SOVIET ECONOMIC TRENDS AND THEIR IMPLICATIONS FOR EAST-WEST TRADE

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP64-00014A000100050016-0
• Release Decision: RIFPUB
• Original Classification: C
• Document Page Count: 36
• Document Creation Date: November 9, 2016
• Document Release Date: July 13, 1998
• Sequence Number: 16
• Publication Date: August 19, 1954
• Content Type: PAPER

Approved For Release : CIA-RDP64-00014A000100050016-0
6/19/54
SOVIET ECONOMIC TI JDsS AND TH191i IMPLICATIONS FOR EAST-NEST TRALE
The purpose of this paper is to bring certain Soviet
economic trends to focus on the future development of trade be-
tween the Soviet bloc and the free world. It is the thesis of
this paper that the Soviet Union is in a rapid transition from
an agricultural economy to a comparatively industrial economy,
and that significu_at shifts in the direction and composition of
EastWest trade are likely to occur. in the ismediate future as a
result of it,
tePredictingOP the course of East-West trade depends on
more than economic analysis. Bits the conscious strategy and
the unconscious bureaucracy of the Soviet Union will have at
least as much to do with East-West trade developments as econ-
omic forces. The analysis of economic trends leads therefore to
suggestions not to convictions., and serves mainly the purpose
of emphasizing some important possibilities rather than certainties.
The principal conclusions reached are the followings
1, The Soviet Union will shortly become an exporter
of capital equipment, even though imports of other types of cap-
ital equipment will continue,
2. Soviet imports of agricultural products, especially
foodstuffs, and probably fibers, are likely to expand,
3. Agricul tural exports f zt m the Soviet Union or the
satellites are unlikely to reach levels substantially higher than
at present., and will be under pressure to diminish in the future
4m Enlarged trade between the Soviet Union' and the
underdeveloped countries of Asia, the Middle East., and Latin
America, is a likely resultant development, and will involve
economic as well as political advantage to the Soviet Union,
5. While Western Europe can continue to trade with the
East at about the present vo]ume9 no substantial sustained in-
crease is likely, and the commodity composition of Soviet imports
will continuously shift as investment and industrial expansion
continue in the Soviet Union,
6, China's requirements for machinery and equipment
are capable of being substantially supplied by the Soviet Union
Approved For Release : CIA-RDP64-00014A000100050016-0
 Approved For Release : CIA-RDP64-00014A000100050016-0
CONFIDENTIAL
and the satellites, and a substantial part of Chinas experts
will be highly suitable to Soviet needs,
7. The Western countries would contribute more to the
Chinese ecenemy as miarke~e for the remainder of ChinaO s exports
than as sources of supply for China0 s imports; and control mea-
sures designed to reduce Western imports from China would be even
more effective than export controls in retarding China?s indus-
trial growth. This is particularly true--and of significant
quantitative importance-?for the United States,
8, The challenge to U, S. economic defense silly more
and more., be the challenge of Russiaau s economic initiative in
Asia and other underdeveloped areas,, a challenge that cannot
be met except in a very partial degree by measures within the
t1econornic defense" field of activity, but can only be met by the
overall foreign as d economic policy of the U. S. and its allies
in those areas,
AGRICULTURE VERSUS INDUSTttY IN THE SOVIET UNION
Economic defense objectivese "be- centered on the con-
cept of t?strategic" retardation of the Russian economy, have fo-
cused attention on Soviet industry rather than agriculture., and
have necessarily been concerned with the weaknesses rather than
the strengths of Soviet industry,
Furthermore., in spite of disputes over the size of the
impact of export controls on the Soviet industrial base, it has
been evident that the Russian economy had important industrial
deficiencies that could be supplied through East-West trade,
Agriculture, being of less immediate importance to Soviet war
potential., has not received a large share of attention in the
economic defense program,
A study of the economic developments in the Soviet
Union must, however., give emphasis to the agricultural side of the
economy. Agriculture has been tle most important source of Soviet
exports in the past and of the exports of the U.S.S.R. and Eastern
European satellites taken together. Agriculture has been a major
source of manpower for Soviet industry over the last 30 years, And
agriculture represents a major part of total consumption in acon- ?
omies with per capita incomes as low as those in the Soviet bloc.
Comparison between Soviet industry and Soviet agricul-
CONFIDENTIAL
Approved For Release : CIA-RDP64-00014A000100050016-0
 Approved For Release : CIA-RDP64-00014A000100050016-0
CONFIDENTIAL
o3e
ture over the last 30 years is striking. While industrial pro-
duction has approximately quadrupled., agricultural production is
barely above the level of 1927 or of the late 30's, and measured
per capita is below the level of the late 30's and still further
below the level of the early 20? s. While industrial plant and
equipment have grown enormously. in the soviet Union, livestock
numbers-even aside farm draft .animals-mare at best where they were
in 1927. Soviet steel production in 1929 was less than that of
Belgium-Luxemburg, only half that of France or Britain, and less
than one third that of Germany., at present it exceeds that of
Britain and Germany together., and may shortly equal that of Brit-
aira.. Germany,., and France ccanbined, Thus Russian industry is not
only relatively large compared math that it was in the 200s, it is
substantial in an absolute sense and growing rapidly.
There are many reasons for this contrast between in-
dustrial growth and agricultural retardation. It is important,
however, not to explain the difference entirely in terms of the
comparative neglect of agriculture- and it is important not to
assume that, once the Soviet planners turn their attention to
agriculture., they can bring that sector of the economy up to the
rate of progress shown in other fields. Whiled agriculture has
suffered at the ?hands; of the Russian planners., its retardation
cannot be explained in terms of simple neglect. According to
estimates of RAND Russian agriculture has received a proportion
of total Russian investment over this last 30 years approximately
twice as high as the proportion of U. s. agricultural investment
to total U. S. investment; and the Soviet figure for investment
in agriculture has been over 1/6 of total investment as d equal
nearly to 1/2 of the value of total investment in Russian industry.
By comparison with the United States, both industry and agriculture
received doubled shares of total investment, the difference fall-
ing on housing., trade., municipal development., etc, Whatever the
errors in these estimates., they certainly indicate that there is
no easy explanation for Russian agricultural failure in terms of
neglect at the planning and investment level.
THE RUSSIAN AGRICULTURAL PROBLEM
First., consider the facts (i.e. estimates) of current
agricultural production in the Soviet Union.
Agricultural production as a whole is probably at just
about the pre-war level, and its post-war recovery has been slow.
Bread grains are at just.about the level of 1935-40. Wool is
slightly above the pre-war level but well below the level of the
CONFIDENTIAL
Approved For Release : CIA-RDP64-00014A000100050016-0
 Approved For Release : CIA-RDP64-00014AO00100050016-0
-4-
200s. Cotton is somewhat above the level of the late 300 a9 and
well above the level of the 200s. Meat production is about where
it was in the late 300 a, and below the 1& *el of the 200's. Sugar
is below the level of-the late 3O 0 s o The trend is currently UP-
ward in practically all of these commodities- but the recovery
in contrast to industry, or in contrast to agricultural recovery
in Western Europe, has been exceedingly slow and the upward trend
in many cases reflect only the. recovery to pre-war yields.
Where is additional evidence of a nova=quantitative sort
that agricultural production is unsatisfactory in the Soviet Uniorj.
The attention given by Soviet authorities to agricultural prom
duction, particularly meat i d dairy production, in the last 18
months indicates serious preoccupation with the problem, This
preoccupation is not confined to the Soviet Union but has been
marked in the satellites of Europe as well. Not only is it pre-
occupation, but the Soviet planners are apparently willing to pay
a "priceo0 for increased production,, as evidenced by improvement
in the teams on which Russian farmers dispose of their produce.
Recent measures to induce greater agricultural production
include tax reductions, higher farm procurement prices, lower forced
delivery quotas., and efforts involving large movements of persons
to bring new land under cultivation in south=centrQl:Iaissiao In=
creased emphasis hat been given in the last twelve months to agri-
cultural technology, with apparently large numbers of agronomists
and machine technicians being directed to farms. These ixcreasm
es reflect both the disappointing progress of agricultural pro-
duction and the importance of foodstuffs in any effort to improve
consumption standards.
To some extent the expressed dissatisfaction 'dth agri-
cultural production may be related to the current concern with
consumer goods in general., which in turn may prove to be transi-
tory. But the concern seems real; and is unquestionably justi-
fied.
The recent composition of Soviet bloc trade with the West
reflects internal difficulties with the production of food, es-
pecially "quality" foods. Neat, butter and fish imports have been
recently increased and emphasized, while grain exports have been
below expectations, Furthermore, imports from China include sev-
eral hundred million dollars of foodstuffs, principally soy beans,
peanuts? and their oils., but also meats, wools fruits, etc
Evidences of agricultural dissatisfaction in the Eastern
European satellites have been numerous- meat shortages have re-
cently been conspicuous in Poland and East Germany. Agricultural
Approved For Release : CIA-RDP64-00014AO00100050016-0
 Approved For Release : CIA-RDP64-00014AO00100050016-0
CONFIIli1TIAL
?5e
problems Czechoslovakia are evidenced in the admission at the
recent Party Congress that production increased by Qty 1/7 from
1949 to 53, compared with as planned increase of over 1/3, and that
production remains well below pre-war output. The new.Czechoslo?
vakia plan evidently includes the movement of over three hundred
thousand workers back to the farm, and indicates that such a shift
will limit manpower available to industry.
As evidence of governmental concern and policy these
facts may be of transitory significance, but they leave little
room for doubt that the facts of agricultural production have been
discouraging both in the satellites and in Russia itself.
All U, S. authorities seem agreed that a major obstacle
to Soviet agricultural improvement (both i , Russia and the satel-
lites) is in the morale of the farmer and his response to the
Soviet system of incentives and organization. The Soviet econom-
ic system has not yet discovered how to organize the agricultural
economy in order to make fanners work productively. The importance
of the individual farmer? s reaction is evidenced by the fact that
the severest problems and the strongest recent experiments as d
incentives are concentrated in the production of livestock pro-
ducts. This seems to crxafirm that Soviet "factory" methods are
more conducive to the raising of grain than to the.more individ-
ual processes of animal husbandry.
