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East-West trade: challenges and opportunities for the U.S. in the 1990s.

During the next four years, the Soviet Union and the countries of Eastern Europe will be undergoing tremendous change.

The situation provides U.S. policymakers and business representatives with opportunities and uncertainties. While our ability to influence events in this region should not be exaggerated, neither should we overlook the possibilities before us.

BACKGROUND

Anyone who has traveled to the Soviet Union and Eastern Europe in recent times can attest to the significant currents of change in those regions. Economic planners speak openly in the East of the need to reorient trade and investment toward the West. Parliaments debate laws to provide private industry with rights and obligations paralleling state enterprise. Some countries have even encouraged debate over independent trade unions and noncommunist-affiliated political parties.

Whether or not they can be sustained, the political and economic changes begun by the Gorbachev regime have unleashed both expectations and an accelerating debate throughout the Soviet bloc. Within the Soviet Union, glasnost and perestroika have resulted in calls for greater political and economic autonomy among the republics, including proposals for separate currencies. Ironically, in some countries in Eastern Europe, people have begun to point to the changes in the Soviet Union in an effort to prod their own governments toward political and economic change.

This evolutionary process coincides with recent or impending leadership successions in many of the countries of Eastern Europe. Unlike the past, many of the "new class" of East Europeans in positions of authority do not have their political and economic training grounded in the Stalinist era. As such, the political and economic landscape of this region is likely to undergo even more radical change during the tenure of the new Administration.

The new Administration must be prepared to respond in a constructive and consistent manner to these changes. Unfortunately, in the past U.S. policy toward the region has been marked by large swings of attitude and actions. A sense of friendship and trust has evaporated overnight into feelings of betrayal as a result of unforeseen events. This has brought about a unilateral reaction coined "lightswitch diplomacy," which has been very disruptive to our trade relations with the region, as well as our relations with our allies.

The U.S. no longer has the luxury of such unilateralism. Our allies and trading partners have signified their intentions of expanding economic ties with the Soviet Union and East Europe. We must be prepared to work with our allies to establish a thoughtful and concerted Western policy toward the region, otherwise our ability to influence the tone and substance of this policy will be limited.

First Secretary Gorbachev, in his speech before the U.N. General Assembly, has thrown out a challenge to the United States and the other nations of the Free World. In a speech conspicuously lacking of ideological rhetoric, the First Secretary expressly recognized the evolutionary dynamics and economic interdependence of the world, while also recognizing the failings of his own system.

The new Administration has a unique opportunity before it. If it is to succeed in this challenge, it must be prepared to respond in a flexible, non-ideological manner of its own.

By doing so, we can signal to the Soviet Union and Eastern Europe that there are benefits to be gained through a constructive relationship with the United States, as well as signal to our allies that we are prepared to play a positive leadership role in East-West economic and trade relations.

AN AGENDA FOR THE 1990S

It is important for the United States to refine its objectives toward the region in light of ongoing changes there and to pursue these objectives in a consistent manner. While trade is an important component of our relationship with the Soviet Union and Eastern Europe, it is not, however, an effective tool for influencing Soviet and East European domestic or external behavior outside the economic realm. Until we understand this, trade will continue in its present rudimentary form.

Among the objectives the United States should pursue in its relations with the Soviet Union and Eastern Europe are: (1) encouragement of market economy principles, (2) safeguards for U.S. investment, (3) a more effective and predictable export control system, (4) a realistic financial policy, and (5) normalized trade relations with countries not currently eligible for most-favored-nation (MFN) tariff status.

MARKET-ORIENTED REFORM

Many of the countries of Eastern Europe and more recently the Soviet Union have been moving in the direction of a decentralization of economic decision-making and greater attention to the forces of supply and demand. Laws and regulations have been adopted on bankruptcy in an effort to rid the systems of old and inefficient industry and price and exchange rate reforms initiated in an effort to bring these economies into greater alignment with the international marketplace. Yet the process of reform remains slow, with numerous bureaucratic obstacles.

The International Monetary Fund and the World Bank have been pressing their East European member countries to accelerate the reform process. The United States should continue to support this effort and the understanding that international financial institution credits will be forthcoming in conjunction with the effective implementation of reforms.

