucian official recog-nized that military defense was a legitimatearea of interest and concern.

Modern science and technology thusfound their first home in China in the ship-yards and armories established to counterthe might of the West. A new generation ofengineers, technicians, and scientists beganto be trained in the Government’s arsenal,where, after 1865, foreign instructorsschooled their Chinese pupils in modernshipbuilding, metallurgy, and arms manu-facture.6 Despite earlier Chinese advances innautical architecture, explosives, and ord-nance, a new set of skills had to be developedas China attempted to preserve its nationaland cultural integrity.

The realization that improvements in de-fensive capabilities could not be pursued inisolation from other modernizing currentscame slowly. At first, each step of militaryand technological modernization was justi-fied in terms of its immediate importance forkeeping out the foreigners. But the fact re-mained that the development of weaponsand other items of military technology re-quired at the least such supportive indus-tries as railroads, steamships, and coalmines.7 For “progressive” Chinese thinkers,the assimilation of Western science and tech-nology took on an importance which tran-scended the strengthening of the militaryand its supporting infrastructure. Scienceand technology were to be the foundation ofa new Chinese society erected on the remainsof a crumbling civilization, and scientific in-quiry and rational thought became “slogans

in an anticlerical war against superstitionand authority. ”8 Even after the collapse ofChina’s last dynasty and the establishmentof the Republic an aggressive belief in the in-tellectual and spiritual superiority of scien-tific ways of thought continued to challengetraditional religious and philosophicalbeliefs.’

There could be no easy incorporation ofscientific thinking or technological applica-tion into the corpus of traditional Chineseelite thought and culture. Effecting the nec-essary changes in the basic elements of thetraditional order posed a great threat tomany Chinese, especially those whose self-identity and authority were bound up withthe Confucian world view. The developmentof modern ways of doing things could not beinitiated without thoroughgoing changes inChinese culture and society, and the tech-niques necessary to preserve Chinese nation-al integrity from the onslaughts of the Westwould paradoxically result in the completeconquest of the traditional way of life. Thefact that the conquest would come fromwithin would make it no less complete.

Some Chinese, however, endeavored tohave it both ways, seeking to retain the es-sential features of Chinese civilization whileat the same time acquiring and assimilatingthe foreign technologies necessary forChina’s resurgence. According to their pre-scription, new technologies and organiza-tional structures could be incorporated fortheir utility, leaving unchanged the essenceof Chinese civilization. The surface plausibil-ity of this synthesis was quickly challengedby the more unregenerate members of theChinese political and cultural elite. To them,a China that took the path of technologicaland organizational modernization wouldsoon lose its way in its pursuit of foreign

‘Charlotte Furth, Ting 14’en-chiang: Science and ChinaA’eu’ (’ulture (Cambridge, Mass.: Harvard University Press,1970), p. 11.

‘Albert Feuerwerker, The Chinese Economy, 1912-1949(Ann Arbor, Mich.: University of Michigan Center for Chi-nese Studies, 1968), pp. 1-2.

“Furth, op. cit., p. 70.9C. K. Yang, Religion in Chinese Society (Berkeley, Los

Angeles, and London: University of California Press, 1970),pp. 363-7.

.


novelties: a commitment to acquire and as-similate modern technologies could only re-sult in the dissolution of the establishedculture. These qualms were not enough tostem the tide of change, and there was littlechance that the Confucian elite could main-tain the world in which they had been socomfortable. By the beginning of the 20thcentury, China was ripe for fundamentalchange.

With its commitment to modernizationand technological development, the People’sRepublic of China (PRC) could be viewed asthe culmination in the transformation of Chi-nese culture, a process that began with theopium wars. This would be an oversimplifica-tion, for even today it is premature to con-clude that modernization through the bal-ancing of imported technologies with indige-nous Chinese culture has been achieved. Ifanything, the problem is now even moreacute, for cultural patterns in today’s Chinaare compounded of ancient tradition andmodern socialist doctrine, and tensions be-tween technological development and ideo-logical patterns—both ancient and contem-porary—persist.

Technology has not acted as an independ-ent force which has autonomously trans-formed the traditional culture and shapedthe postrevolutionary society. In traditionalChina, patterns of political and cultural dom-ination in large measure determined the na-ture and extent of technological change. Thisis still the case, as the Communist govern-ment has manifestly committed itself to gen-erating the policies that will guide the proc-ess of technological development. Yet it hasnever had a free hand in this matter; the pos-sibilities of technological advance have beencircumscribed by both the characteristics ofChinese society and the other goals of theleadership. The next section considers theevolution of technological policies in thePRC and the limitations on their implemen-tation. Although the political actors andmany of the fundamental goals are differentfrom those of traditional China, technologi-cal change has remained firmly in a Chinesecontext.

POSTREVOLUTIONARYTECHNOLOGY POLICY

Although many changes have come to thePRC over the last three decades, there re-mains a certain continuity of goals and ac-tivities. Any analysis of technological policymust be cognizant of continuity as well aschange. Most analyses of policy in Chinahave given relatively little consideration tocontinuity; instead, most Western scholarshave focused their attention on the appar-ently wide fluctuations in basic policies asthe PRC has oscillated between periods ofradical change and periods of retrenchment.From this perspective, “Maoist” methods ofemploying mass mobilization, popular initia-tive, and ideological incentives have beencounteracted in succeeding phases by pol-icies that were built around expertise, pre-cise organization, and remunerative re-wards. Although this characterization ofsocial change in China has put policychanges in context, the policy cycle modelcan be taken as only a rough approximationof historical reality. Despite apparent shiftsof considerable magnitude, there has re-mained a basic continuity of goals in Chinaand a narrowing range of policies has beenemployed as a means of achieving thesegoals. ’” Moreover, in any given period, thereare considerable divergencies between thespecific policies employed in different eco-nomic and political realms (such as agricul-ture, education, and foreign relations). Eventechnological policy is itself too broad ananalytic category to be easily fit into abroadly drawn policy cycle model; at anytime, technological policy is really a clusterof separate policies which reflect the differ-ential impact of general policies on specificsectors of the economy .11 Finally, the chro-nology of policy changes in China is not anunending series of back and forth move-ments along a single axis; the history of thePRC has been a learning experience for the

‘{’See Andrew Nathan, “Policy Oscillations in the People’sRepublic of China: A Critique, ” C’hina Quurterlj~ 68 (Decem-ber 1976).

‘ ‘See Alexander Eckstein, {’hina A’conomic Bevolution(Cambridge, Mass.: Cambridge University Press, 1977), p. 85.

Ch. Xl— Western Technology in the People’s Republic of China ● 249

Chinese people and the leadership alike.Neither a “Maoist” nor a “pragmatic” modelof development is likely to be taken as an in-clusive blueprint for social change and eco-nomic progress, and the years to come willlikely see continued efforts to produce aworkable resolution of the conflicts betweenegalitarian participation and managerialdirection, mass motivation and professionalexpertise, and ideological incentives andmonetary rewards.

When the Communists gained controlover the Chinese mainland in 1949, thesedilemmas were faint concerns. After years offoreign invasion and civil war, China was indesperate need of economic reconstruction.Providing a modicum of economic organiza-tion and meeting the minimal subsistenceneeds of a war-ravaged populace were inthemselves staggering tasks. In addition,the Communists had set a more ambitioustask—the transformation of a backward andeasily exploited country into a strong andself-sufficient Socialist nation.

Technological development was to be anintegral part of this transformation. In addi-tion to restructuring economic institutionsand relationships through land reform, thenationalization of key industries, and theconstruction of a central-planning appa-ratus, the new Government began to takethe first steps toward the formidable task ofmodernization of production. Despite somepromising starts in industrial developmentduring the 1930’ s,” China had scarcely risenabove the agriculture-and-handicrafts econ-omy which had endured for centuries. Tobuild a foundation for China’s economicmodernization, 156 large industrial projectswere designed and built with the direct as-sistance of the Soviet Union. China’s isola-tion from the capitalist world made Sovietassistance crucial, and the U.S.S.R. re-sponded with one of the largest programs of

economic aid and technology transfer in his-t o r y .

It can be argued that the pattern of eco-nomic development that emerged under So-viet sponsorship was in fact ill-suited toChina’s developmental needs. The Chineseembarked on an essentially Stalinist strat-egy which emphasized the rapid develop-ment of heavy industry through the con-struction of the large industrial projectsunder Soviet patronage. At this time, theGovernment plowed 20 to 25 percent of thecountry’s total output into investment, apercentage similar to the Soviet Union andother Communist countries during the firstyears of their existence. ” This investmentwas confined to a narrow part of the econ-omy; in 1952, industry received nearly 40percent of investment funds, and heavy in-dustry was allocated 76 percent of this. ”

The distribution of investment funds wasreflected in the choice of technologies. Fewefforts were made to develop and apply tech-nologies that could make use of China’sabundant labor supply or be tied into theagricultural economy. The Chinese receivedstate-of-the-art technologies from the Sovi-ets, particularly in the area of steelmaking, 16

but modernity in the emerging industrialsector underscored the continued backward-ness of farm technologies. In the agriculturalsector investment rates remained astonish-ingly low. Less than 8 percent of the Statebudget was invested in agriculture duringthe first 5-year plan (1953-57), and of this, asizable percentage went toward the con-struction of hydraulic projects only margin-

L. - 2-1


ally connected to the needs of farm produc-t i on .

Technological change would have to cometo the countryside if the perennial problemof feeding China’s people was ever to besolved. But this realization was slow in com-ing, and stipulated technological prioritiesbore little relevance to agricultural needs. InSeptember 1956, a 12-year plan for the devel-opment of science and technology was for-mulated. Although the details of the planwere never released, 12 areas earmarked forfuture technological advance were pub-lished:

1.2.3.4.5.

6.7.8.9.

10.

11.

12.

peaceful uses of atomic energy,radio and electronics,jet propulsion,automation and remote control,petroleum and scarce mineral explora-tion,metallurgy,fuel technology,power equipment and heavy machinery,the harnessing of the Yellow andYangtze Rivers,chemical fertilizer and the mechanizationof agriculture,prevention and eradication of diseases,andproblems of basic theory in naturalscience. *8

As the list indicates, the main thrust of sci-entific and technological research and appli-cation was to be directed at the developmentof technologies essential to the operation of asophisticated modern economy. With the ex-ception of items 9 and 10, none of the areasselected for intensive development had anyimmediate relationship to the needs of theagricultural economy, nor were they congru-ent with the development of labor-intensivemodes of production. In sum, ambitionsseemed to have exceeded economic and po-litical realities; after decades of submission

1-I,i Choh-ming, E<[>nt>mic l)elc~loprnent o f (’omrnuni.~t( ‘hinu: A n Aj~prui.~ul of k’i[ ‘e l’curs of Indlistrialization(Berkele~’, Calif.: (Jni\ersity of California Press, 1959), p. 53.

IHRichard P. Suttmeim-, Fic,swirch un(l RvIIo//i tion: Scientc/~f)/tf), ~J)t[/ ,$()(,if)tu/ ( ‘hun~f~ in ( ‘hinii (1.exington, hlass.: Lex-ingt(;n l~ooks, 19’74), pp. 60-1.

and inferiority, China was determined tocatch up with the scientific and technologi-cal accomplishments of the West.

The limitations of the Chinese economysoon overwhelmed these ambitions. Al-though industrial growth during the 5-yearplan period was impressive, the agriculturalsector continued to lag. Collectivization andother administrative rearrangements hadnot resulted in an increase of peasant in-come19 and by 1957 Chinese agriculture wasin the hold of diminishing returns as thefarm sector began to exhaust its traditionalsources of growth. Although industrial de-velopment was impressive, it was apparentthat future economic progress in that sectorwas tied to economic progress in agriculture.

Improved agricultural productivity was offoremost importance in the economic devel-opment of the countryside, but at first theGovernment sought to generate it in anoblique fashion, using political mobilizationas a means of coaxing out the “productiveforces” which had hitherto lain dormant.The Government accurately gauged that atechnological revolution in crop growing wasultimately dependent on the widespread de-velopment of water-control projects. Inorder to effect the necessary changes in irri-gation, the Communist leadership began tomake massive efforts to tap China’s seem-ingly limitless supply of rural labor for thebuilding of dams, canals, wells, and reser-voirs. During the slack farming season in thewinter of 1957-58, 100 million people workedan average of 130 days each on hydraulicprojects of this kind. ’() It was hoped that theconstruction of these projects would make a

“’rl’homas ~. 13erst~in, “leadership and Nlass ~lobili~a~ionin the Soviet and Chinese C’ollecti\’ization Campaigns of1929-30 and 1955-56: A Comparison, ‘“ (’hi))u Quurtc>rl~ 31

(July-September 1967), p. 35.‘(’Karl A. N’ittfogel, “U.S.S.R. and Mainland China: Ag-

rarian Systems, ” in M’ .A, Douglas Jackson, cd., AgruriunPolicie,s un(i Pro blern.s in (’omrntini. st und hrc)tl-(’~)mm[irti.vt(’o(intries (Seattle and l.ondon: University of M’ashingtonp r e s s , 197 1), p. 46. A]\,a I,ewis Erisman presents a n~u~’hlower figure of nine million man days: cf. “China: AgriculturalIle\’elopment, 1949-71,’” in Pec)plc ‘.v Repli blic of (’hinu: A nEconomic Asse.s.snt{>nt (U’ashington, 1). C.: U.S. (governmentPrinting Office, 1 972), p, 1 !26. In any event, statistical am-biguity was a hallmark of the I.eap.


major contribution to the Great Leap For-ward, which sought to transform China’seconomy in the space of a few years.

So massive a mobilization of rural laborhad to be complemented by fundamentalchanges in the organization of rural society.At first, special water conservancy organiza-tions were formed. These and other forms ofcooperatives were used to deploy peasantlabor for projects that exceeded the bound-aries of the village. Eventually most of theseunits were amalgamated into people’s com-munes. In the summer of 1958, the com-munes began to proliferate, and by the endof the year 99.1 percent of the peasant house-holds were reportedly incorporated intothem.

The establishment of the communes wasparalleled by a major effort to decentralizepolitical authority and administration. Ini-tiative in economic and technological mat-ters was passed to lower administrative lev-els. Industry, agriculture, commerce, edu-cation, and defense became the concerns ofcommune administrators, thus vastly ex-panding the responsibilities of local cadres.

This expanded role for local-level leader-ship had important ramifications for techno-logical policies and their implementation.Party cadres began to assume many of thetechnical and managerial tasks previouslyheld by Government officials.” This did notsimply mean the imposition of political con-trol over the activities of technical and man-agerial personnel; political cadres, it washoped, would become experts in their ownright, the cadres’ personal involvement withproductive labor would result in the synthe-sis of “red” and “expert. “22 The transfer ofpolitical cadres to basic-level posts, wherethey could participate in labor while oversee-ing day-to-day operations, was a key policyof the Great Leap Forward.

First-hand involvement with local eco-nomic affairs was an absolute necessity;with the radical decentralization measures ofthe Great Leap Forward, the formal nationalplanning apparatus and the statistical workthat supported it were dismantled. The de-tached and rationalized style appropriate toadministration by Government officials andspecialized experts was forsaken in favor of a“combat style” through which leaders wereto form an intimate association with the peo-ple, share in their struggles, and make policyon a largely ad hoc basis.23 The Great LeapForward was a time of politically mandateduncertainty and disjointed or nonexistentplanning.

The technological consequences of theGreat Leap Forward were soon evident. The12-year plan for the development of scienceand technology was all but forgotten as un-coordinated local initiatives became thebasis of technological change. Each localitybegan to push its own programs of economicand technological development through thecommunes. Although great emphasis con-tinued to be placed on the rapid developmentof the heavy industrial sector in the cities,the countryside now became the scene ofmyriad labor-intensive projects. In thecities, heavy industry continued to be theprimary recipient of State-supplied capitaland technical assistance; in the countrysideproductive enterprises were to be developedthrough the mobilization of local labor andresources. The urban enterprises establishedduring the 5-year plan period would continueto grow through the conscious fostering ofeconomic dualism, while new small-scale,labor-intensive ones took root in the coun-tryside. There were few connections betweenthe two sectors.24

The most dramatic example of local initia-tive in technological and economic develop-

: ‘Such a mode of leadership is often found among cir-cumstances of danger and uncertaint~r. See Alvin W’. Gould-n[,r, ~~<ltt(,rrl,~ ~,1 Illc]ll,~ trilli ~]lir”(~il(i(r(lo ( N(>W l’ork: Frt)(>Press, 195’7), pp. 105-16.

- ‘k;ckstein, op. cit., p. 57.


ment were the “backyard blast furnaces”which were erected for the local productionof steel. Coinciding with the commune move-ment in the summer of 1958, thousands offurnaces sprung up each day in the country-side; by September, 350,000 were in oper-ation.” This effort was a sad failure: the steelproduced was of such low quality that it hadfew applications. Other efforts at decentral-izing production were more successful, how-ever, and the foundation of local industriesfor the production of cement, agriculturalchemicals, and energy was laid during thisperiod. Meanwhile, the urban industrial sec-tor continued to emphasize capital-intensivehigher technology methods of production.

In the critical agricultural sector, how-ever, the policies embodied in the Great Leapfailed. A key assumption–that mobilizedlabor could be effectively tapped withoutcomplementary inputs—soon proved falla-cious. Agriculture continued to languish inthe absence of modern inputs and tech-niques, and China found itself in the grips ofa severe economic crisis. This was exacer-bated in the middle of 1960 when the Sino-Soviet rift widened and Soviet economic andtechnical support missions were withdrawn.

The Chinese leadership now had littlechoice but to retrench, and mass mobiliza-tion under the leadership of technically unso-phisticated political cadres was abandonedas the most appropriate road to economicprogress, A decentralized economic systemwith strong inputs from technical expertsonce again took precedence over efforts tocreate an autarkic rural economy throughcollective labor and political leadership.

Although the policies of the Great LeapForward had been specifically constructed toprovide an improved productive base in thecountryside, the rural economy remainedcritically deficient in both the kind of tech-nologies employed and the capital invest-ment necessary for their application.

In 1962, the critical importance of thefarm sector was officially recognized and a

~þ ‘(’l~rk, op. cit., p. 69.

slogan declaring agriculture the “founda-tion” of the economy was adopted. Indus-trial production was more closely tied toagricultural needs, and the central Govern-ment began importing complete plans fromJapan and Western Europe for fertilizermanufacture. At the same time, the ruralsector was better enabled to make effectiveuse of these inputs. Agricultural taxes wereeased and the price relationships between in-dustrial and agricultural goods altered infavor of the latter, thereby increasing the in-centives for increasing crop production.26

Industrial policy now shifted, and a morerationalized and coordinated approach to in-creasing production was taken, stressingtechnological innovation over untrammeledmobilization of labor. The responsibilitiesand authority of managers and technicianswere expanded. The political cadres who hadsupervised local production and technologi-cal innovation were replaced by engineersand managers with the specialized skillsnecessary for modernizing China’s economy.

Yet engineers still did not have a free handto design projects according to the stand-ards of technical competence alone. Effortsto synthesize mass participation in techno-logical development with the more regular-ized procedures of engineers, scientists, andtechnical specialists continued. During thedesign reform campaign which began in late1964, engineers became more closely in-volved with actual production work. Theywere expected to break away from acceptedengineering traditions, established duringthe period of Soviet influence, to engage inon-the-spot design work in close collabora-tion with the workers and managers in theplant. This was expected to result in a com-bination of technical experts, managers, andshop-floor workers who could pool their tal-ents in order to solve technical problems. 27

“h;ckstein, op. cit., p. 60.-’See Gene\ ’ie\’e Dean, “A Note on the Sources of ‘I’echno-

logical Inno\”ation in the People’s Republic of China, ” ,lourno/()/’l)(Jf ‘(J/()/)mP)tt .Stu[lie.s 9, 1, (Ortober 1 9’72), pp. 190-193.

Ch. Xl— Western Technology in the People's Republic of China 253

Despite this effort to unite all segments ofthe Chinese work force, tensions remained,and Mao and his followers feared that the ex-tension of expertise and administrativepower would result in the formation of newsocial classes and new sources of oppression.In late 1965, Mao launched the Great Pro-letarian Cultural Revolution as a means ofredressing the inequalities reemerging inChinese society. Although the cultural revo-lution did not take up the issue of technologi-cal policy directly, it did have importantrepercussions on the people and institutionsdirectly responsible for promoting techno-logical development. The Chinese Academyof Sciences came under heavy criticism from“Mao Zedong Thought Propaganda Teams, ”which had been organized by the army underthe guidance of Lin Biao. The State Scien-tific and Technological Commission faredeven worse. Its Chairman Nie Rong-Zhenwas sharply attacked, and for a while theCommission was threatened with dissolu-tion; an ad hoc Science and Education Groupunder the State Council seemed likely toassume its functions.28

For all the strident attacks on the en-trenched centers of technological expertise,however, political control over technologicalchange was not a prime issue during thecourse of the cultural revolution. The chiefstruggles of the period were directed atpolitical (rather than technical) cadres who,it was claimed, had become entrenched intheir offices, separated themselves from themasses, and forgot their revolutionary roots.

The convening of the Ninth Party Con-gress in April 1969, signaled an official endto the militant phase of the cultural revolu-tion. The ensuing period was marked by con-flicting political signals and uncertainty intechnological policy. Imports of machineryand whole plants began to increase dramati-cally by 1973,29 hardly a hallmark of the suc-cess of the radicals’ efforts to insulate China

‘“SutLmeier, op. cit., pp. 104-5.‘<’SW I lans I{eyrnann, ,Jr., [ ‘hinu ‘.s Approach to Tech nolog>I

A cqui.sitic~n,” Part 111, .9(I m mar>’ ob.ser[ 10 tions (Santa L1 onica,Calif.: ‘1’he RAND Corporation, 1975), p. 7.

from foreign influences. The fundamentalchanges that the cultural revolutionwrought in education and research activitiesgenerated considerable discontent, includingcomplaints about the excessively practicalorientation of research efforts and the ab-sence of adequate basic research. In 1972,the Chinese press featured articles calling forthe improvement of science curricula and formore attention to the conduct of theoreticalresearch.30

On the other hand, the cultural revolutionleft an inhibiting policital legacy. Althoughtechnological policy was never publicly de-bated, the postcultural revolution climatewas not conducive to bold new thrusts in thetechnological realm. Ideological rectitudeseemed to count more than economic expan-sion, and with Mao’s succession very muchin doubt, few leaders were willing to chal-lenge basic Maoist tenets about the primacyof political and ideological mobilization.

This impasse was seemingly broken inJanuary 1975, when Chou En-lai deliveredan important speech at the Fourth NationalPeople’s Congress. In it, he asserted thatChina’s prime task lay in the “four modern-izations” (in agriculture, industry, defense,and science and technology). These wouldpave the way for China’s sustained develop-ment as a “powerful socialist nation’ by thebeginning of the next century .3’

Chou’s assessment of the pressing needfor technological modernization was sec-onded by Deng Xiaoping, who had re-emerged from his cultural revolution dis-grace. Deng used his newly regained influ-ence to aggressively push for technologicalmodernization, even at the expense of classstruggle and party domination over techni-cal work. But with Mao’s health steadilyweakening and China’s political course indoubt, Deng was made the target of con-tinual attacks in the Chinese press. He was

“)See ‘1’homas Fingar and C~enevie\’e Dean, I)e I)e(op men tsin PK( Science and Tech nolc)g}t, oct(~[~(~r-l)ccenlb(~r, 1.976(Stanford, Calif.: U.S.-China Relaiions Program, 1977), p 5.

“Chou F;n-lai, f’heng-~u Arun<q-tso Paw h’ao (Report on theLl”ork of the (;o~’ernment) (Peking: Shen-wu Y i n - s h u Kuan,1975), p . 16.


again purged in April 1976, and his report,which called for an expanded and more au-tonomous role for the Academy of Sciences,was labeled a “poisonous weed.”32 Deng’salleged enthusiasm for importing advanced

technologies from abroad in return for rawmaterial exports,33 was also criticized. Thispolicy was in direct opposition to theautarkic economy advocated by his Maoistopponents.