It is possible that the increased concern with, and
improved incentives for, agricultural production in the Soviet
Union will yield favorable results. But nothing in the experience
of the last 30 years suggests much confidence is success. Further-
morey, even improved agricultural yields obtained in this fashion
will come at a real "cost" to the Soviet aauthorities., since the
unproved incentives for the fawners will represent a higher real
income for them, and depends on both, higher prices for what they
produce and upon greater availability of consumption goods. Thus
the "net" contribution of agriculture to industrial growth will
not be increased by as such as gross output.
While incentives and organization are undoubtedly im-
portant, it is even more important not to ignore the physical
obstacles to increased agricultural output its the Soviet Union,
The current preoccupation with Russian policy and problems of
organization tends to keep these physical problems in the back-
ground; in the long run., they are bound to prove even more inn-
tractable than the J.is siaR peasant.
Approved For Release : CIA-RDP64-00014AO00100050016-0
 Approved For Release : CIA-RDP64-00014A000100050016-0
C ONF"IDkN TIAL
PHYSICAL OBSTACLES TO INCREASED AGRICULTURE
In spite of the huge area of the U.S.S.R.--approximately
equal to all of North America--the country is not wealthy in
arable land. In terms of soil and climate, the agricultural po-
tential of the Soviet Union is substantially less than that of the
United States, perhaps no more than 70%. Most of the good soil
in the Soviet Union was fairly intensely cultivated by 19300 'While
there is always room for sane expansion of acreage (and in fact
there was substantial expansion on marginal land in the 300s) ex-
pansion in the Soviet Union means the use of lower grade soils,
the draining of swamps or uprooting of forests, high transporta-
tion costs, and a heavy. investment in community development. While
the increasing availability of tractors and other machinery have
made some areas usable that weld not otherwise have been, the
general situation remains one of tight limitations on the expansiop
of areas under cultivation. Since these are- limitations of soil,,
raainf all, sunshine and frost, aggravated by the factor of distance,
they are not conquerable by policy reforms.
A number of dramatic attacks on this problem have .been
started. These include irrigation, the planting of forest belts,
improved crop rotation, the more extensive application of ferti-
lizer, and improvements in seed and technique. Few of these have
been successful on any but a minor scale; and some of them suffer
from calculable limitations,
Consider irrigation. A number of major projects have
been initiated with a good deal of publicity. But even if all
known plans are carried out (and there is evidence that some in'
fact may have been,dropped or slowed down already) only about
4% of the total crop .area would be irrigated, half of which was
already irrigated under the Czarist regime, and practically all of
the remainder of which has been in use for non-irrigated crops
already. Complete success of all these projects might add from 3
to % to tot grain output.
The projects are furthermore expensive to carry out.
In many places they run the risk of spoiling the soil by increased
alkalinity (as same has been spoiled under previous irrigation)-
and the water supply is not reliable in all cases.
Irrigation projects will consequently not revolution-
ize Soviet agriculture.
A second., and promising, possibility is the planting
of shelter belts of forests in the dry, grain growing regions.
Approved For Release : CIA-RDP64-00014A000100050016-0
 Approved For Release : CIA-RDP64-00014A000100050016-0
CONFIDENTIAL
There is apparently little question about the ultimate effective-
ness of this if done properly., and in many large areas output
may be increased by one quarter or more. Extensive .forestation
will be very costly, however, and there are technical problems
that have not yet been solved. Most important, trees grow slow-
ly; and the effect within a decade would be negllg.ble (or perhapl
negative, since some tilled areas would have to be devoted to
trees) and the effects at the. end of a secopd decade would still
be only a very few percent added to crop yields. Thirty or forty
years would be required for substantial benefits to be obtained.
With respect to crop rotation., there is room for sig-
nificant improvement but Russian experiments to date have not been
remarkable. Some of the best results may have to await the de-
velopment of forest protection mentioned above. Furthermore,
some of the best results of crop rotation are only available if
a high proportion of output is taken in the form of livestock
rather than grain, and is not therefor readily accessible to an
economy that cannot afford the luxury of substantial meat consump-
tion.
Fertilizers are the most promising solution. Their use
could advantageously increase several fold. Russia furthermore
has very substantial natural deposits of mineral fertilizer, While
it will take many years to develop fertilizer extraction on an
adequate scale, this is an important potential source of improve-
ment.
Improvements in farming technique, livestock,, strains..
seed, etc.., could be of real importance, but the Russians have
not shown striking success. Part of the problem is bureaucratic
and organizational, and is inherently soluble.
The conclusion reached is not that agricultural improve-
ment is out of the question, but only that it will be difficult,
expensive, and somewhat uncertain. Agriculture, by comparison
with industry., suffers from serious physical limitations as well
as from organizational and bureaucratic difficulties that seem
much less readily overcome by Soviet planning and discipline.
Especially in view of the growing population of the Soviet Uniox
(at a rate of at least 1.5% per year) the problem of food productip,
is going to remain difficult and perhaps become progressively more
difficult.
It is particularly worth noting that Soviet agriculture
will continue to require large allocations of investment in the
future. Extensions of acreage will require transport and commuxm
ity development as well as machinery, storage facilities, etc.
Approved For Release : CIA-RDP64-00014A000100050016-0
 Approved For Release : CIA-RDP64-00014A000100050016-0
CONFIDENTIAL
Development of fertiliz ,r will require installations of trans-
port as well as equipment, And continued application of machin-
ery on existing acreage will presumably become progressively less
productive in terms of output, as highest priority uses become
satisfied.
In judging the prospects for increased output per acre,
it must be kept in mind that Soviet yields per acre are not strik-
ingly low, What is strikingly low in the Soviet Union is out-
put per man, rather than output per acre, Investment in agricul-
tural machinery is--and apparently has been--highly effective in
reducing the manpower requirements for producing given yields on
existing acreage; it is much more difficult to raise acreage yields
by the application of machinery. There are important exceptions
to this., such as soil conditioning by machines that cannot be
duplicated by hand methods., and the availability of machines may
often shorten certain processes to reduce the danger of crop dam-
age P etc,, nevertheless the principle effect of farm mechanization
is to release labor rather than to raise yields per acre, (It
should be borne in mind that agriculture is generally a high invest-
ment type of production, In. the U. S, the fixed capital--including
barns, sheds., and other buildings and improvements exclusive of
farm residence, as well as machinery--on farms., per dollar of out-
put., is substantially greater than the fixed capital per dollar of
output in such industries as vehicles, aircraft, shipbuilding, etc,)
This distinction would not matter if agricultural land
were abundant in Russia. In that case, increased mechanization
would make possible an extension of land under cultivation, lead-
ing to higher output with a given, or even reduced, labor force.
But under the circumstances of limited land area, the difference
is crucial.
It is this difference that undoubtedly explains the
failure of agricultural investment to raise output during the
last two decades, The very substantial investment in agricul-
ture, referred to above, had probably had two main effects,
First, it has offset a large reduction in draft animals (which
should somewhat reflect itself in release of produce equivalent
to the feed of animals replaced by motor power,) Second., it has
permitted the release of labor for work in the industrial. sector,
While these have not been the only effects, they help explain the
absorption of machinery without appreciable increase in output.
We should therefore distinguish two different object-
ives in Soviet agriculture for the coming years. One is continued
displacement of agricultural labor in favor of the industrial
labor force; this is achievable by continued mechanization but
Approved For Release : CIA-RDP64-00014A000100050016-0
 Approved For Release : CIA-RDP64-00014A000100050016-0
CONFIDENTIAL
09?
undoubtedly at a slower rate than in the past, The second is
raising agricultural output at least in proportion to population
preferably in much greater proportion; by any standards this
would be a difficult situations and by comparison t6th Soviet
achievments in other economic fields it will be extremely diffi-
cult.
In the near future, the pressure of population against
food and fiber consumption may be less important than the need
to increase per capita consumption. The public attention deliber-
ately given the consumer goods by Soviet authorities in the last
16 months has to be taken seriously--not as a major change in
philosophy but at least as a public comittment for the short-run,
and a comittment that would hardly have been undertaken unless
it was seriosly intended to be followed by tangible results.
Furthemore industrial production of consumer goods is in fact
undergoing rapid increase, and production and imports of textile
machinery suggests increases in textile capacity as well as replace-
ment of obsolete and worn-out equipment. The official plan for
shoe production in 1955 is 150 million pairs per year higher than
the estimated actual production of 1951, which itself was double
the peak level reached before the war and four times the level
sustained luring the war. The high rate of construction of urban
dwellings is good evidence that there are technical as well as
morale reasons for improving the availability of consumer goods
and services. While a few consumer durables may provide impor-
tant window dressing, fibers, hides, and better quality foodstuffs
are the things that will really matter.
Increasingly, the growth of Soviet production will de-
pend on labor productivity rather than recruitment in the indus-
trial labor force or the establishment of basic plant and equip-
ment; and positive incentives in contrast to negative discipline
will become more important to Soviet industrial success. There
is consequently a good basis for supposing that increased living
standards in the Soviet Union are receiving serious attention
rather than just verbal acknowledgement,
It should be kept in mind that Soviet investment is of
sufficient size so that if a determination were made to expand
consumer goods production rapidly, this could be done, Further-
more, if serious attention is really given in the Soviet Union
to raising living standards it may have a strong self-perpetuator
ing effect. Dramatic successes in certain lines could undoubted-
ly be achieved. Bureaucratic momentum would be established, and
so would popular expectations of further increases. A shift of
power, authority, and prestige to those officials whose business
is raising living standards and whose success is measured by the
CONFIDENTIAL
Approved For Release : CIA-RDP64-00014A000100050016-0
 Approved For Ree&eiNCjARDP64-00014AO00100050016-0
output of consumer goods, would not be easy to withdraw or hold
in check.
In summary, while the logic of increased per capita
consumption is by no means compelling, there is a strong possi-
bility that the effort to increase consumption will press hard
against the output of .foods? cottons wool, hides, and agricultu
al production of industrial raw materials,,
THE PROSPECTS FOR ELT WEST TRADE
The natural conclusion to be drawn from the above pic-
ture is that Russia will not--and probably the Soviet bloc will
notmmbeccne again a large supplier of food and foodstuffs to the
West. The cost advantages of producing grain and other foods in
exchange for industrial products will be limited, and will probab-
ly become progressively more limited. Russia will more easily ex-
pand shipyards than maintain a food surplus in exchange for ships,
If this conclusion is true, a corollary is the following.
