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XIV International Economic History Congress, Helsinki 2006, Session 111

EXPAND WORLD TRADE OR SECURITY?THE COLD WAR ECONOMIC DILEMMA AND THE WEST

By Dr. Jacqueline McGlade, Penn State University, USA

At the cessation of World War II, the predominant economic goal of Western nationswas to resume pre-1939 trade and industrial levels with Soviet, Eastern European andAsian partners. As a result, several bi-lateral treaties emerged between Western Europe,Eastern Europe and Soviet Union from 1946-1949 that focused on trade in raw resourcesto facilitate production of heavy and consumer goods. At the time, the treaties specifiedvery little in terms of the production and transfer of high technology or military goods.The central focus of import-export relations rested in collaboration to restore shippingand transportation systems, oil and raw materials extraction, production of essential itemssuch as medical supplies and scientific equipment, and the revival of commercial fishingand food production. US businesses, especially multinationals, also sought a return topre-war markets worldwide including in those previously held in the Soviet Union,Eastern Europe and China. Escalating tensions over Soviet intentions in Eastern Europe, however, prompted newsecurity concerns in the West, especially in the United States, over the free exchange oftechnology, goods and services with Communist Bloc countries. In 1949 and 1950, fearsaccelerated rapidly leading one State Department official to portray the period as the“The Year of The Shock” as the Soviet Union acquired the atomic bomb, expanded itsweapons production capabilities through the acquisition of Czech Skoda and HungaryManfred Weiss works, and raised its annual steel shipments to its Eastern Europesatellites in excess of 1 million tons. A sharp spike in demand for Western imports ofscrap iron, rubber, cotton yarn and wool imports in the Soviet Bloc also heightenconcerns over re-militarization. By April 1950, reports filtered in of Skoda reaching pre-war levels of production through steel deals with Austria for plant additions, the ManfredWeiss plant expanding from 16,000 to 45,000 workers to increase weapons manufacture,and rumored large production of V2 and other guided missiles in several East Germanplants. To facilitate the rapid acquisition of needed raw materials and goods, the SovietUnion also set up a centralized Trading Agency INTRAC in Vienna to broker Westerndeals for its satellites. By June 1950, Der Spiegel reported that a “complete change in arms export business”from West to the East where “they do not bother much where about who has given theorder… as long as he pays in good gold or hard dollars.” Czechoslovakia leadCommunist Bloc exports with specialties antitank, field, howitzer, motor, machine, andtraction guns and land mines, while Hungary specialized in anti-air and tank gunsexports, and Poland manufactured large quantities of light machine guns, carbines, semi-automatic rifles, and trench mortars exports. Other western sources revealed that Trieste,Tangier, Tripoli, Hong Kong, Havana and Houston, Texas had emerged as primary portsof military transshipments with the biggest purchasers of Communist-produced weaponryin Indonesia, North Korea, Indochina, and Israel.

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The rise of Red China in 1949 cemented Western fears over free trade and thefacilitation of communist military expansion, especially after the outbreak of the KoreanWar in the summer of 1950. Trade events such as a 100, 000 ton steel deal between WestGermany and China in 1950 brought increasing calls, particularly from the United Statesto curb the flow of high tech items, military manufactures and raw materials to and fromCommunist Bloc nations. For the next forty years, the United States and Western Europe would struggle overthe central economic dilemma of the Cold War: how to liberalize world trade and buildfree markets without aiding in the economic and military expansion of communistcountries. The challenge to expand world trade and Western security in tandem withCommunist containment prompted serious and consistent re-alignments in US power andEuropean relations over the course of the Cold War. This study probes the economicfactors and business pressures that led first Western Europe and then the United States tomodify containment in favor of greater trade expansion over Cold War military security.It also highlights changes in the Western Alliance as European economic solidarity andcompetition against the United States increased for new consumer and high tech marketsin the Communist Bloc, particularly in the 1970s and 1980s.

A “Hard and Swift” East-West Split: Containment Begins

Initial talks among Western nations on the viability of a Communist trade embargobegan in Bologna in 1947 and again with the finalization of NATO in the spring of 1949.A semi-official trade controls committee, COCOM, emerged as part of the formation ofNATO and began meeting in secret in Paris to discuss possible restrictions. Impatientover the lack of a joint Western system, the US Congress passed the 1949 Export ControlAct, which prohibited American firms from trading in a wide range of raw materials andgoods with Communist Bloc countries. By the fall of 1950 US pressure increased forCOCOM to adopt a “hard and swift” trade split worldwide through implementingimmediate embargoes, restoring combined raw materials boards, and cancelling East-West bi-lateral treaties in an effort to stem sensitive trade. While rooted in contentious, sometimes divisive debates, extensive COCOM embargolists did emerge by the end of 1950, along with the IC/DV Import Export Certificationsystem aimed at circumventing black market and suspicious transshipment activities.When the United States insisted that its COCOM partners comply with enlarged listsemanating from the 1951 Battle Act, Western Europe, led by the United Kingdom andFrance, countered by pushing for a reduction over expansion of the scope of communisttrade containment. For many European nations, the impact of COCOM controls hadprompted unintended, but serious consequences. The cancellation or reduction in bi-lateral trade had forced market re-alignments without a transition period resulting insevere business disruptions. Real constraints on technology trades and knowledgetransfer also translated into lost business opportunities and markets. Understandably,Western European policymakers began to attack COCOM controls as severely impairingnational self-determination in economic and military security matters. The case of the United Kingdom reflected the plight of many Western Europeancountries. As early as the fall of 1950, the UK voiced its “reticence” to back totaleconomic containment as a Cold War strategy as it would “accentuate world division and

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bring conflict faster.” The UK also protested the cancellation of bi-lateral treaties as itwas “forced to pay with exports” for the import of necessary Soviet products such aswood and grains that remain “essential to the [British] economy.” Since the 1920s, theUK had enjoyed steady trade growth with the Soviet Union in machine tools, electricalgenerators and cabling, diesel engines, communication equipment, scientific instruments,and Malaysian rubber. Sharp export reductions by 1950 were highlighted by the loss of45,000 tons in machine tools trade to only 45 tons to Eastern Europe and the same patternwith the Soviet Union from 24,100 tons in 1938 to 10,000 tons. The re-augmentation ofcombined boards in such previously non-restrictive items such as tin, wool, rubber, fats,further “hinder[ed] the impetus of competitive sales” in important Commonwealthproducts. As one British newspaper noted, the revival of bi-lateral Soviet trade deals hadbeen essential as the UK “is counting [on exports] to finance rearmament efforts withoutweakening the pound.” It further reported that the British business community “continuesto want to trade with all of its traditional clients freely and above all fears the dismalconsequences of a new form of super-control system, increasing the difficulties broughtby the national control system.” As a result, the Atlee government declared by 1953 thatUK-Soviet Bloc trade agreements cast through “peaceful means” and for “mutualbenefit” should be honored and continued as existing contracts over COCOM controls.The UK also began to lead a push with its European partners against the US strategy of“security before commerce” for modified position of “commerce and security” inCOCOM dealings. Several nations responded eagerly to the UK call for COCOM relaxation to counterthe anemic state of Western European export trade. With $700 million in goods to SovietBloc and $800 million in imports, Western Europe sat with less than ½ of pre-war bi-lateral trade volume. While comprising only 3 % of Western Europe’s total foreign trade,Communist Bloc trade seemed, on the surface, small in its “relative importance of trade”within European Bloc. However, when broken down into individual economies, Sovietand Eastern European trade accounted for 16% for Austria v. 1% for France v. 80% in thecase of Norway. Norwegian export markets in aluminum, fish and fish oils to USSRallowed the nation to receive essential supplies of coal, grain, and manganese in return,with half the value of its imports concentrated in three commodities: coal, grain andtimber by 1951. In market sectors, the export of 11 million tons of Polish coal onlycomprised 2% of total European coal imports but accounted for 40% of Denmark’ssupplies. One quarter of all European bread grain rested in the import of 13 millionmetric tons with 1 million tons from USSR, which comprised 36% of Norway’s totalsupplies. Due to wartime destruction of European agriculture, 7 million tons of coarsegrain for livestock still relied on imports with 1 ½ tomes from USSR which could not bereplaced. A critical reconstruction material, rough sawn wood, remained at a 20% importlevel with one quarter of all timber coming from USSR countries. Increasingly united in economic need, European COCOM members began to move tosubdue the draconian direction of Cold War trade containment. A general recession in1953 provided the first opportunity to scale economic containment as the Europeanrepresentatives succeeded in 1954 in substantially modifying the COCOM lists over USprotests. American accommodation of “limited shipments” of sensitive items to leaveWestern Europe allowed Norway to trade aluminum and Denmark to send tankers andfreighters for Polish coal, and Austria and Italy to export ball bearings and steel to Poland