)’Thomas Fingar and Genevieve Dean, l)e~’elopments inPRC Science and Technology, January-March 1977 (Stanford,Calif.: U.S.-China Relations Program, 1977), pp. 5-7.

33 See Hung Yuan, “Ultra-Right Essence of Teng Hsip’ing’s Revisionist Line, ” Hung Ch ‘i 10, (1976), in ForeignBroadcast Information Seruice, Oct. 8, 1976, p. E 1.

PRESENT TECHNOLOGY ACQUISITION POLICY

Mao Zedong died in 1976; by the begin-ning of 1977, it was clear that a return to theprinciples of the four modernizations couldbe anticipated. Indeed, throughout 1977there were abundant signs of departure frommany of the practices and policies of theprevious 10 years. In February 1978, a state-ment of the goals of the four modernizationsprogram was made by Premier Hua Guofengin his “Report on the Work of the Govern-ment” delivered to the first session of theFifth National People’s Congress. Hua’s re-

port contained the outlines of an ambitious10-year economic development plan de-signed to produce an independent and com-prehensive national industrial and economicsystem.

Among other things, this plan providedfor enormous increases in agricultural out-put; agroscientific research; increases in thevalue of industrial output of 10 percent peryear to 1985; the development of transport,communications, postal, and telecommuni-cations networks big enough to meet grow-

ing industrial and agricultural needs; and120 large-scale industrial projects. It was fol-lowed by plans for investment in science andtechnology including theoretical researchand the establishment of nuclear power sta- tions, the development of satellites, laserresearch, genetic engineering, and in-tegrated circuit and computer applications.

To foreign observers, this program wasexceedingly ambitious and it seemed to lacka sense of priorities. Doubts within China


Northeast China farm introduces agricultural machines from America

A U.S.-made sprayer at work

Photo credits Ben Lanwu Xinhua News AgencyCombine harvesters working in a soybean field of the Friendship Farm


In redefining the objectives of the fourmodernizations, Beijing has begun to stressthe concepts of “balance” and “proportion-ate development, ” and the thinking associ-ated with the economic administration char-acteristic of the 1950’s is now being praised.“Three major balances, ” have been identi-fied as the foundation for economic policy:the balance in the expenditures and revenuesof the State budget; the balance in the issu-ance and withdrawal of bank credits; and thebalance in the supply and demand of materi-als, including the balance of receipts andpayments of foreign exchange. It is claimedthat during the last 30 years, when these bal-ances were observed, the economy pro-gressed nicely; when they were not observed,development slowed. According to this lineof reasoning, serious imbalances have nowoccurred between development in agricul-ture and industry, particularly heavy indus-try; within industry itself (for instance, be-tween the fuel, power, and raw materials in-dustries and the processing industries;among farming, forestry, and animal hus-bandry; and between food crops and indus-trial crops); between investments and capitalconstruction and the availability of manpow-er, materials and financial resources; be-tween accumulation and consumption; andwithin accumulation itself (e.g., between ac-cumulation for productive purposes and ac-cumulation for nonproductive purposes) .34

It is safe to assume that fears of new “im-balances” are behind the current efforts toscale down the four modernizations, and thatbalance and proportion in development arethe objectives now being sought. This con-clusion is borne out by the main points of therevised program which is intended to checkthe spurt of investments in heavy industry,and return to the principle of priority foragriculture and light industry. There havebeen reports that the proportion of invest-ment in iron and steel will be reduced: pastinvestments have not yielded expected re-turns because of serious shortages of elec-tricity, transport, and other necessary sup-

“Beijing Retieu’, May 11, 1979, pp. 17-18.

porting infrastructure. Major investments inharbor construction are to be postponed.Agriculture is to receive the most attention,although the grand objectives for agricul-tural mechanization announced in early 1978have been abandoned. Instead, it is likelythat investment will foster greater differen-tiation of agricultural production based onthe comparative characteristics of differentregions, and that more attention will begiven to cash crops and to industries sup-porting agriculture. The performance of Chi-nese agriculture is of utmost importance tothe four modernizations; successful per-formance in this sector would release foreignexchange for other purposes.

The serious problems of Chinese infra-structure development will be addressed byadditional investments in coal, electric pow-er, oil, transport, and building materials.Some of the 120 key industrial projects iden-tified in the original four modernizations pro-gram will be postponed, and only a limitednumber will be in operation by 1985. Hous-ing construction is to be accelerated. New at-tention also is to be given to light industry,both to satisfy domestic aspirations, and tomake light industry the chief export and for-eign exchange earner over the short run. Al-though foreign borrowing has not been com-pletely ruled out, the Chinese are stressingthat future investments should come mainlyfrom domestic savings.

In spite of these cutbacks, it is clear thatforeign trade and the acquisition of foreigntechnology will play an important role in Chi-nese modernization programs, although notas great a role as the euphoric estimates of1978 might have suggested. China’s foreigntrade has fluctuated somewhat over time,but it has tended to rise consistentlythrough the 1970’s. Figure 15 shows the Chi-nese balance of trade from 1950 to 1976, in-cluding the shares of trade that non-Commu-nist countries have enjoyed since the early1960’s.

In addition to agreements with individualforeign companies, China has entered intotrade agreements during the last 2 years


Figure 15.— China: Balance of Trade, 1950-76

MillionUs. $ Balance

1200

800

F400

0 1 11 1 1

– 400 -

– 800 L

7500

6 0 0 0

4500

3000

I

Imports

TotalNon-Communist countries

1500

-.I Exports

6000t— Total

_ - Non.Comm un Ist countries

4500t f

3000

1500

0 t 1 s I1950 1955 1960 1965 1970 1976

SOURCE Richard E. Batsavage and John L. Davie, “China InternationalTrade and Finance, in Chinese Economy Post Mao,Joint Economic Committee, 1978. p. 709

with a number of countries. The most dra-matic example is a $20 billion agreementwith Japan calling for Chinese imports oftechnology in exchange for oil and coal.These agreements indicate that at leastthrough 1985 China will continue to have an

active interest in foreign trade and particu-larly in foreign technology. A recent esti-mate of China’s budget for imports of for-eign technology through 1985 shows that$11.4 billion was contracted for in 1978, andthat negotiations to acquire additional tech-nology could amount to as much as $59 bil-lion by 1985. China’s foreign technologybudget is summarized in table 40.

While revisions in the four modernizationprograms may lead to a scaling down of Chi-nese foreign technology purchases, there willundoubtedly be major acquisitions in thenext 5 to 8 years. According to a recent Cen-tral Intelligence Agency (CIA) report, theareas that China has designated for closestattention are as follows:

1. Iron and Steel.—It is expected thatthis sector will require the greatest ex-penditure of foreign exchange. Theplans for doubling China’s steel pro-

Table 40.—China’s Foreign Technology Budget,1978-85

(in billions of dollars)

ContractedCategory for in 1978a

Iron and steel . . . ~ . ‘------- ~. .$ 0.1Coal . . . . . . . . . . . . . . . . . . . . 4.0Other mining and processing 2.4Ports . . . . . . . . . . ... 2.1Petrochemical plants and

equipment. . . . . . . 0.5Hotels . . . . . . . . . . . . . . 0.5Shipping . . . 0.5Petroleum . . . . . . . . 0.4Electronics ., ., . . 0.3Agriculture-related plants and

equipment . . . . . . . 0.1Power development . . . . . . . . . . 0,2Fisheries . . . . . . ... . . . . . . —Aircraft . . . . . . . –Other transportation . —Construction plants and

equipment. . . . . 0.2

Undernegot ia t in b

(roundedestimates)

$19.01.64.411

2 33.0

—3-50.1

0.63.0

2.010

10-15

0 5Textile plants and equipment . —Miscellaneous machinery and

machine tools. . . . . . . . . 0.1Total. ... ... ... ... ... ... ..$11.4

Data as of Apr. 15, 1979-

0.1

0.2$52-59

aExcludes approximately $15 billion in projects contracted after mid-December1978 which were postponed until financing iS arranged

bSome projects under negotiation wiII be completed after 1985

SOURCE The China Business Review, March-Aprll 1979 p 57


2.

3.

4.

5.

duction to 60 million tons by 1985 canonly be achieved by importing majornew steel complexes. Contracts underdiscussion have included a $15 billion,10-million ton complex near Tianjin inHubei Province, and a $2 billion majorfacility at Baoshan near Shanghai. Thelatter was to be a complete plant pur-chased from Japan, a deal which hasnow been delayed but not canceled.

Coal and Electric Power.–China’soriginal plan called for the opening of 8new major coal mines and 30 powerstations by 1985. A coal industry de-velopment project worth $4 billion hasbeen under discussion with West Ger-many. Discussions have been heldwith France for the construction oftwo nuclear powerplants, but no con-tracts have resulted. Priority in elec-tric power development will probablygo to conventional sources of power,including major new hydroelectric sta-tions.

Transportation.—This has been a hith-erto neglected area, and Beijing hasbeen moving aggressively toward re-versing this situation. Reportedly,since 1976 more than $1 billion hasbeen set aside for foreign equipment inroad, rail, water, and pipeline transpor-tation, and negotiations valued at $4billion have been conducted for im-ports of truck, automobile, railroadcar, and locomotive plants and forshipping facilities.

Petrochemicals and Synthetic Fibers.—Approximately $3 billion in con-tracts for technology in petrochemicaland synthetics fields have been signed.

Communications and Electronics.—This is another sector that has beenneglected in the past but which nowhas a high priority. China evidentlywishes to leapfrog toward the mostmodern communications systems andhas entered into discussions with theUnited States for a communicationssatellite. It has also concluded an

6.

7

8.

9.

10.

11.

agreement with Japan for manufactur-ing facilities for color television sets.Part of this deal included the purchaseof an integrated circuit plant.

Nonferrous Metals.–Signed agree-ments exist in this area with Japanand the United States for a coppermining concentration complex and acopper smelter. Of the 120 key projec-tions in Hua’s original formulation ofthe 4 modernizations, 9 dealt with non-ferrous metals complexes.

Construction.—China’s constructionindustry has also been somewhat ne-glected in the past and has become amajor bottleneck for the expansion ofother sectors that require massive con-struction programs. As a result, Chinahas been interested in cement, asbes-tos plate, insulation, and constructionequipment. These have a projected val-ue of about three-fourths of a billiondollars.

Petroleum and Gas.–Both because ofdomestic energy shortages and be-cause of the potential of this sector asa foreign exchange earner, the petro-leum and gas industry has receivedhigh priority. Since 1976, $500 millionhas been spent on oil and gas explora-tion and exploitation equipment.

Machine Building.—China is inter-ested in foreign forges, foundries,press lines, and cutting tools whichcould lead to whole plant contracts to-taling more than $70 million.

Instruments and Controls.—China’seconomic leaders have, in the last fewyears, shown a renewed interest inquality control and standardization ofproducts. As a result there has beenconsiderable interest in measuring in-struments and analytic devices, andcontrol mechanisms for quality con-trol.

Agriculture.—Thus far, a relativelysmall amount of agricultural machin-ery has been purchased, primarily for


use in the large-scale State farms inthe north. With the reduction of mech-anization goals in the revised versionof the four modernizations program,machinery imports in this sector couldbe less than originally anticipated. Onthe other hand, China will probablycontinue to be interested in turnkeyprojects for fertilizers and insecti-c ides .3 5

“)(’entral 1 ntelligence Agenc~’, (’hina: Post-~tla(l Seurch for{’i[’ilian Ifl(ius trial 7’f~(htrO1O.q),” National 1+’oreign Assess-ment Center, 19’79, pp. 4-6.

In addition, China has shown considerableinterest in engineering and service contractsintended to supply design-engineering know-how and managerial skills. Such contractsprovide for foreign firms to design, act asprime contractor, and supervise the develop-ment of various projects. The transportationand mining sectors have received the mostattention: contracts have been signed withWest Germany and the United Kingdom forcoal mine development, and a major servicecontract for railroad development has beenunder discussion with Japan. Negotiationshave also been conducted with Denmark onport construction.

THE NATURE OF THE CHINESE ECONOMY

When the PRC was established, Chineseleaders looked to the Soviet Union for guid-ance and to the Soviet economy as a model toemulate. Although this close relationshiplasted only until 1956, the Chinese and Sovi-et economies still resemble each other. Bothare characterized by central planning, andboth tend to focus on physical output as acriterion for evaluating performance. Thishas resulted in less attention to the value ofproduction efficiency.

While there are similarities in the twoeconomies there are also significant differ-ences, The Chinese economy is both more de-centralized and far more ideologically driventhan the Soviet. As a consequence, Chinahas had a looser approach to economic plan-ning than has the U. S. S. R., and at timesideologically induced decisions have super-seded planner preferences. Decentralizationstems from 1956 to 1957, when dissatisfac-tion with the Soviet model began to surface.As previously noted, the first significantdecentralization occurred as part of theGreat Leap Forward in 1958, when a widerange of industries and financial resourceswere placed under provincial control andCommunist Party committees at the prov-ince and subprovincial levels were assigned amore direct role in running economic ac-tivities.

This had many negative results and wasmodified during the early 1960's. It is thesecond model of decentralization whichlargely persists today. The significant dif-ferences from the Great Leap model are first,that professional managers and engineersshare responsibility with Party committeesin the leadership of enterprises; and second,that responsibility for finance and commerceis held closely by the central Government incontrast to the Great Leap years when thisresponsibility was relinquished. It should benoted that China’s search for a balance be-tween centralized and decentralized forms ofeconomic management is closely related tothe search for a balance between economicefficiency (which has tended to lead to decen-tralization) and the distribution of wealthand economic equity (which has tended tosupport the continuation of an active centralrole in interprovincial redistributive reve-nue-sharing).36

There have also been attempts to accom-modate the power interests of influentialprovincial leaders. It is possible to think ofthe Chinese industrial economy as a three-


tiered phenomenon, the three tiers being“center,” “local,” and “collective.” Al-though the collective sector is subject toplanning, it experiences a measure of auton-omy not enjoyed by the other two tiers be-cause it is entitled to use aftertax profits in alocally discretionary fashion. Establishingand upgrading rural industry have been im-portant investment options for the collectivesector.

The “local” sector includes enterprisesunder provincial, municipal, and county con-trol. Unlike those in the collective sector,these enterprises are all under State owner-ship, and, despite the nomenclature, are sub-ject to a significant amount of central influ-ence. Local sector output forms a substan-tial part of the total value of Chinese indus-trial output.

Despite considerable decentralization, thecentral Government continues to be impor-tant. It maintains control over much heavyand strategic industry; it acts as the allo-cator of such priority goods as energy, keyraw materials, capital goods, military equip-ment, important exports, staple food prod-ucts, and cotton; and it controls interprovin-cial trade.37 The center maintains controlover the economy through such mechanismsas material supply planning; the fiscal andbanking systems; and control over prices,wages, and foreign trade.38

According to a recent statement by theState Planning Commission (SPC), the cen-ter’s responsibilities include:

1. the guidelines and policies of the nation-al economy; 2. output targets for major in-dustrial and agricultural products; 3. basicconstruction investment and major con-struction projects; 4. allocation of importantmaterials; 5. the purchase and allocation ofkey commodities; 6. the state budget and theissuance of currency; 7. the number ofworkers and employees to be added and the

total wage bill; 8. the prices of major indus-trial and agricultural products .39

SPC plays a key role in the planning sys-tem of the Chinese economy. It is generallybelieved that the preparation of economicplans involves both vertical or functionalplanning, and horizontal or territorial plann-ing.40 This dual approach is consistent withthe concept of dual control over the economyin which enterprises are subject both to cen-tral ministries and a unit of local govern-ment. At the central level there are a largenumber of economic ministries that overseethe operation of the economy. These areorganized along functional lines. Enterprisesthroughout the country that have the samefunctional identification come under theirjurisdiction. One stream of planning activityapparently occurs in this vertical system.

On the other hand, there is a secondstream of planning activity that is territori-al, centered around the province. Planning isa process of aggregation and disaggregationof data and tasks. Whereas in the verticalstream the aggregation and disaggregationis performed by ministries and subordinateenterprises, in the territorial stream this isdone by provinces and by the enterpriseswithin provincial boundaries. It is the re-sponsibility of SPC to aggregate on a na-tional basis the information produced inthese two streams of activity.

The planning process is thought to involvethree main stages which the Chinese refer toas “sent down twice, reported up once.”41

The process begins when SPC issues “con-trol numbers” for the coming year. These in-clude value of output, amount of investment,number of workers, and total wage bill andare determined on functional and territorialbases. These flow down through the system,territorially and functionally, generatingmore specific planning information which is

“Gordon Bennet t , (’hina ‘.s l’inarzc[~ and Trade (M. E.Sharpe, 1978), p. 74.

‘mLardy, op. cit., pp. 15-16.

“’Quoted in Nai-Ruenn Chen, “Economic Modernization inPost-hlao China; Policies, Problems, and Prospects, ” in JointEconomic Committee, (’hirze.sc Econorn> Po.st-hlao (Washing-ton, D. C.: U.S. Government Printing Office, 1978).

“’I.ardy, op. cit., pp. 15-16.4’ Ibid.


“reported up” and eventually gets back toSPC. This upward and downward flow of in-formation is by no means a purely technicaloperation; it is highly political, characterizedby bargaining and tradeoffs, and probablyresembles the U.S. budget process. After the“reporting up once” stage, SPC aggregatesthe information and produces a final plan forthe economy.

Provisions for innovation, presumablyalso including the incorporation of foreigntechnology, are folded into the plans duringthis process. But as with the Soviet econ-omy, significant structural constraints on in-novation are related to the system of man-agement. China has seen a variety of ap-proaches to enterprise management sincethe 1950’s; it has been the subject of politicaldispute and ideological debate, centeringaround the problem of whether “reds” or‘ ‘experts should run factories. Additionalissues have concerned whether productionnorms should predominate in management,and the use of material incentives, Manageri-al systems have varied from the Soviet style“one man management” to management byParty committee. Since 1978, the role andauthority of professional managers and ex-pert engineers has been emphasized, al-though the Party still has final responsibil-ity and many, if not most, managers aremembers of Party committees.

Regardless of managerial form, it is impor-tant to note the criteria used by higher au-thorities to evaluate management, and theperformance of firms in fulfilling the objec-tives of the plans. Performance criteria havechanged over 30 years, but there have al-ways been multiple, sometimes contradic-tory, criteria. For example, a 1972 reportlists performance criteria as quantity, quali-ty, variety, cost relationship, labor produc-tivity, profits, and funding; plus numbers ofworkers and total wage bill.42 The targetswere output, variety, quality, consumptionof raw materials, fuel and power, labor pro-

ductivity, costs, profits, and working capitalratio .43

While enterprises are expected to meet allof these targets, from time to time there hasbeen a tendency for enterprises to focus onlyon physical output in the belief that the plan-ning system is biased in this direction. At-tention to this target has led to losses in effi-ciency, product quality, and innovation:

Innovation is another frequent casualty ofthe drive to raise output. Research and ex-perimentation require the attention of engi-neers and skilled workers whose services arealso needed to maintain high levels of out-put. Complaints that “many enterprise lead-ers who are very concerned about plan fulfill-ment pay little attention to new productwork” fall on deaf ears as long as quantityrules supreme. Conflict between researchand production persists. In 1971, at Shang-hai’s Hung Ch’i shipyard, “Under the condi-tion of the urgency of the task of production,there were some people including some mem-bers of the basic level revolutionary commit-tee who said, ‘the task of production is al-ready so heavy, where is there time for carry-ing out innovation?’ There are even somewho said, ‘The task of production is a hardtarget, but the task of scientific research is asoft target. “44

Although there are signs that in some re-spects, particularly in terms of intersectoralcommunication, the Chinese economy ismore innovative than the Soviet economy, itnevertheless imposes technically conserva-tive norms on enterprise managers. In theSoviet case, this has inhibited not only in-digenous innovation, but also the effectiveabsorption of foreign technology .4’ (Seechapter X.)

As discussed above, one of the centralGovernment’s reactions to the chaos of theGreat Leap Forward was to reassert tight fi-nancial control over the economy. This con-

26.2 ● Technology and East- West Trade

trol has continued, and it is exercised pri-marily through the State budget and thebanking system. State enterprises are ex-pected to remit most of their aftertax profitsto the center, and these remittances makeupa substantial share of the State budget.Therefore, for capital construction and otherforms of investment, enterprises must relyon investment resources returned to themvia the State budget. This system, known asunified revenues and unified expenditures,has resulted in a lack of a direct connectionbetween investment funds and economic per-formance, and has also been a source of inef-ficiency. Recent policies have attempted toovercome this problem by shifting frombudgeted capital construction funding toloans supervised by the People’s Bank.

Bank loans have, therefore, been used forovercoming production difficulties, and willbe used more for working capital than for in-vestment in capital goods. Reportedly, how-ever, enterprises do try to get around bank-ing regulations and use bank loans for capi-tal stock. Because of the importance at-tached to physical output norms, enterprisemanagers seek investment funds. Whenthese funds are available through the Statebudget, only depreciation, not interest, ischarged. To meet production quotas, firmstherefore have a natural tendency to pursuea relatively costless strategy of seeking ver-tical integration, especially the acquisition ofwell-stocked machine shops which can repairequipment received from the outside, or re-tool existing machinery.46

Such patterns of management have pro-duced defects in the Chinese economy, in-cluding weak quality control, neglect of inno-vation, excessive vertical integration, andstockpiling—problems endemic to Soviet-style economies.47 Not surprisingly, the Chi-nese have sought remedies for these kinds ofproblems. During the early 1960’s, a numberof reforms were implemented, and some ofthe current discussion seems inspired by theevents of this period.

“>Rawski, op. cit., p. 183.‘ Ibid.

The reforms of the early 1960’s weresoundly denounced as revisionist during thecultural revolution. In fact, a series of thesemeasures came to be called “the five softdaggers. ” They included the use of profits asthe chief success indicator for enterprises;the subordination of “politics’ ’-especiallypolitical campaigns and ideological remold-ing sessions—to production; the widespreaduse of material incentives; reliance on ex-perts in factory management; and movementtowards greater enterprise autonomy .4’

Current economic thinking shows manysimilarities to the “five soft daggers. ” Theleadership is concerned with achievinggreater economic efficiencies and higherquality goods. It therefore feels that produc-tion goals should be expressed in valueterms (such as profits) rather than merephysical output. The idea of “productionfirst” also is now widely discussed; DengXiaoping has suggested that in the currenthistorical period, putting production first isthe key political task. Material incentives inthe form of bonuses and wage increases havebeen reintroduced in the past 2 years (al-though not without problems), and expertisein factory management is being stressedwith a consequent downplaying of the role ofParty committees. Finally, new approachesare being taken to the principle of enterpriseautonomy. In addition, it appears that atleast one leading economist of the 1960’s,Sun Yefang, has been rehabilitated followinghis cultural revolution disgrace, and hasbeen asked to take the lead in designing sixregional economic systems. The establish-ment of regional economic units above theprovince level is a step towards the assertionof greater central control over the local econ-omy and the simplification of planning toachieve better economic results.

In an attempt to free up economic activityfrom restrictive bureaucratic control exer-cised by central ministries, China has rees-tablished industrial companies (reminiscentof the “trusts” of the early 1960’s that were

“Bennett, op. cit., pp. 31 ff.


denounced during the cultural revolution), atleast 15 of which have been established dur-ing the last 2 years. Companies are designedto rationalize internal commerce and con-tracts and to cut across vertical bureaucraticlines. They have responsibility for planning,production, and coordination in their respec-tive fields. In addition, there are corpora-tions which are “economic accounting units”and operate on the basis of profit and loss.49

These serve as consultants for their respec-tive parent ministries and foreign trade cor-porations on matters relating to the importof foreign technology. In any particular fieldthere will be one corporation and severalcompanies. As of late 1978, a partial list ofcorporations included: The China Agricul-tural Machinery Corporation, The ChinaCereal and Oils Corporation, The ChinaChemical Construction Corporation, TheChina Chemical Fiber Corporation, TheChina Coal Industry Technique and Equip-ment Corporation, The China Cotton Spin-ning and Weaving Corporation, The ChinaFeedstuffs Corporation, The China Geologi-cal Exploration Corporation, The China Oiland Gas Exploration and Development Cor-poration, The China Petroleum Corporation,The China Radio Equipment Corporation,The China Railway and Technical Equip-ment Corporation, The China Seed Compa-ny, The China Shipbuilding Corporation, andThe China Waste Materials ReclamationCorporation.

