NOTIFICATION OF SIG MEETING: EASTERN EUROPE POLICY

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP83M00914R000500120012-5
• Release Decision: RIFPUB
• Original Classification: S
• Document Page Count: 104
• Document Creation Date: December 22, 2016
• Document Release Date: November 6, 2009
• Sequence Number: 12
• Publication Date: April 30, 1982
• Content Type: MEMO

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DEPARTMENT OF STATE
Washington, D.C. 20520
SECRET /NODIS
Senior Interagency Group No. 22
TO OVP - Mrs. Nancy Bearg Dyke
NSC - Mr. Michael Wheeler
Agriculture - Mr. Raymond Lett
CIA - Mr. Thomas B. Cormack
Commerce - Ms. Jean Jones
DOD - COL John Stanford
ICA - Ms. Teresa Collins
JCS - MAJ Dennis Stanley
Treasury - Mr. David Pickford
USTR - Mr. Richard Heimlich
April 30, 1982
SUBJECT: Notification of SIG Meeting: Eastern Europe Policy
A meeting of the SIG on Eastern Europe Policy (NSSD 5-82)
will be held Monday, May 3, at 10:00 a.m. in the Deputy Secre-
tary's Conference Room, 7219, at the State Department.
The SIG will review the proposed National Security Decision
Directive (NSDD) which is attached. The SIG Memorandum and an
Executive Summary, also attached, provide background to the NSDD.
Attendance will be principal plus one. Please telephone
the names of your representatives to Mrs. Sheila Lopez, 632-5804,
by 9:30 a.m., Monday,. May 3.
L. Paul Bremer, III
Executive Secretary
1. Proposed NSDD on Policy toward East Europe
2. Executive Summary of SIG Memorandum
3. SIG Memorandum
NSC review completed.
SECRET
GDS 4/29/88
State Dept. review completed
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.National Security Decision
Directive Number
UNITED STATES POLICY TOWARD EASTERN EUROPE
I have reviewed the interagency report on United States policy
toward Eastern Europe. I have determined that the primary
long-term U.S. goal in Eastern Europe is to loosen the Soviet
hold on the region and thereby facilitate its eventual
reintegration into the European community of nations. Western
influence in the region is limited by Moscow's willingness to
use force against developments which threaten what it perceives
as its vital interests in the region. Nevertheless, the United
States can have an important impact on the region, provided it
differentiates in its policies toward the Soviet Union and the
Warsaw Pact countries of Eastern Europe, and among the
countries of Eastern Europe, so as to encourage diversity
through political and economic policies tailored to individual
countries.
Differentiation will be aimed at:
encouraging more liberal trends in the region;
furthering human and civil rights in East European
nations;
reinforcing the pro-Western orientation of their
peoples;
loosening their economic and political dependence on
the USSR and facilitating their association with the
free nations of Western Europe;
-- Undermining the military preparedness of the Warsaw
Pact.
In implementing its policy, the U.S. will calibrate its
policies to discriminate carefully in favor of governments
which:
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show relative independence from the Soviet Union in the
conduct of foreign policy as manifested by the degree
to which they resist associating themselves with Soviet
foreign policy objectives and support or refrain from
obstructing Western objectives; or
show relatively greater internal liberalization as
manifested in a willingness to observe internationally
recognized human rights and to pursue a degree of
pluralism and decentralization.
Conversely, states which fail to show internal or external
independence should be treated essentially as we treat the USSR.
The U.S. Government will employ commercial, financial, exchange
informational, and diplomatic instruments in implementing its
policy toward Eastern Europe to include the following:
Most-Favored-Nation (MFN) Status. MFN status will be
exploited consistent with U.S. law and policy
objectives, as an important and highly visible benefit
of improved U.S. relations with Eastern European
nations and a hallmark of our attitude toward them.
Credit Policy. Access to private and official Western
capital is a key asset for the economic development of
Eastern Europe. The U.S. Government extends financing
which benefits Eastern European countries through a
number of programs. In deciding on the extension of
such financing, we will take into account U. S.
political and security objectives within the framework
of U.S. law, agencys' regulations, and economic
criteria.