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for coal and Russia for crude steel. The act of European solidarity which led to asignificant break in US domination in COCOM was hailed by the French press in August1954 as a triumph, especially for smaller nations or the “le petit blocus.” With thereduction of the COCOM lists in 1957, Western Europe began to vigorously pursue re-opening opportunities for business engagement with communist-based countries.

“First In Wins”: Western Europe Rebuilds Markets

Despite new US restrictions on extending export licenses to nations engaged incommunist trade, European strategic trade with the Soviet Bloc declined only by 13% asnon-strategic trade reached a new high of $555 million by the end of the 1950s. The UNEconomic Commission for Europe enabled a restoration of business relations by offeringtrade talks with USSR in Geneva in1953. After the reduction of COCOM restrictions in1954, a sharp increase in Western ships reaching Chinese ports occurred in 1955 withgross tonnage at 7,136,202 and 1,187 trips up from 935 trips and 5,650,091 tons with53% of the ships under British registry. Soviet imports of copper, aluminum alloys, andmachine tools also double in first 9 months of 1954. The further re-opening of marketsdue to COCOM’s 1957 China Differential led to huge new business opportunities for UKand France to supply China with military as well as civilian goods and investmentservices. Overall, list reductions in the 1950s drove new business partnerships andalignments between Western Europe, USSR and Eastern European nations into the1970s. This proved a critical period, especially for the UK and France, to develop keyindustrial and high tech partnerships with Communist Bloc countries before the re-entryof the United States in the 1970s. In 1961, UK Imperial Chemicals Industries (ICI)entered into polyethylene and synthetic materials, technical assistance and factories dealswith Poland, Czechoslovakia, GDR, and Rumania and sold $15 million in chemicals,equipment and technology in one deal, with expected “doubled or quadrupled sales in1962.” In terms of the USSR alone, West Germany sales doubled and UK bi-lateral tradejumped up by 35% ($358 million v. 265 million) by 1961. Japanese exports to USSR alsorose from $23 to 60 million with imports up from $40 million to $87 million. Italy’sexport totals to USSR followed suit and soared 78% over 1959 levels. Soviet oil provedone of the most lucrative and desirable markets as the UK and Italy projected 25-30%further increases in import sales. UK government level trade talks began in 1962 foropening of British market to Russian oil which sat at $1.89 a barrel over EasternEuropean satellites price of $3.02. By 1962, ¼ of Italian oil came from Russian importswith West European imports up 11% overall from Soviet oil sources. Areas of Western European export trade concentrated in industrial, scientific andoptical equipment, chemicals, power plants and factories fabrication, and synthetic fibers.The UK-USSR Trade Fair of 1961 attracted 620 British firms and 50 MPs to Moscowgarnering $250 million in contracts in capital and manufactured goods imports. As oneBritish official noted afterwards, “The Soviet Union is now by far and away Britain’sbest customer in the textile machinery field.” Eastern European imports such as Skodacars, Bulgarian tinned tomatoes, Romanian canned eggplants, Hungarian butter, Polishham, and Georgian wine began to enter British shops by the early 1960s. Overall, suchimports rose by 60% in UK from 1956-1962 with increased trade value up from 99

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million to 156 million pounds. Eastern Europe also posed more “dynamic potential” withthe UK as a trade partner as Moscow policy dictated a balance in trade with the UKlimiting exports to timber, barley and furs match its chemical, industrial and machineryimports. By contrast, Eastern European countries eagerly pursued import deals with theUK in industrial equipment and consumer goods, even at the risk of shouldering largeexport deficits in order to build new business ties to the West. In the 1960s, Western Europe continued to rebuild business relations with CommunistBloc countries breaking into sensitive scientific and electronic communications markets.In the 1960s, UK repeatedly led the call in COCOM for additional revisions of theembargo lists to account for communist scientific achievements and take advantage ofemerging technical trade. As one British official noted, “It is foolish to embargoequipment the Russians are now producing….East-West trade leads to raised livingstandards….A fat man is less likely to become a Communist than a thin one.” By 1964,exports of UK electrical machinery sat at $200 million of which $4.5 million involvedSoviet buyers. Even though constituting only 2% of its total technical exports, the dealsallowed the UK to hold a virtual monopoly in sales of scientific electrical instrumentswith telecommunications equipment such as civil radar sets, marine telecommunications,direction finders, and broadcast gear to the Soviet Union. Overall, the biggest business that emerged between the UK and communist countriesin the 1960s and 1970s involved large plant contracts vs. product sales. The increasedautomation of processing required the installation of computerized instrumentation,machinery and controls, which for example typically comprised 10% of the costs ofmodernized chemical plants. By the 1970s, the UK had entered into a $111 millionsynthetic fiber plant deal with USSR and five similar contracts with China andCzechoslovakia. British firms also negotiated scientific and optical plant contracts ofmore that $1.5 million with China and held regular trade shows in Peking to push sales oftelecommunications, electronic and scientific plants and equipment. France also expanded its sales of scientific, electronics, and communicationsequipment to Communist Bloc nations in the 1960s and 1970s. While small, Frenchtechnical exports reached $2 million in sales to Rumania and $1.5 million in Russia inradio and tv transmitters and receivers, cathodo-ray tubes, and measuring instruments bythe early 1960s. Like their UK competitors, French firms regularly attended Russian andChinese trade shows by the fall of 1964. As a new COCOM partner, Japan acted on the relaxed lists by entering into severalseparate trade deals with Russia and also “unofficial” trade with China. China regularlysought in the 1960s to acquire large digital computers to develop nuclear weapons, powerresources, oil refining and automate key industries. Though thwarted by Americanintervention, Mitsubishi Electric Co. pursued a contract to produce 60 Gamma computersfor China in a partnership with France’s Compagnie des Machines Bull. Japan also raisedtensions, not only with the United States but with Taiwan, over the sale to China of achemical fiber plant, with 4% of plant’s $20 million cost including computerized controland measurement equipment. Private agreements between Tokyo, Peking and Shanghaias a result of trade fairs became commonplace in the 1960s and by the 1970s Japanexported more electrical and computerized equipment to China than Russia. At $9million a year, Japan did supply Russia, however, with fertilizer and chemical plants and