Recently, these have entered into directcontracts with foreign vendors. For example,the Chemical Construction Corporation wasresponsible for importing hydrocrackingknow-how from Lummus and purchasingeight synthetic ammonia plants from Kel-logg in 1974. The China National ChemicalFibers Corporation evaluates petrochemicalfiber technology from Europe, the UnitedStates, and Japan, and recommends whichtechnologies China should buy.50

The reintroduction of the corporationform of organization has also been accompa-

nied by calls for greater enterprise special-ization designed to break down excessivepatterns of vertical integration. Some Chi-nese economists are beginning to discuss aversion of market socialism in which enter-prise specialization would be matched by amuch greater reliance on market mecha-nisms in the industrial economy. Currentlythey are at least officially forbidden. The ap-proach to economic organization would alsomake use of contracts to enforce interenter-prise agreements, and would rely more heav-ily on the banking system both for supplyinginvestment capital and for enforcing eco-nomic discipline. These proposed reforms areat various stages of discussion and imple-mentation. While some of them do in fact ap-pear to be steps in the direction of great effi-ciency, quality consciousness, and innova-tiveness, they are unquestionably subject toopposition in a number of quarters, includ-ing provincial authorities and corporation of-ficials.51

In sum, China’s planning and manage-ment practices, and indeed the structure ofthe economy itself, are now in a state of flux,and it is difficult to predict how far or howfast economic reform might go. Those mem-bers of the leadership, including many ofChina’s economists, favoring an aggressivepursuit of the four modernizations, un-doubtedly favor significant economic re-form. But there are others in the leadershipwho, while wishing to promote the four mod-ernizations, are, for reasons of self interestand ideology, hesitant to encourage signifi-cant economic reform. This is particularlytrue of reforms that will emphasize profit,market exchanges, and more rationalizedmanagement practices. The ongoing debatebears watching. It will have a major impactat least on the pace, if not the character, ofthe four modernizations program, and willaffect the extent of China’s reliance on andcapacity to absorb foreign technology.

4’(( ‘Altto BU.SI tl(>.~.~ A’(II ifll , Septemher octoher 1978, pp. 21ff.

‘“l hid., p, 22. “ Ihici., hlarch ,+\pril 1979, p. 56.


THE STRUCTURE OF ECONOMIC DECISIONMAKING

At present, the highest levels of economicpolicymaking take place in the State Councilon the Government side, and in the Politburoof the Central Committee of the CommunistParty on the Party side. The pinnacle ofpower in China is the standing committee ofthe Politburo of the Central Committee.While the body is clearly the locus of deci-sion for issues of strategic national impor-tance, studies of policymaking in China indi-cate that participation in policymaking isconsiderably broader. Of particular interestare various kinds of sectorial work confer-ences (that is, national conferences in a givenfunctional area involving Central Committeemembers, and central Government and pro-vincial government officials) and variouskinds of meetings of the Central Committeeitself. The State Council is China’s cabinet.It interprets policy coming from the Partyand oversees the work of the Government.Most high Government officials are alsomembers of the Politburo, while most minis-ters are members of the Central Committee.Under the State Council are a series of spe-cialized agencies, ministries, and commis-sions. Of particular importance in economicpolicy are the State commissions dealingwith economic and technical affairs. Theseare SPC and the State Science and Technol-ogy Commission (STC).

SPC is the center of economic policymak-ing after the Central Committee and theState Council. The other planning bodiesfollow the SPC’s policy; it approves thebudgets of the other commissions whichthen make detailed plans within these budg-etary guidelines. Reportedly, SPC has bu-reaus for production, foreign trade, commu-nications, agriculture, and construction, aswell as other bureaus corresponding to eachministry. It also has field offices at the pro-vincial and municipal levels .52

STC, abolished during the cultural revolu-tion, was reestablished in October 1977. A

“Ibid., p. 14.

measure of the importance the regime at-taches to science and technology in the fourmodernizations can be seen in that fact thata member of the Politburo was made minis-ter in charge. STC is known to have a bureaufor foreign affairs, a planning bureau, a pol-icy research office, a bureau for energy andpetrochemicals, a bureau for computers andmachinery, and five or six other bureaus ofunknown functions. These functions prob-ably reflect the eight priority areas of the na-tional science plan which was announced inearly 1978—agriculture, energy, materials,computers, lasers, space, high energy phys-ics, and genetic engineering. Prior to thecultural revolution, STC had an importantrole in coordinating national R&D activities,in science and technology planning, and insetting national standards.

The Chinese planning process involvesboth vertical plan development through thefunctional ministries and horizontal plandevelopment through the provinces. WhileSTC develops its own plans, it presumablyalso acts to provide specialized advice andinformation to SPC in the formulation of na-tional plans. It is SPC that has the key rolein turning national economic policy as speci-fied by the Party and the State Council intoa set of priorities, although little is knownabout how and by what criteria this is done.Nor is it entirely clear how technological re-quirements are set, although decision on in-cremental technological improvements andevaluation of the utility of technologiesresult from the downward and upward flowof planning information. The process of set-ting major new nonincremental technologi-cal requirements is less clear. On issues ofmajor national importance, the State Coun-cil and the Central Committee undoubtedlyplay important roles, but information avail-able to, and the strategic position of, SPCshould ensure it a lead role in identifying atthe policy level significant areas of techno-logical need. In evaluating that need, par-ticularly from the technical side, SPC has at

Ch. Xl— Western Technology in the People Republic of China ● 265

its disposal the competencies of the State resources of the Academy of Science, minis-Capital Construction Commission (described terial research institutes, and professionalbelow) and STC. The latter can draw on the societies.

DECISIONMAKING ON FOREIGN TECHNOLOGY

Predictably, given the multiple bureau-cratic actors involved in making Chineseeconomic policy and managing the economy,there is no single or simple pattern of deci-sionmaking concerning the importation offoreign technology. Moreover, little detailedknowledge of this process is available in theWest. Nevertheless with the growth in Chi-nese foreign trade and in the number of con-tacts relating to foreign technology, under-standing of the decisionmaking process is in-creasing. Figure 16 represents a recent at-tempt by the CIA to summarize the decision-making procedure.

According to the CIA, the procedure be-gins with an initial request for foreign tech-nology from provincial governments, indi-vidual plants, or industrial ministries. In ad-dition, China has recently resurrected vari-ous types of industrial corporations thattypically would be the end users of technol-ogy, and which undoubtedly generate theirown requirements for foreign technology.Requests then go to SPC which approves theinitiation of an investigation into obtainingtechnology. The SPC behavior presumably isguided by national economic policy directedfrom the State Council and the Central Com-mittee, and by its own preliminary estimatesand initial control figures for imports and ex-ports based on overall economic goals andstatistical information it has received fromvarious sources.” SPC works with the Minis-try of Foreign Trade (MFT) setting prioritiesfor foreign technology. Reportedly, MFT hasresponsibility for mapping out general im-port and export plans that accord both withforeign policy and with existing contractualcommitments to foreign trading partners.

‘y ‘Gene T, Hsiao, 7’he F’oreign Tradp of China: Polic?~, Lau,

and Practice (Berkele~’, Calif.: The University of CaliforniaPress, 1977), p. 74.

Also taken into account are the nature of im-port and export commodities, world marketconditions, domestic demand and exportcapability, and available foreign currencyand external credits .54

According to the CIA, the State EconomicCommission (SEC) also may initiate requestsfor foreign technology. SEC is responsiblefor the implementation of production plansapproved by SPC on an annual and quarterlybasis. It coordinates the supply and demandof industrial raw materials, energy, andother inputs. If domestic sources are un-available it can turn to imports to overcomeshortages. The SEC’s activities in foreigntrade are thus limited more to raw materialsand other industrial inputs, than to plantand equipment orders.55 But according to in-formation received during a recent SEC mis-sion to the United States, the Commissionalso has a bureau of technical affairs, andmay, therefore, have a more active role inassessing and evaluating technology thanhad been thought.

An important actor which is not includedin the CIA scheme is the State Capital Con-struction Commission (SCCC), which prob-ably coordinates with SPC in the earlystages of the decision process. SCCC has thelead role in overseeing the administration ofprojects exceeding a certain size. SCCC coor-dinates the work of various ministries—forexample, the Ministry of Metallurgical In-dustry with regard to steel investments.Once the SCCC’s budget receives SPC ap-proval, it coordinates investment plans ofministries, and in turn approves their invest-ment budgets. SCCC has liaison bureaus for

‘)’ I hid.“’)(’ hirza Busine.s.s F/r[ieu. Nlarch April 1979, p. 14.

r 4 -:J 1“ : -, - -’ ‘i — 18


Figure 16.—China: Technology Import Decisionmaking Procedure

7.,7%., i ..M:+:,*: End-User Corporations Professional Societies Industrial Ministries

ITrading Corporations ~~~<~~

.&{,&#= !. T 7

Obtain and research available literatureForm delegations to visit foreign manufactures

I

.,!% > ~~. ... % ,. ..:,:; .Consult with foreign counterpart-experts “6#%;@F

Evaluate available technologies . . . ..: ~$~$

Make recommendations toMinistries and State Planning Commission

‘::4&~&:~:j+ *’

Tech import I

SOURCE Central Intelligence Agency. National Foreign Assessment Center. China post Mao Search for Cwd(an Indusfrlal Technology, 1979 P 8

each ministry except agriculture. These in- likely that SCCC has become considerablyelude bureaus of coal, petrochemicals, ma- more influential since the beginning of 1978.chine building, petroleum, railroad, metal- Some have speculated that it was the motivelurgy, and water conservation and power. force behind the reconsideration of the fourSCCC maintains branches at the local level.56 modernizations and the move toward more

Unlike SEC, SCCC can initiate requests “balanced” and proportionate development

for plant equipment orders from abroad. It is as it began to aggregate the enormous capi-tal construction requirements coming from

“Ibid. v a r i o u s m i n i s t r i e s .


Once authorization for beginning an in-vestigation for obtaining technology hasbeen approved, the action shifts to other in-stitutions. Until recently a lead role in thisstage was played by the foreign trading cor-porations. These fall administratively underMFT which transmits to them guidelines forspecific import and export plans. The foreigntrade corporations add detail to the guide-lines, and return them to MFT. Once ap-proved, they become part of the generaltrade plans and, in turn, part of the nationaleconomic plan. Finally, after approval of thenational plan by the State Council, MFTassumes ultimate responsibility for super-vising the national foreign trade corpora-tions in executing their specific plans.57 How-ever, at the search stage, industrial minis-tries, professional societies, and end-usercorporations are also important. As the CIAhas pointed out, these groups obtain and re-search available literature, form foreign dele-gations to visit foreign manufacturers, con-sult with foreign counterpart experts, evalu-ate foreign technology, and finally make rec-ommendations to the ministries and SPC.

The Chinese have shown increasing so-phistication in this search procedure, and agreat deal of technology and technical in-formation is transferred during this searchstage. The Chinese have been making a coor-dinated national effort to accumulate asmuch written material as possible. TheChina National Publication Import Corpora-tion procures technical titles from Westernbooksellers, and the Beijing Document Serv-ice was recently established to serve as afocus for a national technical informationsystem linking the libraries of the ChineseAcademy of Sciences, research institutes,ministries, and other organizations. The Chi-nese are interested in using the latest infor-mation-handling technology to provide ahigh-speed technical information network ona national scale.

The last 2% years have seen an enormousgrowth in Chinese technical delegationstraveling abroad to Western Europe, Japan,

‘ 1 {siao, op. cit., pp. 74-5.

and the United States. Some 2,000 Chinesetechnicians and officials have traveled inthis capacity in 1977 and 1978. Members ofthese delegations appear to their Westerncontacts to be knowledgeable and well-in-formed. It has been suggested that thesedelegations are logically arranged in a serialfashion beginning first with “surveygroups” which visit potential vendors to dis-cuss technology and prices. They are thewindow shoppers who then report back theirfindings. Follow-on “study groups” thenvisit only a few selected firms chosen on thebasis of the reports. These study groups en-gage in a more detailed investigation ori-ented toward the specific applicability of for-eign technology to specific Chinese needs,and may be composed of individuals withgreater technical expertise. The reports ofthe study groups become the basis for select-ing a vendor. 58

In addition, the Chinese have been in-viting many Western firms and Western ex-perts to present technical seminars in China,Reportedly, more than 250 such seminarswere held during the first 6 months of 1978.’’”

The results of these technical survey ac-tivities are widely discussed in China withinthe economic ministries. Additional techni-cal advice is supplied by professional soci-eties such as the China Chemical Society orthe China Civil Engineering Society. Suchsocieties occupy a strategic position in net-works of information since they have con-tacts with foreign counterparts on one handand they are linked to domestic industrialministries and research institutes on theother. China’s R&D efforts are vertically or-ganized by production ministries, the Acad-emy of Sciences, and the higher educationalsystem. The professional societies on theother hand, draw their members from thevertically organized R&D sectors, and fromproduction units. They thus appear to offer asignificant horizontal linkage that may over-come some of the worst forms of "bureaucra -

“(’ IA, op. cit,, pp. 3-4,“’I bid., pp. 2-3.


tism” induced by strong vertical organiza-tions.

Once the search and survey are completed,a recommendation is made to the ministriesand the Planning Commission and the pur-chase is then factored into national economicplans. As the CIA scheme shows, MFT isagain involved at this stage. SCCC also prob-ably plays an important role in approvingthe selection of the foreign vendor. Depend-ing on the scale of the project, the StateCouncil may also be asked to intervene in thefinal stage of the decisionmaking process.Once approval of the project has been given,the Ministry of Finance, working throughthe Bank of China, must authorize funds.

Although it had been assumed that for-eign exchange was closely controlled by thecenter, in the last few years individual enter-prises may have had greater discretion thanhas been thought. Institutes of the Academyof Sciences have their own foreign exchangebudgets, and reportedly allocations of for-eign exchange to local production units forthe purchase of foreign equipment have re-cently doubled. However, China has appar-ently been dissatisfied with authorizationand control procedures for the use of foreignexchange which make it possible for buyersand users of technology to minimize theirconsultations with the Bank of China.60 As aresult, it was announced in April 1979, that anew General Administration of ExchangeControl has been established directly underthe leadership of the State Council.61

The final phase of the technology acquisi-tion process is the initiation of formal pur-chasing procedures by a foreign trade cor-poration. The corporation most directly in-volved with acquiring foreign technologyand responsible for importing whole plantsand high-technology equipment has been theChina National Technical Import Corpora-tion (TECHIMPORT). While the use ofTECH IMPORT and other corporations mayfacilitate central control, particularly controlover foreign exchange, in the past these cor-

‘Y’hina ~usine.~.< h’et’iel[, March April 1979, p. 3.“’BeiJing Rc[iell, Apr. 20, 1979, p. 2.

porations have prevented direct contacts be-tween vendors and end users. The Chineseseem now to be moving away from the use ofmiddlemen by encouraging users to enterinto direct negotiations with vendors. Theforeign trade corporations may then take re-sponsibility for administrative details. Thefirst such contract signed with a U.S. firmwas between Atlantic Richfield and theChina Petroleum Corporation. The contractwas signed on March 17, 1979, and providesfor seismic survey work in offshore waters.

Another organization with a role inChina’s technology acquisition procedures isthe China Committee for the Promotion ofInternational Trade. Officially a nongovern-mental body which nevertheless maintainsclose ties with MFT, it has helped establishand maintain contacts with foreign tradingfirms and agencies, and has also had a role insponsoring foreign travel and exhibits inChina. Its U.S. counterpart, particularly inthe period prior to normalization and directgovernment-to-government contacts, is theNational Council for U.S.-China Trade.

A final, and possibly significant, omissionfrom the CIA scheme is STC. It is likelythat, at least for some types of technology,this commission would play a role both in theinitial stages and in the search and evalua-tion stages.

It is difficult to assess the effectiveness ofChina’s decisionmaking processes for im-porting foreign technology. It is possiblethat the initial surge of interest in foreigntechnology in 1977 and 1978 exceededChina’s decisionmaking capacity, and thatone of the reasons for retrenchment evidentin early 1979 was the realization that themultiple demands for foreign technologycoming from the various sectors of the econ-omy would exceed the PRC’s ability to payand to absorb. It is curious, however, thatdiscussions with foreign firms should havegone as far as they did without apparent cen-tral control. One explanation for theseevents is that the new policies were intendedto shake up the economic structure, and/orwere part of strategy to encourage Chinese


economic managers to survey the technol-ogy available on world markets. An alterna-tive explanation is that things did get out ofcontrol, and that only when SPC and SCCCbegan to aggregate the demands did China’stop leaders begin to realize that the coun-try’s capacity to pay for and absorb technol-ogy was being taxed. The charge of inade-quate management of the technology acqui-sition program is supported by the establish-ment of the General Administration of Ex-change Control in April of this year.

The Chinese are clearly seeking a balancebetween central control and flexibility. Thesanctioning of contracting authority for end-user corporations is a step in the direction ofgreater flexibility. It is also possible thatwith the greater liberalization of the econ-omy described above, additional flexibility inforeign trade and technology acquisition willfollow. For instance there have been reportsof industries under local government controlentering into product payback schemes withforeign firms on their own authority. It islikely, therefore, that a greater measure ofdecentralization in foreign trade can be ex-pected. There are two caveats to this gener-alization, however. First, the central Govern-ment is likely to retain careful control overforeign exchange. Second, acquisition ofwhole plants and high-technology items isalso likely to remain in centralized hands.

Apart from exchange control functions,the two main centers of authority for foreigntrade appear to be SPC and SCCC, which re-portedly “direct the work of the Ministry ofForeign Trade.’’62 Undoubtedly the tasksconfronting SPC and SCCC are numerousand complex since they have major roles indirecting the domestic economy as well. Re-portedly the personnel at SPC are of thehighest quality. Unfortunately, it is impossi-ble to determine the views of the SPC staffon the series of important matters of eco-nomic policy confronting China: the mix ofheavy industry, light industry, and agricul-ture investments; the degree of technological

self-reliance; the relative share of effort go-ing to military work; etc. Officially, SPC car-ries out national economic policy handeddown from above, but because of its strate-gic position in economic management it ispresumably also in a position to influencethe agenda of the top policy makers, there af-fecting policy itself.

Some sense of the operation of the technol-ogy acquisition procedures can be extractedfrom the following examples, which, how-ever, are not intended to be typical examplesof China’s negotiating strategies.

Decisionmaking for acquiring foreigntechnology needed in Chinese scientific re-search is nicely illustrated in a recent reporton the efforts of the Institute of Oceanogra-phy to procure an advanced research vessel.This project is reportedly one of the top 25priority items in the new science develop-ment plan. The decisionmaking process in-volved an initiative from the Institute, ap-proval from the Academy’s central offices,and authorization from the State Council.The first phase took less than 1 year and wascompleted in December 1977. With thishigh-level authorization, the Institute begandetailed studies of its objectives and itsdomestic capabilities for reaching those ob-jectives, and concluded that the ship shouldbe procured abroad. An interdisciplinary andinterorganizational team was then formed toinvestigate the state-of-the-art in Japan andthe United States. The delegation wasabroad for nearly 6 weeks. Its recommenda-tions will require the approval of the Acad-emy of Sciences, which in turn will pass it onto the Ministry of Foreign Trade, and finallyto the China National Machinery Import andExport Corporation, which will contact po-tential suppliers.63

A second example concerns a $5.2 millioncontract between TECH IMPORT and theHigh Voltage Engineering Corporation(HVEC) of Burlington, Mass., for the pur-chase of an HI-13 tandem accelerator to be

“’I bid., hlay ,June 1978, pp. 9 ff.


used by the Atomic Energy Institute of theChinese Academy of Sciences. In 1975, theChinese initiated correspondence with theAmerican firm. The corporation attractedChinese attention because one of its found-ers had been Robert Van de Graff, a well-known figure in modern physics and the in-ventor of the Van de Graff accelerator.Nothing came of these initial contacts until1978, presumably because of the confusionin Chinese scientific circles occasioned by

the succession struggle involving the Gangof Four. In 1978, however, TECHIMPORTinvited a representative from HVEC toPeking for preliminary talks. In July 1978,TECHIMPORT sent its own 10-man delega-tion to the United States to visit the firmand also one of its chief competitors. In Au-gust, HVEC was invited to Peking to dis-cuss the possible installation of the HI-13machine, and it sent its top people in engi-neering and management.

Photo credit: U.S. China Trade Council

13-million volt HI-13 Tandem accelerator, sold by High Voltage Engineering Corporationto the PRC


What was expected to be a 2-week visitlasted 32 days. The U.S. team met with itsChinese counterparts 35 times during thisperiod, the Chinese inevitably outnumberingthe Americans. Representatives from theAcademy of Sciences as well as from TECH-IMPORT participated. The scientist mem-bers of the Chinese team produced a barrageof questions and kept seeking an improvedversion of the HI-13. According to the Amer-ican side, the Chinese objectives were to ex-tract the maximum technical informationand to wear down the Americans with highlytechnical questions in order to enable TECH-IMPORT to get the best possible contractterms. The patience of the Americans worethin, and on the second occasion that theythreatened to leave without concluding thecontract, the Chinese moved quickly to anagreement and the contract was promptlyprepared. In the final 2 days while the con-tract was being typed, the Chinese asked theAmericans whether they would be preparedto meet with a second group of end userswho were also interested in their equipment.HVEC agreed, and this led to preliminarydiscussions on a second purchase.

The endurance of HVEC paid off. Not onlywas it able to incorporate favorable termsinto the contract, but there is now potentialfor further business. Once assurance hasbeen given that the equipment is not subjectto U.S. or CoCom export controls, the Chi-nese will put down 15 percent of the priceand will make installments at 6-month inter-vals with the last two 5-percent paymentscoming after demonstration and a 12-monthperformance evaluation. ”

A third example involves an engineeringservice contract between TECH IMPORTand Kaiser Engineers of Oakland, Calif. Thiscontact was initiated when Kaiser sent a rep-resentative to China to give a paper on coalmine maintenance. At this time, the firmwas not actively soliciting business in China.In March 1978, however, the Chinese con-tacted the firm via the PRC liaison office inWashington, to discuss the possibility of

“’lt)ici., No\emt)er I)w(’mber 1 97X, pp. 5-6.

developing iron ore mines. Kaiser first ascer-tained that the Chinese were aware that theywere purely an engineering service concernand then supplied the Chinese with informa-tion about their firm. After this material wasthoroughly reviewed, TECHIMPORT pro-vided Kaiser with sufficient informationabout its requirements to enable it to orga-nize an appropriate team to go to China thefollowing month.

As with the previous case, the Chinesesubjected the Kaiser representatives to ex-haustive questioning. Among the question-ers was the Minister of the MetallurgicalIndustry. The Chinese were apparently sat-isfied with Kaiser’s answers, for 1 monthafter the visit it obtained the contract fromTECHIMPORT to develop two mines. Onewas an old mine that needed upgrading; theother involved opening mining operations ata new iron ore deposit. The contract is for 1year and provides for one lumpsum pay-ment. According to the contract, Kaiser is todo the general engineering, although thereare also possibilities for detailed engineeringdevelopments. Kaiser has begun sendingteams to China and also has been receivingChinese engineers for training in California.Although Kaiser dealt primarily with themining and metallurgical technology special-ists at TECH IMPORT, they also had con-tact with the Chinese Society of Metals, con-firming again the importance of professionalsocieties in technology acquisition decisions.

