Inside the red-trade lobby.

INSIDE THE RED-TRADE LOBBY

SOME TIME THIS WEEK, if all goes according to plan, Secretary of Commerce C. William Verity will be winging his way to Moscow for a personal meeting with Mikhail Gorbachev. His mission? To negotiate a new U.S.-Soviet trade agreement, easing high-tech export restrictions and de-linking Soviet human-rights violations from U.S.-Soviet trade. At about the same time (officially by coincidence), members of the U.S.-USSR Trade and Economic Council (USTEC) will be in the Soviet Union to discuss ways to increase U.S-Soviet economic cooperation. Advertising executives from top U.S. firms such as Young & Rubicam are dropping by to teach the Soviets how to market their products more effectively in the United States. And in the March 25 Washington Times, you can catch a glimpse of another kind of history in the making: a photo of the mayor of Belgrade chowing down on one of the first Big Macs ever sold in Communist territory.

Clearly a new day is dawning in trade relations between the U.S. and the Iron Curtain countries. And to those in the Reagan Administration committed to blocking the flow of high-tech exports and government-backed credit to those countries--and especially to the Soviet Union--the future doesn't look sunny. Trade experts within the Administration say Verity has put together a "coordinated effort" to weaken high-tech and computer trade restrictions and increase the Kremlin's access to U.S. credit markets. They say Verity and his cohorts are getting primed for the explosion of U.S.-Soviet trade that they feel is sure to be detonated if George Bush gets to the White House.

The battle lines were drawn when Reagan picked Verity, a former Armco steel executive, who had chaired the President's Task Force on Private Sector Initiatives, to fill the vacancy left by Malcolm Baldrige's death. The U.S. Business and Industrial Council, led by Anthony Harrigan, pulled together an Ad Hoc Coalition to Oppose the Verity Nomination. Says John Cregan, a USBIC lobbyist, "We went all out [in opposing Verity] with full knowledge we couldn't stop his confirmation." Indeed, only 11 senators, led by Jesse Helms, voted against confirmation.

Those 11 had good reason. For one thing, Verity has long been harshly critical of any policy linking trade and human rights. Speaking to his Soviet "friends" (his word) in an interview on Radio Moscow on March 7, 1984, Verity denounced the Jackson-Vanik Amendment, which made U.S. trade benefits dependent on the Kremlin's willingness to allow Jewish emigration. "I think Jackson-Vanik was one of the terrible mistakes that was made by American politicians," said Verity; "...I believe that the Jackson-Vanik amendment can be amended so that it won't have the effect that it's had now." In the same interview, Verity called for Most Favored Nation status for the Soviet Union. At his confirmation hearing, Verity emphasized that increased trade with the Soviet Union was a "vital need" of the United States.

ANOTHER MAJOR concern is Verity's close ties to the elusive U.S.-USSR Trade and Economic Council. He was on USTEC's executive committee from 1979 to 1985, and was co-chairman in 1984. While he was co-chairman, Verity worked closely with USTEC executive-committee member Yevgeny Pitovranov, who has been identified as a KGB lieutenant general. More than one government official told me that Verity's association with Pitovranov should have been cause for automatic rejection for a Cabinet-level position. Verity brought along two USTEC executives to a secret meeting with Gorbachev during last December's Summit.

Relatively little is known about USTEC's activities. Although it was officially sponsored by the Commerce Department during the Nixon Administration (the protocols were signed by then-Treasury Secretary George Shultz), getting information about USTEC from the government is practically impossible. Requests by outsiders for copies of USTEC's Journal are routinely rebuffed, and its membership list is top secret.

A look at some of the material published in the few copies that I have seen shows why. Dwayne Andreas's grain concern, Archer-Daniels-Midland, runs an ad depicting the East Coast of the United States connected to the western border of the Soviet Union. Not exactly the kind of wholesome image the company tries to project in its domestic advertising. An ad placed by McDermott International offers the Russians "a multinational company which is a worldwide leader in providing state-of-the-art energy systems, products, and high-technology services," while the Gleason Corporation proudly announces that "more than two thousand Gleason machines and systems are at work in the Soviet Union today. From Kiev to Gorky to Ulyanovsk to Chelyabinsk. We are an active partner in Soviet automotive, agricultural, construction, production-tooling, and tableware industries..."; Gleason also claims to have set up "state-of-the-art gear-production system[s]." Nor is the USTEC Journal's editorial copy more reassuring: "Complete factories can be exported to the Soviet Union comparable to new factories that would be built in the U.S. with all the most modern equipment including process controls," rhapsodized Bruce Smart, a former Reagan Under Secretary of Commerce for International Trade, at a USTEC luncheon reported in the Journal.