International Monetary Fund (IMF) membership. It has
long been U.S. policy to support the membership in the
IMF of any country which is prepared to accept the
obligations of Fund membership. The U.S. will continue
to place economic and financial factors first among
other decision criteria when considering IMF membership
in individual cases; we will also continue to judge
applications on a case-by-case basis, giving due weight
to political and security factors when considering
whether countries, particularly those in Eastern
Europe, can be expected to meet the obligations of Fund
membership fully and without reserve.
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Debt Rescheduling. U.S. policy is to extend debt
relief only when it is necessary as a financial measure
to ensure repayment and when the debtor country embarks
on an economic/financial stabilization program designed
to rectify the country's financial position. In
addition to these financial criteria, political and
security objectives will continue to be given due
weight in reaching a final decision on rescheduling the
debts of Eastern European countries.
Technology Transfer and Export Controls. U.S.
strategic concern will remain paramount. A cautious
policy of export control differentiation, reached in
cooperation with our allies, should be an important
facet of our policy towards Eastern Europe.
Cultural and Educational Exchange and Informational
Programs. Such programs will be employed to reinforce
the pro-Western orientation of the populace in Eastern
Europe, and communicate U.S. views to publics there.
Scientific Exchanges. Through exchanges and increased
interactions, the USG will continue to work to
reinforce the Western orientation of the countries'
scientific- technical elites. Scientific exchanges
will continue to be subject to our strategic concerns
with technology transfer.
High Level Visits, Ship Visits and Consultations. Such
actions provide an opportunity to show U.S. support --
or by their absence, lack of support -- for an
individual country's policies.
International Organizations. International fora will be
exploited particularly for negative differentiation, to
focus world attention on actions by the Soviet Union and
Eastern European states which violate internationally
recognized human rights or norms of international
behavior.
Restrictions on Eastern European Diplomats and Consular
Personnel. Restrictions provide a means of regulating
the number and activities of Eastern European diplomats
in the United States in accordance with our approval or
disapproval of the sending country's actions. Use of
this tool will be considered in the context of
reciprocal actions and their impact upon U.S. security
and other interests.
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U.S. POLICY TOWARD EASTERN EUROPE
I. U.S. Policy Toward Eastern Europe: Executive Summary
II. U.S. Policy Toward Eastern Europe: Overview Paper
III. The Balance Sheet of Differentiation
A. U.S.-Soviet Relations
B. The Military Balance
C. Relations with Our Allies
D. East-West Economic Relations
E. Intra-Warsaw Pact and Intra-CEMA Relations
F. The U.S. Private Sector
IV. Instruments for Implementing Differentiation
A. MFN
B. Credits
C. IMF Membership
D. Concessional Sales of Foodstuffs
E. Debt Rescheduling
F. Technology Transfer
G. Commercial Policy as an Instrument of Differentiation
H. Cultural and Scholarly Exchanges and Information
I. Scientific Exchanges
J. High-Level Visits; Ship Visits, Consultations
K. Activities in International Fora
L. Restrictions on Consular and Diplomatic Personnel
V. Allied Cooperation
Vi. Regional Aspects
A. Poland
B. The German Democratic Republic
C. Czechoslovakia
D. Hungary
E. Romania
F. Bulgaria
VII. Appendix
A. Yugoslavia
B. Albania
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I. U.S. POLICY TOWARDS EASTERN EUROPE:
EXECUTIVE SUMMARY
In accordance with the President's Directive of March 25,
an Interagency Group examined U.S. Policy Toward Eastern
Europe. It is the Group's opinion that the primary long-term
U.S. goal in Eastern Europe is to loosen Moscow's hold on the
region, thereby leading to its eventual reintegration into the
European community. The Group recognizes that Western influence
in the region is limited by Moscow's willingness to use force
against developments which threaten its vital interests (e.g.,
East Berlin, 1953; Hungary, 1956; Czechoslovakia, 1968; and
Poland, 1981). Nevertheless, the Group feels that the USG can
have an important impact on the region, provided it
differentiates in its policies toward the Soviet Union and the
Warsaw Pact countries of Eastern Europe and among the East
European States, by encouraging diversity through active
political and economic policies tailored to individual
countries. For example, a policy of differentiation could:
-- encourage liberalizing trends in the region,
-- increase the region's economic dependence on the U.S.,
-- help advance human rights concerns,
-- reinforce the already existing pro-Western orientation
of the populace in Eastern Europe,
-- adversely impact on Warsaw Pact military offensive
capabilities in Europe.