Although there is undoubtedly consider-able variation in China’s approach to negoti-ations, on the basis of these and other cases,a few generalizations about the style of ac-quiring technology can be tentatively ad-vanced. First, when technical requirementsenter the decisionmaking process, effortswill be made, as in the oceanographic vesselcase, to assess the possibility and desirabili-ty of meeting the need with indigenous tech-nology. Second, these and other cases in-dicate that China prepares for its searchesand negotiations with great care. Third, ef-forts are made to extract the maximumamount of information from the negotia-tions, and increasingly to use contractual ar-


rangements that will also yield as much in-formation and experience to the Chinese aspossible. For instance, it has been reportedthat China wants to change from fixed-fee tocost-plus contracts, which offer more in-timate contacts with vendors. Fourth, theChinese are hard bargainers seeking to getas much for their money as possible. AsHVEC and other cases show, they some-times use delaying tactics and gruellingnegotiating sessions to wear down the sellerin order to get better terms. Finally, China’ssearch for technology and negotiating tac-tics may have political and diplomatic, aswell as economic and technical objectives.

In conclusion, mention should be made ofthe technology transfers and knowledge

flows that will result from the exchanges ofstudents and scholars. While this area hasgenerally been beyond the scope of exportcontrol legislation, it is important to recog-nize that such exchanges are mechanisms oftransfer. The Chinese have estimated that asmany as 10,000 students and scholars couldbe sent abroad for training by 1985. The ex-change agreement with the United Statesprovides for a target of 500 to 700 Chinese tocome to this country to study during thefirst year of the agreement. Most of thosewho have come thus far have been midcareerresearch scientists. It should be noted thatin keeping with the highly decentralized andpluralistic system of higher education in theUnited States, student and scholar ex-changes are at present largely beyond mostkinds of central U.S. policy controls.

THE ROLE OF WESTERN TECHNOLOGYIN THE CHINESE ECONOMY

Western technology has become economi-cally significant in the PRC only in the pastdecade. For this reason, and because hardeconomic data for the PRC is extremelyscarce (the population of the country was un-known until 1979), attempts at macroeco-nomic analyses of the economy would bemeaningless exercises. The role of foreigntrade and the technology component in thattrade can only be treated anecdotally. In thisarea the most meaningful generalizationsthat can be made concern the potential,rather than past, impacts of trade with theWest.

Chinese foreign trade presently involvesthe exchange of crude oil, coal, ores, food-stuffs, simple machine tools, textiles, bi-cycles and other manufactures for equip-ment and technologies for oil exploration,coal mining, steelmaking, chemical fertil-izers, power generation, petrochemicals, anda small number of consumer goods. In addi-tion, after 1961, bad harvests forced thePRC to import several million tons of grainfrom non-Communist countries, and it has

continued this practice as an economical wayof feeding its large northern cities.

The PRC reaps substantial gains from itscomparative advantage in foreign trade. Itexports items that have a high labor andnatural resource content, and imports prod-ucts that it could produce, if at all, only withgreat expenditure of high-technology re-sources. Its exports—specialty foods, silk,textiles, and high-grade handicrafts—com-mand a high price abroad but are accordedlow-priority domestically; with these earn-ings, it imports wheat, steel mill products,and electronics—items that command a com-paratively low price in world markets, butare of great usefulness in running and ex-panding the economic machinery at home.

Foreign technology will provide the cut-ting edge of the general program for econom-ic modernization discussed above. This tech-nology will be most useful in the urban in-dustries where large-scale plants are en-gaged in basic industry and military produc-tion. These plants typically are under central


control, mass producing standardized prod-ucts of tried a-rid prove-n design. They-tendnot to be highly innovative. The quality oftheir products and production efficiencystand to benefit greatly from the import ofmodern process equipment and completeplants. In contrast, the medium- to small-scale enterprises that are typically underprovincial or municipal control have beendescribed as innovative and dynamic. Someof these are also important potential andactual end users of such foreign technologyas production equipment and prototypes foradoption and copying.

In the 1950’s embodied technology in theform of imported industrial goods from theU. S. S. R., particularly in complete plant pur-chases, was crucial in equipping basic in-dustries such as iron and steel, transport,and mining. Imports were also responsiblefor the creation of virtually new industries,including machine building, electrical powergeneration, chemicals, and crude oil produc-tion. Soviet withdrawal, halfway throughthe agreed program, virtually halted China’sindustrial progress in some sectors.

The expansion of industrial imports in the1970’s is important, but not in the same wayas that of the 1950’s. The scale of total im-ports is now relatively small; for instance,the average value of imports of machineryand transport between 1970 and 1973 wasbelow the average for 1952 to 1960. Further,since domestic output of these commoditieshas increased several times between the twophases, the imported share of the total valueof deliveries of machinery and transportequipment has fallen dramatically.

But despite the low overall volume of in-dustrial imports, their importance to theeconomy cannot be overemphasized. Notonly have Chinese imports of completeplants risen from the 1950’s, but these im-ports are crucial in the context of particularindustries. In fact, nearly all of the $2.6billion spent between 1973 and 1976 hasbeen to support two industries: chemicalsand steel. In chemicals, imports are addingover a third to the capacity of the chemical

fertilizer industry, and in the case of man-made fibers and petrochemicals, imports arepractically creating new industries.

The situation with respect to steel is dif-ferent. This is a well-established industrythat, due to planning errors, is technicall y in-efficient and unable to satisfy domestic de-mand. Imports of finished steel productsnow account for over 90 percent of total Chi-nese steel purchases, paid for at the expenseof machinery. The effect of steel plant im-ports should be to increase steel finishingcapacity by a third as compared to the early1970’s.

The industrial imports are more importantthan their quantitative level suggests pre-cisely because of their component of em-bodied technology, They have the capacityto provide a cumulative, quantitative im-provement in Chinese industry. The Chinese,like the Soviets, acquire foreign technologyin many ways. They read literature; theysend specialists to study abroad; they en-courage foreign firms to give expositions inChina. They also purchase prototypes thatthey try to copy in substantial quantities.All of this is useful, although prototypecopying has been more difficult than ex-pected. For example, in 1963, the Chinesepurchased a Dutch urea plant that theyplanned to replicate in a twin plant. Theywere unable to do so, and in general pro-totype copying has not so far proven feasibleas a solution to technology acquisition. TheChinese have, therefore, had to purchasesubstantial quantities of equipment and toobtain the technical assistance necessary toadapt and integrate specialized equipmentinto their industrial systems. The remainderof this section deals with two industries inwhich this process has been facilitated byU.S. industrial exports; computers and oildrilling and exploration equipment.

C O M P U T E R S

The computer industry in the PRC has re-ceived relatively little attention in the West.Western computers did not begin to appearin China until several years ago, and relative-


ly little information on this industry is avail-able. Western sources are primarily limitedto a series of trip reports which record theobservations of delegations that have trav-eled in China in the past 5 years,65 and a 1973CIA report on computers in the PRC. Thelatter provided details on production facili-ties and on performance characteristics ofmany domestically produced computers.66

The CIA material reveals the extent towhich the Chinese computer industry before1960 relied on Soviet assistance; the trip re-ports often provide excellent information onthe present technical level of these comput-ers. Nevertheless, discussion of this industrymust remain incomplete and inconclusive.

‘]’rrhese are available through the National Council for U. S.-China Trade.

“Central Intelligence Agency, The Computer industry inthe People Republic of (’hina, National Foreign AssessmentCenter, 1973. I

China produced its first computer in 1958from designs provided by the U.S.S.R. Sub-sequent models were also based on Sovietdesigns or prototypes. The Sine-Soviet splitoccurred before the development of Sovietcomputers based on transistors, but thePRC was able to continue its domestic devel-opment. It produced a second-generationcomputer in 1965, only about 3 years afterthe introduction of transistorized computersin the U.S.S.R. A computer based on inte-grated circuits appeared within about 2years of such models in the U.S.S.R. In 1974,the PRC announced the production of itsfirst computer capable of 1 million opera-tions per second. (In comparison, Americancomputers were then operating with speedsof about 12 million operations per second.)The Chinese are presently capable of build-ing computers with speeds higher than anyreported Soviet computer in production.

Photo credit: Hsinhua News Agency

Testing calculators produced domestically in the PRC


This might suggest that the Chinese havebeen able to surpass the U.S.S.R. in comput-er technology, but the impression is mislead-ing. The U.S.S.R. is capable of producingrelatively large quantities under conditionsof serial production, but virtually all Chinesecomputers are prototypes or small batchmodels. The stock of computers in theU.S.S.R. is at least 10, if not 20, times that ofthe PRC. Only a few factories in China pro-duce more than a few computers each year,and only one of these is equipped withmodern automated equipment for assemblyand testing of computer components andfinal products.

As was the case in the U. S. S. R., the quali-ty of Chinese computer peripherals and soft-ware lags significantly behind the perform-ance of the central processing unit, thus lim-iting the effectiveness of the computer. Thisis an area that is currently receiving highpriority, as is the development of better pro-duction capabilities to meet the demand forlarger quantities of higher quality integratedcircuits. At present, China’s integrated cir-cuits are about 7 years behind the state-of-the-art in the West, and the lag in productiontechnology and production capacity is evengreater. Although China has been able toclose some of the gap in its production of ad-vanced integrated circuits, it. has done soonly in small-scale laboratory production.The methods used to achieve these resultsare outdated, the production process ineffi-cient, and the number of devices that can bemanufactured is limited. In order to meetthis shortcoming, the PRC attempted to pur-chase a Japanese turnkey plant for the pro-duction of integrated circuits (ICs). Thisplant was to be part of a deal that includedfacilities for the production of color televi-sion sets. The IC portion of the project wasblocked by CoCom restrictions. Nonetheless,the Chinese have begun to close the gap inthe production of ICs. As their capability inthis area increases, computer production willalso begin to expand more rapidly. But,while the availability of better ICs is impor-tant to the production of new computerswith very high speeds, the most important

advantage of their increased availability willbe to reduce the size and production costs ofthose computers already available in limitedquantities in China.

Essential to the effective use of those com-puters produced in the PRC are improve-ments in the quality and range of peripheraldevices. Available primary memory, for in-stance, lags far behind both Western andSoviet computers. Although access time isreasonably good by Western standards, thelimited core memory is a great problem,especially in light of an even greater lagbehind the West in other online storagecapabilities.

Magnetic drums and magnetic tapes con-tinue to be the predominant form of other on-line storage for Chinese computers. Magne-tic disk use did not appear on a prototypecomputer until late in 1977. Thus far, thereare believed to be only two models capable ofmaking use of disks for storage, and thosedisks that are available have a capacity one-third that of the best disks now being pro-duced in the U.S.S.R. and Eastern Europe.

In addition to problems with insufficientmemory capacity, Chinese computers arelimited in the rate at which information canbe fed into the computer and put out by thesystem. The principal forms of input con-tinue to be keyboard and papertape readers.There has been no evidence of the use ofcardreaders, which would represent a signifi-cant improvement over the current state ofinput technology. This is a particular liabili-ty for problems that involve large data-han-dling requirements, or frequent updating ofdata banks. Such tasks are also difficult forChinese computers since they place a highdemand on the availability of a range ofhigh-quality output devices,

The Chinese produce standard line print-ers in quantities that seem to meet their de-mand but, at 600 to 800 lines per second, theunit is slow by Western standards. A newermodel, which employs electrostatic printingtechnology and has a speed of 1,800 lines perminute, has appeared in the most advanced


computer prototypes, but is unlikely to bewidely available soon. The availability ofother terminals and output devices is simi-larly limited, and those that are producedemploy early technology.

The small number of standardized com-puter models has delayed the developmentof software, a situation similar to that in theU.S.S.R. prior to the introduction of Ryad.Efforts are now focused on extending therepertoire of the languages most commonlyused in the West and on training programmersin adapting programs for use in differentmodels.

The architecture of the first series ofChinese minicomputers seems to have beenbased on an American prototype, but thesecond series was almost certainly designedby the Chinese themselves—after extensiveexamination of the architecture of both IBMand Control Data computers. The goal forthis second series is to achieve software com-parability and program interchangeability,but there are indications that different fac-tories producing the same model are usingdifferent hardware designs.

Since the cessation of extensive transfersof technology from the U. S. S. R., the Chinesecomputer industry has received very limitedassistance from abroad, in either manufac-turing technology or computers themselves.In fact, no country appears to have trans-ferred computer manufacturing technologyto China since 1960. This partly explains thecomparatively slow progress of the Chinesein serial production relative to their progressin the design of prototypes. Limited importsof Western computers took place during themid-1960’s, but no complete or detailed sur-vey of the sales from this period, or for the1970’s, is available.

France and Britain both sold several com-puters to the PRC between 1964 and 1967,before imports of virtually all Western tech-nology were blocked by the policies of thecultural revolution. These systems went toseveral different end users for seismic data

analysis, process control, plant automation,and medical research. The two largest are be-lieved to be in Beijing’s Central StatisticalOffice. The primary source of demandthroughout the 1970’s has continued to beplant automation and data handling or anal-ysis.

Accurate figures for computer importsduring the 1970’s are unavailable, but it isunlikely that major orders were placedbefore 1973, and these have remained quitelimited since. Orders during 1973 and 1974probably amounted to about $6 million to $7million per year, rising about $25 million foreach of the next several years. During 1978,these figures rose dramatically, primarily asa result of a single $69 million contract withan American firm, but imports much in ex-cess of $100 million per year are consideredunlikely.

China desires to be as self-sufficient aspossible, but difficulties in serial productionof computers are likely to persist. Imports ofindividual Western models will contributemuch by providing computers with largedata-handling capabilities for networks thatinvolve data transmission and the use ofremote terminals, and for various businessand advanced scientific uses. The acquisitionof software and the increased exposure ofChinese programmers and users to Westerntechnology will also aid the Chinese in theadvancement of their own software capabil-ities. Imported computers will be placed inhigh-priority areas, but less-than-criticalusers will have to await improvement indomestic manufacturing capabilities. Thus,China has little interest in purchasing manysmall- or medium-size computers. These willbe produced domestically; until then, endusers will do without.

A shift in the primary motivation behindthe selection of computer imports appears tohave occurred in recent years. The demandfor computers with specific applications,particularly in the all-important petroleumindustry, indicates a preoccupation with thespecific services rendered by individual com-


puters rather than more general software ac-quisition. Most other computers importedby the Chinese have been for process controlat imported turnkey plants, or for end usesfor which domestic computers are not par-ticularly well-suited—analyses of weatherdata, computers and terminals for the Bankof China, and air traffic control.

On the other hand, some imports are moti-vated primarily by the desire to obtain pro-totypes for domestic production. Minicom-puters probably fall into this category. Thesecondary benefits of all imports, moreover,lie in the exposure they provide to terminals,peripherals, software, etc. Any Westerncomputer, therefore, may ultimately help inthe design of better Chinese products.

Western export controls place a severeconstraint on the purchase of computer man-ufacturing technology. They also limit thesale of systems with certain performancecharacteristics. Relaxation of these regula-tions would almost certainly result in theallocation of greater amounts of foreign cur-rency for the purchase of large, advancedWestern computers in high-priority sectors.Access to these systems would provide tech-nology surpassing China’s present technicalfrontier and specific capabilities to benefitthe entire economy.

Little is known about the criteria em-ployed in selecting Western suppliers. As inthe U. S. S. R., the most important factorseems to be the desire to obtain the bestavailable technology. In many cases thiswould point to American suppliers, despitethe difficulty of obtaining U.S. exportlicenses. For example, a Japanese firmrecently contracted to supply computers forthe Chinese Meteorological Center, but onlyafter an American computer firm withdrewfrom negotiations for export control reasons.When the contract was signed by the Japa-nese, the United States tried to block thesale through CoCom. Safeguards were addedand the sale was ultimately approved. At themoment, the Chinese have no difficulties ob-taining financing, although this may changeas their hard-currency debt grows (see

chapter III). Thus, the only other factor in-fluencing choice of supplier may be thespecial relationship between the PRC andJapan. The Japanese are willing to providethe Chinese with large amounts of sophisti-cated technology. In the future, this may in-clude manufacturing technology for the pro-duction of computers or peripheral equip-ment. The Japanese are more likely to agreeto supply such technology than any otherWestern country (see chapter IX) and fur-ther enjoy the advantage of their experiencewith the character alphabet. It is likely,then, that the two most important sources ofcomputer technology for the Chinese will befirms from the United States and Japan.

It is still too early to determine the impactof Western computer technology on the Chi-nese economy. Although the imports of the1960’s clearly aided the design of later do-mestically produced computers, no Chinesemodels seen since closely resemble Westernprototypes. The major effect of Westerntechnology so far has been as a source of in-formation and starting point for R&D withinthe domestic computer industry. The lack ofdirect transfers of manufacturing technol-ogy is the most important factor affectingfuture impacts.

It will take time for the Chinese to makefull use of imported technology. Some West-ern computers remain advanced beyond theunderstanding of many of the people work-ing with them. The adaptation and diffusionof the technology embodied in accompany-ing software is likely to be more rapid thanthat of the hardware. Again, however, therewill be significant lags before the availabilityof this software has an appreciable effect onthe ability of the Chinese to generate theirown software capabilities.

OIL AND GAS

The oil industry, like most other sectors ofthe economy, was extremely underdevelopedin 1949, when the PRC came into existence.Levels of production were very low andChina had relied heavily on imports to equip


its small domestic industry. Potential re-serves were believed to be inconsequential,and much of the country had not been fullyexplored.

During the 1950’s, due primarily to the ef-forts of the U. S. S. R., this picture changedconsiderably. One of the most importantforms of assistance provided by the SovietUnion was in training. Between 1950 and1958, some 8,000 skilled workers, 6,500 stu-dents, and about 1,000 industry expertsfrom China were trained in the Soviet Union.The data does not show how many of thesewere involved in the oil industry, but it isknown that about 450 Soviet petroleum ex-perts were sent to the PRC to provide techni-cal assistance.

In addition, the U.S.S.R. provided largeamounts of equipment to the Chinese oil in-dustry. Imports from the U.S.S.R. and East-ern Europe accounted for nearly 65 percentof all equipment supplied to this sector dur-ing the first 5-year plan (1953-58).

By 1954, China had begun expanding itsproduction of basic tools and parts (e.g., oil-extraction drilling tools, pumps, and smallcompressors), but it was not until theU.S.S.R. helped it to establish several largeplants for the production of oilfield equip-ment that China’s output began to expandsignificantly. By 1958, using Soviet models,the Chinese had increased production of oilindustry equipment.

All Soviet technical help was withdrawnand equipment sales virtually ceased in1960, although Romania remained an impor-tant source of oil and gas technology. Theloss of Soviet aid was sorely felt, however,particularly in the area of geological pros-pecting. The U.S.S.R. had provided exten-sive help in carrying out a number of serialmagnetic, gravity, and seismic surveys.These had led to the identification of thefields that have since become the center ofChina’s industry.

The most important oil reserves in Chinanow, and for the past two decades, have beenthe Taching fields in the northeast part of

the country. The U.S.S.R. began prospectingin this area in 1955, and drilling began in1958. Fortunately, most of the wells drilledduring the first years were relatively shallowand did not tax the capacities of domestical-ly produced rigs.

After 1960, research programs aimed atimproving technological levels in the oil in-dustry were begun and many of these cen-tered on the analyses of the available foreignequipment. These efforts paid off. From1962 to 1963, China’s output of oil equip-ment increased by more than 60 percent. Bythe following year, 1963 production wasmore than doubled.

But the equipment now being produced,primarily for shallow drilling, was patternedprimarily on Soviet and Romanian designwhich lagged behind the technology em-ployed in the West. The Chinese made onlyvery limited use of equipment imports fromthe West before the 1970’s. Although smallpurchases were made from Japan andFrance there were no direct sales by theUnited States until after 1972, althoughthere is evidence that some American equip-ment designs were used by the Chinese toaid in the development of domestic designs.This technology was acquired either throughequipment sales from third parties, orthrough foreign equipment incorporatingU.S. technology.

Detailed knowledge of equipment and oilproduction in China is limited in the West,where, again, trip reports are among the fewsources of information. Furthermore, be-cause most Western oil technology was notacquired until after 1972, its full impact onproduction and the level of domestic equip-ment development has not yet become ap-parent.

According to most Western oil industryexperts, the technology being employed bythe Chinese for geological prospecting, drill-ing, and production is about at the level ofU.S. technology circa 1950. The Chinesethemselves estimate that their technical ca-pabilities in various phases of the oil indus-


i

Photo credit: U.S. China Trade Council

Drilling platform in the Pohai Gulf

try lag behind Western state-of-the-art by 15to 20 years. Often, Chinese oil equipmenttechnology has been copied or adapted fromthe dated technology of the U.S.S.R. orEastern Europe. China, therefore, experi-ences many of the same problems in this sec-tor as the U. S. S. R.. although often on alarger scale. Geological prospecting technol-ogy is unsophisticated, and this limits theusefulness of other activities. Further, theChinese seem to lag the Soviet Union indeep-drilling capabilities, the level of mostwell-completion equipment and automationof production facilities could be significantly

improved and technical assistance is sorelyneeded in offshore operations.

Much of China’s oil reserves still lie un-discovered, and domestic prospecting equip-ment is inadequate to this task. The geologyof China’s three largest fields, Taching,Shengli, and Takang, involves complicatedstructures, the result of unpredictable frac-turing which has left oil dispersed in a num-ber of small pools. Efficient exploration re-quires sophisticated prospecting equipment,including such equipment for the collectionand analysis of seismic data as computers


with specially designed software. The Chi-nese have already imported several of these,in order both to obtain the capabilities of theequipment itself and to gain access to thesoftware. It will be some time before domes-tic production is adequate to meet the de-mand for large-scale high-quality prospect-ing equipment.

Most of the geological prospecting equip-ment imported by China thus far has comefrom the United States, which sells the besttechnology available in the field. The Na-tional Council for U.S.-China Trade has esti-mated that such sales totaled nearly $40 mil-lion between 1973 and mid-1977.

At the end of 1977, it was reported thatworkers at the Shengli oilfields had bothgreatly increased drilling speeds and re-duced costs by 50 percent by using domes-tically produced synthetic diamond drill bitsand high-pressure jet drilling techniques.Western drilling and well-completion tech-nologies that might lead to further improve-ments are mud technology and cementing.Drilling-mud lubricates the cutting bit, aidsin removing waste material from the well,and seals the borehole. In the West, a vari-ety of chemical additives for the mud areavailable, but a more primitive practice is tomix soil with the fluid being pumped into thewell. The Chinese primarily use the lattertechnique.

There are also indications that significantimprovements could be made in the cement-ing operations necessary for well completion.Present cementing methods are predomi-nantly either domestic or imported fromRomania or France.

There is no detailed information on qualityof Chinese wellhead equipment or the num-ber of operating wells. Whatever their num-ber, several production problems are beingencountered. Most Chinese oil has a highparaffin content. This means that extractiveequipment must be heated during the winterto maintain oil flow. Other production prob-lems arise from the high water content of theoil and from complex geological structures.

By early 1979, 85 percent of the oil output ofat least one field was measured and recordedby computer, but there have been no reportsof automatic metering at other fields, andvery little evidence of automation of anyother aspects of field operations.

The Chinese claim to be relatively ad-vanced in their understanding and use ofwater-flooding as a means of increasing wellproduction, but there is evidence, for exam-ple, that injection control and the monitor-ing of injection performance remains limited.In the West, water injection is used heavilyin mature or declining fields. In both theU.S.S.R. and the PRC, however, water injec-tion is often used at new fields and withrecently completed wells. This may increasethe initial rate of production, but it alsoreduces the ultimate recovery rate from thereserve. Because the reserves at China’s ma-jor oilfields are fragmented into small pools,it is difficult to know whether low pressuresat a particular well is symptomatic of thestate of the field as a whole. Low wellheadpressure would indicate that rapid growthrates from the field cannot be achieved bymodern technology alone.

Initially, China depended heavily on theU.S.S.R. for assistance with drilling and ex-traction of onshore reserves; the Soviets pro-vided both equipment and assistance in themanufacture of equipment. Eastern Eur-ope’s technological contribution to the Chi-nese industry was relatively minor at thistime. The role of the West was virtually non-existent.