'East-West trade will remain of no more than marginal significance
for the countries of Western Europe (with the usual allowance for
Finland, Norwegian fish, etc?) The prospect of a large market for
industrial production, and a long-run source of foods and agri-
cultural raw materials, is a falso one. EastWest trade is not an
important key to the viability of Uestern Europe or Western pros-
perity.
While this conclusion is probably a correct one, it is
important not to assume that Russia can not export large amounts
of grain. Russia did it in the early0?s under conditions a good
deal more stringent than are likely to occur in the future; and
Russia has exported grain since World War II at severe costs to
Russia and satellite consumption (particularly consumption of
animal produdts.) If Russia wants to export grain,' it can do so;
and if it wants to export several million tons per year it certain-
ly can do so. We cannot rule out the possibility that they will;
what is ruled out is a good economic motive for it.
There are, however, certain advantages to Russia in
continuing some grain exports. First, the markets and market-
ing procedures are a good deal more familiar and certain for grain
than for industrial products that may be newly expanded. Second,
grain output can be substantially expanded if the .Russians are
willing to incur the costs; and expansion of grain production
on marginal land is the kind of agricultural project that yields
Approved For Release : CIA-RDP64-00014A000100050016-0
 Approved For "M:L,A-RDP64-00014A000100050016-0
to Soviet organizational technique. If the Russians want reli-
ability rather than economy, they may push ahead with expanded
grain production. Third, present Russian wheat targets suggest
an export surplus even though one might expect them to devote the
resources to alternative foods or industrial markets. Fourth,
crop variations due to weather may cause the Russians to take
out some insurance by keeping their average grain production a-
bove normal, opportunistical ly, disposing of the frequent surplus-
es abroad. Finals from the point of view of strategic self-
sufficiency, collectivized grain farms are more reliable than meat
and dairy production., being more amenable to control and less
subject to damage from disorganization.
It is also important not to identify grain with agri-
culture. The Russian agricultural problem may indicate grain ex-
ports and imports of m?3at, butter, cheese, and other foods that
prove less responsive to Russian governmental techniques. Our
conclusion, therefore, should be interpreted to refer to net agri-
cultural exports rather than to grain exports. Thus the longer-
texm prospects may be more favorable to the Danish butter trade
than to the British and Italian shipyards and engineering indust-
ries. (The dark cloud to Danish butter producers is more likely
margarine produced with Chinese soy beans and peanuts.)
Lumber and timber and their products also seem unlikely
of greatly expanded export in the future. Production is barely
recovered from the war now- expanded production would require
heavy investment in transport and other facilities. Furthermore,
construction demand within %ssia is large and will stay large
with the growth of urban populations, and improvement and expansion
of railroad track mileage will also make heavy demands. Location
in relation to transport will continue to account for some export
of timber products, but no serious enlargement of East-West trade
seems likely on the basis of expensive increases in timber extraction.
Since overall Russian trade with the West is currently
small in relation to Russian production, significant percentage
increases cannot be ruled out. Miscellaneous raw materials and.
industrial production, as well as some production of agriculture,
could account for several hundred millions of dollars of addition-
al exports in the future. But with the exception of capital goods
to be discussed below, the present structure of Russian resources
and Russian production suggests no dramatic increases in trade;
and even if Russia is to emerge eventually as an exporter of in-
dustrial products there is a dry spell ahead for many years in which
the economic advantages of greatly enlarged trade will not be
great. A stable Russian market for machinery aid equipment should
not be expected. The Bloc will import items of advanced tech-
nology, items desired in too small numbers to warrant domestic
Approved For Release : CIA-RDP64-00014AO00100050016-0
 Approved For R@Npp&Sjk-RDP64-00014A000100050016-0
production, items needed during an interim in which Russian pro-
duction is expanding., etc,,; but it will not for long import such
items as ships, which require resources of the kind becoming com-
paritively more cheap and less scarce in the Soviet Union,
(The demand for imports of advanced technology is only
very partly met by imformation and blue-prints alone. Prototypes
are not mainly important for copying, they are important for ex-
perimental use, testing, adaptation and modification, design of
ancillary equipment, and further research and development. If
prototypes are obtained these related processes can proceed at
the same time as the new item is being developed for indigenous
production; if only blue-prints are obtained, experience and fur-
ther design has to await completion of the first model. The im-
portance of jet aircraft engines imported by the Soviets several
years ago is probably best understood in these terms, What was
needed was probably not some physical models to copy, but a suf-
ficient number of engines to permit the Russians to proceed with
airframe design and all the other processes that require contin-
uous experiment and testing with live engines, Redesigning the
engines themselves would be a major reason for having physical
models on hand. We should consequently expect a continuous de-
mand for items embodying new technology, even when complete spec-
ifications are freely available,,)
SOVIET SELF-SUFk'ICIENCY
The Soviet objective of self-sufficiency is frequently
adduced as a continuing limitation on East-West trade, as well
as a limitation of the effects of export controls to weaken the
Soviet economy. The distinction is not generally made between
wartime self-sufficiency as a strategic objective and peace time
self-sufficiency as a political or bureaucratic objective; pre-
sumably both are intended, In projecting these objectives into
the future, several important qualifications should be kept in
mind for East-West trade purposes.
First., strategic self-sufficiency in the sense of maxi-
mum preparedness for isolation or war does not imply a lack of
trade and may even imply the opposite. This point is often rec-
ognized with respect to imports for stockpileg but it goes beyond
that. War time requirements differ from cold war or peace time
requirements, and war time ability to use certain goods differs
from the peace time ability. Preparation for war suggests over-
building the kinds of industries that otherwise have to expand in
case of war., and relying on outside sources for the goods that
would not or could not be consumed in time of war. Thus a posture
Approved For Release : CIA-RDP64-00014A000100050016-0
 Approved For RQIE mo-RDP64-00014A000100050016-0
?13m
of preparedness might contain a deliberate pattern of permanent
trade.
Second, imports are not the same thing as "reliance"
on imports. It may, for example, be cheaper to build production
capacity or extractive capacity for certain raw materials and hold
them in standby while importing, than. to use fully the facili-
ties that are built for strategic purposes. It is time enough
to mine the low grade ores when war comes, without expensively
mining them for practice during peace time.
Third, with an appropriate degree of insurance in the
form of stockpile, some risks of unexpected war may be justified
by the economies of continuing trade. Reliance on trade as a
marginal source of certain commodities can be afforded as long as
imports remain a manageable fraction of total consumption.
These considerations may not have been of concern to
the Russians at a time when they were underbuilt in the industries.
most relevant to war. They are now on the threshold of the oppo-
site stage and their attitude may change accordingly. Furthermore,
the exploitation of satellites may be teaching the.Russians how
to take advantage of trade with an augmentation rather than dim-
inution of their internal economic strength. The fear of reli-
ance on foreign countries can now- as far as economics is concerned--
give way to a desire for tributkry sources dependent on the Soviet
Un4on. What remains may be a doctrinal or bureaucratic prejudice
against trade but not one that is bolstered by strategic, economic,
or political, necessity.
Soviet doctrine has not been favorable to the active
use of trade for economic ends, except the ultimate end of in-
dependence of trade, Is it likely that this traditional and
strongly embedded doctrine will be overcome? The important ques-
tion here is not whether external propaganda will be flexible
enough to make the Soviets appear as constructive and peaceful
traders, but rather whether continuous external trade will be
viewed in a new light by the Soviet authorities themselves. Per-
hapz even more important is whether a change in the doctrinal
approach to. trade will actually work itself into the methodology
of soviet planning and the bureaucracy of soviet economic controls.
Two factors in the present situation are likely to ease
the probelm of revising traditional doctrine. One is simply the
growth of Russian industrial power, which substantially reduces
the sense of industrial inferiority that must have embarrassed
Soviet authorities since the beginning of the regime. The Rus-
sians have been parading both their technological and their in-
dustrial strength for some years now, and are even talking of
CONFIDENTIAL
Approved For Release : CIA-RDP64-00014A000100050016-0
 Approved For Release : CIA-RDP64-00014AO00100050016-0
CONFIDENTIAL
inviting tourists in the near future. The urge to isolation that
was inherent in an economic inferiority complex is apparently
breaking down, and it is not unlikely that an urge for industrial
prestige will take its place. Russian interest in recent trade
fairs around the world certainly suggests this.
Second, the economic trend in the Soviet Union will be
toward increased trade with the underdeveloped areas of the world,
where economic "reliance" would at least not involve reliance on
Serious potential enemies. This trend is furthermore consistent
with the strategic argument mentioned above.
In any event, a change in doctrinal attitudes is re-
quired, and the change will have to be explicit if it is.- to work
itself into Soviet economic planning. Indications of changes in
internal doctrine would be more significant than external prop-
aganda in indicatirIg the likely importance of Russian intentions
to make a permanent place for trade in their economic plan.
THE LONG-TEA 4 INTACT OF TRADE CONTROLS
Assuming that a prejudice ccaztinues against trade--
except as a political weapon--to what extent will the Russians
progressively eliminate the specific shortages in their own pro-
duction that make trade desirable? Resent estimates of the im-
pact of trade controls have stressed the ability of the Russian
economy, in the space of three or four years, to develop the ca-
pacity to produce nearly everything that they now import and could
not readily do without. This conclusion applied both to machinery
and equipment and to metals and most other raw materials.
What that estimate left out of account, and what seems
worthy of considerable research, is the future tendency of the
Russian economy to generate new shortages as it grows in both
volume and diversity. Todayas equipment shortages may well be
filled fran indigenous production within a very few years if
they cannot be filled from outside sources; what other kinds of
equipment will be scarce in the Russian economy that results when
Russian industrial growth is projected another half dozen years
ahead? What raw raterial shortages will occur in the next half
dozen years if Russian industrial production rises by another 40%
as the ORR projections show it rising between 1951 and 1957?