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also sold numerically controlled metalworking tools into Moscow along with robustSiberian trade. Overall, plants over products sales dominated Soviet and Chinese trade requests ascomputers became pervasive in communications systems and industrial manufacturing. Inthe early 1960s, Soviet planners sought to increase chemical production in Communistbloc countries by 25% driving a need for $10 billion in processing plants and equipmentfrom the West. Similarly, the Soviets set a goal to automated production lines in a varietyof industries with the goal of the installation of 400 new lines before the end of the 1960s. Immediately, US concerns escalated over such sales citing the danger that communistcountries could “piggyback” military electronics knowledge through the acquisition ofcommercial plants and technologies. As the design, operations of maintenance ofcomputerized communications and automated systems remained highly indigenous tospecific firms, the sale of plants and equipment into Communist Bloc countries, however,virtually insured European and Japanese producers of the regular extension of lucrativeupgrade and new contracts. As a result, huge, emerging markets began to emerge forWestern firms in advanced instrumentation and control equipment as integrated in plantcontracts with the Soviet Union, Eastern Europe and China. For European computermanufacturers in particular, such contracts were critical in acquiring growth in tighttransatlantic markets dominated by such American producers as IBM and Honeywell. Reflecting this market trend, computerized instruments imports into the CommunistBloc from Western Europe shot up from $45 million to $60 million by 1963, with the UKand Germany leading sales. By contrast, US sales of such equipment dwindled,especially after the Bay of Pigs from less than $250,000 in 1961 to $90,000 in 1962.Concurrently, European firms began to aggressively take advantage of the self-imposedAmerican embargo conditions. The annual Leipzig Fair in East Germany soon became aconduit for Western computer and electronics sales allowing European firms to regularlymake connections and demo products to Soviet Bloc countries. East German officialsannounced intentions to introduce micro-modules into industry computers by 1965 andtransitorize telephones and radio systems by 1966 through Western contracts. American fears of technology transfer soon followed with the Eastern Germancompany, VED Electromat, setting up automatic assembly lines to produce 1 milliontransistors per year with a similar line planned for Czechoslovakia in the mid-1960s.Reports leaked from the Soviet bloc claimed that 100 East German scientists werealready making “copycat” US electronics and computer components and working onWestern variations of imported lasers. Verification of such activity soon emerged as EastGerman exports of electronics rose 180% by the end of the decade with exports incommunications equipment, lasers, and electronics exports to other communist bloccountries along with nations in Africa and Asia. Poland and Hungary also advancedrapidly in lasers and electronics development for export along with Czechoslovakiawhich specialized in mainframe computer and components development. By the 1970s, the flow of East-West computer and electronics trade accelerated asrevision of COCOM restrictions again came into play. In 1972, the US industrymagazine, Electronics, reported in its October issue that “COCOM begins to weaken”with “drastic (pruning) reduction of list of electronics prohibited from export to EasternBloc is positive move but US obstruction may die hard.” While certainly more in favorthan their European counterparts of preserving stringency over open trade, American

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COCOM representatives, nevertheless, demonstrated a new willingness to loosen theembargoed lists of commercial computers, precision instruments, and communicationsequipment, signaling a distinct departure from earlier attempts by the United States tomake relaxation “very difficult.” The strained nature of the Western Alliance along withunprecedented pressure from US companies worked against any attempts by Americanpolicymakers to hold the line for strict containment. As one American diplomatcommented that “All we expect to leave under embargo this time around is electronicsgear that is clearly military, and obvious stuff like guns and atomic bombs.” For Europe, 1972 proved a watershed year as COCOM approved an RCA satelliteterminal transaction with Red China and Ferranti’s unprecedented contract with Poland toshare integrated circuit know how. In the same year, 4 out of 5 exceptions cases beforeCOCOM involved electronics and 700 applications received approvals constituting a15% rise over the previous year. Britain proved the most active applicant for electronicsand computers exceptions totaling $30 million, Germany second with $20 million andItaly third with $14 million. As evidence of deals filtering through COCOM at a swifterpace, Honeywell-Bull received approvals for a big $6 million computer sale toLeningrad’s GOSBANK and $1.2 million data switch system sale to AEROFLOT by anITT subsidiary, La Compagnie Generale Des Constructions Telephonique, by 1973. Despite streamlined lists and procedures, COCOM’s hold over East-West trades stillrankled in US-European relations and led to more frequent, open clashes starting in the1970s. “The European bitterness surfaces fast in any talk about COCOM…..Not only is ituseless, it is harmful,” commented one French government economist, “COCOM hasbecome an instrument for surveillance of international competition. Each application foran exception must contain voluminous technical detail, the value of the potential contract,the name of the selling company, and the name of the buyer – an industrial spy’s dream.”Despite growing suspicion of American military and business aims, Western Europecaptured important gains in the 1960s and 1970s by taking advantage of relaxed tradebarriers to fill the void of US competition and actively re-build market relations withSoviet Bloc countries and China.

Containment Over Expansion: American Business Lost

While their European counterparts freely acted on the relaxation of COCOM lists,American firms remained stymied as the US Department of Commerce maintained a tightshut-down of non-strategic as well as strategic items for overseas export. Even into the1970s, seemingly innocuous items such as underwear, socks, gardening tools, andtoothbrushes still required US producers to secure elaborate government export licenses,even to sole distributors in Western Europe. Along with frustrations over complicatedlicensing and permissions arrangements, many American export-import firms continuedto reel under the enforcement of the 1951 Kem Amendment and Battle Act, whichprohibited trade with European nations which supplied commodities and manufactures in1700 categories to the Communist Bloc. While the Eisenhower Administration hadbacked down on enforcement of the acts to preserve European relations stressing a “needfor flexibility” and “mutual respect for sincere differences” on East-West trade, US firmsreceived little relief from Cold War trade restrictions.

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Counter to scholarly views that American firms remained staunch supporters of tradecontainment throughout the Cold War, business attitudes actually reflected a vigorouslyconsistent promotion of exports expansion over restrictions. US firms activelyanticipated and planned for predictions of a 63% increase in export trade after World WarII. Overseas trade shutdowns driven by communist containment policies in the 1950sgarnered guarded support in the American business community with the assumption ofembargo as a short-term condition to be followed by a return to liberalized worldmarkets. A 1955 poll conducted MIT Center for International Studies of 903 executivesof firms with over 100 employees verified this position as 38% remained in favoredlowering trade barriers v. 5% of firms polled in 1939. In their responses, 7 executives to1 favored exports expansion in 1955 v. 2 to 1 against in 1939. In a similar poll conductedby Fortune magazine in 1939, 41.6 of executives of small businesses v. 7.2% of bigcompanies wanted to keep higher import tariffs in place. By 1954, only 5% of smallbusiness and 2% of big business wanted to continue high import tariffs. The reversal in attitudes stemmed, in part, from the newly-acquired “technicalsuperiority” of post-WW II US exports. Competitive advantage held by the United Statesover collective security agreements would dominate and control the flow of world trademarkets without excess government intervention. Indeed, US export volume had beenpredicted in 1946 to rise to $7 billion over less than a $1 billion prior to 1945, due toanticipated growth in machinery, aircraft and vehicles markets tied to overseas postwarrehabilitation. In particular, new consumer products and materials born from World WarII contracts, technologies and production processes, e.g. photographic goods, scientificand professional equipment, electronics, tools, steel products, etc., posed some of thegreatest trajectories for the expansion of American postwar markets. Instead, US producers found themselves by the 1950s bound to an ever-restrictive setof government policies which gave unparalleled aid and support for European andJapanese recovery and development over overseas trade growth. In addition, worldcompetition increased dramatically as Western nations gained comparable capacities toengage in mass and specialized production and distribution. Competition and profits inforeign markets tightened even further as American companies no longer could rely onexports to alleviate excessive inventories or oversupply conditions, particularly whenaggravated by recession conditions. The late 1950s triumphs of Soviet air defense, spaceand satellite programs also delivered a severe blow to “security superiority through tradeembargo” arguments, triggering business calls for re-considerations of US and COCOMcontainment policies. As one representative of the National Association of Manufacturers noted, exports nolonger served for as “supplementary markets” for the dumping of production surplusesbut constituted an “integral part of operations and profits” for many firms. In terms ofbusiness dynamics then, trade containment policies which drove rapid, unyieldingreduction in accessible world markets collided with the new conditions of exportdependencies, which pervaded US corporate short-term profitability and long-termgrowth. By 1959, limited exports, along with a sharp Dollar Gap, triggered a $3.7 billionnet outflow constituting the largest deficit in balance of payments in American history. Along with derogatory trade policies, US firms faced unparalleled shits in overseaseconomic and business development. Supported by Marshall Aid and technical assistancecontracts, European companies re-tooled to “mass produce for mass markets” by