During the 1960’s, after the U.S.S.R.’s im-portance to China as a source of drilling andextraction equipment drastically declined,the Chinese continued to rely on the Sovietequipment already in place, using it asmodels for domestic production. In the1970’s, China turned increasingly to theWest for both equipment and technology toimprove and expand domestic production,but as yet there have been no sales of turn-key plants for production of oilfield equip-ment. Earlier, Chinese desire for self-suffi-ciency led them to accept delivery of equip-


ment without participating in training onoperation and maintenance. More recentsales have included such training, however.

Most sales of drilling and extractionequipment from the West to the PRC havecome from American firms, but Westernsales of onshore drilling and extractionequipment through mid-1976 totaled onlyabout $13.4 million. The pace of these pur-chases has since been stepped up. The Chi-nese oil equipment market is now highlycompetitive, and many Western companiescompeting in it are reluctant to discuss thedetails, particularly the value, of recentsales. Accounts of oil equipment sales can,therefore, be assumed to understate the truevolume of equipment and technology trans-ferred.

An upswing in Chinese equipment pur-chases for drilling and extraction of onshorereserves has occurred over the past fewyears. In 1978, the Chinese bought a widevariety of drilling and extraction equipment.One French company has signed a $22.9 mil-lion contract for drilling equipment, but allother major sales are believed to have beenmade by U.S. companies. Sales have in-cluded $10 million worth of drill bits, drillingtools, submersible pumps, down-hole instru-ments, and wellhead equipment. In somecases, China has chosen to pay a higher pricein order to gain access to the latest technol-ogy. For example, it has purchased drill bitswith tungsten-carbide cutting structuresand a new bearing design. These are said tolast three to four times as long as previousdesigns and are particularly important tohelp China with deep drilling.

China also gained access to a variety ofother equipment to help improve drilling per-formance and extraction capabilities. It haspurchased $100,000 worth of petroleum-han-dling tools, $7 million worth of workover rigsand blowout preventers, as well as unknownvalues of down-hole instruments, wellheadand well-completion equipment, well-testinginstruments, and other equipment. Much ofthis has been bought in limited quantities,

suggesting that China is seeking primarilyto import prototypes for duplication.

The total value of 1978 contracts forwhich values are known is about $50 million.These figures indicate that China is likely tocontinue looking to the West as a primarysource of drilling and extraction technology,although Romania may continue to be an im-portant source of technology and equipmentfor drilling rigs and cementing equipment.While purchases from the West are made pri-marily for the embodied technology, pur-chases from Romania are used to obtain sup-plies of currently needed equipment.

Serious difficiencies exist in Chinese pros-pecting, drilling, and extraction methodsand equipment, yet China has successfullydeveloped several major oilfields, andreached a production level of about 200 mil-lion tons per year. This is about 25 percent ofU.S. output. Extensive reserves of oil andpossibly natural gas, still largely unex-plored, are believed to exist in fields in the in-terior of China and in its offshore waters. Toexploit the interior fields, China must usedeep-drilling equipment. Heretofore, littledeep drilling has been carried out; the devel-opment of these fields has been delayed, pri-marily by the tremendous cost involved inbuilding long-distance pipelines to transportthe oil.

Delays in offshore production result morefrom technological problems. The Chinese(as the Soviet) oil industry lags farthestbehind the West in offshore technology.China’s first offshore drilling activity beganonly in the late 1960’s, when limited drillingwas undertaken from fixed platforms in shal-low water in the Pohai Gulf. The Chinesehave relied extensively on foreign technol-ogy for offshore geological prospecting capa-bilities, purchasing entire vessels as well assmaller pieces of equipment. Two of threeprospecting vessels in use in offshore watersin 1976 were outfitted by copying Westernequipment.

A large program to import Western off-shore equipment was begun in late 1972,


starting with the purchase of a Japanesejack-up drilling rig and accompanying work-ship. The value of orders, all placed with theWest within little more than a year, came tomore than $175 million, a figure greatly ex-ceeding the total value of all Chinese equip-ment then in use for offshore exploration anddevelopment. Most purchases were forequipment that embodied high technology,but in some cases–dredges, for example–the technology is not sophisticated. Some ofthe PRC’s decisions to import rather thanbuild such equipment can be attributed to adesire to begin using the equipment quickly.This approach typifies the Chinese use ofWestern imports to fill production gaps asmuch as to fill technology gaps.

The orders placed in 1972 and 1973 for oilindustry equipment ultimately resulted in asharp drop in foreign exchange reserves, andthe drive for offshore equipment contractsfrom the West greatly abated thereafter.The decision to cut back imports was partial-ly the result of traditional Chinese conserva-tive fiscal policy, but the political uncertain-ties as rival political factions battled forposition before and after the death of MaoZedong were also factors. This political con-flict made planners more cautious, particu-larly since reliance on foreign products andtechnology was a central point over whichthe two sides disagreed.

Despite this retrenchment, equipment im-ports for offshore needs totaled at leastanother $125 million through mid-1977, re-flecting the priority accorded them. Theycontinue to dominate oil industry equipmentpurchases. Over the past 2 years, Chineseorders for Western offshore equipment haveagain risen sharply. The PRC decided tomake much greater use of Western technol-ogy in high-priority industries as Chineseforeign exchange reserves recovered and theindustry had more time to assimilate foreigntechnology that had already been imported.Preliminary estimates for the 2-year periodfrom mid-1977 to mid-1979 indicate Chineseorders for more than $275 million in offshoreequipment, about 80 percent in drillingequipment.

Geological prospecting has generated agreat deal of interest as the first area inwhich Western firms have considered goingbeyond equipment sales and training. Anumber of major U.S. oil companies, alongwith representatives from Japan and severalEuropean countries, have discussed the pos-sibility of assisting the Chinese directly withexploration, and even production, of offshorereserves. The most important roles in suchcooperative ventures are likely to be playedby Japan and several American oil firms.

By early in 1974, three U.S. oil compa-nies—Exxon, Phillips, and Union Oil of Cali-fornia–had signed a “group shoot” explora-tion contract, in partnership with the for-eign-owned firms of Shell, Elf-Aquitaine, andBritish Petroleum (project leader); and At-lantic Richfield became the first Americanfirm to sign a contract for sole exploration ofChinese prospects. Other companies are alsoexpected to enter the market, since it ap-pears that the Chinese are willing to permitextensive Western involvement in offshoredevelopment. Reportedly, the Chinese havenot imported any turnkey plants for the pro-duction of offshore or onshore oil equipment,but moves in this direction may be under-way.

The Chinese have clearly made a seriouscommitment to the development of their off-shore oilfields. They realize that the activeacquisition of Western equipment, technol-ogy and experience will significantly speedthe development process. It maybe that Chi-nese experience in this stage of offshore de-velopment will help to shape the size and di-rection of Western involvement in China’sonshore oil program.

Until 1972, the amount of Western tech-nology transferred to the oil industry waslimited by conscious policy decision. Yeteven then the Chinese recognized their needfor such technology. They had relied heavilyon the U.S.S.R. during the 1950’s, and lateron Romania, particularly for deep-drillingequipment. There is ample evidence that in-dividual pieces of equipment have beencopied by the Chinese from Western, and

Ch. Xl— Western Technology in the People’s Republic of China 283

particularly American, models. Several oilindustry experts believe that the Chinesecould make very effective use of greatertransfers of technology from the West inseveral areas of the onshore oil industry. TheChinese have reportedly made detailedstudies of the state of Western technology,and are likely to make a greater effort in thefuture to increase its acquisition. Shortagesof seismic equipment and computerized fieldunits are posing serious problems for thegeological prospecting sector in locatingdeeper reserves. Improvements in drilling in-struments could produce important changesin performance by raising the effectivenessof the limited number of available rigs. The

Chinese have limited experience with second-ary recovery methods other than water injec-tion. Greater experience with alternativetechniques could produce results without amajor need for additional equipment.

It is still too soon to assess Chinesecapabilities to absorb the technology em-bodied in purchased equipment. Some ex-perts point to the low level of experience ofthe average oil industry workers and expressdoubts as to the level at which this equip-ment can be operated and maintained. Im-ported equipment used in technical schoolsand colleges for training may ameliorate thisproblem.

CONCLUSIONS

Transfers of foreign technology have in-fluenced both the level and direction ofeconomic progress in the PRC. In the imme-diate postrevolutionary period, Soviet equip-ment and expertise contributed heavily toChinese industrialization. With the intensifi-cation of the Sine-Soviet rift in 1960 thissource of technology was eliminated. Im-ports of technology did not again play a sig-nificant role in Chinese growth until the mid-1970’s—this time, however, through trans-fers of plant, equipment, and associatedtechnology from the West. Japan has beenthe major beneficiary of the process; thusfar, the United States has succeeded ingarnering only a small (7 to 8 percent) shareof PRC imports.

China’s imports from the West have beencrucial to the development of key industrial

sectors such as steel and petrochemicals.China’s modernization drive, although sig-nificantly less ambitious now than as origi-nally announced in February 1978, dependson imports of plant and associated technol-ogy to play an important role in strengthen-ing the industrial infrastructure, raising pro-ductivity in the agricultural sector, and inthe exploration and development of energyresources. While Japan will undoubtedlybenefit most from this drive in terms of in-creased export receipts, the United Statescan significantly increase its share of Chi-nese purchases through a normalization oftrade relations as well as extension of officialexport credit facilities.

Appendix

Export Administration Actof 1979

PUBLIC LAW 96-72—SEPT. 29, 1979 93 STAT. 503 93 STAT. ,504 PUBLIC LAW 96-72—SEPT. 29, 1979

Public Law 96-7296th Congress

An Act

To provide authority to regulate exports, to improve the efficiency of export Sept 29, 1979regulation, and to minimize interference with the ability to engage in commerce [S 737]

Be it enacted by the Senate and House of Representatives of theUnited States of America in Congress assembled, Export

AdministrationSHORT TITLE Act of 1979

SeCTION 1. This Act may be cited as the “Export Administration 50 USC app. 2401

Act of 1979”. note

FINDINGS50 USC app2402.

SEC. 2. The Congress makes the following findings 50 USC app.( 1 ) The ability of United States citizens to engage in interna- 2401

tional commerce is a fundamental concern of United Statespolicy.

(2) Exports contribute significantly to the economic well-beingof the United States and the stability of the world economy byincreasing employment and production in the United States, andby strengthening the trade balance and the value of the UnitedStates dollar, thereby reducing inflation. The restriction ofexports from the United States can have serious adverse effectson the balance of payments and on domestic employment,particularly when restrictions applied by the United States aremore extensive than those imposed by other countries.

(3) It is important for the national interest of the United Statesthat both the private sector and the Federal Government place ahigh priority on exports, which would strengthen the Nation’seconomy.

(4) The availability of certain materials at home and abroadvaries so that the quantity and composition of United Statesexports and their distribution among importing countries mayaffect the welfare of the domestic economy and may have animportant bearing upon fulfillment of the foreign policy of theUnited States.

(5) Exports of goods or technology without regard to whetherthey make a significant contribution to the military potential ofindividual countries or combinations of countries may adverselyaffect the national security of the United States.

(6) Uncertainty of export control policy can curtail the effortsof American business to the detriment of the overall attempt toimprove the trade balance of the United States.

(7) Unreasonable restrictions on access to world supplies cancause worldwide political and economic instability, interferewith free international trade, and retard the growth and develop-ment of nations.

(8) It is important that the administration of export controlsimposed for national security purposes give special emphasis tothe need to control exports of technology (and goods which

contribute significantly to the transfer of such technology) whichcould make a significant contribution to the military potential ofany country or combination of countries which would be detri-mental to the national security of the United States.

(9) Minimization of restrictions on exports of agriculturalcommodities and products is of critical importance to the mainte-nance of a sound agricultural sector, to achievement of a positivebalance of payments, to reducing the level of Federal expendi-tures for agricultural support programs, and to United Statescooperation in efforts to eliminate malnutrition and worldhunger.

DECLARATION OF POLICY

SEC. 3. The Congress makes the following declarations:(1) It is the policy of the United States to minimize uncertain-

ties in export control policy and to encourage trade with allcountries with which the United States has diplomatic or tradingrelations, except those countries with which such trade has beendetermined by the President to be against the national interest.

(2) It is the policy of the United States to use export controlsonly after full consideration of the impact on the economy of theUnited States and only to the extent necessary—

(A) to restrict the export of goods and technology whichwould make a significant contribution to the military poten-tial of any other country or combination of countries whichwould prove detrimental to the national security of theUnited States;

(B) to restrict the export of goods and technology wherenecessary to further significantly the foreign policy of theUnited States or to fulfill its declared international obliga-tions; and

(C) to restrict the export of goods where necessary toprotect the domestic economy from the excessive drain ofscarce materials and to reduce the serious inflationaryimpact of foreign demand.

(3) It is the policy of the United States (A) to apply anynecessary controls to the maximum extent possible in coopera-tion with all nations, and (B) to encourage observance of auniform export control policy by all nations with which theUnited States has defense treaty commitments.

(4) It is the policy of the United States to use its economicresources and trade potential to further the sound growth andstability of its economy as well as to further its national securityand foreign policy objectives.

(5) It is the policy of the United States—(A) to oppose restrictive trade practices or boycotts fos-

tered or imposed by foreign countries against other countriesfriendly to the United States or against any United Statesperson;

(B) to encourage and, in specified cases, require UnitedStates persons engaged in the export of goods or technologyor other information to refuse to take actions, includingfurnishing reformation or entering into or implementingagreements, which have the effect of furthering or support-ing the restrictive trade practices or boycotts fostered orimposed by any foreign country against a country friend] y tothe United States or against any United States person; and

Ill Ill IllI I I

PUBLIC LAW 96-72—SEPT. 29, 1979 93 STAT. 505

(C) to foster international cooperation and the development of international rules and institutions to assure rea-sonable access to world supplies.

(6) It is the policy of the United States that the desirability ofsubjecting, or continuing to subject, particular goods or technol-ogy or other information to United States export controls shouldbe subjected to review by and consultation with representativesof appropriate United States Government agencies and privateindustry.

(7) It is the policy of the United States to use export controls,including license fees, to secure the removal b foreign countriesof restrictions on access to supplies where such restrictions haveor may have a serious domestic inflationary impact, have causedor may cause a serious domestic shortage, or have been imposedfor purposes of influencing the foreign policy of the UnitedStates. In effecting this policy, the President shall make everyreasonable effort to secure the removal or reduction of suchrestrictions, policies, or actions through international coopera-tion and agreement before resorting to the imposition of controlson exports from the United States. No action taken in fulfillmentof the policy set forth in this paragraph shall apply to the exportof medicine or medical supplies.

(8) It is the policy of the United States to use export controls toencourage other countries to take immediate steps to prevent theuse of their territories or resources to aid, encourage, or givesanctuary to those persons involved in directing, supporting, orparticipating in acts of international terrorism. To achieve thisobjective, the President shall make every reasonable effort tosecure the removal or reduction of such assistance to interna-tional terrorist through international cooperation and agree-ment before resorting to the imposition of export controls.

(9) It is the policy of the United States to cooperate with othercountries with which the United States has defense treatycommitment in restricting the export of goods and technologywhich would make a significant contribution to the militarypotential of any country or combination of countries which wouldprove detrimental to the security of the United States and ofthose countries with which the United States has defense treatycommitments.

(10) It is the policy of the United States that export trade byUnited States citizens be given a high priority and not becontrolled except when such controls (A) are necessary to furtherfundamental national security, foreign policy, or short supplyobjective, (B) will clearly further such objectives, and (C) areadministered consistent with basic standards of due process.

(11) It is the policy of the United States to minimize restrictionson the export of agricultural commodities and products.

GENERAL PROVISIONS

SEC. 4. (a) TYPES OF Licenses.-Under such conditions as may be 50 USC app.imposed by the Secretary which are consistent with the provisions ofthis Act, the Secretary may require any of the following types ofexport licenses:

(1) A validated license, authorizing a specific export, issuedpursuant to an application by the exporter.

(2) A qualified general license, authorizing multiple exports,issued pursuant to an application by the exporter.

93 STAT. 506 PUBLIC LAW 96-72—SEPT. 29, 1979

(3) A general license, authorizing exports, without applicationby the exporter.

(4) Such other licenses as may assist in the effective andefficient implementation of this Act.

(b) COMMODITY CONTROL LIST–The Secretary shall establish andmaintain a list (hereinafter in this Act referred to as the “commoditycontrol list”) consisting of any goods or technology subject to exportcontrols under this Act.

(c) FOREIGN AVAILABILITY .-In accordance with the provisions ofthis Act, the President shall not impose export controls for foreign

policy or national security purposes on the export from the UnitedStates of goods or technology which he determines are available

without restriction from sources outside the United States in signifi-cant quantities and comparable in quality to those produced in theUnited States, unless the President determines that adequate evi-dence has been presented to him demonstrating that the absence ofsuch controls would prove detrimental to the foreign policy ornational security of the United States.

(d) RIGHT OF EXPORT.-NO authority or permission to export mayberequired under this Act, or under regulations issued under this Act,except to carry out the policies set forth in section 3 of this Act.

(e) DELEGATION OFAUTHORITY -The President may delegate thepower, authority, and discretion conferred upon him by this Act tosuch departments, agencies, or officials of the Government as he mayconsider appropriate, except that no authority under this Act may bedelegated to, or exercised by, any official of any department or agencythe head of which is not a pointed by the President, by and with theadvice and consent of the Senate. The President may not delegate ortransfer his power, authority, and discretion to overrule or modifyany recommendation or decision made by the Secretary, the Secre-tary of Defense, or the Secretary of State pursuant to the provisionsof this Act.

(f) NOTIFICATION OF THE PUBLIC; CONSULTATION WITH BUSINESS.—The Secretary shall keep the public fully apprised of changes in

d export control policy an procedures instituted in conformity withthis Act with a view to encouraging trade. The Secretary shall meetregularly with representatives of the business sector in order toobtain their views on export control policy and the foreign availabil-ity of goods and technology.

NATIONAL SECURITY CONTROLS

50 USC app. SEC. 5. (a) AUTHORITY.--(1) In order to carry out the policy set forth2404. in section 3(2)(A) of this Act, the President may, in accordance withthe provisions of this section,

heprohibit or curtail the export of any

goods or technology subject tojurisdiction of the United States orexported by any person subject to the jurisdiction of the UnitedStates, The authority contained in this subsection shall be exercisedby the Secretary, in consultation with the Secretary of Defense, andsuch other departments and agencies as the Secretary considersappropriate, and shall be implemented by means of export licenses

beddescri in section 4(a) of this Act.Publication in (2)(A) Whenever the Secretary makes any revision with respect toFederalRegister. any goods or technology, or with respect to the countries or destina-

tions, affected by export controls imposed under this section, theSecretary shall publish in the Federal Register a notice of suchrevision and shall specify in such notice that the revision relates tocontrols imposed under the authority contained in this section.

●

.

PUBLIC LAW 96-72—SEPT. 29, 1979

(B) Whenever the Secretary denies any export license under thissection, the Secretary shall specify in the notice to the applicant ofthe denial of such license that the license was denied under theauthority contained in this section. The Secretary shall also includein such notice what, if an , modifications in or restrictions on thegoods or technology for which the license was sought would allowsuch export to be compatible with controls imposed under thissection, or the Secretary shall indicate in such notice which officersand employees of the Department of Commerce who are familiar withthe application will be made reasonably available to the applicant forconsultation with regard to such modifications or restriction, ifappropriate.

(3) In issuing regulations to carry out this section, particularattention shall be given to the difficulty of devising effective safe-guards to prevent a country that poses a threat to the security of theUnited States from diverting critical technologies to military use, thedifficulty of devisingeffective safeguards to protect critical goods, andthe need to take effective measures to prevent the reexport of criticaltechnologies from other countries to countries that pose a threat tothe security of the United States. Such regulations shall not be basedupon the assumption that such effective safeguards can be devised.

(b) POLICY TOWARD INDIVIDUAL COUNTRIES--.-In administeringexport controls for national security purposes under this section,United States policy toward individual countries shall not be deter-mined exclusively on the basis of a country’s Communist or non-Communist status but shall take into account such factors as thecountry’s present and potential relationship to the United States, itspresent and potential relationship to countries friendly or hostile tothe United States, its ability and willingness to control retransfers ofUnited States exports in accordance with United States policy, andsuch other factors as the President considers appropriate. The Presi-dent shall review not leas frequently than every three years in thecase of controls maintained cooperatively with other nations, andannually in the case of all other controls, United States policy towardindividual countries to determine whether such policy is appropriatein light of the factors specified in the preceding sentence.

(c) CONTROL LIST.--(1) The Secretary shall establish and maintain,as part of the commodity control list, a list of all goods and technologysubject to export controls under this section. Such goods and technol-ogy shall be clearly identified as being subject to controls under thissection.

(2) The Secretary of Defense and other appropriate departmentand agencies shall identify goods and technology for inclusion on thelist referred to in paragraph (l). Those items which the Secretary andthe Secretary of Defense concur shall be subject to export controlsunder this section shall comprise such list. If the Secretary and theSecretary of Defense are unable to concur on such items, t e mattershall be referred to the President for resolution.

(3) The Secretary shall issue regulations providing for review of thelist established pursuant to this subsection not less frequently thanevery 3 years in the case of controls maintained cooperatively withother countries, and annually in the case of all other controls, inorder to carry out the policy set forth in section 3(2)(A) and theprovisions of this section, and for the prompt issuance of suchrevisions of the list as may be necessary. Such regulations shallprovide interested Government agencies and other affected or poten-tially affected parties with an opportunity, during such review, tosubmit written data, views, or arguments, with or without oralpresentation. Such regulations shall further provide that, as part of

93 STAT. 507 93 STAT. 508

Export licensedenial, notice

Review

Regulatorysafeguards forU.S. security.

Publication inFederalRegister

Report toCongress

ValidatedRegulations.

licenses,requirement

Submittal ofwritten data,views, orarguments.


such review, an assessment be made of the availability from sourcesoutside the United States, or an of its territories or possessions, ofgoods and technology comparable to those controlled under thissection. The Secretary and any agency rendering advise with respectto export controls shall keep adequate records of all decisions madewith respect to revision of the list of controlled goods and technology,including the factual and analytical basis for the decision, and, in thecase of the Secretary, any dissenting recommendations received from

(d) MILITARILY CRITICAL TECHNOLOGIES.-(1) The Secretary, in con-sultation with the Secretary of Defense, shall review and revise thelist established pursuant to subsection (c), as prescribed in paragraph(3) of such subsection, for the purpose of insuring that export controlsimposed under this section- cover and (to the maximum extentconsistent with the purposes of this Act) are limited to militarilycritical goods and technologies and the mechanisms through whichsuch goods and technologies maybe effectively transferred.

(2) The Secretary of Defense shall bear primary responsibility fordeveloping a list of militarily critical technologies. In developing suchlist, primary emphasis shall be given to—

(A) arrays of design and manufacturing know-how,(B) keystone manufacturing, inspection, and test equipment,

and(C) goods accompanied by sophisticated operation, application,

or maintenance know-how,which are not possessed by countries to which exports are controlledunder this section and which, if exported, would permit a significantadvance in a military system of any such country.

(3) The list referred to in paragraph (2) shall be sufficiently specificto guide the determinations of any official exercising export licensingresponsibilities under this Act.

(4) The initial version of the list referred to in paragraph (2) shall becompleted and published in an appropriate form in the FederalRegister not later than October 1, 1980.

(5) The list of militarily critical technologies developed primarilyby the Secretary of Defense pursuant to paragraph (2) shall become apart of the commodity control list, subject to the provisions ofsubsection (c) of this section.

(6) The Secretary of Defense shall report annually to the Congresson actions taken to carry out this subsection.

(e) EXPORT LICENSES.—(1) The Congress finds that the effectivenessand efficiency of the process of making export licensing determina-tions under this section is severely hampered by the large volume ofvalidated export license applications required to be submitted underthis Act. Accordingly, it is the intent of Congress in this subsection toencourage the use of a qualified general license in lieu of a validatedlicense.