The question is not one of the absolute bottlenecks to
develop; there is a presumption that the severest shortages are
manageable with advanced planning. The question is rather one
of how great in magnitude are the potential gains from trade, as
CON FID:giV TIAL
Approved For Release : CIA-RDP64-00014AO00100050016-0
 Approved For Release : CIA-RDP64-00014A000100050016-0
COIUFIDENTIAL
m15-
distinguished firm complete self sufficiency, as ,issian industrial
mementum carries it to higher and higher consumption levels of raw
materials and as hitherto neglected industries attempt to expand?
Even a country that is bent on the rapid attainment of self-suffic-
iency may--if it grows rapidly in size, diversity, and technology--
generate new imbalances as rapidly as it eliminates the old ones.
This is an area that seems insufficiently studied.
Perhaps there has been too much tendency to search for an Achillesfl
heel which probably does not exist, and too little attention to
trends that may have important implications for Russian commerce
with Asia, Africa, Latin America, as well as with the industrial
countries of the West.
TH DYNAMICS OF CAPITAL GOODS PRODUCTION
It is one of the paradoxes of capital goods production
that, when a backlog deficiency of equipment is filled, the bigger
the backlog to begin with the greater the excess capacity that
may result at the end of the process. The key to this paradox
is the durability of capital goods; while food production, for
example, is related to current food consumption, production of
durable equipment is related to the growth of the stock of capital.
When a severe deficiency exists for a particular kind
of equipment, it may be essential to double the stock of equip-
ment in a very few years, after which it will grow at a more "nor-
mal" rate. The industry using the equipment will show rapid
increases followed by a slower increase; the industry producing
the equipment will show an absolute decline in production orIce
the backlog is made up.
In general, the drop off to a normal growth rate will
be the greater, the greater the initial backlog, the faster it is
made up, and the more durable the equipment (i.e. the lesser the
eventual replacement rate in relation to the total stock). Care-
ful planning could prevent the drop off, by stretching the de-
ficiency over among enough period of time; this would reduce the
facilities required during the interim. But this would not be
good planning, if the deficiency is a serious one to the economy;
in that case, the cost of overbuilding the particular equipment
industry would be justified by the urgency of requirements.
This principle is the same one that gave rise, in the
United States during World War II and the Korean War, to "rapid
amortization" of facilities for tax purposes. When a deficiency
of military equipment is to be made up rapidly, production levels
CONFIDENTIAL
Approved For Release : CIA-RDP64-00014A000100050016-0
 Approved For Release : CIA-RDP64-00014A000100050016-0
CONFIDENTIAL
m16-
must be expanded to a rate that cannot be indefinitely sustained,
and the resulting excess.capacity is justified by the urgency of
demand for short-run output.
This phenomenon is not only related to initial back-
log deficiencies but also to disproportionately high growth rates
in individual industries. If electric power, or petroleum refin-
ing, or metals production, is to grow at a disproportionately rap-
id rate for a temporary period and then proceed in a proportion
to the rest of the industrial sector, the demand for equipment by
that rapidly growing industry may drop off in absolute terms when
the industry itself simply shifts to a lower growth rate, Growth
of .electric power output by 15% for several years and 7h there-
after implies a 50$ reduction in the demand for new generating
equipment.
The principle is seldom clear out in practice. Replace-
ment of obsolescent equipment can usefully occur when the rate
of expansion falls off. In some industries, continued application
of equipment saves costs and replaces labor. And in most cases,
the facilities producing equipment can be converted to the produc-
tion of something else that continues in strong demand. Thus the
question is" not a sharp one of whether completely idle capacity
appears at a certain date; it is whether production for export
becomes fairly suddenly economical right after a period of fairly
acute domestic shortage. British experience in the engineering
industries during the last three years presents an illustration.
The question is whether the Soviet economy is beginning to pre-
sent, or will shortly present,, a similar picture in important
lines of capital goods production.
Certainly the conditions are present in Russia under
which one would expect this. Huge backlogs of particular kinds
of curable equipment existed after the war; many industries are
rushing ahead at a disproportionate rate of growth that can ob-
viously not be sustained indefinitely to any advantage. And it
must be stressed that planned economies are not immune to this
phenomenon, since the objective of planning is usually not to
avoid excess capacity but to get equipment in a hurry even at
the expense of overbuilding an equipment industry in relation to
subsequent demands on it.
CONFIDtTIAL
Approved For Release : CIA-RDP64-00014A000100050016-0
 Approved For Release : CIA-RDP64-00014AO00100050016-0
-l7-
EVIDENCE OF EMERGING EXPORTABLE SURPLUSES OF HEAVY CAPITAL GOODS IN THE
SOVIET UNION
There is already evidence that exportable surpluses are de-
veloping in certain lines of Soviet capital goods production, By flex-
portable surpluses" is meant, of course, potential output for export-
the likelihood of actual export decisions cannot be deducted from pro-
duction estimates alone.
The clearest case of production capacity beyond current
Soviet needs is in the field of railroad equipment, both locomotive
and railroad cars. This equipment is, of course, extremely durable;
annual replacement requirements are necessarily small in relation to
the requirements for rapid expansion. Furthermore, limitations of track
and maintenance facilities are limits on the cumulative demand for loco-
motives and cars.
The Russians ended the war with a large backlog requirement
for railroad equipment. Production was virtually absent during four
years of war; and traffic requirements are greater at the present time
than they ever were before the war, particularly with the increase in
coal and steel production. But as a result of the backlog demand and
the importance of transportation in the Soviet economy, production of
locomotives and freight cars has been exceedingly high during the last
few years. Present production levels could not usefully be sustained
for any length of time in the absence of a major expansion of track mile-
age,, and no comparable expansion is taking place.
Russian production os railroad cars in 1951 reached 2/3 of the
highest production rate registered in the United States after the close
.of World War II (calculated in terms of railroad car capacity; in number
of cars it is substantially greater than any U. S. production of the
last 30 years.) This production rate is above the average U. S. pro-
dtictiori of railroad cars for the last thirty years; and the U. S. has
nearly four times the track mileage of Russia. Not only is Russian pro-
duction high in relation to U. S, production, and tremendously high per
mile of track compared to U. S. production, but it looks as though it
would lead to a storage problem for unused cars within a matter of years,
A somewhat similar picture seems to be true for locomotives. Traffic
actually carreid is estimated for 1951 at 50% above the pre-war (191.1)
peak.
As a matter of fact, there is evidence that production of rail-
road cars began an absolute decline inzssia-by 1951, indicating by, that
time the emergence of some excess capacity. There is some evidence that
locomotive plants were being converted to other uses during recent years.
CONFIDENTIAL
Approved For Release : CIA-RDP64-00014AO00100050016-0
 Approved For Release : CIA-RDP64-00014AO00100050016-0
CONFIDENTIAL
-lb-
It seems therefore beyond question that production capacity
for locomotives and freight cars currently exists beyond the needs of
the near future. The capacity could of course be converted to other
use, or could be left practically idle and the man power and materials
switched to other uses. Nevertheless there are conversion costs in
switching to alternative production; and a substantial part of produc-
tion costs are already sunk in existing plant and skill; there is con-
sequently considerable advantage in continuing production with part of
the output going into export, In value terms, the order of magnitude
involved in exportable surpluses may well be 100 million dollars per
year,
There is similar evidence with respect to trucks. A simple
comparison of trucks on hand in the Soviet Union with trucks on hand in
the United States suggests demand in the U.'S,S,R, capable of absorbing
several times current production indefinitely. But this simple compari-
son ignores the extreme limits imposed on trucks in the Soviet Union
by absence of roads, the difficulty of developing roads, the organization
of trade, the lesser role of consumer goods, etc., in the Soviet Union,
and the tendency for existing plants to be served by railroad sidings?
The present output of some four hundred thousand trucks per year may be
the most that Russia can usefully absorb, even with a high replacement
rate due to adverse driving conditions and lack of maintenance facilities,
There is an interesting piece of evidence to support that view.
Compared with an estimated realized 375 thousand trucks in 1951, the
present Soviet plan is only to produce 120 thousand in 1955. The im-
plied annual growth in production is only about 2% per year. Capacity
considerations in the vehicle industry could hardly be a reason for hold-
ing production to such a gentle rise. In the five years previous to 1951
production rose approximately four fold, to an output approximately double
the pre-war rate production. The strong suggestion is that (a) production
could be increased substantially beyond the plan as far as any specific
limitations in the vehicle industry are concerned,, and (b) domestic ab-
sorption beyond current levels is not strongly desired by Soviet planners.
In view of the fairly short service life of vehicles in the
Soviet Union., and the fact that road development will probably move for-
ward rather than backward, production for domestic use will surely not
fall off and in fact will continue to grow. Nevertheless there seems t
be no specific limitation on the export of vehicles, end the development
of an export of 50 thousand units per year at a value of over 100 million
dollars would seem achievable if the Russians were interested,
.It is interesting to notice the same comparison between realized
1951 production and planned 1955 production for tractors. Estimated pr
duction in 1951 was 116 thousand units3 planned production in 1955 is 1`16
thousand units, an annual increase in the rate of production of about 2%,
Approved For Release : CIA-RDP64-00014AO00100050016-0
 Approved For Release : CIA-RDP64-00014AO00100050016-0
CONFIDENTIAL
Whatever the accuracy of the production estimate., there is clearly a
trend toward tapering off toward a production plateau after a rise from
zero production during the war years to a level approximately equal t
the peak pre-war production, The coincidence of this plateau with the
pre-war peak might suggest the effect of prewar capacity limitations
on the production plan, But this seems a doubtful explanation. The
prig' nal prewar capacity was all developed within the space of six
years, and investment requirements for expansion are, not large in the
truck or tractor industry,
What, though, in the case of tractors would limit useful
absorption by Russian farms? Is there anything analogous to the rail-
road track limitations or the road limitations that prevents indefinite
useful expansion of railroad equipment and trucks?
No such limitations are apparent- all the evidence is.that
substantial tractor requirements exist in the Russian countryside with-
out bottlenecks to their use., and that replacement requirements are
heavy as the result of poor care and maintenance. But there are two
explanations left. One is that the Russians are counting on an inventory
of, say, a million tractors with i life span of eight years and calculate
.the present production rates will achieve that progressively over the
next five or six years, and that additional tractor production now,
though shortening that period., would'be excessive to replacement and
growth requirements thereafter, The second is that tractors serve mainly
the purpose of dispacing farm labors and that the ability of the indus-
trial sector of the Russian economy to absorb additional labor is suf-
ficiently limited to make such displacement a relatively low priority
objective. If the second condition exists, the plausibility of the first
is increased.