The General Agreement of Tariffs and Trade (GATT) represents another body within which to press for market-oriented reform. A number of the countries of the region currently belong to the GATT. Others, including the Soviet Union, have expressed interest in membership. Rather than dismissing outright membership requests, the U.S. should hold out the possibility for Soviet and East European membership in the GATT as these countries institute market economy-oriented reforms.

Ironically, the initiation of economic reform in East Europe and the Soviet Union may make trade and investment in the region initially more difficult as new or existing economic units grapple with newly earned production and foreign trade rights. In the long-run, however, the adoption of market economy principles will make for a more stable and profitable trading relationship.

SAFEGUARDS FOR U.S. INVESTMENT

U.S. investment in the region can help support the United States' exports to Eastern Europe and the Soviet Union. Moreover, U.S. managerial involvement in firms in the re ion can be a positive force to introduce market oriented practices. President Reagan acknowledged during the Washington and Moscow summits that commercially viable joint ventures complying with the laws and regulations of both countries can play a role in the development of bilateral commercial relations. As stated, U.S. policy is to neither encourage nor discourage joint ventures as a way of doing business but to allow the private sector to gauge the commercial viability of individual joint venture projects. This policy is a correct one. On the other hand, the United States should be prepared to provide American companies with investment safeguards similar to those available to our Western trade competitors. The Overseas Private Investment Corporation (OPIC) through its political risk insurance program provides such safeguards. The executive branch should take a leadership role in working with the Congress to provide OPIC eligibility for Hungary and other countries that otherwise meet the 1974 Trade Act criteria for eligibility for U.S. financial guarantee programs.

EXPORT CONTROLS

American companies have been greatly disadvantaged in the past when trading with the Soviet Union and East Europe due to an overabundance of unilateral export controls for national security reasons, interagency wrangling or other bureaucratically imposed obstacles to export licensing, and a proliferation of economic sanctions for foreign policy purposes.

It is time for the United States to move forward in implementing the export administration reforms in the 1988 Trade Act. Specifically, the U.S. must move to eliminate unilateral controls and to decontrol goods and technology freely available from uncontrolled foreign sources. We must also end our propensity to impose foreign policy controls in reaction to events inside and outside the region.

The US must also pay more heed to the recommendations of the U.S. National Academy of Sciences' 1987 report entitled "Balancing the National Interest." The report urged that executive branch decisions concerning export controls accord greater importance to maintaining U.S. technological strength, economic vigor, and allied unity rather than focusing almost exclusively on their military utility, however slight. In this latter regard, the United States must continue to work with its allies to streamline the multilateral export control system COCOM. By pruning the control list of items that no longer have military significance, the United States and its COCOM allies can focus export control resources on truly strategic goods and technologies and thus achieve a more effective control regime. The United States should also avoid the divisive actions of the past, such as the unilateral control of oil and gas equipment and technology.

A REALISTIC FINANCIAL POLICY

Legislation has been introduced in the last two Congresses to provide the President with unilateral authority to control private financial transactions with the Soviet Union and the countries of Eastern Europe. The legislation was prompted by concerns that Western lending has supported Soviet efforts aimed at the illegal acquisition of Western technology and Soviet defense spending and international adventurism.

Concerns have also been expressed from various quarters over general purpose loans not tied to any specific trade transactions. This will most probably be an issue involving great scrutiny in the coming year. Greater scrutiny should be encouraged as financial data would appear to alleviate many concerns. An interagency report of November 7 on Western lending shows that net Soviet and East European debt adjusted for exchange rate changes has actually fallen in recent years and that new borrowing by the Soviet Union in 1988 was largely tied in contrast to borrowing earlier in the decade.

To its credit, the Reagan Administration opposed unilateral financial controls as being ineffective and damaging to foreign perceptions of the United States as a free market and stable base for foreign investment. It rightly noted that such controls would be less likely to achieve intended results than direct controls on goods and technology.

The United States should avoid unilateral controls on U.S. financial transactions. Moreover, pressing our allies to adopt similar controls will only result in unnecessary friction within the NATO alliance. The United States should work instead with our Western trading partners to maintain agreed OECD credit rate rules for the Soviet Union and East Europe.