(2) To the maximum extent practicable, consistent with thenational security of the United States, the Secretary shall require avalidated license under this section for the export of goods ortechnology only if—

(A) the export of such goods or technology is restricted pursu-ant to a multilateral agreement, formal or informal, to which theUnited States is a party and, under the terms of such multi-lateral agreement, such export requires the specific approval ofthe parties to such multilateral agreement;

(B) with respect to such goods or technology, other nations donot possess capabilities comparable to those possessed by theUnited States; or

111111111 I I I

PUBLIC LAW 96-72–SEPT. 29, 1979 93 STAT. 509

(C) the United States is seeking the agreement of othersuppliers to apply comparable controls to such goods or technol-ogy and, in the judgment of the Secretary, United States exportcontrols on such goods or technology, by means of such license,are necessary pending the conclusion of such agreement.

(3) To the maximum extent practicable, consistent with thenational security of the United States, the Secretary shall require aqualified general license, in lieu of a validated license, under thissection for the export of goods or technology if the export of suchgoods or technology is restricted pursuant to a multilateral agree-ment, formal or informal, to which the United States is a party, butsuch export does not require the specific approval of the parties tosuch multilateral agreement.

(4) Not later than July 1, 1980, the Secretary shall establishprocedures for the approval of goods and technology that may beexported pursuant to a qualified general license.

(f) FOREIGN AVAILABILITY . --(1) The Secretary, in consultation withappropriate Government agencies and with appropriate technicaladvisory committees established pursuant to subsection (h) of thissection, shall review, on a continuing basis, the availability, tocountries to which exports are controlled under this section, fromsources outside the United States, including countries which partici-pate with the United States in multilateral export controls, of anygoods or technology the export of which requires a validated licenseunder this section. In any case in which the Secretary determines, inaccordance with procedures and criteria which the Secretary shall byregulation establish, that an such goods or technology are availablein fact to such destinations from such sources in sufficient quantityand of sufficient quality so that the requirement of a validated licensefor the export of such goods or technology is or would be ineffective inachieving the purpose set forth in subsection (a) of this section, theSexretary may not, after the determination is made, require avalidated license for the export of such goods or technology duringthe period of such foreign availability, unless the President deter-mines that the absence of export controls under this section wouldprove detrimental to the national security of the United States. Inany case in which the President determines that export controlsunder this section must be maintained notwithstanding foreignavailability, the Secretary shall publish that determination togetherwith a concise statement of its basis, and the estimated economicimpact of the decision.

(2) The Secretary shall approve any application for a validatedlicense which is required under this section for the export of anygoods or technology to a particular country and which meets all otherrequirement for such an application, if the Secretary determinesthat such goods or technology will, if the license is denied, beavailable in fact to such country from sources outside the UnitedStates, including countries which participate with the United Statesin multilateral export controls, in sufficient quantity and of sufficientquality so that denial of the license would be ineffective in achievingthe purpose set forth in subsection (a) of this section, subject to theexception set forth in paragraph (1) of this subsection. In any case inwhich the Secretary makes a determination of foreign availabilityunder this paragraph with respect to any goods or technology, theSecretary shall determine whether a determination of foreign avail-ability under paragraph (1) with respect to such goods or technologyis warranted.

(3) With respect to export controls imposed under this section, anydetermination of foreign availability which is the basis of a decision

Qualifiedgeneral license

R e v i e w

Export controlsmaintenance.

Validatedlicense approval


Informationgathering

Regulations.

Site visitation requirement,removal

to ant a license for, or to remove a control on, the export of a good ortechnology, shall be made in writing and shall be supported byreliable evidence, including scientific or physical examination, expertopinion baaed upon adequate factual information, or intelligenceinformation. In assessing foreign availability with respect to licenseapplications, uncorroborated representations by applicants shall notbe deemed sufficient evidence of foreign availability.

(4) In any case in which, in accordance with this subsection, exportcontrols are imposed. under this section notwithstanding foreignavailability, the President shall take steps to initiate negotiationswith the government of the appropriate foreign countries for the

f’purpose of eliminating such availability.Whenever the President hasreason to believe goods or technology subject to export control fornational security purposes by the United States may become availa-ble from other countries to countries to which exports are controlledunder this section and that such availability can be prevented oreliminated by means of negotiations with such other countries, thePresident shall promptly initiate negotiations with the governmentof such other countries to prevent such foreign availability.

(5) In order to further carry out the policies setforth in this Act, theSecretary shall establish, within the Office of Export Administrationof the Department of Commerce, a capability to monitor and gatherinformation with respect to the foreign availability of any goods ortechnology subject to export controls under this Act.

.(6) Each department or agency of the United States with responsi-bilities with respect to export controls, including intelligence agen-cies, shall, consistent with the protection of intelligence sources andmethods, furnish information to the (Mice of Export Administrationconcerning foreign availability of goods and technology subject toexport controls under this Act, and such Office, upon request orwhere appropriate, shall furnish to such department andagenciesthe information it gathers and receives concerning foreignavailability.

(g) INDEXING.-1n order to ensure that requirement for validatedlicenses and qualified general licensee are periodically removed asgoods or technology subject to such requirement become obsoletewith respect to the national security of the United States, regulationsissued by the Secretary may, where approriate, provide for annualincreases in the performance levels of g00/s or technology subject toany such licensing requirement. Any such goods or technology whichno longer meet the performance levels established by the latest suchincrease shall be removed from the list established pursuant tosubsection (c) of this section unless, under such exceptions and undersuch procedures as the Secretary shall prescribe, any other depart-ment or agency of the United States objects to such removal and theSecretary determines, on the basis of such objection, that the goods ortechnology shall not be removed from the list. The Secretary shallalso consider, where appropriate, removing site visitation require-ment for goods and technology which are removed from the listunless objections described in this subsection are raised.

(h) TECHNICAL ADVISORY COMMITTEES .--(1) Upon written request byrepresentatives of a substantial segment of any industry whichproduces any goods or technology subject to export controls underthis section or being considered for such controls because of theirsignificance to the national security of the United States, the Secre-tary shall appoint a technical advisory committee for any such goodsor technology which the Secretary determines are difficult to evalu-ate because of questions concerning technical matters, worldwideavailability, and actual utilization of production and technology, or

PUBLIC LAW 96-72–SEPT. 29, 1979

licensing procedures. Each such committee shall consist of repre-sentatives of United States industry and Government, including theDepartments of Commerce, Defense, and State and, in the discretionof the Secretary, other Government departments and agencies. Noperson serving on any such committee who is a representative ofindustry shall serve on such committee for more than four consecu-tive years.

(2) Technical advisory committees established under paragraph (1)shall advise and assist the Secretary, the Secretary of Defense, andany other department, agency, or official of the Government of theUnited States to which the President delegates authority under thisAct, with respect to actions designed to carry out the policy set forthin section 3(2)(A) of this Act. Such committees, where they haveexpertise in such matters, shall be consulted with respect to questionsinvolving (A) technical matters, (B) worldwide availability and actualutilization of production technology, (C) licensing procedures whichaffect the level of export controls applicable to any goods or technol-

rogy, and (D) exports subject to multilateral controls in which theUnited States participates, including proposed revisions of any suchmultilateral controls. Nothing in this subsection shall prevent theSecretary or the Secretary of Defense from consulting, at any time,with any person representing industry or the general public, regard-less of whether such person is a member of a technical advisorycommittee. Members of the public shall be given a reasonable

opportunity, pursuant to regulations prescribed by the Secretary, topresent evidence to such committees.

(3) Upon request of any member of any such committee, theSecretary may, if the Secretary determines it appropriate, reimbursesuch member for travel, subsistence, and other necessary expensesincurred by such member in connection with the duties of suchmember.

(4) Each such committee shall elect a chairman, and shall meet atleast every three months at the call of the chairman, unless thechairman determines, in consultation with the other members of thecommittee, that such a meeting is not necessary to achieve thepurposes of this subsection. Each such committee shall be terminatedafter a period of 2 years, unless extended by the Secretary foradditional periods of 2 years. The Secretary shall consult each suchcommittee with respect to such termination or extension of thatcommittee.

(5) To facilitate the work of the technical advisory committees, theSecretary, in conjunction with other departments and agencies par-ticipating in the administration of this Act, shall disclose to each suchcommittee adequate information, consistent with national security,pertaining to the reasons for the export controls which are in effect orcontemplated for the goods or technology with respect to which thatcommittee furnishes advice.

(6) Whenever a technical advisory committee certifies to theSecretary that goods or technology with respect to which suchcommittee was appointed have become available in fact, to countriesto which exports are controlled under this section, from sourcesoutside the United States, including countries which participate withthe United States in multilateral export controls, in sufficientquantity and of sufficient quality so that requiring a validated licensefor the export of such goods or technology would be ineffective inachieving the purpose set forth in subsection (a) of this section, andprovides adequate documentation for such certification, in accord-ance with the procedures established pursuant to subsection (f)(1) ofthis section, the Secretary shall investigate such availability, and if

93 STAT. 511

Membership

Term of Office

Travel and otherexpenses,reimbursement

Termination

Export controlsmaintenance.


such availability is verified, the Secretary shall remove the require-ment of a validated license for the export of the goods or technology,unless the President determines that the absence of export controlsunder this section would prove detrimental to the national security of

Determination, the United States. In any case in which the President determines thatpublication export controls under this section must be maintained notwithstand-ing foreign availability, the Secretary shall publish that determina-tion together with a concise statement of its basis and the estimatedeconomic impact of the decision.

CoordinatingCommittee. (i) MULTILATERAL EXPORT CONTROLS .--The President shall enterfunctions into negotiations with the government participating in the group

known as the Coordinating Committee (hereinafter in this subsectionreferred to as the “Committee”) with a view toward accomplishingthe following objectives:

(1) Agreement to publish the list of items controlled for exportby agreement of the Committee, to ether with all notes, under-

fstandings, and other aspects of such agreement of the Commit-tee, and all changes thereto.

(2) Agreement to hold periodic meetings with high-level repre-sentatives of such governments, for the purpose of discussingexport control policy issues and issuing policy guidance to theCommittee.

(3) Agreement to reduce the scope of the export controlsimposed by agreement of the Committee to a level acceptable toand enforceable by all government participating in theCommittee.

(4) Agreement on more effective procedures for enforcing theexport controls agreed to pursuant to paragraph (3).

(j) COMMERCIAL AGREEMENTS WITH CERTAIN COUNTRIES.--(1) AnyUnited States firm, enterprise, or other nongovernmental entitywhich, for commercial purposes, enters into any agreement with artyagency of the government of a country to which exports are restrictedfor national security purposes, which agreement cites an intergovern-mental agreement (to which the United States and such country areparties) calling for the encouragement of technical cooperation and isintended to result in the export from the United States to the otherparty of unpublished technical data of United States origin, shallreport the agreement with such agency to the Secretary.

(2) The provisions of paragraph (1) shall not apply to colleges,universities, or other educational institutions.

(k) NEGOTIATIONS WIYH OTHER COUNGTRIES.-The secretary ofState, in consultation with the Secretary of Defense, the Secretary ofCommerce, and the heads of other appropriate departments andagencies, shall be responsible for conducting negotiations with othercountries regarding their cooperation in restricting the export ofgoods and technology in order to carry out the policy set forth insection 3(9) of this Act, as authorized by subsection (a) of this section,including negotiations with respect to which goods and technologyshould be subject to multilaterally agreed export restrictions andwhat conditions should apply for exceptions from those restrictions.

(1) DIVERSION TO MILITARY USE OF CONTROLLED GOODS OR TECHNOL-OGY.-(1) Whenever there is reliable evidence that goods or technol-ogy, which were exported subject to national security controls underthis section to a country to which exports are controlled for nationalsecurity purposes, have been diverted to significant military use inviolation of the conditions of an export license, the Secretary for aslong as that diversion to significant military use continues—

(A) shall deny all further exports to the party responsible forthat diversion of any goods or technology subject to national

PUBLIC LAW 96-72–SEPT. 29, 1979 93 STAT. 514●

Ill Ill Ill II


United States export controls apply of any goods or technologycomparable to goods or technology controlled under this section.

(h) INTERNATIONAL OBLIGATIONS .—The provisions of subsections(b), (c), (d), (f), and (g) shall not apply in any case in which thePresident exercises the authority contained in this section to imposeexport controls, or to approve or deny export license applications, inorder to fulfill obligations of the United States pursuant to treaties towhich the United States is a party or pursuant to other internationalagreements.

(i) COUNTRIES SUPPORTING INTERNATIONAL TERRORISM .—The Secre-tary and the Secretary of State shall notify the Committee on ForeignAffairs of the House of Representatives and the Committee onBanking, Housing, and Urban Affairs oft}:: Senate before any licenseis approved for the export of goods or technology valued at more than$7,000,000 to any country concerning which the Secretary of Statehas made the following determinations:

(1) Such country has repeatedly provided support for acts ofinternational terrorism.

(2) Such exports would make a significant contribution to themilitary potential of such country, including its military logisticscapability, or would enhance the ability of such country tosupport acts of international terrorism.

(j) CRIME CONTROL INSTRUMENTS .— (1) Crime control and detectioninstruments and equipment shall be approved for export by theSecretary only pursuant to a validated export license.

(2) The provisions of this subsection shall not apply with respect toexports to countries which are members of the North Atlantic TreatyOrganization or to Japan, Australia, or New Zealand, or to such othercountries as the President shall designate consistent with the pur-poses of this subsection and section 502B of the Foreign AssistanceAct of 1961.

(k) CONTROL LIST.--The Secretary shall establish and maintain, aspart of the commodity control list, a list of any goods or technologysubject to export controls under this section, and the countries towhich such controls apply. Such goods or technology shall be clearlyidentified as subject to controls under this section. Such list shallconsist of goods and technology identified by the Secretary of State,with the concurrence of the Secretary. If the Secretary and theSecretary of State are unable to agree on the list, the matter shall bereferred to the President. Such list shall be reviewed not lessfrequently than every three years in the case of controls maintainedcooperatively with other countries, and annually in the case of allother controls, for the purpose of making such revisions as arenecessary in order to carry out this section. During the course of suchreview, an assessment shall be made periodically of the availabilityfrom sources outside the United States, or any of its territories orpossessions, of goods and technology comparable to those controlledfor export from the United States under this section.

SHORT SUPPLY CONTROLS

SEC. 7. (a) AUTHORITY .—(1) In order to carry out the policy set forthin section 3(2)(C) of this Act, the President may prohibit or curtail theexport of any goods subject to the jurisdiction of the United States orexported by any person subject to the jurisdiction of the UnitedStates. In curtailing exports to carry out the policy set forth in section3(2 XC) of this Act, the President shall allocate a portion of exportlicenses on the basis of factors other than a prior history of exporta-tion. Such factors shall include the extent to which a country engages

Notification tocongressionalcommittees.

22 USC 2304.

Periodicalreview

50 USC app.2406

Export licenses,allocation.


Publication inFederalRegister

Fees

7 USC 612c-3

Weekly ormonthly reports

in equitable trade practices with respect to United States goods andtreats the United States equitably in times of short supply.

(2) Upon imposing quantitative restrictions on exports of any goodsto carry out the policy set forth in section 3(2)(C) of this Act, theSecretary shall include in a notice published in the Federal Registerwith respect to such restrictions an invitation to all interested partiesto submit written comments within 15 days from the date of publica-tion on the impact of such restrictions and the method of licensingused to implement them.

(3) In imposing export controls under this section, the President’sauthority shall include, but not be limited to, the imposition of exportlicense fees.

(b) MONITORING .-(1) In order to carry out the policy set forth insection 3(2 XC) of this Act, the Secretary shall monitor exports, andcontracts for exports, of any good (other than a commodity which issubject to the reporting requirements of section 812 of theAgricultural Act of 1970) when the volume of such exports in relationto domestic supply contributes, or may contribute, to an increase indomestic prices or a domestic shortage, and such price increase orshortage has, or may have, a serious adverse impact on the economyor any sector thereof. Any such monitoring shall commence at a timeadequate to assure that the monitoring will result in a data basesufficient to enable policies to be developed, in accordance withsection 3(2)(C) of this Act, to mitigate a short supply situation orserious inflationary price rise or, if export controls are needed, topermit imposition of such controls in a timely manner. Informationwhich the secretary requires to be furnished in effecting suchmonitoring shall be confidential, except as provided in paragraph (2)of this subsection.

(2) The results of such monitoring shall, to the extent practicable,be aggregated and included in weekly reports setting forth, withrespect to each item monitored, actual and anticipated exports, thedestination b country, and the domestic and worldwide price,supply, and demand. Such reports may be made monthly if theSecretary determines that there is insufficient information to justifyweekly reports.

(3) The Secretary shall consult with the Secretary of Energy todetermine whether monitoring or export controls under this sectionare warranted with respect to exports of facilities, machinery, orequipment normally and principally used, or intended to be used, inthe production, conversion, or transportation of fuels and energy(except nuclear energy), including, but not limited to, drilling rigs,platforms, and equipment; petroleum refineries, natural gas process-ing, liquefaction, and gasification plants; facilities for production ofsynthetic natural gas or synthetic crude oil; oil and gas pipelines,pumping stations, and associated equipment; and vessels for trans-porting oil, gas, coal, and other fuels.

(c) PETITIONS FOR M ONITORING OR CONTROLS .-(1)(A) Any entity,including a trade association, firm, or certified or recognized union orgroup of workers, which is representative of an industry or asubstantial segment of an industry which processes metallic materi-

ials capable of being recycled wit respect to which an increase indomestic prices or a domestic shortage, either of which results fromincreased exports, has or may have a significant adverse effect on thenational economy or any sector thereof, may transmit a writtenpetition to the Secretary requesting the monitoring of exports, or theimposition of export controls, or both, with respect to such material,in order to carry out the policy set forth in section 3(2)(C) of this Act.

111111111 I I


(B) Each petition shall be in such form as the Secretary shallprescribe and shall contain information in support of the actionrequested. The petition shall include any information reasonablyavailable to the petitioner indicating (i) that there has been asignificant increase, in relation to a specific period of time, in exportsof such material in relation to domestic supply, and (ii) that there hasbeen a significant increase in the price of such material or a domesticshortage of such material under circumstances indicating the priceincrease or domestic shortage maybe related to exports.

(2) Within 15 days after receipt of any petition described inpagraph (1), the Secretary shall publish a notice in the Federal

Register. The notice shall (A include the name of the material whichis the subject of the petition,(B) include the Schedule B number of thematerial as set forth in the Statistical Classification of Domestic andForeign Commodities Exported from the United States, (C) indicatewhether the petitioner is requesting that controls or monitoring, orboth, be imposed with respect to the exportation of such material, and(D) provide that interested

fpersons shall have a period of 30 days

commencing with the date o publication of such notice to submit tothe Secretary written data, views, or arguments, with or withoutopportunity for oral presentation, with respect to the matter in-volved. At the request of the petitioner or any other entity describedin paragraph (1)(A ) with respect to the material which is the subjectof the petition, or at the request of any entity representative ofproducers or exporters of such material, the Secretary shall conductpublic hearings with respect to the subject of the petition, in whichcase the 30-day period maybe extended to 45 days.

(3) Within 45 days after the end of the 30-or 45-da period describedin paragraph(2), as the case maybe, the Secretary shall—

(A) determine whether to impose monitoring or controls, orboth, on the export of such material, in order to carry out thepolicy set forth in section 3(2)(C) of this Act; and

(B) publish in the Federal Register a detailed statement of thereasons for such determination.

(4) Within 15 days after making a determination under paragraph(3) to impose monitoring or controls on the export of a material, theSecretary shall publish in the Federal Register proposed regulationswith respect to such monitoring or controls. Within 30 days followingthe publication of such proposed regulations, and after consideringany public comments thereon, the Secretary shall publish andimplement final regulations with respect to such monitoring orcontrols.

(5) For Purposes of publishing notices in the Federal Register andscheduling public hearings pursuant to this subsection, the Secretarymay consolidate petitions, and responses thereto, which involve thesame or related materials.

(6) If a petition with respect to a particular material or group ofmaterials has been considered in accordance with all the proceduresprescribed in this subsection, the Secretary may determine, in theabsence of significantly changed circumstances, that any other peti-tion with respect to the same material or group of materials which isfiled within 6 months after consideration of the prior petition hasbeen completed does not merit complete considerationi under this

.(7) The procedures and time limits set forth in this subsection with

respect to a petition filed under this subsection shall take precedenceover any review undertaken at the initiative of the Secretary withrespect to the same subject as that of the petition.

Publication inFederalRegister.

Hearings

Publication in

’ +Publicatlon inFederalRegister.

Petitions,consolidation

93 STAT.

Temporarymonitoring 01controls

Exportation,conditions.

Report toCongress

30 USC 18.5.

518 PUBLIC LAW 96-72—SEPT. 29, 1979

(8) The Secretary may impose monitoring or controls on a tempo-rary basis after a

akespetition is filed under paragraph (1)(A) but before

the Secretary makes a determination under paragraph (3) if theSecretary considers such action to be necessary to carry out thepolicy set forth in section 3(2KC) of this Act.

(9) The authority under this subsection shall not be construedaffect the authority of the Secretary under any other provision of thisAct.

(10) Nothing contained in this subsection shall be construed topreclude submission on a confidential basis to the Secretary ofinformation relevant to a decision to impose or remove monitoring orcontrols under the authority of this Act, or to preclude considerationof such information by the Secretary in reaching decisions requiredunder this subsection. The provisions of this paragraph shall not beconstrued to affect the applicability of section 552(b) o title 5, UnitedState Code.

(d) DOMESTICALLY PRODUCED CRUDE OIL.-(1) Notwithstanding anyother provision of this Act and notwithstanding subsection (u) ofsection 28 of the Mineral Leasing Act of 1920 (30 U.S.C. 185), nodomestically produced crude oil transported by pipeline over right-of-

F + ’way granted pursuant to section 20 of the Trans-Alaska PipelineAuthorization Act (43 U.S.C. 1652) (except any such crude oiI which(A) is exported to an adjacent foreign country to be refined and

therein in exchange for the same quantity of crude oilbeing exported from that country to the United States; such exchangemust result through convenience or increased efficiency of transpor-tation in lower prices for consumers of petroleum products in theUnited States as described in paragraph (2)(A)(ii) of this subsection, or(B) is temporarily exported for convenience or increased efficiency oftransportation across parts of an adjacent foreign count andreenters the United States) may be exported from the United States,or any of its territories and possessions, unless the requirements ofparagraph (2) of this subsection are met.

(2) Crude oil subject to the prohibition contained in paragraph (1)may be exported onlv if—

(A)-the President makes and publishes express findings thatexports of such crude oilj including exchanges—

(i) will not diminish the total quantity or quality ofpetroleum refined within, stored wit in, or legally commit-ted to be transported to and sold within the United States;

(ii) will, withthin 3 months following the initiation of suchexports or exchanges, result in (I) acquisition costs to therefiners which purchase the imported crude oil being lowerthan the acquisition costs such refiners would have to payfor the domestically produced oil in the absence of such anexport or exchange, and (II) not less than 75 percent of suchsavings in costs being reflected in wholesale and retail pricesof products refined from such imported crude oil;

(iii) will be made only pursuant to contracts which maybeterminated if the crude oil supplies of the United States areinterrupted, threatened, or diminished;

(iv) are clearly necessary to protect the national interest;and

(v) are in accordance with the provisions of this Act; and(B) the President reports such findings to the Congress and the

Congress, within 60 days thereafter, agrees to a concurrentresolution approving such exports on the basis of the findings.

(3) Notwithstanding any other provision of this section or any otherprovision of law, including subsection (u) of section 28 of the MineralLeasing Act of 1920, the President may export oil to any country

111111111


pursuant to a bilateral international oil supply agreement enteredinto by the United States with such nation before June 25, 1979, or toany count pursuant to the International Emergency Oil SharingPlan of the International Energy Agency.

(e) REFINED PETROLEUM PRODUCTS.-(1) No refined petroleum prod-uct may be exported except pursuant to an export license specificallyauthorizing such export. Not later than 5 days after an application Export licensefor a license to export any refined petroleum product or residual fuel applicationsoil is received, the Secretary shall notify the Congress of such notification ofapplication, together with the name of the exporter, the destination committeesof the proposed export, and the amount and price of the proposedexport. Such notification shall be made to the chairman of theCommittee on Foreign Affairs of the House of Representatives andthe chairman of the Committee on Banking, Housing, and UrbanAffairs of the Senate.