These figures on trucks and tractors do not, of course, directly
suggest that the Russians are thinking of substantia'. exports. What the
figures do demonstrate is a certain ease of making trucks and txactors
available for export without serious interference with Russian plans,
The truck and tractor industries are expandable, trucks and tractors seem
from the figures to be 4NM accumulating at a satisfactory rate from
the Soviet planning point of view; and either increased production or
reduced domestic absorption seems readily able to make room for exports.
Machine tools should reflect this same phenomenon in the near
future if not already. The production of machinery and equipment is
limited not by the current production of machine tDols but by the in-
ventory of machine tools on hand., i.e., by the accumulated total of
machine tools produced in the past. Some allowance must be made, of
course, for replacement needs, for machine tools located in the wrong
places, and for specialized tools that have served some original purpose
Approved For Release : CIA-RDP64-00014AO00100050016-0
 Approved For Release : CIA-RDP64-00014A000100050016-0
CONFIDENTIAL
and cannot be transferred to other uses. But in general machine tools
are extremely durable,, reasonably transferrable,, and Yighly versatile.
The rapid rise in the Soviet output of machinery and equip-
ment in general was accomplished during the last few years by the use
of machine tools that must have been on, hand during those years. With
some allowance for replacement, it could be expected that the same rate
of increase could continue with the machine tool-- capacity on hand. For
example, according to ORR, machinery and equipment production rose by
approximately 120 index units between 1947 and 1951. (An index unit
refers to 1% of 1948 production.) 1947 production was itself nearly
at the peak level reached in the 1930usg and the increase over 1947 was
nearly 200%. In other words,, during that four year period,, machinery
and equipment production rose each year by an amount equal to approxi-
mately 25% of 1948 production. The projected increase to 1957 is a
lesser increase per year than was realized during the four years pre-
ceding 1951.
The implications for machine tool demand cannot of course be
derived with any accuracy from such a composite total of machinery and
equipment production. Nevertheless, the following calculation is of
some illustrative value. Assuming that machinery and equipment produc-
tion requires a proportionate inventory of machine tools,, the. lesser
rate of increase in production of the former projected for the period
1951-7 would mean an absolute decline in machine tool. production. In
other words,, the decreasing annual increment in the level of production
of machinery and equipment would imply decreasing annuadditions to the
stock of machine tools and hence (with allowance for replacement) de-
creasing annual production of machine tools. Andy, incidentally,, the
decreasing production of machine ebDols would tend to be somewhat greater
than implied by the diminishing rate of increase in machinery and equip-
ment production because of the elimination of demand by machine tool
industries for part of their own output.
general.
Somewhat the same should be true of metal working machinery in
These comparisons are much too crude to prove anything. But
they suggest something important. It is instructive to recall what
happened to the demand. for machine tools during the period from 1950 to
1953. All through 1951 and 1952 production of the metal goods industry
in the U. S. and Western Europe was expanding rapidly, and the demand
for machine tools caused an immediate severe shortage. This instantaneous
demand for an enlargement in the stock of machine tools on hand caused
order books to be filled for up to 24 months ahead. But by 1953 distress
was being felt in machine tool industries both here and abroad, and this
distress became substantial in 1954. The same phenomenon occurred during
World War II in this country. The general history--perfectly consistent
with the logic of machine tool demand--has been one of machine tool
CONFIDENTIAL
Approved For Release : CIA-RDP64-00014A000100050016-0
 Approved For Release : CIA-RDP64-00014AO00100050016-0
CONFIDENTIAL
shortage whenever metal goods productive capacity underwent a dispro-
portionate expansion relative to the rest of the economy; and machine t
tools became surplus when the industries using them leveled off at
a higher plateau or a reduced rate of expansion.
It is interesting now to notice what has happened to estimated
machine tool production in the Soviet Union. According to ORR it rose
fairly rapidly until 1949, at which time it was 1/3 higher than the
peak reached in 1939; then it rose slightly less rapidly to 1950; and
then strikingly less to 1951. After increasing by 28 index units in
1947, 19 in 1948, and another 19 in 1949, it rose by 14 index units
from 849 to 2'50, and it only rose by 4 index units- between 1950 and 1951.
A number of explanations for the sudden cessation of rapid
growth of this industry would be possible, of course, including simple
errors in the estimates. Nevertheless, levelling off (or even an
absolute decline) is precisely what one would expect by looking at those
other production indexes that relate to machine tool requirements.
(Incidentally, the substantial continued growth of the machine tool
industry projected by CIA would be contradicted by the conclusion reach-
ed here about the demand for machine tools, but would not be in conflict
with the implied capacity for further machine tool production.)
Unquestionably there are many kinds of machine tools whose
production is still unsatisfactory in the Soviet Union and machine tools
are not so homogeneous::;:as to permit reliable analysis based on an' index
of 'the total. But it is hard to escape the conclusion that a very sub-
stantial range of basic machine tools are in reasonably easy supply in
the Soviet Union.
The above examples cover only a part of Soviet capital goods
output. Many kinds of agricultural machinery might fall in a similar
category. But, too much stress, however, should not be placed on this
tendency for a rapidly growing economy to generate specific surplus
capacities. These provide the more dramatic possibilities of export
production, but perhaps tend too much to imply that surpluses of some
sort are a condition for exporting. What is more generally pertinent
is the fact that equipment and machinery output in the U. S. S. R. has
been growing at a rate out of proportion to the growth of the economy
as 'a whole, that this disp1DportLon is ogioal for a limited period, or
perhaps an extended one, but that a result of it is a steady increase
in the advantage of hard goods production for export, relative to the
effectiveness of labor devoted to other kinds of production. Produc-
tics of ccn.st-vuction and earth-moving equipment, for example, is unlikely
to become' excessive to Russian needs in any absolute sense; but, the
rapid expansion of this industry, coupled with the realized rate of
construction in the Soviet Union suggests that recent offerings for
export could be fulfilled without special difficulty to the Soviet
Economy, and also that further increases in production for export would
Approved For Release : CIA-RDP64-00014AO00100050016-0
 Approved For Release : CIA-RDP64-00014AO00100050016-0
CONFIDENTIAL
not be difficult to achieve. Obviously the rate of construction cannot
increase at anything like the rate of increase of the construction
equipment industry; and high priority needs for the equipment cannot
last long.
The credibility of the proposition advanced here,, and ,an
assessment of its quantitative importance, requires a much more com-
prehensive survey than has been possible to undertake in connection
with this paper.
Two kinds of analysis must go into any such attempt at a mote
comprehensive surveys First, estimates of production and present stocks
must be made. These estimates would be neither new nor peculiar to the
present problem, although the orientation of analysis toward the export
question might involve some shifts in emphasis or attempts at breakdowns
that have not been considered warranted so far. The second kind of
analysis is inherently more speculative, related to the "demand" side
of''the equation. This kind of analysis probably requires not only
"projection" of various sectors or industries of the Soviet economy but
also comparative studies of other countries that have displayed similar
characteristics on which substantially better information is available.
Study of post-war recovery of certain Western European countries,, par-
ticularly West Germanys should be able to provide not only some indica-
tions of the kinds of items whose supply in the Soviet Union will ease
appreciably in the next few years but also a notion of their quantita-
tive importance, of the ease or difficulties of converting facilities,
etc.
Additionally, up-to-date study of the composition of Soviet
bloc trade, both actual trade and what is contemplated in trade agree-
ments, will undoubtedly yield a number of specific indications of
conmiodities deserving analysis from this point of view.
No amount of analysis will make it possible to forecast the
voles and composition of Soviet trade with any accuracy. That cannot
be'done even for a Western country on which we have adequate informa-
tion--not even for the United States. What can be hoped for is'an
informed judgement of the magnitudes likely to be involved, and a
sufficient identification of the most important items themselves to
permit country analysis of the most important potential trading partners
to see the likely extent of the Soviet appeal.
In summary, the most that the present paper has been able to
present ism-it is hoped--provocative evidence that "capital shortage"
in the Soviet Union is not necessarily an obstacle to capital goods ex-
ports, and that the latter is a highly promising candidate for Soviet
export activity in the immediate future.
Approved For Release : CIA-RDP64-00014AO00100050016-0
 Approved For R ~,%NT'TA- RDP64-00014A000100050016-0
-23-
THE MEANING OF EXPORTABLE SURPLUSES
Whenever an industryQs productive capacity is expanded
beyond current demand for its output, it is tempting to say that an
exportable surplus exists, And when it appears that an industry
could readily be expanded for export, it is tempting to say that an
exportable surplus could easily be achieved. The concept of an
exportable surplus is deceptively simple.
Excess capacity does not have to be used. Even if it
exists, say, in the locomotive industry, locomotive production for
exports still require labor, fuel, steel and other materials,
electric power, transportation, and all the other costs that go into
production. Furthermore, a little bit of excess capacity may allow
a margin of economy, permitting less intensive use of plant and
equipment, disuse of the most obsolescent equipment, better mainte-
nance of equipment, etc. Thus the use of excess capacity to produce
for export not only involves all the costs other than overhead
costs but may even be more costly than the average cost of production.
The desirability of producing for export is consequently far from
obvious.
Furthermore, the ewdemand" for output is not likely to be
sharply defined even in a rigidly planned economy. The remaining
demand becomes progressively less urgent if the higher priorities
are met., but there is seldom an abrupt limit to the economy's ability
to absorb further output usefully,
Finally, facilities can be converted. Locomotive factories
can produce tanks or tractors; tractor factories can produce trucks,
etc.
Nevertheless, the relative advantages of exporting
substantially increase as excess capacity begins to appear. Or, to
put it negatively, the reluctance to export, which may be strong
when requirements are urgent and capacity is strained, may disappear
when production for domestic use begins to slacken off, The
desirability of exporting still depends on comparison of export costs
with the internal value or usefulness of what can be imported with
the earnings (plus, of course, any non-economic factors involved in
trade policy); but when production begins to slacken off, there is
some presumption in favor of exporting, since the overhead costs of
export production are largely sunk, since conversion of the plant for
some other use involves extra cost, and since there are certain
disorganizations and lapses in production involved in either switching
the plant to alternative production or moving some of the labor out
and diverting materials to other uses.