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automating and diversifying production lines. Imports reversals ensued as Europeanfirms moved from manufacturing a “limited quantity of luxury goods” to offering well-made consumer products in mass quantities. Fueled by new jobs and products flowingfrom home industries over American imports, European living standards and consumerbuying patterns increased dramatically as West Germany realized a 110% rise with jumpsin France of 60% and Australia of 81% v. US at 35% from 1950-1958. As European and then Japanese producers aggressively moved to compete in “greatnew mass markets”, American firms started to lose ground, not only overseas but in theirown domestic markets. Recession conditions were certainly aggravated in 1957 by thesudden onslaught of Asian imports. Unabated until the 1980s, the Asian Challengeimperiled several US consumer industry sectors, particularly in shoes, textiles, and metalware. As an example, US import levels of Japanese and Korean foot ware set at 6 millionpairs in 1957 but jumped to 120 million by 1960 resulting in 25% decline in US homeproduction. Asian sandals exports in the 1960s virtually eliminated American worlddominance in leisure foot ware, which had rested largely with tennis shoes and sneakers. Whether from Asia or Europe, the “Imports Challenge” clearly presented a new,disturbing problem for US firms and policymakers – how to support growth and thealignment of free trading countries without reducing the world share of American trade?Foreign imports jumped from $1.5 billion in finished goods to $5 billion from 1950 to1958 - an increase of 240% in less than a decade. “What used to be primarily a flow ofraw materials for US plants has become a flood of finished goods vigorously competingwith US goods on their own home ground”, declared one economist in the March 1961report, Public Opinion Index for Industry. The emergence of the European Union and the European Free Trade Association(EFTA), which created a single, integrated market of 300 million consumers, alsotranslated in a huge $5 billion loss in US overseas trade. From 1958 to 1961, membercountries experienced an annual growth rate of 20% in trade v. 14% from 1953-1958with the United States in the same period only capturing 4.8%. Non-members tradingwith the European Union also realized increased annual trade volumes of 10.5% from1958 to 1961. While liberalized, European trade became increasingly intra-union in termsof access shutting out traditional as well as new American exporters. When taken together, rising imports, European trade integration and Cold Warembargos, business executives began to debate in earnest by the end of the 1950s thedirection of US foreign policy. They questioned strongly then the wisdom ofcontainment policies that tried to combat Communism and support Western Europe andJapan at the expense of US trade protection and economic expansion.

Export or Die: US Economic v. Military Security

The 1960s proved a decade of extreme frustration for the American businesscommunity as it attempted to relax Cold War security policies in favor of greater tradeexpansion. Declaring that the United States needed to “export or die”, several businessassociations, particularly in chemicals, computers, and machinery, began to lobby forincreased trade in strategic as well as non-strategic markets. Anti-communist tensions ranhigh, however, often thwarting business progress through direct trade blocking and thepassage of additional measures that further hurt US world trade.

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As a specific example of trade blocking, the US Departments of Commerce and Stateallowed licenses for the Bryant Chucking Grinding Co. to sell 45 metal grindingmachines to USSR though “vital in missile production” as “practically identical machineswere available in W. Europe.” When an anti-communist minded company officialcomplained to Sen. Dodd on the Senate Subcommittee on Internal Security, the licenseswere revoked. The hearings also showcased the frequent and virulent disputes ragingbetween the Pentagon and the Commerce and State Departments over “strategic”definitions when applied to business products and services requiring export licensure. The Trade Expansion Act of 1961 and the Kennedy Round of the GATT also posedreal threats to many firms which condemned both initiatives as “concessionary tradepolicy” that promoted Western alliance, over US business interests. Instead of openingEast-West trade, the Trade Expansion Act in 1962, in theory, provided PresidentKennedy with broad tariff-cutting powers to be used as a lever in negotiating concessionswith American trading partners. The tariff power was also intended to “broker andstrengthen unified Western economic policy toward USSR” and “Allied readiness and acoordinated response” over opening more world markets to US trade. Businesses soonexpressed distinct alarm as Kennedy’s answer to the challenge of European economicunity and the growing US balance of payments deficit was to institute a 50% cut acrossthe board in tariff rates to avoid, “disintegration of the free world economy into separatetrading systems.” “This tariff cutting is necessary”, Kennedy declared, “if we are tomatch the reductions to be made in the internal tariffs of the European Common Marketand the Free Trade Association … since both groups will have reduced their tariffs by50% by 1966.” For many companies, tariff cutting without concessions to grant increasedAmerican trade access into the European Union and with the European Free TradeAssociation posed a greater threat to US security than communist expansion. Substantial tariff cuts offered through GATT negotiations also angered Americanproducers, especially in chemicals and industrial products. In a 1963 report by SyntheticOrganic Chemical Manufacturers, executives voiced strong opposition to further tariffreductions through the Kennedy Round of GATT. “US industry was not encouraged … toadvise or assist the US (GATT) negotiators” and as a result “knowledgeable bargainingby the Europeans (allowed) the Common Market to protect its import-sensitive products… (through a) system and process of collaboration between foreign governments andtheir industries.” The report went on to state that, since the 1950s, over half of protectivetariffs in chemical products had been eliminated which had “greatly accelerated” balanceof payments deficits 3.9, 2.4, and 2.2 billion dollars respectively in 1960, 1961, and 1962with projected deficit of 2.5 billion in 1963 – the lowest levels since 1939. Whilechemical exports still represented $1.3 billion in excess of imports and a critical 2/3 interms of an overall trade balance, further tariff reductions through the GATT posed threatof even more reversals already initiated by the 1961 Trade Expansion Act. In 1962, USchemical exports rose worldwide by 4% but could not stem the rise of European importswhich increased by 7%. By 1963, the value of US chemical exports continued to declineby $6 million while foreign imports grew by $15 million, all facilitated by the opening ofAmerican markets to greater European and Japanese penetration through the 1961 TradeExpansion Act. Along with increased Western business competition and import levels, executivesbemoaned the institution of even tighter controls under the renewal of the Export Control

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Act in 1961 which resulted in 20% drop in US-Soviet Bloc trade. Further complicatingtrade application procedures, the Office of Export Control started new pilot programs tofurther scrutinize the activities of customs offices issuing export licenses. Firms watchedin frustration as more licenses, such as a previously approved $43 million deal inautomobile production equipment to Russia and Czechoslovakia, were cancelled ordenied. As a result of the Export Control Act, US-USSR trade slumped against Europeancompetition descending from a 1960 high of $23 million to $16 million by 1962, withmost trade concentrated innocuous exports such as tobacco, hides, tallow, synthetics, andpaper and pulp machines. Belabored by growing restrictions, industry leaders such as Everett M. Hicks,President of National Machine Tool Builders Association began to speak out directly infavor of an end to East-West trade embargos. “I think it would be a good thing if therewere more trade between the Soviet Bloc and the West,” Hicks declared, “A refusal bythe US to sell to Russia simply results in donating this business to Western Europeanfirms, particularly those in West Germany and England.” In a 1962 study on the TradeExpansion Act, the National Association of Manufacturers called East-West tradecontainment “almost completely negative”, which had led to “disruptive trade practices”and a “wholesale pirating of Western patents, know how and technology.” One industryexpert cited in the study “urged free world negotiations with USSR” as an alternate pathto containment “to win its [USSR] adherence to an acceptable code of commercialbehavior in world trade.” Such pleas, however, fell on stony ground in the US Congress and the Pentagon. Asone official stated in a 1962 hearing on the impact of the Trade Expansion Act, “the hopeof profit has too often been placed higher than the self-discipline needed in the contest forsurvival.” Containment also remained necessary according to Secretary of DefenseRobert W. McNamara, as “greater concern … [rests in the] penetration of the USSR intoWestern markets than West into Soviet commerce” citing the expansion of Soviet oil at adaily rate of 600,000 barrels, up to 12 million tons shipped by 1957 at $1 a barrel throughBlack Sea ports to Europe. While Middle East oil sat 75 cents per barrel, cheapertransport costs made Soviet oil highly attractive to European buyers, especially Italy, adependency, according to McNamara, that could not be left unchecked.