(2) The Secretary may not grant such license during the 30-dayperiod beginning on the date on which notification to the Congressunder paragraph (1) is received, unless the President certifies inwriting to the Speaker of the House of Representatives and thePresident pro tempore of the Senate that the proposed export is vitalto the national interest and that a delay in issuing the license wouldadversely affect that interest.

(3) This subsection shall not apply to (A) any export licenseapplication for exports to a country with respect to which historicalexport quotas established by the Secretary on the basis of pasttrading relationships apply, or (B) any license application for exportsto a country if exports under the license would not result in morethan 250,000 barrels of refined petroleum products being exportedfrom the United States to such country in any fiscal year.

(4) For purposes of this subsection, ’’refined petroleum product”means gasoline, kerosene, distillates, propane or butane gas, dieselfuel, and residual fuel oil refined within the United States or enteredfor consumption within the United States.

(5) The Secretary may extend any time period prescribed in section10 of this Act to the extent necessary to take into account delays inaction by the Secretary on a license application on account of theprovisions of this subsection.

(f’) CERTAIN PETROLEUM PRODUCTS.— Petroleum products refined inUnited States Foreign Trade Zones, or in the United States Territoryof Guam, from foreign crude oil shall be excluded from any quantita-tive restrictions imposed under this section except that, if theSecretary finds that a product is in short supply, the Secretary mayissue such regulations as maybe necessary

-to limit exports.

(g) AGRICULTURAL COMMODITIES .-(1) he authority conferred bythis section shall not be exercised with respect to any agriculturalcommodity, including fats and oils or animal hides or skins, withoutthe approval of the Secretary of Agriculture. The Secretary ofAgriculture shall not approve the exercise of such authority withrespect to any such commodity during any period for which thesupply of such commodity is determined by the Secretary of Agricul-ture to be in excess of the requirements of the domestic economyexcept to the extent the President determines that such exercise ofauthority is required to carry out the policies set forth in subpara-graph (A) or (B) of paragraph (2) of section 3 of this Act. The Secretaryof Agriculture shall, by exercising the authorities which the Secre-tary of Agriculture has under other applicable provisions of law,with respect to export sales of animal hides and skins.

Secretary of Agriculture, agricultural commodities purchased by or

“Refinedpetroleumproduct. ”

Time extension

Regulations

Export sales ofanimal hides andskins. data


for use in a foreign country may remain in the United States forexport at a later date free from any quantitative limitations on exportwhich may be imposed to carry out the policy set forth in section3(2)(C) of this Act subsequent to such approval. The Secretary maynot grant such approval unless the Secretary receives adequateassurance and, in conjunction with the Secretary of Agriculture,finds (A) that such commodities will eventually be exported, (B) thatneither the sale nor export thereof will result in an excessive drain ofscarce materials and have a serious domestic inflationary impact, (C)that storage of such commodities in the United States will not undulylimit the space available for storage of domestically owned commod-ities, and (D) that the purpose of such storage is to establish a reserveof such commodities for later use, not including resale to or use by

Regulations another country. The Secretary may issue such regulations as may benecessary to implement this paragraph.

(3) If the authority conferred by this section or section 6 is exercisedto prohibit or curtail the export of any agricultural commodity inorder to carry out the policies set forth in subparagraph (B) or (C) ofparagraph (2) of section 3 of this Act, the President shall immediatelyreport such prohibition or curtailment to the Congress, setting forththe reasons therefor in detail. If the Congress, within 30 days afterthe date of its receipt of such report, adopts a concurrent resolutiondisapproving such prohibition or curtailment, then such prohibitionor curtailment shall cease to be effective with the adoption of suchresolution. In the computation of such 30-day period, there shall beexcluded the days on which either House is not in session because ofan adjournment of more than 3 da to a day certain or because of anadjournment of the Congress sine die.

(h) BARTER AGREEMENTS .-(1) The exportation pursuant to a barteragreement of any goods which may lawfully be exported from theUnited States, for any goods which may lawfully be imported into theUnited States, may be exempted, in accordance with paragraph (2) ofthis subsection, from any quantitative limitation on exports (otherthan any reporting requirement) imposed to carry out the policy setforth in section 3(2)(C) of this Act.

(2) The Secretary shall grant an exemption under paragraph (1) ifthe Secretary finds, after consultation with the appropriate depart-ment or agency of the United States, that—

(A) for the period during which the barter agreement is to beperformed—

(i) the average annual quantity of the goods to be exportedpursuant to the barter agreement will not be required tosatisfy the average amount of such goods estimated to berequired annually by the domestic economy and will besurplus thereto; and “

(ii) the average annual quantity of the goods to be im-ported will be less than the average amount of such goodsestimated to be required annually to supplement domesticproduction; and

(B) the parties to such barter agreement have demonstratedadequately that they intend, and have the capacity, to performsuch barter agreement.

“Barter (3) For purposes of this subsection, the term “barter agreement”agreement “ means any agreement which is made for the exchange, without

monetary consideration, of any goods produced in the United Statesfor any goods produced outside of the United States.

(4) This subsection shall apply only with respect to barter agree-ments entered into after the effective date of this Act.

Ill Ill Ill I I I


(i) UNPROCESSED RED CEDAR.-(1) The Secretary shall require avalidated license, under the authority contained in subsection (a) ofthis section, for the export of unprocessed

ecl’Owestern red cedar (Thuja

plicata) logs, harvested from State or Federal lands. The Secretaryshall impose quantitative restrictions upon the export of unprocessedwestern red cedar logs during the 3-year perio dbeginning on theeffective date of this Act as follows:

(A) Not more than thirty million board feet scribner of suchlogs may be exported during the first year of such 3-year period.

(B) Not more than fifteen million board feet scribner of suchlogs may be exported during the second year of such period.

(C) Not more than five million board feet scribner of such logsmay be exported during the third year

After the end of such 3-year period, no unp western red cedarlogs maybe exported from the United States.

(2) The Secretary shall allocate export licenses to exporters pursu-ant to this subsection on the basis of a prior history of exportation bysuch exporters and such other factors as the Secretary considersnecessary and appropriate to minimize any hardship to the producersof western red cedar and to further the foreign policy of the UnitedStates.

(3) Unprocessed western red cedar logs shall not be considered to bean agricultural commodity for purposes of subsection (g) of thissection.

(4) As used in this subsection, the term “unprocessed western redcedar” means red cedar timber which has not

(A) lumber without wine;been processed into-

(B) chips, pulp, and pulp prroducts;(C) veneer and plywood;(D) poles, posts, or pilings cut or treated with preservative for

use as such and not intended to be further processed; or(E) shakes and shingles.

(j) EXPORT OF Horses.(1) Notwithstanding any other provision ofthis Act, no horse maybe exported by sea from the United States, orany of its territories and possessions, unless such horse is part of aconsignment of horses with respect to which a waiver has beengranted under pargraph (2) of this subsection.

(2) The Secretary, in consultation with the Secretary of Agricul-ture, may issue regulations providing for the granting of waiverspermitting the export by sea of a specified consignment of horses, ifthe Secretary

%in consultation with the Secretary of Agriculture,

determines t ‘ t no horse in that consignment is being exported forpurposes of slaughter.

FOREIGN BOYCOTTS

SEC. 8. (a) PROHIBITIONS AND EXCEPTIONS .-(1) For the purpose ofimplementing the policies set forth in subparagraph (A or (B) of

iparagraph (5) of section 3 of this Act, the President shall issueregulations prohibiting any United States person, with respect to his

activities in the interstate or fore@ commerce of the United States,from taking or knowingly agreeing to take any of the followingactions with intent to comply with, further, or support any boycottfostered or imposed b a foreign country against a country which isfriendly to the United

[States and which is not itself the object of any

form of boycott pursuant to United States law orregulation:(A) Refusing, or reuiring any other person to refuse, to do

business with or in t e boycotted country, with any businessconcern organized under the laws of the boycotted country, with

93 STAT. 522

Employmentdiscrimination,prohibition.

ExportterminationsExport licenses,allocation.

Businessinformation,

“Unprocessedwestern redcedar.”

Letter of credit.

Regulatoryexceptions.

vIationa50 SC app.za47.


any national or resident of the boycotted country, or with anyother person, pursuant to an agreement with, a requirement of,

fr!or a request om or on behalf of the boycotting country. Themere absence of a business relationship with or in the boycottedcountry with any business concern organized under the laws ofthe boycotted country, with any national or resident of theboycotted country, or with any other person, does not indicatethe existence of the intent required to establish a violation ofregulations issued to carry out t is subparagraph.

(B) Refusing, or requiring any other parson to refuse, to employor otherwise discriminating against any United States person onthe basis of race, religion, sex, or national origin of that person orof any owner, officer, director, or employee of such person.

(C) Furnishing information with respect to the race, religion,sex, or national origin of any United States person or of anyowner, officer, director, or employee of such person.

(D) Furnishing information about whether any person has, hashad, or proposes to have an business relationship (including arelationship by way of sale purchse, legal or commercialrepresentation, shipping or other transport, insurance, invest-ment, or supply) with or in the boycotted country, with anybusiness concern organized under the laws of the boycottedcountry, with any national or resident of the boycotted country,or wit ‘ any other person which is known or believed to berestricted from having any business relationship with or in theboycotting country. Nothing in this paragraph shall prohibit the

ffurnishing of normal business inormation in a commercialcontext as defined by the Secretary.

(E) Furnishing information about whether any person is amember of, has made contributions to, or is otherwise associatedwith or involved in the activities of any charitable or fraternalorganization which supports the boycotted country.

(F) Paying, honoring, confirming, or otherwise implementing aletter of credit which contains any condition or requirementcompliance with which is prohibited by regulations issued pursu-

rant to this paragraph, and no United States person shal , as aresult of the application of this paragraph, be obligated to pay orotherwise honor or implement such letter of credit..-. - .

(2) Regulations issued pursuant to paragraph (1) shall provideexceptions for—

(A) complying or agreeing to comply with requirements (i)prohibiting the import of goods or services from the boycottedcountry or goods reduced or services provided b any business

izedconcern organ” under the laws of the boycotted country or bynationals or residents of the boycotted country, or (ii) prohibitingthe shipment of goods to the boycotting country on a carrier ofthe boycotted country, or by a route other than that prescribedby the boycotting country or the recipient of the shipment;

(B) complying or agreeing to comply with import and shippingdocument requirements with respect to the country of origin, thename of the carrier and route of shipment, the name of thesupplier of the shipment or the name of the provider of otherservices, except that no information knowingly furnished orconveyed in response to such requirements may be stated innegative, blacklisting, or similar exclusionary terms, other thanwith respect to carriers or route of shipment as may be permittedby such regulations in order to comply with precautionary

requirements protecting against war risks and conflation;


(C) complying or agreeing to comply in the normal course ofbusiness with the unilateral and specific selection by a boycott-ing country, or national or resident thereof, of carriers, insurers,suppliers of services to be performed within the boycottingcountry or specific goods which, m the normal course of business,are identifiable by source when imported into the boycottingcountry;

(D) complying or agreeing to comply with export requirementof the boycotting country relating to shipments or transship-ments of exports to the boycotted country, to any businessconcern of or organized under the laws of the boycotted country,or to any national or resident of the boycotted country;

(E) compliance by an individual or agreement by an individualto comply with the immigration or passport requirements of ancount with respect to such individual or any member of suchindividual’s family or with requests for information regardingrequirements of employment of such individual within the boy-cotting country; and

(F) compliance by a United States person resident in a foreigncountry or agreement by such

his, person to comply with the laws of

that country with respect to activities exclusive therein,and such regulations may contain exceptions for such residentcomplying with the laws or regulations of that foreign countrygoverning imports into such country of trademarked, tradenamed, or similarly specifically identifiable products, or compo-nents of products or is own use, including the performance ofcontractual services within that country, as may be defined bysuch regulations.

(3) Regulations issued pursuant to paragraphs (2)(C) and (2)(F) shallnot provide exceptions from paragraphs (1)(B) and (1)(C).

(4) Nothing in this subsection may be construed to supersede orlimit the operation of the antitrust or civil rights laws of the UnitedStates.

(5) This section shall apply to any transaction or activity under-taken, by or through a United States person or any other person, withintent to evade the provisions of this section as implemented by theregulations issued pursuant to this subsection, and-such regulationsshall expressly provide that the exceptions set forth in paragraph (2)shall not permit activities or agreements (expressed or implied by acourse of conduct, including a pattern of responses) otherwise prohib-ited, which are not within the intent of such exceptions.

(b) FOREIGN POLICY CONTROLS.-(1) In addition to the regulationsissued pursuant to subsection (a) of this section, regulations issuedunder section 6 of this Act shall implement the policies set forth insection 3(5).

(2) Such regulations shall require that an United States personfreceiving a request for the furnishing of in ormation, the entering

into or implementing of agreements, or the taking of any other actionreferred to in section 3(5) shall report that fact to the Secretary,together with such other information concerning such request as theSecretary may require for such action as the Secretary considersappropriate for carrying out the policies of that section. Such personshall also report to the Secretary whether such person intends tocomply and whether such person has complied with such request.Any report filed pursuant to this paragraph shall be made availablepromptly for public inspection and copying, except that informationregarding the quantity, description, and value of any goods ortechnology to which such report relates may be kept confidential ifthe Secretary determines that disclosure thereof would place the

Reports,

Publicinspection andcopying.


Transmittal to United States person involved at a competitive disadvantage. TheSecretary ofState Secretary shall periodically transmit summaries of the information

contained in such reports to the Secretary of State for such action asthe Secretary of State, in consultation with the Secretary, considersappropriate for carrying out the policies set forth in section 3(5) ofthis Act.

(c) PREEMPTION.-The provisions of this section and the regulationsissued pursuant thereto shall preempt any law, rule, or regulation ofany of the several States or the District of Columbia, or any of theterritories or possessions of the United States, or of any governmen-tal subdivision thereof, which law, rule, or regulation pertains toparticipation in, compliance with, implementation of, or the furnish-ing of information regarding restrictive trade practices or boycottsfostered or imposed by foreign countries against other countries.

PROCEDURES FOR HARDSHIP RELIEF FROM EXPORT CONTROLS

50 USC app SEC. 9. (a) FILING OF PETITIONS .-Any person who, in such person’s2408 domestic manufacturing process or other domestic business oper-

ation, utilizes a product produced abroad in whole or in part from agood historically obtained from the United States but which has beenmade subject to export controls, or any person who historically hasexported such a good, may transmit a petition of hardship to theSecretary requesting an exemption from such controls in order toalleviate any unique hardship resulting from the imposition of suchcontrols. A petition under this section shall be in such form as theSecretary shall prescribe and shall contain information demonstrat-ing the need for the relief requested.

(b) DECISION OF THE SECRETARY . —Not later than 30 days afterreceipt of any petition under subsection (a), the Secretary shalltransmit a written decision to the petitioner granting or denying therequested relief. Such decision shall contain a statement setting forththe Secretary’s basis for the grant or denial. Any exemption grantedmay be subject to such conditions as the Secretary considers appro-priate.

(c) FACTORS To BE CONSIDERED .-For purposes of this section, theSecretary’s decision with respect to the grantor denial of relief fromunique hardship resulting directly or indirectly from the impositionof export controls shall reflect the Secretary’s consideration of factorssuch as the following:

(1) Whether denial would cause a unique hardship to thepetitioner which can be alleviated only by granting an exceptionto the applicable regulations. In determining whether relief shallbe granted, the Secretary shall take into account—

(A) ownership of material for which there is no practicabledomestic market by virtue of the location or nature of thematerial;

(B) potential serious financial loss to the applicant if notgranted an exception;

(C) inability to obtain, except through import, an itemessential for domestic use which is produced abroad from thegood under control;

(D) the extent to which denial would conflict, to theparticular detriment of the applicant, with other nationalpolicies including those reflected in any international agree-ment to which the United States is a party;

(E) possible adverse effects on the economy (includingunemployment) in any locality or region of the UnitedStates; and


(F) other relevant factors, including the applicant’s lack ofan exporting history during any base period that may beestablished with respect to export quotas for the particulargood.

(2) The effect a finding in favor of the applicant would have onattainment of the basic objectives of the short supply control

In all cases, the desire to sell at higher prices and thereby obtaingreater profits shall not be considered as evidence of a uniquehardship, nor will circumstances where the hardship is due toimprudent acts or failure to act on the part of the petitioner.

93 STAT. 525

PROCEDURES FOR PROCESSING EXPORT LICENSE APPLICATION

SEC. 10. (a) PRIMARY RESPONSIBILITY OF THE SECRETARY .-(l) All 50 USCexport license applications required under this Act shall be submittedby the applicant to the Secretary. All determinations with respect toany such application shall be made by the Secretary, subject to theprocedures provided in this section.

(2) It is the intent of the Congress that a determination with respectto any export license application be made to the maximum extentpossible by the Secretary without referral of such application to anyother department or agency of the Government.

(3) To the extent necessary, the Secretary shall seek informationand recommendations from the Government departments and agen-cies concerned with aspects

of United States domestic and foreign

Policies and operations having an important bearing on exports. Suchdepartments and agencies shall cooperate fully in rendering such

fin ormation and recommendations.(b) INITIAL SCREENING .-Within 10 days after the date on which

any export license application is submitted pursuant to subsection(a)(l), the Secretary shall—

(1) send the applicant an acknowledgment of the receipt of theapplication and the date of the receipt;

(2) submit to the applicant a written description of the proce-dures required by this section, the responsibilities of the Secre-tary and of other departments and agencies with respect to theapplication, and the rights of the applicant;

(3) return the application without action if the application isimproperly completed or if additional information is required,with sufficient information to permit the application to beproperly resubmitted, in which case if such application is resub-mitted, it shall be treated as a new application for the purpose ofcalculating the time periods prescribed in this section;

(4) determine whether it is necessary to refer the application toany other department or agency and, if such referral is deter-mined to be necessary, inform the applicant of any such depart-ment or agency to which the application will be referred; and

(5) determine whether it is necessary to submit the applicationfto a multilateral review process, pursuant to a multilateralagreement, formal or informal, to which the United States is aparty and, if so, inform the applicant of this requirement.

(C) ACTION ON CERTAIN APLICATIONS .-In each case in which theSecretary determines that it is not necessary to refer an applicationto any other department or agency for its information and recommen-dations, a license shall be formally issued or denied within 90 daysafter a properly completed application has been submitted pursuantto this section.


(d) R EFERRAL TO OTHER DEPARTMENTS AND A GENCIES .—In each casein which the Secretary determines that it is necessary to refer anapplication to any other department or agency for its informationand recommendations, the Sec retary shall, within 30 days after thesubmission of a properly completed application—

(1) refer the application, together with all necessary analysisand recommendations of the Department of Commerce, concur-rently to all such departments or agencies; and

(2) if the applicant so requests, provide the applicant with anoportunity to review for accuracy any documentation to beref erred to any such department or agency with respect to suchaplication for the purpose of describing the export in question in

dor er to determine whether such documentation accuratelydescribes the proposed export.

(e) ACTION BY OTHER DEPARTMENTS AND AGENCIES.-(1) Any depart-ment or agency to which an aplication is referred pursuant tosubsection (d) shall submit to the Secretary, within 30 days after itsreceipt of the application, the information or recommendationsrequested with respect to such application. Except as provided inparagraph (2), any such department or agency which does not submitits recommendations within the time period prescribed in the preced-ing sentence shall be deemed by the Secretary to have no objection tothe approval of such application.

Recommendations, (2) If the head of any such department or agency notifies thetime extension

Conflictingrecommendations

Applicantnotification andopportunity forwrittenresponse.

Applicant denialprocedures.

Secretary before the expiration of the time period provided inparagraph (1) for submission of its recommendations that more timeis required for review by such department or agency, such depart-ment or agency shall have an additional 30 day period to submit itsrecommendations to the secretary. If such department or agencydoes not submit its recommendations within the time period pr-scribed by the preceding sentence, it shall be deemed by the Secretaryto have no objection to the approval of such application.

(f) ACTION BY THE SECRETARY .-(1) Within O days after receipt ofthe recommendations of other departments and agencies with respectto a license application, as provided in subsection (e), the Secretaryshall formally issue or deny the license. In deciding whether to issueor deny a license, the Secretary shall take into account any recom-mendation of a department or agency with respect to the applicationin question. In cases where the Secretary receives conflicting recom-mendations, the Secretary shall, within the 90 day period providedfor in this subsection, take such action as may be necessary to resolvesuch conflicting recommendations.

(2) In cases where the Secretary receives questions or negativeconsiderations or recommendations from an other department oragency with respect to an application, the Secretary shall, to themaximum extent consistent with the national security and foreignpolicy of the United States, inform the applicant of the specificquestions raised and any such negative considerations or recommend-ations, and shall accord the applicant an opportunity, before thefinal determination with respect to the application is made, torespond in writing to such questions, considerations, or recommenda-tions.

(3) In cases where the Secretary has determined that an applicationshould be denied, the applicant shall be informed in writing, within 5days after such determination is made, of the determination, of thestatutory basis for denial, the policies set forth in section 3 of the Actwhich would be furthered by denial, and, to the extent consistentwith the national security and foreign policy of the United States, thespecific considerations which led to the denial, and of the availability


of apeal procedures. In the event decisions on license applicationsare referred inconsistent with the provisions of this section, theaplicant shall be so informed in writing within 5 days after suchdeferral.

(4) If the Secretary determines that a particular application or setof applications is of exceptional importance and complexity, and thatadditional time is required for negotiations to modify the applicationor applications, the Secretary may extend any time period prescribedin this section. The Secretary shall notify the Congress and theapplicant of such extension and the reasons therefor.

(g) SPECIAL PROCEDURES FOR SECRETARY OF DEFENSE.—(1) Notwith-standing any other provision of this section, the Secretary of Defenseis authorized to review any proposed export of any goods or technol-ogy to any country to which exports are controlled for nationalsecurity purposes and, whenever the Secretary of Defense determinesthat the export of such goods or technology will make a significantcontribution, which would prove detrimental to the national securityof the United States, to the military potential of any such country, torecommend to the President that such export be disapproved.

h(2) Notwithstanding any other provision of law, t e secretary OfDefense shall determine, in consultation with the Secretary, andconfirm in writing the types and categories of transactions whichshould be reviewed by the Secretary of Defense in order to make adetermination referred to in paragraph (l). Whenever a license orother authority is requested for the export to any country to whichexports are controlled for national security purposes of goods ortechnology within any such type or category, the Secretary shallnotify the Secretary of Defense of such request, and the Secretarymay not issue any license or other authority pursuant to such requestbefore the expiration of the period within which the President maydisapprove such export. The Secretary of Defense shall carefullyconsider any notification submitted by the Secretary pursuant to thisparagraph and, not later than 30 days after notification of therequest, shall—

(A) recommend to the President that he disapprove any re-quest for the export of the goods or technology involved to theparticular country if the Secretary of Defense determines thatthe export of such goods or technology will make a significantcontribution, which would prove detrimental to the nationalsecurity of the United States, to the military potential of suchcountry or any other country;

(B) notify the Secretary that he would recommend approvalsubject to specified conditions; or

(C ) recommend to the Secretary that the export of goods ortechnology be approved.

If the President notifies the Secretary, within 30 days after receivinga recommendation from the Secretary of Defense, that he disap-proves such export, no license or other authority may be issued forthe export of such goods or technology to such country.

(3) The Secretary shall approve or disapprove a license application,and issue or deny a license, in accordance with the provisions of thissubsection, and, to the extent applicable, in accordance with the timeperiods and procedures otherwise set forth in this section.

(4) Whenever the President exercises his authority under thissubsection to modify or overrule a recommendation made by theSecretary of Defense or exercises his authority to modify or overruleany recommendation made by the Secretary of Defense under subsec-tion (C) or (d) of section 5 of this Act with respect to the list of goodsand technologies controlled for national security purposes, the Presi-

Time extension,notification toCongress andapplicant

Review

Exporttransactions,review


Multilateralreview process.