Verity, of course, is not the only official pushing more Soviet trade. The growing influence of USTEC's Red-trade lobby became apparent on April 11, 1985, when President Reagan dismantled the Senior Interagency Group for International Economic Policy (SIG/IEP), the key advisory panel on trade security. Manned by personnel from the CIA, Defense Department, and NSC, SIG/IEP was quite successful in impeding the flow of high-tech goods to the USSR. Under its influence, the Reagan Administration eliminated taxpayer subsidies to the Soviet Union in the form of U.S. Government-backed credits, persuaded the Organization for Economic Cooperation and Development to eliminate similar subsidies, convinced the International Energy Agency to cap European gas imports from the Soviets at 1982 levels, and accelerated the development of alternatives to Soviet natural gas. The new security-conscious trade climate was reinforced by a June 1983 NATO communique and again at the 1983 Williamsburg Summit. President Reagan also strengthened Cocom, which regulates trade with the Communist bloc.

SIG/IEP was definitely a thorn in the side of the Red-trade lobby. The stage was set for its removal, according to one former Defense Department official, when Dwayne Andreas became head of the President's International Private Enterprise Task Force. The task force recommended (and Reagan agreed to) the creation of a new Economic Policy Council (EPC) to replace SIG/IEP. Although the EPC--a Cabinet-level agency--is supposed to advise President Reagan on East-West trade-security matters, the task-force report purposely excluded the Defense Department, CIA, and NSC from policy-making roles in this field; no one from these departments is a statutory member of the EPC. A former Defense official told me that the EPC selectively deletes mention of security aspects of East-West trade in written and oral briefings for the President.

On December 10, 1987, Verity held an unannounced private meeting with Mikhail Gorbachev, along with Dwayne Andreas, who was then co-chairman of USTEC; James Giffen, president of USTEC; and the ubiquitous Armand Hammer. At the meeting, Abel Agbanbegyan, Gorbachev's chief economist, listed $10 billion worth of trade projects the Soviets are interested in, ranging from waste-processing equipment to bio-technology. Ten billion dollars a year happens to be exactly the amount that Verity used to claim the U.S. was losing because of Jackson-Vanik and other trade restrictions. Commerce officials at first denied that Verity even attended the Gorbachev powwow. Giffen, who confirmed Verity's presence at the meeting, told me "nothing substantive" was discussed with Gorbachev; yet he told Jane Pauley on the Today show the morning after the meeting that "We had a very good conversation about future trade with the Soviet Union . . . the level of [non-agricultural] trade could go from a billion dollars . . . up to four or five billion per year and maybe even higher--into the ten- to 15-billion [range]."

Some charge that President Reagan did not even know the meeting was taking place. "He wasn't even informed about the Verity session," one former government official told me. "How can a Cabinet member meet with a Soviet head of state and not have talking points on subject matter not only approved by interagency process, but in a full National Security Council meeting attended by the President?" As one national-security official noted, "This is the kind of policy-making we promised not to do after Ollie North."

With or without Reagan's blessing, the pace of U.S.-Soviet trade (including sophisticated technology) is already picking up. Commerce Department officials, in conjunction with the Kremlin, are setting up working groups to streamline U.S.-Soviet trade in five areas, including (ominously) energy projects; the Soviets already get 70 to 80 per cent of their hard-currency income from energy exports. One former Reagan official told me the new working groups will be "a major watershed change in the way we do business--resulting in the formal integration of whole sectors of the U.S. and Soviet economies." Products soon to be available in the Soviet Union under a new endorsement from Cocom include the IBM 4341 computer and products based on Motorola's 68000 microprocessor. The New York Times reports that Boeing may soon sell jetliners to Moscow, pending approval by Cocom. There are also at least ten joint ventures under way between Western companies and the Soviet Union. Combustion Engineering owns 49 per cent of a venture with the Soviet Ministry of Oil Refining and Petrochemical Industry, while Armand Hammer's Occidental Petroleum will invest between $5 and $6 billion to build what Hammer calls "one of the largest petrochemical complexes in the world" on Soviet soil. Hammer, who along with an Italian company owns 49 per cent of the venture, aims to sell at least 50 per cent of its products on the world market--giving the Soviets badly needed hard currency.