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By the 1960s then, it became clear to the American business community that anti-communist geopolitics posed a long-term set of damaging, restrictive conditions on USforeign trade. Corporate frustration mounted dramatically over the lack of political andmilitary understanding of the business and market consequences wrought by economiccontainment and mutual security concessions. From a leadership point of view, Americanexecutives also criticized the fact that Western Europe v. the United States now paved theway for real worldwide trade liberalization with its embrace of economic integration andrenewed communist trade. Taking advantage of a 1964 hearing on East-West trade, 214 leading corporationsurged the US Senate Foreign Relations Committee to relax embargo measures with allfirms favoring trade with communist countries. The testifying executives also representedan astonishing array of American business interests ranging from food stuffs, chemicals,

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paper, printing, petroleum, tobacco, fabricated metals, machinery, electrical equipmentand transportation equipment. Hearing statements stressed over and over the trade groundlost by the United States to Western Europe after the significant relaxation of COCOMrestrictions in the late 1950s. Since 1959, the UK, armed with its adjusted policiescommitted to “peaceful trade”, had more than doubled its export-import business with theUSSR in support of its key industries in scientific, optical, and industrial equipment,chemicals, man-made fibers, motor vehicles, pharmaceuticals, leather footwear, cottonand woolen goods, knitwear and clothing. The consortium, the Soviet Foreign TradeOrganizations, also annually awarded $63 million in contracts to UK firms to supplymanufacturing facilities, chemical and industrial plants, synthetic fiber mills, avionicsand other technological equipment. Soviet import levels with the rest of Western Europealso rose from $3 billion in 1955 to $7 billion in 1964 with construction, technology andequipment contracts to France ($100 million), Italy ($160 million), and $100 millioncontracts to Sweden, Denmark, Holland, Austria and West Germany. Of the $1.2 billionin USSR imports in 1963 only $22 million came from the US with more than $880million from Europe, $158 million from Japan, and $139 million from Canada. With theconclusion of a new set of lucrative bi-lateral treaties between the USSR, France andJapan, the New York Times in 1964 supported growing business concerns andcommented, “Is it not time that we … re-examine our policy … that sharply contrastswith the attitude taken by many American allies? In response to mounting business pressure, President Johnson declared in early 1964that he was “open” to relaxing E-W Trade” and supported a partial scale back during hisadministration. Johnson officials supported Western European allies in reducing strategicembargoes levied by COCOM through NATO on some electronic equipment(oscilloscopes) and raw materials (boron/crystalline salt). Trade liberalization did notserve though as the over-arching reason for new US backing of such forms of “moderateliberalization” – by 1964 the United States had clearly lost its leadership position to theUK in Europe in relation to NATO and COCOM over its former intractability over anti-communist containment. To appease American business interests, the Johnson Administration did try to loosenCongressional attitudes and geopolitical boundaries regarding direct communist trade.Connected to internal strife in the Soviet Bloc, Johnson supported a greater opening oftrade first with Eastern Europe over Russia and China. Citing that Western trade hadrisen by 3.9% in 1964, almost double the 1952 figure, Johnson declared that it was “notin the interest of the United States to prevent Eastern European countries from achievinggreater contacts with the West.” The State Department followed suit by issuing a reportin February 1966 promoting the pursuit of “expanding peaceful trade with EasternEurope through non-strategic items. Johnson went so far as to condemn efforts by anti-communist groups to boycott of Eastern European imports of “peaceful goods” such asPolish ham, Czech Christmas ornaments and Yugoslavia hops and tobacco. “The FederalGovernment cannot be in the position of permitting private pressure groups byintimidation and threats to frustrate US foreign policy”, he warned. Johnson’s backing ofgrain deals to the Soviet Union also signal a change away from containment in US worldtrade policy. At the start of 1964, total US export sales to the USSR comprised a paltry$300,000 with 90% in agricultural cereals. By the end of 1964, the Soviet balance of

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trade had a surplus of $310 million with the United States in 1963 turned into a deficit$90 million due to wheat and wheat flour purchases.

BREAKING OUT: DÉTENTE AND FDI

The opening of Soviet Bloc and American agricultural import-export trade did little toalleviate business anxieties over industrial trade lost through military containmentpolicies. At the end of the Johnson Administration in 1968, China-Western tradeexceeded $1 billion in exports and imports had risen by 22% to $977 million with 7countries provided ¾ of Chinese imports – Australia, Japan, Canada, Argentina, Cuba,Britain and France. The US trade balance with China, on the other hand, had slippedlargely due to the Vietnam War from $4.6 positive from 1955-1965 to $3.5 billion bymid-1968. By 1970, Europe provided even less hope for US industrial goods markets with 25%of all transatlantic exports in primary commodities as mineral ores, raw chemicals, textilefibers and non-mineral oils. 40% of US exports to Europe had rested in manufacturedgoods but now were highly threatened by EEC/EFTA policies. Predictions of seriousdeclines in high-tech equipment to European producers also plagued American firms.While another 30% of US exports sat in food and tobacco products, European agriculturalmarkets were highly protected and increasingly competitive, not only intra union butworldwide. Up to 70% of US export trade to Western European then faced possibledecreases due to economic integration and intra-trade arrangements. By 1972, the American business association, The National Industrial ConferenceBoard (NICB), announced with alarm that the United States no longer sat as the world’slargest trading entity – the European Economic Community had taken the lead withAsian markets gaining significant ground as well. In its 1972 report, the NCB revealedthat out of 106 US Fortune 500 firms, over ¼ had been seeking trade with the Soviet Blocand China since the 1960s. Over half had been conducting business indirectly throughEuropean and Japanese subsidiaries and suppliers with ¾ of the firms directly seekingtrading partners in the Soviet Bloc and China. As one executive of an American chemicalcompany commented, “Like many other major companies, our company sees the SovietUnion and Eastern Europe, as well as the People’s Republic of China, as the lastrelatively untapped major markets still available.” Despite the embrace by the Nixon Administration of détente and relaxed trade inSino-Soviet-American relations, the United States still maintained high barriers againstbusiness entry into communist-based strategic and industrial markets. While Nixon’sproposed New Economic Policy promised to cut imports to help US firms, it alsocontinued to limit overseas investment access and opportunities. Strong WesternEuropean competition, as well as lingering domestic political pressures to preservemilitary containment, presented then American firms with untenable obstacles toexpansion. Unable to influence substantial changes in containment policies, many UScompanies turned to foreign ownership, joint licensing, and overseas subsidiaryrelationships as a way to meet overseas competition and establish a foothold incommunist markets.