Notification toCongress andapplicant.

Applicant status,report toCongress.

Filing of petitionby applicant.

Presidentialstatement,transmittal toCongreas

dent shall promptly transmit to the Congress a statement indicatinghis decision, together with the recommendation of the Secretary ofDefense.

(h) MULTILATERAL CONTROLS .-In any case in which an application,which has been finally approved under subsection (c), (f), or (g) of thissection, is required to be submitted to a multilateral review process,pursuant to a multilateral agreement, formal or informal, to whichthe United States is a party, the license shall not be issued asprescribed in such subsections, but the Secretary shall notify theapplicant of the approval of the application (and the date of suchapproval) by the Secretary subject to such multilateral review. Thelicense shall be issued upon approval of the application under suchmultilateral review. If such multilateral review has not resulted in adetermination with respect to the application within 60 days aftersuch date, the Secretary’s approval of the license shall be final andthe license shall be issued, unless the Secretary determines thatissuance of the license would prove detrimental to the nationalsecurity of the United States. At the time at which the Secretarymakes such a determination, the Secretary shall notify the applicantof the determination and shall notify the Congress of the determina-tion, the reasons for the determination, the reasons for which themultilateral review could not be concluded within such 60 day period,and the actions planned or being taken by the United States Govern-ment to secure conclusion of the multilateral review. At the end ofever 60 day period after such notification to Congress, the Secretaryshall advise the applicant and the congress of the status of theapplication, and shall report to the Congress in detail on the reasonsfor the further delay and any further actions being taken by theUnited States Government to secure conclusion of the multilateralreview. In addition, at the time at which the Secretary issues ordenies the license upon conclusion of the multilateral review, theSecretary shall notify the Congress of such issuance or denial and ofthe total time required for the multilateral review.

(i) RECORDS.-The Secretary and any department or agency towhich any application is referred under this section shall keepaccurate records with respect to all applications considered by theSecretary or by any such department or agency, including, in the caseof the Secretary, any dissenting recommendations received from anysuch department or agency.

(j) APPEAL AND COURT AcTIoN.-(1) The Secretary shall establishappropriate procedures for any applicant to appeal to the Secretarythe denial of an export license application of the applicant.

(2) In any case in which any action prescribed in this section is nottaken on a license application within the time periods established bythis section (except in the case of a time period extended undersubsection (f)(4) of which the applicant is notified), the applicant mayfile a petition with the Secretary requesting compliance with therequirements of this section. When such petition is filed, the Secre-tary shall take immediate steps to correct the situation giving rise tothe petition and shall immediately notify the applicant of such steps.

(3) If, within 30 days after a petition is filed under paragraph (2),the processing of the application has not been brought into conform-ity with the requirements of this section, or the application has beenbrought into conformity with such requirements but the Secretaryhas not so notified the applicant, the applicant may bring an action inan appropriate United States district court for a restraining order, atemporary or permanent injunction, or other appropriate relief, torequire compliance with the requirements of this section. The United

1111111111 I


States district courts shall have jurisdiction to provide such relief, asappropriate.

VIOLATIONS

SEC. 11. (a) IN GENERAL.—Except as provided in subsection (b) ofthis section, whoever knowingly violates any provision of this Actorany regulation, order, or license issued thereunder shall be fined notmore than five times the value of the exports involved or $50,000,whichever is greater, or imprisoned not more than 5 years, or both.

(b) W ILLFUL VIOLATIONS .-(1) Whoever willfully exports anythingcontrary to any provision of this Act or any regulation, order, orlicense issued thereunder, with knowledge that such exports will beused for the benefit of any country to which exports are restricted fornational security or foreign policy purposes, shall be freed not morethan five times the value of the exports involved or $100,000,whichever is greater, or imprisoned not more than 10 years, or both.

(2) Any person who is issued a validated license under this Act forthe export of any good or technology to a controlled country and who,with knowledge that such a good or technology is being used by suchcontrolled country for military or intelligence gathering purposescontrary to the conditions under which the license was issued,willfully fails to report such use to the Secretary of Defense, shall befined not more than five times the value of the exports involved or$100,000, whichever is greater, or imprisoned for not more than 5years, or both. For purposes of this paragraph, “controlled country”means any country described in section 620(f) of the Foreign Assist-ance Act of 1961.

(c) C IVIL PENALTIES ; ADMINISTRATE SANCTIONS .-(1) The head ofany department or agency exercising any functions under this Act, orany officer or employee of such department or agency specificallydesignated by the head thereof, ma impose a civil penalty not toexceed $10,000 for each violation of this Act or any regulation, order,or license issued under this Act, either in addition to or in lieu of anyother liability or penalty which maybe imposed.

(2)(A) The authority under this Act to suspend or revoke theauthority of any United States person to export goods or technologymay be used with respect to any violation of the regulations issuedpursuant to section 8(a) of this Act.

(B) Any administrative sanction (including any civil penalty or anysuspension or revocation of authority to export) imposed under thisAct for a violation of the regulations issued pursuant to section 8(a) ofthis Act may be imposed only after notice and opportunity for anagency hearing on the record in accordance with sections 554 through557 of title 5, United States Code.

(C) Any charging letter or other document initiating administra-tive proceedings for the imposition of sanctions for violations of theregulations issued pursuant to section 8(a) of this Act shall be madeavailable for public inspection and copying.

(d) PAYMENT OF PENALTIES.-The payment of any penalty imposedpursuant to subsection (c) maybe ma e a condition, for a period notexceeding one year after the imposition of such penalty, to thegranting, restoration, or continuing validity of any export license,permission, or privilege granted or to be granted to the person uponwhom such penalty is imposed. In addition, the payment of anypenalty imposed under subsection (c) may be deferred or suspended inwhole or in part for a period of time no longer than an probationperiod (which ma exceed one year) that may be imposed upon suchperson. Such a deferral or suspension shall not operate as a bar to the

93 STAT. 529

50 USC app.2410.

“controlledcountry”22 USC 2370

Deferral orsuspension.

93 STAT. 530

50 USC app. 2021note, 2401 note.


collection of the penalty in the event that the conditions of thesuspension, deferral, or probation are not fulfilled.

(e) REFUNDS .–Any amount paid in satisfaction of any penaltyimposed pursuant to subsection (c) shall be covered into the Treasuryas a miscellaneous receipt. The head of the department or agencyconcerned may, in his discretion, refund any such penalty, within 2years after payment, on the ground of a material error of fact or lawin the imposition of the penalty. Notwithstanding section 1346(a) oftitle 28, United States Code, no action for the refund of any suchpenalty may be maintained in any court.

(f) ACTIONS FOR RECOVERY OF PENALTIES.—In the event of thefailure of any person to pay a penalty imposed pursuant to subsection(c), a civil action for the recovery thereof may, in the discretion of thehead of the department or agency concerned, be brought in the nameof the United States. In any such action, the court shall determine denovo all issues necessary to the establishment of liability. Except asprovided in this subsection and in subsection (d), no such liabilityshall be asserted, claimed, or recovered upon by the United States inany way unless it has previously been reduced to judgment.

(g) OTHER AUTHORITIES .-Nothing in subsection (c), (d), or (f)limits—

(1) the availability of other administrative or judicial remedieswith respect to violations of this Act, or any regulation, order, orlicense issued under this Act;

(2) the authority to compromise and settle administrativeproceedings brought with respect to violations of this Act, or anyregulation, order, or license issued under this Act; or

(3) the authority to compromise, remit or mitigate seizures andforfeitures pursuant to section l(b) of title VI of the Act of June15,1917 (22 U.s.c. 40l(b)).

ENFORCEMENT

SE C. 12. (a) GENERAL AUTHORITY. -TO the extent necessary orappropriate to the enforcement of this Actor to the imposition of anypenalty, forfeiture, or liability arising under the Export Control Act

9 of 194 or the Export Administration Act of 1969, the head of anydepartment or agency exercising any function thereunder (and offi-cers or employees of such department or agency specifically desig-nated by the head thereof) may make such investigations and obtainsuch information from, require such reports or the keeping of suchrecords by, make such inspection of the books, records, and otherwritings, premises, or property of, and take the sworn testimony of,any person. In addition, such officers or employees may administeroaths or affirmations, and may by subpena require any person toappear and testify or to a pear and produce books, records, and otherwritings, or both, and in the case of contumacy by, or refusal to obey asubpena issued to, any such person, the district court of the UnitedStates for any district in which such person is found or resides ortransacts business, u n application, and after notice to any suchperson and hearing, shall have jurisdiction to issue an order requir-ing such person to appear and give testimony or to appear andproduce books, records, and other writings, or both, and any failure toobey such order of the court may be punished by such court as acontempt thereof.

(b) IMMUNITY. -NO person shall be excused from complying withany requirements under this section because of his privilege againstself-incrimination, but the immunity provisions of section 6002 of

Ill Ill Ill


title 18, United States Code, shall apply with respect to any indi-vidual who specifically claims such privilege.

(c) CONFIDENTIALITY .(1) Except as otherwise provided by the thirdsentence of section 8(b)(2) and by section ll(c)(2)(C) of this Act,information obtained under this Act on or before June 30, 1980, whichis deemed confidential, including Shippers’ Export Declarations, orwith reference to which a request for confidential treatment is madeby the person furnishing such information, shall be exempt fromdisclosure under section 552 of title 5, United States Code, and suchinformation shall not be published or disclosed unless the Secretarydetermines that the withholding thereof is contrary to the nationalinterest. Information obtained under this Act after June 30, 1980, Informationmay be withheld only to the extent permitted by statute, except that disclosureinformation obtained for the purpose of consideration of, or concern-ing, license applications under this Act shall be withheld from publicdisclosure unless the release of such information is determined by theSecretary to be in the national interest. Enactment of this subsection ACCess to boycottshall not affect any judicial proceeding commenced under section 552‘ -,) reports

of title 5, United States Code, to obtain access to boycott reportssubmitted prior to October 31, 1976, which was pending on May 15,1979; but such proceeding shall be continued as if this Act had notbeen enacted.

(2) Nothing in this Act shall be construed as authorizing the Information,withholding of information from the Congress, and all information availability toobtained at any time under this Act or previous Acts regarding the Congresscontrol of exports, including any report or license application re-quired under this Act, shall be made available upon request to anycommittee or subcommittee of Congress of appropriate jurisdiction.No such committee or subcommittee shall disclose any informationobtained under this Act or previous Acts regarding the control ofexports which is submitted on a confidential basis unless the fullcommittee determines that the withholding thereof is contrary to thenational interest.

(d) REPORTING REQUIREMENTS . —In the administration of this Act,reporting requirement shall be so designed as to reduce the cost ofreporting, recordkeeping, and export documentation required underthis Act to the extent feasible consistent with effective enforcementand compilation of useful trade statistics. Reporting, recordkeeping,and export documentation requirements shall be periodically re-viewed and revised in the light of developments in the field ofinformation technology.

(e) SIMPLIFICATION OF REGULATIONS .—’he secretary, in consulta- Review oftion with appropriate United States Government departments and regulationsagencies and with appropriate technical advisory committees estab-lished under section 5(h), shall review the regulations issued underthis Act and the commodity control list in order to determine howcompliance with the provisions of this Act can be facilitated bysimplifying such regulations, by simplifying or clarifying such list, orby any other means.

EXEMPTION FROM CERTAIN PROVISIONS RELATING TO ADMINISTRATIVEPROCEDURE AND JUDICIAL REVIEW

SEC. 13. (a) EXEMPTION.-Except as provided in section 11(c)(2), the 50 USC app.functions exercised under this Act are excluded from the operation ofsections 551, 553 through 559, and 701 through 706 of title 5, UnitedStates Code.

(b) PUBLIC PARTICIPATION .—It is the intent of the Congress that, tothe extent practicable, all regulations imposing controls on exports

93 STAT. 532 PUBLIC LAW 96-72–SEPT. 29, 1979

under this Act be issued in proposed form with meaningful opportu-nity for public comment before taking effect. In cases where aregulation imposing controls under this Act is issued with immediateeffect, it is the intent of the Congress that meaningful opportunity forpublic comment also be provided and that the regulation be reissuedin final form after public comments have been fully considered.

ANNUAL REPORTReport toCongress. SEC. 14. (a) CONTENTS .-Not later than December 31 of each year,50 USC app. the Secretary shall submit to the Congress a report on the adminis-2413 tration of this Act during the preceding fiscal year. All agencies shall

cooperate fully with the-secretary in providing information for suchreport. Such report shall include detailed information with respectto—

(1) the implementation of the policies set forth in section 3;(2) general licensing activities under sections 5, 6, and 7, and

any changes in the ‘exercise of the authorities contained insections 5(a), 6(a), and 7(a);

(3) the results of the review of United States policy towardindividual countries pursuant to section 5(b);

(4) the results, in as much detail as maybe included consistentwith the national security and the need to maintain the confiden-tiality of proprietary information, of the actions, including re-views and revisions of export controls maintained for nationalsecurity purposes, required by section 5(c)(3);

(5) actions taken to carry out section 5(d);(6) changes in categories of items under export control referred

to in section 5(e);(7) determinations of foreign availability made under section

5(f), the criteria used to make such determinations, the removalof any export controls under such section, and any evidencedemonstrating a need to impose export controls for nationalsecurity purposes notwithstanding foreign availability;

(8) actions taken in compliance with section 5(0(5);(9) the operation of the indexing system under section 5(g);(10) consultations with the technical advisory committees

established pursuant to section 5(h), the use made of the advicerendered by such committees, and the contributions of suchcommittees toward implementing the policies set forth in this

7 USC 612c-3.

Act;(11) the effectiveness of export controls imposed under section

6 in furthering the foreign policy of the United States;(12) export controls and monitoring under section 7;(13) the information contained in the reports required by

section 7(b)(2), together with an analysis of—(A) the impact on the economy and world trade of short-

ages or increased prices for commodities subject to monitor-ing under this Act or section 812 of the Agricultural Act of1970:

(B) the worldwide supply of such commodities; and(C) actions being taken by other countries m response to

such shortages or increased prices;(14) actions taken by the President and the Secretary to carry

out the antiboycott policies set forth in section 3(5) o this Act;(15) organizational and procedural changes undertaken in

furtherance of the policies set forth in this Act, includingchanges to increase the efficiency of the export licensing processand to fulfill the requirements of section 10, including an

Ill Ill Ill I I


analysis of the time required to process license applications, thenumber and disposition of export license applications takingmore than 90 da s to process, and an accounting of a pealsreceived, court orders issued, and actions taken pursuant theretounder subsection (j) of such section;

(16) delegations of authority by the President as provided insection 4(e) of this Act;

(17) efforts to keep the business sector of the Nation informedwith respect to policies and procedures adopted under this Act;

(18) any reviews undertaken in furtherance of the policies ofthis Act, including the results of the review required by section12(d), and any action taken, on the basis of the review required bysection 12(e), to simplify regulations issued under this Act;

(19) violations under section 11 and enforcement activitiesunder section 12; and

(20) the issuance of regulations under the authority of this Act,including an explanation of each case in which regulations werenot issued in accordance with the first sentence of section 13(b).

(b) REPORT ON CERTAIN EXPORT CONTROLS .-TO the extent that thePresident determines that the policies set forth in section 3 of this Actrequire the control of the export of goods and technology other thanthose subject to multilateral controls, or require more stringent

dcontrols than the multilateral controls, the President shall inclu e ineach annual report the reasons for the need to impose, or to continueto impose, such controls and the estimated domestic economic impacton the various industries affected by such controls.

(c) REPORT ON NEGOTIATIONS .-The President shall include in eachannual report a detailed report on the progress of the negotiationsrequired by section 5(i), until such negotiations are concluded.

REGULATORY AUTHORITY

SEC. 15. The President and the Secretary may issue such regula- Regulations.tions as are necessary to carry out the provisions of this Act. Any 50 USC appsuch regulations issued to carry out the provisions of section 5(a), 6(a),7(a), or 8(b) may apply to the financing, transporting, or otherservicing of exports and the participation therein by any person.

DEFINITIONS

SEC. 16. As used in this Act—(1) the term “person” includes the singular and the plural and

any individual, partnership, corporation, or other form of associ-ation, including any government or agency thereof;

(2) the term “United States person” means any United Statesresident or national (other than an individual resident outsidethe United States and employed by other than a United Statesperson), any domestic concern (including an permanent domes-

dtic establishment of any foreign concern) an any foreign subsidi-ary or affiliate (including an permanent foreign establishment)of any domestic concern which is controlled in fact by suchdomestic concern, as determined under regulations of the Presi-

(3)’ the term “good” means any article, material, supply ormanufactured product, including inspection and test equipment,and excluding technical data;

(4) the term “technology” means the information and know-how that can be used to design, produce, manufacture, utilize, or

50 USC app.2415.

93 STAT. 534 PUBLIC LAW 96-72–SEPT. 29, 1979

reconstruct goods, including computer software and technicaldata, but not the goods themselves; and

(5) the term “Secretary” means the Secretary of Commerce.

EFFECT ON OTHER ACTS

50 USC app. SEC. 17. (a) IN GENERAL.—Nothing contained in this Act shall be2416. construed to modify, repeal, supersede, or otherwise affect the provi-sions of any other laws authorizing control over exports of anycommodity.

(b) COORDINATION OF CONTROLS .-l%e authority granted to thePresident under this Act shall be exercised in such manner as toachieve effective coordination with the authority exercised undersection 38 of the Arms Export Control Act (22 U.S.C. 2778).

(c) CIVIL AIRCRAFT EQUIPMENT .-Notwithstanding any other provi-sion of law, any product (1) which is standard equipment, certified bythe Federal Aviation Administration, in civil aircraft and is anintegral part of such aircraft, and (2) which is to be exported to acountry other than a controlled country, shall be subject to exportcontrols exclusively under this Act. Any such product shall not besubject to controls under section 38(b)(2) of the Arms Export ControlAct. For purposes of this subsection, the term “controlled country”means any country described in section 620(f) of the Foreign Assist-

22 USC 2370. ance Act of 1961.(d) NONPROLIFERATION CONTROLS .-(1) Nothing in section 5 or 6 of

this Act shall be construed to supersede the procedures published bythe President pursuant to section 309(c) of the Nuclear Non-Prolifera-tion Act of 1978.

(2) With respect to any export license application which, under theprocedures published by the President pursuant to section 309(C) of

92 Stat. 141 the Nuclear Non-Proliferation Act of 1978, is referred to the Sub-42 USC 2139. group on Nuclear Export Coordination or other interagency group,

the provisions of section 10 of this Act shall apply with respect to suchlicense application only to the extent that they are consistent withsuch published procedures, except that if the processing of any suchapplication under such procedures is not completed within 180 daysafter the receipt of the application by the Secretary, the applicantshall have the rights of appeal and court action provided in sectionIO(j) of this Act.

(e) TERMINATION OF OTHER AUTHORITY .—On October 1, 1979, theMutual Defense Assistance Control Act of 1951 (22 U.S.C.1611-1613d), is superseded.

AUTHORIZATION OF APPROPRIATIONS

50 USC app. SEC. 18. (a) REQUIREMENT OF AUTHORIZING LEGISLATION.—Notwith-2417 standing any other provision of law, no appropriation shall be madeunder any law to the Department of Commerce for expenses to carryout the purposes of this Act unless previously and specificallyauthorized by law.

(b) AUTHORIZATION .There are authorized to be appropriated tothe Department of Commerce to carry out the purposes of this Act—

(1) $8,000,000 for each of the fiscal years 1980 and 1981, ofwhich $1,250,000 shall be available for each such fiscal year onlyfor purposes of carrying out foreign availability assessmentspursuant to section 5(0(5), and

(2) such additional amounts, for each such fiscal year, as maybe necessary for increases in salary, pay, retirement, other

cooM

●

Ill Ill Ill I I I


employee benefits authorized by law, and other nondiscretionarycosts.

EFFECTIVE DATE

SEC. 19. (a) EFFECTIVE DATE. -This Act shall take effect upon theexpiration of the Export Administration Act of 1969.

(b) ISSUANCE OF REGULATIONS .-(1) Regulations implementing theprovisions of section 10 of this Act shall be issued and take effect notlater than July 1,1980.

(2) Regulations implementing the provisions of section 7(c) of thisAct shall be issued and take effect not later than January 1, 1980.

TERMINATION DATE

SEC. 20. The authority granted by this Act terminates on Septem-ber 30, 1983, or upon any prior date which the President by proclama-tion may designate.

SAVINGS PROVISIONS

SE C. 21. (a) IN GENERAL .—A11 delegations, rules, regulations,orders, determinations, licenses, or other forms of administrativeaction which have been made, issued, conducted, or allowed tobecome effective under the Export Control Act of 1949 or the ExportAdministration Act of 1969 and which are in effect at the time thisAct takes effect shall continue in effect according to their terms untilmodified, superseded, set aside, or revoked under this Act.

(b) ADMINISTRATIVE Proceedings.-’hishis Act shall not apply to anyadministrative proceedings commenced or any application for alicense made, under the Export Administration Act of 1969, which ispending at the time this Act takes effect.

TECHNICAL AMENDMENTS

SEC. 22. (a) Section 38(e) of the Arms Export Control Act (22 U.S.C.2778(e)) is amended by striking out “sections 6(c), (d), (e), and (f) and7(a) and (c) of the Export Administration Act of 1969” and inserting inlieu thereof “subsections (c), (d), (e), and (f) of section 11 of the ExportAdministration Act of 1979, and by subsections (a) and (c)of section 12of such Act”.

(b)(1) Section 103(c) of the Energy Policy and Conservation Act (42U.S.C. 6212(c)) is amended—

(A) by striking out “1969” and inserting in lieu thereof “1979”;and

(B) by striking out “(A)” and inserting in lieu thereof “(C)”.(2) Section 254(e)(3) of such Act (42 U.S.C. 6274(e)(3)) is amended by

striking out “section 7 of the Export Administration Act of 1969” andinserting in lieu thereof “section 12 of the Export Administration Actof 1979”.

(c) section 993(c)(2)(D) of the Internal Revenue Code of 1%54 (26U.S.C. 993(c)(2)(D)) is amended—

(1) by striking out “4(b) of the Export Administration Act of1969 (50 U.S.C. App. 2403(b))” and inserting in lieu thereof “7(a)of the Export Administration Act of 1979”; and

(2) by striking out “(A)” and inserting in lieu thereof “(C)”.

50 USC app.241850 USC app 2401note50 USC app. 2409note50 USC app. 2406note.

50 USC app.2419

93 STAT. 536

Effective date.22 USC 3108note

7 USC 1732.


INTERNATGIONAL INVESTMENT SURVEY ACT AUTHORIZATIONS

SEC. 23. (a) Section 9 of the International Investment Survey Act of1976 (22 U.S.C. 3108) is amended to read as follows:

“AUTHORIZATIONS

“SEC. 9. To carry out this Act, there are authorized to be appropri-ated $4,400,000 for the fiscal year ending September 30, 1980, and$4,500,000 forthe fiscal year ending September 30, 1981.”.

(b) The amendment made by subsection (a) shall take effect onOctober 1, 1979.

MISCELLANEOUS

SEC. 24. Section 402 of the Agricultural Trade Development andAssistance Act of 1954 is amended by inserting “or beer” in thesecond sentence immediately after “wine”.

Approved September 29, 1979,

50 USC app.2420

50 USC app. 2021note.

LEGISLATIVE HISTORY.HOUSE REPORTS No 96-200 accompanying H.R. 4034 (Comm. on Foreign Affairs)

and No 96-482 {Carom of conference).SENATE REPORT No. 96-169 (Comm on Banking, Housing, and Urban Affairs)CONGRESSIONAL RECORD, Vol. 125 (1979)

July 18, 20, 21, considered and passed SenateMay 31, July 23, Sept 11, 18, 21.25, H.R 4034 considered and passed House;

passage vacated and S. 737, amended, passed m lieuSept 27, Senate agreed to conference reportSept 28, House agreed to conference report.

o