NORMALIZED TRADE RELATIONS

Section 402 of the Trade Act of 1974 establishes the parameters under which the United States can extend to non-market economy countries most-favored-nation (MFN) tariff treatment and access to U.S. government credits and credit guarantees. For the President to extend MFN, he must first seek a waiver by determining that MFN extension will lead to the freedom of emigration objectives of Section 402. Only Hungary and the People's Republic of China (PRC) currently receive MFN treatment in accordance with the President's waiver authority (Poland received MFN in 1960 and was grandfathered from Section 402).

An attempt was made toward the end of the I 00th Congress to broaden the emigration conditionality of Section 402 to link MFN conferral to a country's compliance with the overall principles established in the Helsinki Accord. While perhaps noble in intent, the result would most certainly have been to create a permanent obstacle to MFN extension and further dampen the environment in which U.S. business operates.

The United States should strive instead under current law to achieve a situation whereby MFN might be extended to the Soviet Union and other countries in Eastern Europe. It should be noted in this regard that emigration levels from the Soviet Union have increased substantially in the last year. The new Administration should respond by beginning a dialogue with the business community and other interested groups aimed at both normalizing trade relations and realizing the emigration objectives set forth in Section 402.

As a signal of U.S. seriousness to move forward, the new Administration should also work with Congress to repeal current provisions in the U.S. Export-Import Bank Act restricting the Bank's lending in the Soviet Union.

POLICY OBJECTIVES AND RECOMMENDATIONS

The following are policy objectives and actions recommended by the U.S. Chamber of Commerce for dealing with the Soviet Union/Eastern Europe:

*Work to strengthen the U.S. and multilateral

system of export controls by reducing redundant

and unilateral controls and strengthening enforcement

efforts.

*Continue to work with Western trading partners

to uphold OECD credit rate rules while resisting

demands for unilateral financial controls.

*Negotiate OPIC bilateral investment guaranty

agreements with East European MFN recipients

in order to better protect U.S. investments in

these countries.

*Pursuant to U.S. trade legislation, seek to implement

the MFN waiver provision, thereby extending

MFN to the Soviet Union and other East

European countries.

*Work for repeal of the Stevenson and Church

amendments to the United States' Export-Import

Bank Act establishing EXIM credit limitations on the Soviet Union.

*Continue to work with the IMF, IBRD, and, as appropriate, other international financial institutions to press for economic reform in East European member countries.

*Hold out the firm possibility for Soviet and East European membership in the GATT as these countries effectively institute market economy oriented reforms.

PLANNING FOR THE LONG TERM

One should not exaggerate the short-term commercial opportunities available to U.S. business in the Soviet Union and Eastern Europe. The region has tremendous economic problems that are complicated by the paucity of hard currency reserves and the non-convertibility of local currencies. Internal CMEA trade obligations will continue to limit the ability of these countries to expand trade flows with the West.

Nevertheless, the longer-term potential is there and should not be overlooked by American companies. Ten years ago the United States had over $5.6 billion in annual export sales to Eastern Europe and the Soviet Union and a trade surplus of nearly $4.0 billion. While perhaps small in relationship to our trade with Western countries, the East has traditionally been an important market for U.S. agricultural commodities, agribusiness machinery, energy equipment and chemicals, and chemical and petrochemical equipment.

However, for the potential to be realized, it will involve the support and encouragement of the U.S. government. The United States cannot afford to continue to burden U.S. business with unilateral demands and restrictions that significantly damage U.S. credibility and competitiveness in the region. There must be a partnership between the U.S. public and private sectors. The new Administration should be encouraged to begin a dialogue with representatives of the business community and other interested groups in an effort to develop an EastWest trade policy geared to the new realities of Eastern Europe and the Soviet Union. To ensure continuity to this dialogue, the Administration should re-establish the now defunct East-West Trade Advisory Committee to the Commerce Department. As the Congress will also be deeply involved in the formulation of trade policy, members and staff should be included in the work of this body. n
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Title Annotation:Soviet-American Joint Ventures
Author:Hasfurther, Donald J.
Publication:Business Perspectives
Date:Sep 22, 1989
Words:2482
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