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Over all other factors, the unprecedented rise of foreign imports starting in the 1960sand 1970s acted as the greatest unifying factor among American firms, both domesticbound and multinational in operations, in re-opening world trade. While politicallyexecutives may have remained anti-communist in their views, the need to protect theirfirms from foreign competition drove a strong consensus by the mid-1970s to relax, if notend, East-West trade embargoes. Reflecting such views, the National Conference Boardpublished a report encapsulating the growing anxiety of American business over slidingexport trade:

US exports in 1950 were $10 billion. By 1960, this had doubled to $20 billion, by1970 to $34 billion and in 1977 $120 billion. Since the US share of world exports hasdeclined from 18.1% in 1950 to little over 12% in 1977, the trade of other countries isobviously growing even faster. As a whole, exports of all nations grew from a meager$57 billion in 1950 to nearly $ 1 trillion last year. Automobiles prior to 1975represented only 15% of US imports but by 1975 foreign models reached a high of20% with American automakers never recovering lost share since. The slump in USmodels in domestic market declined from 9 to 6 million units leading to 250,000 jobslayoffs. Clearly, international rules and procedures on US import-export trade castfrom 1950 to 1965 have fallen behind the times.

The report further recommended opening technical as well as consumer products withembargoes countries, along with tighter import controls, as ways to immediately stemAmerica’s growing “competitiveness gap.” However, these recommendations relied on a significant shift in the US politicalclimate away from communist containment. For many firms, direct investment becamethe most immediate and least encumbered avenue for entry into East-West markets. In1972, the National Conference Board had issued a report – Direct Investment: Blessing orBurden? reflecting changing trends in Cold War foreign business strategies. The reportnoted that direct investment re-flows between 1950 and 1965 on investment and serviceaccounts in US balance of payments were $21.8 billion larger in annual transferredreflows than direct investment outflows. This led to an increase of $37.4 billion in bookvalue of investments in same period and an increase of $3.2 billion in annual reflows plusa rise of over $1 billion in retained earnings per year. In the same vein, the NationalAssociation of Manufacturers reported that American FDI more than doubled from 1960-1969 from $31.8 to &70.8 billion. Net gains were overshadowed by net exports to USaffiliates with roughly $65 billion in exchanges from 1950-1965. Overall, the figures demonstrated the rapid growth of markets gained from newlyconstructed foreign production bases, which proved more economical than exporting intoconstrained markets from original home production bases. Direct investment also becamenecessary to combat reciprocal effects of lower tariffs which had enabled previouslyinefficient overseas competitors to prevail through advantages of lower wages, greaterdirect access to raw materials and finished goods markets, and faster export to higherincome areas. Direct investment and offshore production through subsidiaries alsoallowed American firms to largely escape “designing out” products which remainedbound by an onerous, myriad of US export controls and licensing procedures.

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CATCHING UP IN SCI-TECH MARKETS

While détente and FDI strategies facilitated the expansion of some US businesssectors into communist trade markets by the 1970s, sci-tech firms continued to face anuphill battle in terms of access and meeting growing European and Japanese competition.Companies particularly affected rested in computers, electronics and communicationsequipment, automated machinery, and chemicals and scientific equipment sectors. Atfirst, the firms benefited from vigorous efforts by US policymakers to compile, apply andenforce COCOM embargo lists throughout the Western bloc. As American resolveweakened, however, in the face of frequent European challenges to the COCOM lists, USmanufacturers found themselves fighting a fierce tide of real competition, complicated byuncertain government support, if not outright resistance, to pursuing lucrative communistsci-tech markets. The stakes proved highest in computers and electronic communications as Americanfirms finally received greater levels of federal permission to enter Eastern Europe. Bymid-1960s demand increase dramatically in Eastern Europe for specialized transistors,inertial guidance equipment, radio navigational gear, and microwave components.Industry executives as early as 1962 commented frequently on the differences in therevised 1957 COCOM v. US Embargo Act lists which the former had opened up mostindustrial electronic equipment including transistors to communist trade. Europeancompetitors then had access to Soviet Bloc business in “practically every type ofelectronic equipment, components and materials worth selling, even radio and tv.” Still,disputes remained within the American electronics industry in the early 1960s over the“ethical and moral” dilemmas involved with communist trade. Nevertheless, James H.Binger, president of Honeywell argued the expanding position of industry executivesthat, “The US should broaden its list of items we can trade. We’re not going to starvethem out and we’re not making it tough on them by keeping our products out. If theydon’t get those items from us, they will get them from somewhere else.” Electronicsmagazine, demonstrated the uneasy divide among firms advocating for freer trade overthose holding lingering ambivalence over market interaction. “If our government thinksit’s in the national interest,” said one company official, “who am I to over-rule thatjudgment?” In contrast, a president of an electronics company countered in the story bydeclaring, “We’re sending representatives to the trade fairs in the East and are activelyseeking business in the Red Bloc. So far this isn’t much. But if the door is ever openedwide to trade with the East, we’re going to be there.” The historic shift finally came in the industry in May 1968 when the New York Timesreported that Secretary of State Dean Rusk had sent a recent letter to Arthur K. Watson,head of IBM World Trade Corp., that stated “Your company’s trade with Eastern Europe,so long as it continues to meet the requirements of our laws and regulations, iscompatible with national interests and is welcome from the standpoint of our foreignpolicy.” IBM’s waiver proved a bold move to try and stem the rising tide of WesternEuropean computer dominance in the Communist Bloc. For over two decades, the lack ofUS competition heightened the attractiveness and “first in” access for Western. Europeancomputer and electronics firms into Eastern Europe markets, particularly after TexasInstruments and Collins Radio refused to export in the 1960s into the Soviet Bloc.Evidence of the futile of such technology embargoes soon surfaced in the American

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business community as copycat versions of US electronics such as duplicate Ampexrecorder sets appeared in Russia through European suppliers. With the coming of relaxation through the Johnson and Nixon Administrations, manyAmerican firms abandoned the former government and self-imposed bans. While stillminiscule, US computer trade jumped up in the late 1960s from virtually zero to the salesof $734,850 in equipment to the USSR, $1.156 million to E. Germany, $1.8 million toCzechoslovakia, $110,489 to Rumania, $17,750 to Poland, and $131,032 to Yugoslaviaby the end of 1968 with approved export licenses increasing measurably in 1968-1969over 1967 limits. However, US efforts through COCOM to block British computer sales to EasternEurope at a point when IBM seemed positioned to sell into the Communist Bloc triggeredoutcries by Western governments and competitors as to the true basis of Americanintentions. Unlike in 1963 when US officials interdicted 100 W. German exporters, 60 ofwhich 60 were dealing in electronic equipment, European COCOM support for theblocking of high-tec trades had eroded significantly and under a darkening cloud of tradecompetition. Certainly, the US position against UK-Eastern Europe computer sales in1968, when taken with the IBM decision, reflected a new desperation on the part ofAmerican policymakers and executives to correct the trade gap, even at the expense ofWestern relations and military security.

Under the Nixon Administration, several technology deals, particularly with China,signaled a rapid reversal of containment as the overriding policy over computer andelectronic communication sales. In February 1972, the International Herald Tribunereported that Nixon had authorized the sale of a permanent communications station toChina “which will give China access to the world’s six commercial communicationssatellites.” In a $2.2 million deal with Globcom, a RCA subsidiary, the permanent “earthstation” was installed to allow three US television networks to carry live satellitebroadcasts of President Nixon’s subsequent visit to Shanghai and Peking in the sameyear.