What can be concluded, then, from these emerging trends in.
Soviet capital goods production is a strong and suggestive possibility
CONFIDENTIAL
Approved For Release : CIA-RDP64-00014A000100050016-0
 Approved For Release : CIA-RDP64-00014AO00100050016-0
CONFIDENTIAL
of export. Taken together with continuing difficulties in
agricultural production and a possible desire for increased imports
of consumption goods, some of these possibilities become strong
probabilities.
STRATEGIC CONSIDERATIONS IN `CAPITAL GOODS EXPORTS
It would be to the strategic advantage of the Soviet
Union to develop exports of machinery and equipment, First, this
is the kind of production that is most relevant to war potential.
Balanced production in relation to the countryes own consumption
needs is less conducive to wartime self-sufficiency than unbalanced
production, The strategic policy for the Soviet Union should be to
overbuild the hard goods industries, using them for export, and
underbuild its production potential in those kinds of goads that
would not be consumed anyhow in case of war. If, for example,
consumption is to be -increased in the absence of war, the occurance
of war would certainly lead to a cutback in consumption levels.
Partly this would reflect the austerity that goes with war, and
partly it would reflect the inability during war to use certain kinds
of consumer goods because of transportation bottlenecks or un-
availability of necessary auxiliary goods,
The exchange of construction equipment for tea, tobacco,
fruit, meat, and industrial raw materials for consumer goods, would
be a strategic policy for the Russians to follow, by comparison with
diverting investment resources to enlarged output of quality foodstuffs
or the extra raw materials that would go into enlarged production of
consumer goods.
Second, the prestige and propaganda effect in under-
developed countries of capital goods exports from the Soviet Union
would be appreciable. It would strongly suggest that Communism in
Russia was "over the hump" and that Russia had become a mighty
industrial nation capable now of supplying heavy capital goods to
other parts of the world,
Third, if Russia is interested in developing close
commercial relations with the under-developed countries of Asia or
the Middle East or even Latin America, exports of machinery and
equipment would find a much better market than most of Russians
traditional exports. The relation of these developments to the
problems of China is dealt with below.
The Russians have not been exporters of capital goods and
generally lack experience in selling machinery and equipment abroad,
Approved For Release : CIA-RDP64-00014AO00100050016-0
 Approved For Release : CIA-RDP64-00014A000100050016-0
CONFIDENTIAL
m25
It takes more than available supplies to be a successful exporters
'Contacts and confidence must be obtained, quality must be
satisfactory, and design must be suitable. It seems likely that
in most areas the Russians would have to overcome substantial
skepticism about Russians ability to fill the orders with quality
products,and provide spare parts, replacements, etc., in the future,
Furthermore, in quality terms Russian equipment will probably be
substantially less attractive than American or West European
products.
Nevertheless, the Russians have certain advantages over
their competitors in their trading techniques. The ability to
negotiate imports against exports is one that the Western
industrial countries have been progressively giving up during the
last several years, with steady diminution of economic controls, trade
and payments discrimination, etc. Furthermore, the Russians have
fewer administrative, legal,, or philosophic objectiQns to outright
dumping techniques, tie-in sales, etc., and could engage in very
effective price competition if they once decided it'were necessary
in order to establish themselves in export markets,
The Russians must also reach decisions and incorporate
them in their plans, and in some cases take a risk that their own
needs may rise unexpectedly and compete with their export commitmefts.
There is nothing necessarily difficult about this, and nothing that
seems incapable of being overcome by the granting of appropriate
authority and priorities to the appropriate ministries. Nevertheless,
a change in attitude would be required and might be :slow.and laborious
in taking place.
RUSSIAN TRADE WITH THE NON-INDUSTRIALCOUNTRIES
The most important implication of the trends discussed
above is the liklihood for enlarged trade between the Soviet Union
and the undeveloped or agricultural countries of the worlds Several
trends converge on this liklihood.
The development of capital goods exports clearly aims in
the direction of the underdeveloped countries.
The industrial countries of the world are unlikely to
provide satisfactory markets for machinery and equipment for a number
of reasons, including the quality and design disadvantages that
would attach to Russian products. While some prejudice exists in
the underdeveloped countries in favor of latest models of.equipment,
the technological advantages of modern improvements are of.compara-
tively less importance in those areas where labor is cheap, comfort
and safety are of less value, and complexity of design causes
maintenance problems. Furthermore, many underdeveloped countries have
Approved For Release : CIA-RDP64-00014A000100050016-0
 Approved For Ra,IE RDP64-00014A000100050016-0
u26-
a sufficient prejudice against colonial dependence on*the
traditional exporters of capital goods to make an alternative
source of supply rather welcome, And in those areas the Russians
could follow a pricing policy of a highly competitive sort without
incurring protectionist opposition.
On the import side these are the areas where many foodstuffs
and industrial raw materials (fibers, hides, vegetable oils, etc,)
are to be obtained. If consumption levels are to be allowed to rise
in the Soviet Union, one of the most effective and economical ways
for the government to bring this about is to permit enlarged con-
sumption of tea., tobacco,, cocoa, fruits, and other tropical and
semi-tropical foodstuffs that can be grown in the Soviet Union only
with difficulty if at all--unless they are considered dangerously
"habit forming" by Soviet authorities, Even more important will
be imports of meat, fats., and oils, These are the kinds of items
in which Russian consumption is most deficient; and livestock
products have been least amenable to Soviet production efforts.
Furthermore$ expansion of textile production would necessarily consti-
tute a major part of any increased production of consumer goods,
and if it occurred in the near future would almost certainly out-
strip wool and cotton availabilities in the Soviet Union. (Incidentally,
if Russia were to raise consumption of tea, coffee, cocoa., spices,
fruits, etc,, to the levels of the poorest Western European countries--
Greece and Portugal, or Italy and Austria--literally hundreds of
millions of dollars of additional imports would be required,)
In this connection the recent Soviet Argentine trade
agreement seems particularly significant, Argentina imports sub-
stantial quantities of capital goods and can export substantial
quantities of meats, wool, hides, and vegetable oils, It practices
sufficient control of its trade to permit conclusion of long-term
agreements, Even if only for bargaining purposes, it undoubtedly
would like to develop trade with a competitor of the British.
Finally, in spite of apparent ideological differences, the development
of close come rcial ties with an important'Western Hemisphere country
would be of political advantage to the Soviet Union,
The provision in that agreement for Soviet financing of
30 million dollars worth of capital goods on credit looks like the
first in a series of logical steps by the Russians to capture a part
of world markets for machinery and equipment, The credit device is
a familiar competitive one among non-Soviet capital goods exporters,
While there is a lack of any evidence yet that this line of credit
is being successfully used, skepticism on the Russian willingness to
make machinery and equipment available seems optimistic. On the
contrary, the Soviet Argentine trade agreement may signal the entry
of !Russia into a new phase of world trade,
Most recently, the financial agreement signed a few weeks
ago by the USSR and Uruguary is reported to contemplate $20 million
per year of Soviet import of meat, hides, and wool, with Soviet
Approved For Release : CIA-RDP64-00014AO00100050016-0
 Approved For F 4 TtfA[ 4-RDP64-00014A000100050016-0
?27
exports including machinery and equipment as well as other
industrial goods and fuels.
Aside from the degree of complementarity that may exist
between Russia and the less developed countries in relation to
-external trade., there would be strong political advantages to
Russia in enlarged commercial relations with countries like Egypt,
India, Argentina, etc, Trade is ordinarily a vehical for closer
political relations; negotiated trade including long-term commodity
arrangement and Russian determination to make the most of commercial
relations may be even more potent. The development of a routine
pattern of trade consultation, the exchange of trade missions, the
development of vested interests in the countries depending, on
either import or export trade with Russia, the opportunity and
excuse for greater propaganda activities, etc., all seem to be
attractive to Russian foreign policy. In fact, a strong effort to
provide capital goods, a willingness to sign some long-term import
agreements, and perhaps a technical assistance program of modest cost,
might serve to transfer a good deal of economic initiative in those
areas away from the United States and Britain toward Russia. Russian
willingness to sign longterm import, contracts for raw materials,
such as rubber, cotton, jute, etc,, may be a key to preferential
treatment for Russian exports of hard goods.
From an economic warfare point of view, the danger is not
that Russia will damage its trading partners, The danger is exactly
the opposite, that Russia will establish trade relationships that
are quite satisfactory to the trading partners that reduce or
partially replace., or at least offset., the commercial and other ties
between those countries and the major western countries, (Whether
such a development deserves to be called a "danger" 16 discussed below.,)
A "'trade offensive" of this sort may not be the most
expeditious way for Russia to bring underdeveloped countries into the
Soviet bloc; but it is a highly effective way of keeping them
neutralized., of "normalizing" relations with them, of increasing the
basis for political and propaganda activity, and developing some
economically advantageous trade at the same time.
No single one of these arguments by itself is very con-
clusive, it is far from sure that the Russians will want to
develop capital goods exports. It is not certain that higher
consumption levels in Russia will include the kinds of foodstuffs
and other raw materials that Asia, the Middle East, and Latin America
produce, even though that is what the Russian consumer might want
most badly, And Russian plans for the conquest or neutralization of
Asia, the Middle East, and Latin America, may envisage nothing so
patient and civilized as the progressive development of trade. But
together these factors seem to point toward a strategy which must
consequently be judged highly probable,
CONFIDENTIAL
Approved For Release : CIA-RDP64-00014AO00100050016-0
 Approved For Release : CIA-RDP64-00014AO00100050016-0
CONFIDENTIAL
IMPLICATIONS FOR CHINESE TRADE AND DEVELOPMENT
The above analysis implies two conclusions about the
position of China in relation to the Soviet bloc and to the West.
The first is that a substantial degree of complementarity exists
between the Chinese and the Russian economies,, with wide scope for
economically advantageous trade between theme The second is that
China will probably depend on the West more for markets in which to
sell Chinese exports than for the supply of capital goods needed in
Chinese industrial development.