Indeed, the Defense Department estimates that "virtually every Soviet long- and short-term research project for military systems--well over four thousand in the late 1970s and well over five thousand in the early 1980s--is benefiting from the documents and hardware of at least a dozen Western countries." In 1980 alone, the Soviets saved half a billion rubles, or $800 million, in research costs through acquisition (both legal and illegal) of Western technology. When Toshiba and the Norwegian state-owned firm Kongsberg Vaapenfabrikk sold the Soviets high-tech propeller-milling equipment, they wiped out a significant U.S. lead in submarine-warfare capability, costing U.S. taxpayers an estimated

$30 billion to counteract the very technology American companies had invented.

The Reagan administration has also begun to soften its position on Soviet participation in the World Bank, the International Monetary Fund (IMF), and the General Agreement on Tariffs and Trade (GATT). A report the Reagan Administration sent to Congress on January 19 said that, although the "Soviet economic system remains at this point fundamentally incompatible with participation with free-world institutions," if "policy statements" can be "translated into positive action," Soviet participation "can be considered." That is consistent with Deputy Secretary of State John Whitehead's pronouncement last March: "We would like to see the Soviet Union become a member of all these international bodies." Whitehead was recently in Europe discussing participation by Poland, Bulgaria, Rumania, and Czechoslovakia in the Overseas Private Investment Corporation (OPIC), which guarantees loans of up to $50 million for American investments overseas and insures investors against nationalization of their property. Whitehead also eased restrictions on the shipment of sensitive defense technology to Eastern Europe.

Not surprisingly, the report to Congress on Soviet participation in the World Bank, IMF, and GATT had not been approved by a full, formal meeting of the National Security Council. Also not surprisingly, the report makes no mention of the link between trade and human rights (the Administration called the omission "inadvertent"). Micah Naftalin, national director of the Union of Councils for Soviet Jews, told me, "We are alarmed at the pace of pressure to advance trade without reference to human rights by Commerce . . . The Soviets believe they can expand business and trade and credit relationships without doing better. That's the message Verity and Commerce are sending." Just before the Summit last December the Kremlin allowed a number of prominent Jews to leave the Soviet Union. On January 1, Soviet authorities again clamped down on Jewish emigration.

From Gorbachev's point of view, gaining access to U.S. technology and credit is critical. One GOP staffer on the Senate Foreign Relations Committee says that over the last twenty years the Soviets "spent so much money on the military they didn't buy anything new" for other industries; now "their capital stock needs to be modernized." Twenty per cent of Soviet GNP goes to the Soviet military. But that doesn't include the cost of maintaining a client-state empire stretching from Mongolia to Nicaragua. Figures on Soviet hard-currency earnings prove that without continued Western economic assistance and trade, the USSR could not sustain its foreign adventures. In 1975, hard-currency earnings were $9.5 billion; in 1985, $26.4 billion. Preliminary figures for 1986 were around $30 billion--the equivalent of one-fourth of General Motors' sales that year--all from sales of oil, gas, gold, and weapons. In other words, the Soviets don't have an economy.

Former NSC official Roger Robinson put his finger on the key issue in a Wall Street Journal column when he asked, "Hasn't it struck most Western policy-makers as odd that the Soviet Union, with a total annual hard-currency income of only about $32 billion, . . . can sustain a global empire?" In fact, the Soviets' gross indebtedness to the U.S. rose from $21.8 billion in 1984 to $35.8 billion in 1986, and the Wall Street Journal (December 7, 1987) reported that the Soviets are dipping into Western credit markets at a rate of $700 million a month.

These loans to the Eastern bloc are usually made on extremely generous terms: one-eighth of one per cent over the cost of funds, much less than U.S. citizens have to pay for house or car loans. Furthermore, 80 per cent of these loans are untied, meaning they aren't made for a specific subject. How serious is the untied-loan problem? One indication surfaced in 1985, when a syndicate of banks led by Citibank lent East Germany $500 million. Days later, $20 million arrived in Nicaragua. Last year, according to the Wall Street Journal, when the First Chicago gave the Soviets $200 million (at one-eighth over cost of funds), a bank spokesman said, "The loans could be used for the military, but we would hope not. I mean, they do so much of that kind of thing anyway, it doesn't matter."

Jack Kemp and Toby Roth have introduced a bill requiring banks to include information on loans to the Soviet Union in annual shareholder reports. The White House opposes the bill. "I think the pro-Soviet trade lobby is making some real inroads," Representative Roth told me. "I'm not only fighting the liberal establishment, but fighting the Administration."