With the China satellite deal, the log jam of American technology transfer and businessdeals broke quickly. A rush of computer trades spurred The Economist to run an articlein 1973 questioning, “How much technology?” as the US authorized the sale of twoControl Data 17 computers to Russia for use in making calculations on oil explorationand earthquake detection. In 1972, Russia had asked for similar machine IBM 370-158model, which was turned down by American officials for fear it would be used forsurveillance of foreign tourists. Russia countered with entering into negotiations withFujitsu-Hitachi to obtain the Japanese equivalent to the IBM model. Even though newsreports predicted that, “COCOM would … stop the sale”, congressional representativescalled for a special committee on US competitiveness in world technology markets.Headed by Fred Bucy, President of the electronics firm, Texas Instruments, thecommittee issued a report in association with the Office of Defense Research andEngineering that stated that “the west should stop worrying about products that it sells tothe communists and should instead concentrate on controlling the flow of technology.”Embargoes no longer worked, in the opinion of Bucy and others on the committee asWestern competitors would supply items that American firms were prohibited fromsupplying. Only through more authorized trades could the United States be certain ofbeating its competitors and insuring which kinds of technologies were exported and

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acquired by communist countries. According to Bucy, the business community had“growing concerns over reverse engineering and extracting the know how by analyzingthe product” through the current flow of European technology trades.

In line with freer trade attitudes, the Ford Administration in November 1975 approvedthe sale of the first full computer systems, the Control Data Cyber 73 systems, to bothRussia and China. When asked about the sale, James Bowe, a VP at Control Data,confirmed the trade and commented to the International Herald Tribune that some“Pentagon and Commerce Dept. were “unhappy” about the sale. However, a CommerceDepartment official also went on the record stating the inevitability of relaxed barriers,“If there were no potential military applications there would have been no reason toimpose safeguards on the use of the equipment.” The re-opening of US-Communist Bloc technology trades, however, proved fleetingas the Carter entered office in 1980 calling for closer scrutiny of Eastern Bloc computersales. In January 1980, Newsweek reported that a proposed $1.3 million sale of a SperryRand UNIVAC 1100/10C computer to the Soviet State Institute for Design and Researchin Synthetic Rubbers outside of Moscow posed “reverse technology” security breaches.The Tupolev facility which would receive the UNIVAC equipment manufactured bothmilitary and civilian aircraft including the controversial Backfire bomber. US alarm arosewhen one Moscow source also commented that the UNIVAC computer going to be usedin aircraft design, fueling speculation that the Backfire could then be upgraded to anintercontinental bomber – a clear violation of the pending SALT II treaty. Complicatedthe sale even further were reports that Soviet officials were less interested in theUNIVAC which was a “lobotomized” computer but wanted its ASKA software that couldbe used to conduct “any kind of stress analysis from chemical plants to bridges toairplanes.” Admitting the security concerns associated with the sale, UNIVAC VP H.Glen Haney when asked about the trade pointed to the untenable position faced by theUnited States in communist technology trades. Haney stressed the need for the UnitedStates to control such sales as Sweden, where the ASKA software originated, “doesn’tbelong to COCOM and under no obligation to help prevent the flow of sensitivetechnology to the USSR.” Despite the gains made since 1975, the trajectory of US-Communist high-tech trade began to stall as the UNIVAC deal and others came undergreater scrutiny at the start of 1980. The Soviet invasion of Afghanistan in March 1980 led the Carter Administration torapidly cut off of grain sales and any export of high technology to the USSR. By the endof March, the International Herald Tribune reported that:

More than 400 licenses for exporting to the Soviet Union were suspended pendingthe review as some were 300 new license applications on file. Almost 70% ofhigh tech trade was to be cut to …’stand up and punch the Soviets in the jaw’.The US business community generally has reacted with skepticism to some of theexport embargoes, believing the Soviets can simply go to other countries to getwhat they need. Nevertheless White House aides made clear they would viewallied support for these measures another test of Western solidarity in making theprice of the Afghan intervention clear to Moscow.”

Indeed, American business reactions to the new trade boycott were generally negativeleading several associations to openly protest the shutdown. In April 1980, the tradejournal, Chemical and Engineering News, reported that “some companies such as

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Occidental Petroleum, Dow Chemical, Control Data Corp., etc. who trade directly withUSSR will be hurt more than helped by the ban on trade.” In fact, the biggest contract tofall on the chopping block was a $20 billion agreement between Occidental and theUSSR to supply fertilizer in exchange for Russian ammonia. While Occidental wasbanned from the fertilizer sale, the firm did manage to import Soviet ammonia through aseparate deal. Other losers in the wake of the 1980 included Armco, which had a $100 million dealfor an electric steel mill near Moscow. A tie-in with Nippon Steel, hit Japan as well withmissed business worth $250 million on the canceled contract. Alcoa’s efforts to finalizethe sale of technology for the construction of an aluminum smelter in Siberia worth $100million became frozen, along with the loss of a number of contracts totaling over $15million by IBM, Control Data, and Ingersoll Rand for computer parts and automatedassembly lines for the Kama River truck plant. NBC proved the biggest casualty withCarter’s decision to boycott the 1980 Olympic Games. NBC had expected to earn $165million from televising the games, after paying $87 million for the television rights. IBMhad already supplied computer hardware for the administration of the Olympics but at thelast minute the supply of software need to run the equipment was blocked. By May 1980, International Herald Tribune estimated that over 500 Americancompanies had been affected by post-Afghanistan invasion ban. Exports to the USSRwhich stood at $4.8 billion at the start of 1980 had been trimmed back to $1.5 billion withhigh tech sales cut back to $50 million from high of $200 million. According to one USofficial, the ban was necessary despite the business impact as Soviet “replacement oftechnology items cannot be accomplished all that easily, particularly in vehicleproduction, civil aviation, chemicals and energy, without access to Americanknowledge.” To cushion the blow, the official noted government outlays of $2.5 millionto compensate American farmers hit by the pull back of the grain deal. However, comparable direct subsidies for lost business did not exist for high-tech andmachinery firms. The ban also imperiled American companies as competitive advantagenow clearly rested in maintaining an uninterrupted foundation for business cooperationand technology trades. As one Commerce Department official noted, “US companies, aswell as many from Western Europe, rushed into Moscow to set up offices at the time ofthe big boom in East West trade a few years ago. But now the picture has changedsharply….now there is a marked tendency for the Russians to sell more and more of theirraw materials and to buy less and less plants or equipment.” As a result of tighteningcommunist-bloc high-tech and equipment trades, open, consistent access had become acritical factor for firms competing for Soviet Bloc contracts. With the ban, American companies also watched as European competitors actedswiftly on the vacuum that ensued as the US Commerce Department canceled existingand new trade deals. In its year end report, the Organization for Economic Cooperationand Development documented the shits in American and European trade positions inrelation to the USSR. In 1979, OECD nations had a $4.7 billion trade surplus with theseven Comecon countries and a $600 million surplus with the Soviet Union. By contrast,US-Soviet trade plummeted from a high of $1.46 billion in 1979 to $693 million in 1980.As an example of the European dividend gained by the US ban, the aluminum firm,Kloeckner of West Germany, obtained a large Soviet aluminum smelter contractfollowing the forced withdrawal of Alcoa. The deal evolved even further as Kloeckner