Chinese industrial development will require large amounts
of machinery and equipment from outside China. Aside from the pos-
sibility of grant assistance from the Soviet Union., which does not
seem to be forthcoming on an effective scale., China must mobilize
an export surplusq largely of agricultural origin., in order to import
machinery and equipment. China thus presents an analogy to the Russian
position during the last three decades., in which machinery and equip-
ment were acquired by the export of grains., timber., and raw materials.
But'this analogy falsely suggests that China and Russia continue to
have similar problems., and that Russia would be unable to sell capital
goods., having difficulty itself in obtaining them from the Western
world. What the above analysis suggests is that Russia., though con-
tinuing to find imports of machinery and equipment advantageous., will
find exports of certain kinds of machinery and equipment relatively
easy and economically desirable. It seems likely.-and the railroad
equipment., trucks., tractors., etc. mentioned above partially confiam
this--that China's present requirements are largely for the types of
capital goods which have moved or are about to move into easy supply
if not excess capacity in the Soviet Union. There would undoubtedly
be important exceptions; but the considerations discussed above sug?
gest,the possibility of at least substantial trade,, in capital goods
against foodstuffs., with mutual advantage to Russia and China,, even
if a significant portion of Chinese requirements fall outside this
category.
Not only win China have substantial requirements for the
kinds of capital goods that will be available in Russia., but a large
portion of Chinese exports appear highly suitable to Russian import
needs. In 1936-38 substantially more than half of China's exports
were agricultural; nearly fifty percent were foodstuffs. Exports
now to other bloc countries are thought to be very largely agricul-
tural,, with a heavy emphasis on oil bearing seeds9 beans., and nuts.
CONFIDENTIAL
Approved For Release : CIA-RDP64-00014AO00100050016-0
 Approved For Release : CIA-RDP64-00014AO00100050016-0
CONFIDENTIAL
-29-
The relevant question is not whether the Russians are willing
to trade capital goods for an imporvement in diet. The question--answered
affirmatively by the above analysis-=is whether Russian requirements for
such foodstuffs can be more readily met by producing tractors, railroad
equipment, machinery, etc., than by allocating manpower and investment
to livestock and dairy production at home. (There is also the question
whether Russia would consider an overbuild hard goods industry and a
deficit in domestic production of luxury foodstuffs to represent a super-
ior situation of ""self-sufficiency" than a production structure in better
balance with peacetime domestic consumption.)
Furthermore, the development of heavy, Russian industry in
Eastern Siberia and the enlargement of population in that area enhances
the value of trade with China. Eastern Siberia will be a food deficit
area in spite of any expensive efforts to develop ldcal supply. And
transport from China can take advantage of the tendency for railroad
cars to return empty from East to West.
There is substantial scope for North-South traffic between
China and the east coast of Siberia, as illustrated by. shipments. of coal
and iron ore that have already taken place. China could be an important
source of raw materials for the Far Eastern area of Russia.
Whether both China and Russia will wish to exploit these
possibilities to the maximum cannot be answered on economic grounds;
but the possibility of such continuing enlarged trade should seem
attractive.
This complementarity should not be pushed too far as a basis
for predicting the profitability of trade between Russia and China; the
main point contained in it is the ease with which Russia could make
available much of Chinas capital goods requirements, and the probable
gain to Russia of accepting agricultural production in exchanged The
magnitude of non-military hard goods that the Chinese might manage to
import with their export earnings has been estimated by 0IR at about
$400 million per year; this overall magnitude hardly seems unmanageable
for the Soviet Union to supply. So far, it must be admitted, there is
evidence of Chinese dissatisfaction with the supply of capital goods
from the Soviet Union.
Meanwhile, there remains a substantial part of Chinese exports
that cannot usefully be absorbed by the Soviet bloc. Unless most of
their value is to be lost to China, these must be sold to the West. The
fraction is difficult to predict because of inadequate knowledge of
China-Bloc trade (which Accounts for 70% or 75% of China gs trade today)
and because China is in a rapid transition which began from a situation
that had not been normal for 15 years. But a number of industrial raw
'materials of which bristles and tung oil are the most familiar examples
could hardly find bloc markets comparable to those formerly enjoyed in
the West.
Approved For Release : CIA-RDP64-00014AO00100050016-0
 Approved For Release : CIA-RDP64-00014AO00100050016-0
CONFIDENTIAL
-30-
But exports to the West and imports from the West should
not be too closely identified. The foreign exchange received by
China would be highly useful to the rest of the Soviet bloc. Fail-
ure of China to acquire needed goods from the West could lead to
Chinese purchases from the rest of the Bloc, the latter acquiring
foreign exchange to procure additional goods for themselves.
The problem of denyint China access to capital goods,
metals, and other raw materials is therefore not just a problem
of denying China access to Western supplies but also denying China
access to supplies from Russia, Czechoslovakia, etc. This can only
be accomplished by denyint China useful foreign exchange to spend in
the Bloc, i.ee, by action against imports from China as distinct.
from action against exports to China.
The point may be illustrated by an artificial example.
Suppose China were incorporated into the Soviet Union. If the
Russians obtained several hundred million dollars of foreign exchange
annually from exports grown or extracted in China, and if their plan
called for installing an equivalent amount of capital goods in China,
would they provide the capital goods from Soviet production and use
the foreign exchange for their own requirements, or would they pro-
cure abroad the particular capital goods to be installed in China?
The thesis of this paper is that they would largely do the former.
China is not, of course, incorporated into the Soviet Union
and there are strategic, political, and bureaucratic reasons why the
actual outcome will be substantially different. Nevertheless the
hypothetical-example indicates the economic pressures that will be
operating.
Import controls against Chinese goods would be unnecessary
if export controls against both China and the rest of the Bloc were
sufficiently rigorous to take most of the value out of foreign exchange
earnings. But as long as the controls allow either China or the rest
of the Bloc substantial access to useful goods, it would be hard to
keep the Chinese from acquiring the capital goods they need.
The political difficulty with import controls is that they
are inherently unselective and must be based on a desire to suppress
trade in general and not trade in particular commodities. But import
controls do,have at least three advantages when the political circum-
stances permit their consideration. First, they would be easier to
enforce because of the distinctive nature of Chinese exports and
because the policing of imports rests on the historical fact of origin
rather than future intentions.
Approved For Release : CIA-RDP64-00014AO00100050016-0
 Approved For Release : CIA-RDP64-00014AO00100050016-0
CONFIDENTIAL
~31.?
Second, by being inherently and all-or-none-measure,
they involve a degree of determination and finality that leaves
no question as to intentions. They avoid argument over what goods
are strategic and just how strategic they are. They avoid the
administrative and political difficulties of selections.
Third, import controls against China represents about the
only case in East-West trade in which unilateral U.S. action would
be of some effectiveness. The U.S. as a source of supply for China
is readily replaced by other countries; the U.S. as a market for 100
million dollars or more of goods is far more important. (For certain
commodities., import restrictions may already have developed "infant
industries" in the U.S. that permanently spoil the market for China.
Tung oil seems to be an example.)
An import embargo is aimed, of course, at the w1o a Chinese
economy and not at just a "strategic" portion of it. Whatever the
validity of distinguishing strategic from non-strategic trade with
the Soviet Union, that distinction has little value with respect to
China. In the short run Chinese war potential depends on Russia.
In the longer run., it depends on China's solution of its economic
problem and the development of its entire economy. There is littlo
sense in aiming at any target in China smaller than the whole economy.
CONCLUSION AND PERSPECTIVE
The foregoing thesis can be summed up as follows.
1. A comparison of industry and agriculture in the Soviet
Union, and a study of the limits on agricultural expansion., suggests
that Russia is rapidly leaving or has left the status of an agricultural
economy and that its future potential is in the industrial field., and
that this potential is being rapidly realized. The still low per capita.
level of total production, and the still primitive nature of many aspects
of the Russian economy, do not contradict the relative dominance that
industry is acquiring over agriculture in that country
Enlargement of the area to include the European satellites
does not alter this general conclusion.
2. If it were not for Soviet strategy, ideology, and
bureaucracy, we should conclude that the country would soon emerge
as an exporter of industrial goods and an importer of agricultural
raw materials and foodstuffs, even though continuing to import
particular kinds of machines and industrial products especially for
temporary periods. But self-sufficiency considerations engrained
in Russian planning make this development appear doubtful.
CONFIDENTIAL
Approved For Release : CIA-RDP64-00014AO00100050016-0
 Approved For Release : CIA-RDP64-00014AO00100050016-0
CONFIDENTIAL
3o The persistence, however, of the self-sufficiency objective
should be questioned, since strategic self-sufficiency implies taking
advantage of any export possibilities for hard goods and import possi-
bilities for goods that would be dispensable in time of war,
4. The disproportionate growth of certain capital goods
industries since the war, stimulated by backlog requirements aid gaps
in productions as well as by the continued policy of rapid industriali-
zation, points to the likely emergence of production levels in many
types of capital goods excessive or at least adequate to the priority
needs of the economy. There is evidence that this is already occuring
in certain-lines. In those lines, any specific reluctance to export
based on acute scarcity will soon have disappeared, and these goods
will become comparatively soft commodities whose export in retxrn for
other goods would be profitable.
5. These trends point to enlarged Soviet trade with the non-
industrial or under`-developed countries. Any Soviet desire for political
reasons toestablish strong commercial ties with those eountrips would
be compatible withg and reinforced by, economic developments within the
Soviet bloc..
6. Recent developments in trade and payments are copsistant
with this analysis. They cannot be said at this time to constitute
strong evidence, but they are certainly suggestive. Failure of the
Russians to make capital goods available during the last few years
throws some doubt on the thesis; on the other hand, a fairly rapid
change in hard goods availabilities is what the analysis would lead
us to expect.
7. With respect to China, the analysis points to sub-
stantial room for mutually profitable trade between that country
and the rest of the Bloc, with'China receiving capital goods in
exchange for agricultural produce. Furthermore, the analyeis indicates
that China may be much more dependent on the West as a market,n which
to earn foreign exchange than as a source of supply. Export controls
alone could be partly offset by triangular trade involvipg a Chinese
import surplus from Russian while an import embargo would directly
reduce ChiW.s ability to procure in this fashion from the V.S aS .R,
Incidentally unilateral import embargo by the U.S. would be much
more effective than unilateral export controls in respect to China.