But Congress alone can do little; the Soviets get 95 per cent of their untied-loan money from the West Germans and the Japanese. These countries and other NATO allies have taken note of the Reagan Administration's new attitude toward Soviet trade. The West German ambassador to Moscow has suggested dropping high-tech-trade restrictions altogether, and West German Foreign Minister Hans Dietrich Genscher suggested in a recent article that "closer integration of the Soviet Union and Comecon is . . . in our interest." A few months ago, the Soviets came up with another idea: for the first time since the Bolshevik Revolution they issued bonds: a West German bank arranged the sale of the first $75 million. Watch out--the Kremlin may be holding your pension money.

And Gorbachev & Co. will be putting it to good use. As Roger Robinson concluded in testimony before a House subcommittee. "Virtually 100 per cent of Moscow's global commitments, stretching from Managua to Hanoi, were funded on Western financial markets."

WHEN MIKHAIL GORBACHEV came to Washington in December, many have concluded, it was not merely to get an INF treaty signed; he came to get an expansion of U.S.-Soviet trade. Says Joseph Finder, the author of Red Carpet, a study of the relationships between the Kremlin and American industry, "This is an exact replication of [Lenin's] New Economic Policy. Have them set up everything and kick them out. It's not risky for the Soviets. Americans put up the investment. A lot of companies see the Soviet Union as a giant unexploited market. They had the same feeling in the 1920s."

"It is pretty evident that Gorbachev is interested in trade in relationship to his willingness to pursue arms control," says former Commerce Deputy Secretary Clarence Brown. "He needed some method of getting the materials he needs . . . he pays for it with a nuclear withdrawal." USTEC's James Giffen concurs: "If you get a START agreement, if the U.S and USSR [move forward] on ABM, you'll see a lot of progress [on trade]."

In the last few months of the Reagan Administration, Verity and the Red-trade lobby are laying the groundwork for a new economic detente scheduled to go into effect when Ronald Reagan steps down. When the White House nixed Verity's plan to appoint Kempton Jenkins (a former Armco official, president of USTEC, and Carter trade official) as Under Secretary for International Trade, Verity boldly announced he was forming an informal "kitchen cabinet" headed by--Kempton Jenkins.

That may cost him some credibility with the current Administration, but Verity is thinking ahead. Said a former Administration official, "This is a setup for Bush or Dole. They are very comfortable with the Eastern establishment/ moderate perspective on East-West relations." Brown says: "I think that is correct. It is their ambition to increase [U.S.-Soviet trade]." In recent years, the Commerce Department has lived up to its current nickname: "Bush gardens." For example, when Bruce Smart (who, you will recall, is the guy who wants to ship whole factories to the USSR) resigned from Commerce, he segued into the Bush campaign as chief advisor on international trade and other economic issues.

The day after Verity's first meeting with Gorbachev, James Giffen was asked whether we really want to help turn the Soviet Union into an economic superpower. "I think we do," he replied. People who oppose greater U.S.-Soviet trade are "a bunch of ideologues . . . mental midgets . . . blowing in the wind to get a headline," he told me. After all, he continued, "what alternative do we have? Confrontation? Do we really want confrontation? Or do we want to try to persuade them to enter the community of nations and act responsibly? We've used the stick for the last ten to twenty years. Withheld some assets that might have an influence. That is our economic power. Why not use that in a positive way to encourage them to do things that are more reasonable?" That is the rope-seller's usual pitch. The subtext here is that a fat bear is a happy bear. It would be nice if that were so, but history suggests otherwise: U.S.-Soviet trade reached its zenith in 1979, just before the Red Army marched into Afghanistan.

The next arms-control Summit will give Gorbachev an opportunity to get Reagan's imprimatur on a new trade policy in return for a START treaty. The concessions Gorbachev may get include: an announcement of the high-profile joint ventures discussed in the first meeting between him and Verity; a relaxation of Jackson-Vanik; a commitment from the Administration not to oppose untied cash loans from the U.S. and our allies to the Warsaw Pact; and Soviet membership in the World Bank, GATT, and IMF. Gorbachev's final request, says one analyst, "will be the assurance that George Bush provides the required continuity of these commitments as President."

Thus will George Shultz build a legacy of arms-control agreements, with Verity ready and awaiting to grease the Soviets' palms--sophisticated technology; Most Favored Nation status; the above-mentioned amendment of Jackson-Vanik and membership in the World Bank, GATT, and IMF; and ever more loans to pay for Gorbachev's "perestroika." The establishment will say Ronald Reagan was all right after all: he "grew" in office.

And that's too bad. Why spend $300 billion on defense if we're going to underwrite the Soviet military too? With a tough trade policy, the West could cripple the Kremlin's ability to project its power beyond its own hemisphere. Cut off Soviet access to hard currency and Western technology, and we can undo the Evil Empire without firing a single shot.