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received $50 million Deutsche Mark (about $305 million) as part of a multi-billion,multi-year trade deal in which the USSR extended natural gas supplies against theacquisition of increased German steel from the firm and others. As a result of the newdeal, West Germany’s trade surplus fell lower and came in greater balance with theSoviet Union. France also acquired favorable trade gains with the Soviet Union in the wake of theUS ban. French firms obtained contracts worth just over $1 billion compared with half ofthat in the same period last year. With the abandonment of the ARMCO steel millcontract, the Soviets fill the gap with a new contract extended to Le Creusot-Loire. Thechemical firm, Phone-Poulenc, also received contracts for $75 million franc (about $210million) after the cancellation of the Occidental fertilizer deal. The Franco-Soviet tradecommissions also met in October 1980 to re-cast import-export trades in favor of moreplant and high-tech deals to balance increased supplies of Russian raw materials and oil. Great Britain also increased its trade with the Soviet Union as a result of the Americanban. Overall trade with the Soviets rose by 473 million pounds (about $1.3 billion) in thefirst 8 months of 1980 compared with 261 million pounds ($626 million) last year.Soviet imports to the UK also climbed to 522 million pounds ($1.25 billion) against 331million ($794 million) the previous year. For the most part, trades were concentrated onthe Soviet side in oil, timbers, furs and above all diamonds against a variety of Britishexports in machinery, chemicals and fibers. As one OECD official noted, aside from theUnited States and West Germany, the major Western trading nations had incurred adeficit position in trade with the Soviet Union, by the end of 1980. As an unanticipatedside effect of the US ban, the official commented that “The Russians are now in anexcellent position. With their raw material and gold sales they should be in surplus by theend of the year. This may not help the Soviet consumer but it looks good to the plannersin Moscow as they seek to drive down the foreign debt.” The embargo then had stimulated the opposite affect that US policymakers had hopedto achieve – that instead of starving out the Soviets from high-tech trades, the USSR hadswiftly filled the vacuum with willing European partners. Unlike previous decades, theAmerican business community expressed almost immediately virulent opposition to there- imposition of trade containment conditions. In an article in September 1980, theInternational Herald Tribune reported that President Carter stood “under increasing fireover his embargo on computer sales to the Soviet Union. Critics mainly from UScomputer firms and groups favoring East West détente say that the embargo is causingthe Soviet Union only minor annoyance and is handing business to US competitors suchas West Germany, France and Japan.” The US Commerce Department expressed theopposition position that, as a result of the ban, “We’ve fouled up their current five-yearplan. The Russians have been forced to cannibalize their computers for want of spareparts.” Despite government support for the ban, American corporations continued,nevertheless, to express worries, not only over lost business, but control over Soviettechnology development. With canceled contracts in computers, assembly plants, steelproduction, auto and spare parts, and a host of electronic and communications equipment,American companies warned that non US firms would soon fill the gap with littleoversight. Computer firms also noted that their main loss from the embargo would beindirect as foreign companies, “now would have no choice but to replace the UScomputers with machines made elsewhere…” Control Data executives, further warned

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that the continued embargo would “force Soviets to make their own computers faster”and that “electronic technology will most likely continue to drift into the Soviet Unionfrom Western Europe and Japan.” Despite such warnings, the US ban on high tech and machinery trade drug on into thepro-containment Reagan and Bush administrations of the 1980s. The only significantattempt to break the renewed barriers came in 1988 with the passage of the OminbusTrade Act that reduced the amount of paperwork and timeframe for CommerceDepartment decisions regarding import-export license applications. Nevertheless, the actonly simplified some of the onerous bureaucracy involved with Cold War trade, not thenature of the decisions which still continued to exclude American-Communist Bloc deals,especially emanating from computer and other high-tech products firms. The cumulative effects of the decade long ban soon became obvious. In 1991, theSurvey of US Export Control Compliance Costs estimated that the United States had lost$9-10 billion in overseas sales each year due to communist export controls. As a furtherconsideration, the “disincentives” inherent in the export control system caused Americanbusinesses to forego an additional $30 billion in sales to Russia, Eastern Europe andChina alone. In contrast, West German machine tools sales to Russia in 1989 stood at$500 million with Japan at $200 million compared to the United States with a mere $1.5million. While the American business community continued to lodge frequent complaintsand warnings on the arbitrary and ineffective nature of containment trade strategies andbans, little was done to alleviate excessive US controls until the entrance of the ClintonAdministration, along with the end of COCOM, in the mid and late 1990s. In addition tothe prolonged nature of the ban, the constraint of trade to largely grain sales and nonstrategic goods severely limited US-USSR high tech business development providing anextended set of advantages for European competitors. By the time of the privatization ofthe Soviet Bloc economies in the 1990s, few American firms held an interest then in re-entering Russia and Eastern Europe as direct investment outflows has been solidly re-attached to business development in Asia, South America, the Middle East and WesternEurope.

Conclusion

Of all Western nations, the United States held the longest to a stringent set of ColdWar trade controls that impacted significantly the ability of American firms to develophigh tech and industrial manufacturing markets in communist countries. By contrast,Western Europe nations moved swiftly to re-develop Soviet Bloc and China traderelations after Korean War leading the way for the reduction of COCOM and otherstrategic controls. The business void created by the United States in its insistence to adhere to economiccontainment gave a prolonged period of trade advantage over American firms to manyindustries in Western Europe and Japan. Lacking significant US competition, Europeancompanies in particular captured a strong, first foothold in emerging, profitable high techfields in computer and electronics technologies, automated plant developments, scientificequipment and chemicals. Coupled with the military necessity of possessing high tech capabilities, COCOMembargoes also elevated dramatically Soviet and Chinese efforts to acquire Westerntechnologies and scientific knowledge. The central question remains whether communist

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demand for high tech trades would have been as intense after World War II if Westernrelations had remained open. Indeed, traditional bi-lateral treaties between the SovietUnion and Western nations prior to and immediately following World War II involved,for the most part, modest exchanges of raw materials for processed food stuffs and oils,consumer staples, and low tech scientific equipment an medical supplies. Only afterPoland was absorbed into the USSR did Soviet officials possess an item of “strategicdependency” – coal – to influence Western import-export negotiations. Soviet tin andmanganese supplies were helpful to the West but other foreign sources existed to makeup for embargo limits. As a result then, Western nations, without the new dimension ofhigh tech trade, would have faced a usual surplus in trade with Russia and Eastern Europedue the countries unattractive position in world consumer and industrial markets. Without an attractive base of exportable goods, the Soviet economies would havemore than likely to have remained underdeveloped, especially in consumer markets withheavy industry and military development tied to scientific innovation occurring at a muchslower pace. The diversification and internationalization of Soviet trade strategy to avoidundue Western dependencies, especially in high technology, came then as a directconsequence of embargo policies and actions. Also, the Soviets embarked on buildingintra-trade relations within the communist bloc resulting in 1954-1956 in a 200% leap innon-Western trade and with developing countries which rose by 70% from $850 millionto $1.44 billion.1 The contest with the United States and COCOM also drove Sovietplanners to hyper-develop Eastern European economies swiftly away from agricultureand agricultural exports toward accelerated industrial output with emphasis on consumeras well as military production. The decision of Soviet officials to rapidly developmentUSSR oil, minerals, and chemicals extraction industries also provided the attractive baseof essential imports most desired by Western European countries especially after the1957 Suez Crisis and growing US domination of Persian Gulf. By the 1980s, the SovietUnion managed to gain additional access to high tech markets and equipment through itsdirect ownership of Western firms as counter measure to US efforts to re-embargo worldtechnology trade in the 1980s. All told, the US-USSR military conflict forced painful market re-alignments and tradere-development under the Cold War that severely impacted traditional American andEuropean business activity and Western economic relations. The intractability of theUnited States to allow modest technology sales and flows along traditional market pathsto communist nations created a 40 year void in American competition and allowedWestern European and Japanese firms to aggressively pursue, with the gradual relaxationof COCOM restrictions, emerging lucrative, high tech trades with the USSR and China.The full sum of Cold War decisions and policies which chose military security over tradeliberation and expansion is yet known in terms of the historic re-development of worldeconomies after 1945. The postwar detraction of American and European businessdevelopment, the re-direction of communist economies, and the re-configuration of worldtechnology markets and trajectories should continue then to occupy scholarlyinvestigation, especially with the recent opening of the COCOM papers and NATO tradepolicy archives.

1 Wells and Becker