(This is not, of course, an argument against having botho)
There are three questions to ask about the above con-
clusions. :?.First, are they valid? Second, if so, are they
important? Third, if so, what should the U.S. do about ,t?
As to validity, the economic trends are much more con-
vincing than the trade conclusions. The development of enlarged
trade between the Soviet bloc and the under-developed areas re-
quires Soviet policy decisions and required overcoming bureaucratic
obstacles. The economic pressures may not be so strong as to force
CONFIDENTIAL
Approved For Release : CIA-RDP64-00014AO00100050016-0
 Approved For Release : CIA-RDP64-00014A000100050016-0
CONFIDENTIAL
-33-
a "natural" development along the lines discussed above. The implied
trade pattern may run sufficiently counter to the methods and prejudices
of thr goviet bureaucracy, to make it depend on a decision that such
trade is lesirable on political grounds. Perhaps the best way to
characterize the conclusion is the followings
If Russia were to consider the development of significant
trade with the under-developed countries important, and were in-
terested in developing formal commercial relations including commodity
arrangement, etc.. with them, the economics of Russian development
are not a constraint but rather an inducement. Ever if the political
advantages of such a commercial development are not great or perfectly
clear, the effort required would probably not be costly but rather
economical. The obstacles are bureaucratic rather than economic.
An effort would be required, and the Soviet Union would certainly
have to accommodate itself to the demands of its trading partners
with some pain or expense; nevertheless, the principle cost of
such a trade development would be over-coming bureaucratic inflexi-
bility. (To some extent these developments may occur gradually
without an explicit decision, Again using the Argentine examp7.e,
it is either a good example of a policy decision or an excellent
example of a. natural development,
Nevertheless, it must be admitted that the foregoing.
analysis is overdrawn in favor of the general thesis, anl.con-
sequently serves more to point out a strong possibility than to
prove a cased
As to the importance of this development, in terms of
the implied volume of trade, the speed with which it might develop,
and the extent to.which it would yield strategic. advantages to the
Bloc, it must be.admitted that the effect will be more qualitative
than quantitative. The threat of lost markets to the Western in-
dustrial countries in the medium term future is probably.trivisl in
quaantita,.tive terms,, as is any corollary danger of lost sources of
raw materials (referring, of course, to loss by competition, not
by conquest or subversion.) It is similarly unlikely that the
Soviet Union will become the dominant trading partner of many, or
even any,of such countries. Finally, the development of such. trade
is not something that will occur over night; a persistent sales
and negotiations effort will be required by the Soviet bloc.
The source of concern to the West seems twofold. First,
if the Russians wish to select certain countries for the develop-
ment of very substantial trade, they might succeed in becoming a
major dominant trading partner. The political advantages to
Russia, for example, of being the market for more than half of
Egypt?s cotton would be a case in point.
CONFIDENTIAL
Approved For Release : CIA-RDP64-00014A000100050016-0
 Approved For Release : CIA-RDP64-00014A000100050016-0
CONFIDENTIAL
m34o
Secoxd, the difference between no trade and some trade, or
between negligible trade and substantial trade, may provide political
advantages out of proportion to the economic magnitudes. It presents
the Russians an-opportunity to be in constant daily contact with
government officials; it helps put inter-governmental relations on
a Knormal*;basis;. it puts the Russians in contact with a number of
citizens having a vested interest in "normal" relations With the Soviet
Union; and it provides an enlarged basis for indigenous propaganda in
their favor as well as subversive activities. While it Would be alarmist
to propose that many countries would develop an active favorable attitude
toward Russia as a result of such trade, such comtnercial.rela.tions do
help to allay.unfavorable attitudes and can reduce the awareness of the
Russian threat in such countries. In this respect it probably parallels
one of the greatest advantages to the Soviet Union in developing "normal"
trade and "formal" trade relationships with the countries of Western
Europe; that split makes it easier for those countries to forget that
a cold war exists.
In its purely economic effects, enlarged trade between the
Soviet bloc and the underdeveloped countries could be substantially
beneficial to the latter. It would improve their terms pf trade and
probably add a measure of stability to their foreign markets. Assuming
that such trade would not reach proportions that would put great
leverage in Russian hands, we must ask ourselves whether the Russians
really are likely to undertake such a "constructive" step in furtherance
of their foreign policy.
It is generally assumed that economic instability represents
a threat to democratic forms of government and association with the
Western allies, and that Communist influence is aimed at increasing
such instability in order to exploit it. Is the U.S.S.R. likely to
reverse itself and follow trade policies that promote economic stability
instead; and, if sod wherein lies the danger to the West involved in
Soviet success in this endeavor'
A comprehensive answer to this question would require in-
dividual analysis of each country that is a potential trading partner,
As a general answer, however, it must be admitted that enlarged trade
of the kind'under'discussion here is alternative to, rather than con-
sistant with, the objective of early conquest or subversion. There
is some degree of'compatability between theme trade missions, sales
and purchasing agents, etc., can provide a cloak for propaganda or
subversive activities. Mainly, however, the political advantages
to the Soviets of expanded trade would be relevant to countries in
which the prospects for more violent acquisition of influence were
poor,,
If, for example, the Soviet government believed conquest
through subversion or uprising a practicable possibility in Indonesia
CONFIDENTIAL
Approved For Release : CIA-RDP64-00014A000100050016-0
 Approved For Release : CIA-RDP64-00014AO00100050016-0.
CONFIDENTIAL
within the next few years, it might abstain from any ecopomic activity
in that country that would tend to provide markets or otherwise contribute;
to economic progress,, If on the contrary there is, in the. Soviet judge-
ment, little liklihood of early success along those lines, there remains
the objective of developing the most favorable attitude on,the..part of
the existing= government toward the Soviet bloc and its activities. In
that case the beneficial effects to the country concerned of.any such
expanded trade could benefit Soviet policy, It would .be,unduly alarmist
to propose that trade alone would make Indonesia an ally of the Soviet
bloc; it is not unreasonable to expect expanded trade toreduce suspecion
and fear,, A more precise estimate of the value that this modest Ob-
jective would have for the Soviet Union in various different countries
can only be'determined by thorough political-economic evaluation of
those countries. The potential advantages of such a policy, especially
outside of the most inflamable areas, is sufficient to warrant thorough
study, at least of particularly relevant or important countries. Egypt,
Indonesia, and Argentia would provide useful case studies.
Finally, what can the United States do about itT Supposing
the enlargement of trade between the Soviet Bloc and the nonindustrial
countries to be likely, and assuming it would carry political advantages
to the Soviet Union, what poliG.es are indicated for the United States?
Whatever the complete answer to this question, one thing seems
fairly clearer the answer does not lie mainly in the field of 'economic
defense', Trade developments of the sort pictured. above will not be
countered by measures in kind. They will not be countered by measures
aimed at the Soviet Union, but by measures aimed at the areas and
countries concerned, The principal orientation of our policy should
not be to prevent such-, development of trade, but to assure that it
does not achieve disproportionate psychological and political results.
Thus the main policy question raised is not what new control
devices are needed but whether our policies altogether are,adequate for
those areas, In Asia, the most critical area immediately.concerned, the
question may.best 'be posed as follows. In the race between Communist
development. of China and non-Communist development of India, the. Soviet
Bloc will bd the main provider of capital equipment and.th.e.principal
market for China; will,.R1ssia be able to exploit the promise of becoming
the same for the rest of Asia?
IMPLICATIONS FOR FURTHER RESEARCH
Several specific research objectives are suggested by this
paper, Additionally, general research beyond what lies behind this
paper would be required in order to document it convincingly and
thereby confirm it, or, alternatively to contradict it with any finality.
The specific lines of research that seem desirable are the followings
Approved For Release : CIA-RDP64-00014AO00100050016-0
 Approved For Release : CIA-RDP64-00014A000100050016-0
CONFIDENTIAL
-36-
1. Particular attention to the analysis of trade and trade
agreements between the Soviet Union and the underdeveloped areas.
Beyond that, an attempt should be made to identify those countries
that, on political grounds, will be of most conrRrns in order that a
particular watch be kept of trade developments there and some analysis
of potential trade developments can be undertaken in anticipation of
any actual development of serious trade with the Bloc. In generals
that is implied is giving more attention to Soviet trade and trade
prospects with the underdeveloped countries than might otherwise be
warranted on ordinary economicy defense grounds,
2.. According to this papers the degree of economic integration
that is possible between China and the rest of the Bloc is somewhat
greater than is generally assumed, and is possibly more triangular than
is generally recognized. Analysis of the Chinese economy should be
more closely tied in to analysis of the Soviet bloc economies.
3. The development of exportable surpluses of hard goods
by the Soviet Y5nion has rested in this paper on a sampling of evidence,,
and is based on research materials that have not been oriented toward
this particular possibility. Amore systematic and comprehensive re-
view of this possibility should be undertaken.
/+ A related line of inquiry would be a projection of the
raw materials and other requirements of the Soviet economy if it
continues to grow at present rates. Pre-occupation with the operating
requirements of the export denial program has perhaps discourage analysis
of the longer run costs to the Soviets of continued limitations on trade
between East and West, The NIEes concerned with the immediate impact
of trade controls are deficient in this respect, in their conceptration
on Soviet adjustment to existing shortages and inattention to Soviet
development: of new shortages in the future,,
The agricultural limitations of the Soviet Unions and
their implications for the future of East West trade, deserve more
complete analysis to serve as the basis for discussion with.. Western
European countries. To some extent the current popular belief in
Europe, in the importance of East-West trade to "the longrun viability
of Western Europe, could be dampened by education of the;govermmnents
concerned to the insubstantial contribution that the Soviet bloc can
make to the viability of Western Europe,, Furthermore, substantiation
and documentation of the thesis brought forth in this paper could
indicate that Russian interest in such Western commodities as cargo
ships and tankers and heavy capital goods generally is domed to short
life. Soviet bloc imports of machinery and equipment from the West
will continue to be of substantial importance to the Soviet bloc but
seem sure to be limited in overall volume; a persuasive presentation
of this liklihood to the members of COCOM might lead to.a somewhat more
sober European attitude toward Eastern European markets,
CONFIDENTIAL
Approved For Release : CIA-RDP64-00014A000100050016-0