The Group also reviewed an alternative policy of
non-differentiation which would call upon the USG and our
Allies to minimize political and economic contacts with the
region. The Group rejected this approach on the grounds that
such a policy would seriously limit Eastern Europe's freedom of
action vis-a-vis the USSR and result in increased Soviet
hegemony over the region.
In implementing a policy of differentiation, the Group
agreed that the U.S. should follow a course of carefully
discriminating in favor of countries which:
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-- show relative independence from the Soviet Union in the
conduct of foreign policy as manifested in the degree to which
they resist associating themselves with Soviet forei n policy
objectives and support or refrain from obstructing Western
objectives; or
-- show a greater degree of internal liberalization as
expressed in a willingness to observe internationally
recognized human rights, and -a degree of _pluralism and
decentralization in the political and economic spheres.
It was also the Group's conclusion that states which fail
to show internal or external independence should be treated
essentially as we treat the USSR. The Group also concluded
that to be effective, a policy of differentiation must be
carefully calibrated. For example, those countries less
involved in support of Soviet foreign policy should be treated
more favorably than those which vigorously back up Moscow in
its policies around the world. Instruments for implementing
differentiation include:
-- Most Favord Nation Status
-- Granting of Credits
-- IMF Membership
-- Concessional Sales of Foodstuffs
-- Debt Rescheduling
-- Technology Transfer
-- Cultural and Scholarly Policies and Information Policies
-- Scientific Exchanges
-- High Level Visits, Ship Visits, Consultations
-- Activities in International Fora
-- Restrictions on Eastern European Diplomatic and Consular
Personnel.
Finally, the Group noted that in the past too little
attention has been focused on negative differentiation. To be
credible, those countries which do not show visible signs of
progress should be penalized. We must not assume that U.S.
concessions will of themselves lring about greater independence
on the part of these countries. Such rewards must be earned.
(0826A)
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II. U.S. POLICY TOWARD EASTERN EUROPE:
OVERVIEW PAPER
Preambular Statement
The purpose of this study is to review U.S. policy toward
Eastern Europe. It will determine whether or not the United
States should continue to differentiate in its policies between
the countries of Eastern Europe and the Soviet Union and among
the countries of Eastern Europe. If the answer is affirmative,
the Review will define to what end such a policy is to be
pursued and by what instrumentalities. The study will provide
policy. recommendations for achieving our objectives for
consideration by the National Security Council and,
subsequently, for decision by the President.
I. The Problem
Is the primary long-term objective of U.S. policy toward
Eastern Europe to encourage processes which, in time, may loosen
Moscow's hold on the region and lead to its reintegration into
the European community or is it to maintain regional stability
in order to prevent the area from turning into a potential
cause of East-West confrontation? Two long-term approaches
have been suggested to achieve these two different goals.
II. The Policy of Differentiation
The policy of differentiation argues that the U.S. should
differentiate in its policies toward the Soviet Union and the
Warsaw Pact countries of Eastern Europe, and between the
countries of Eastern Europe, by encouraging diversity through
active political and economic policies tailored to individual
countries. Those who favor this policy point to the strong and
enduring pro-Western bias of most East European populations,
which has easily survived thirty-four years of communist rule.
They argue that this desire for closer economic, political and
cultural ties with the West can be exploited to weaken the USSR
and that we should:
-- encourage liberalizing tendencies in the region.
Increased pluralism will make it more difficult for the Soviets
to exert political control over the region. Moscow will face
continuing problems in enforcing ideological orthodoxy if the
internal policies of the countries of Eastern Europe differ
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significantly. Likewise, in the foreign policy area, the
Soviets will find it more difficult to muster the support of
their Warsaw Pact allies on issues of importance. For example,
the Warsaw Pact requires unanimous approval for a document to
receive Pact approval. Refusal by one or more members to
endorse a policy document forces the Soviets either to modify
their position or do without the Pact's imprimatur.
-- increase economic dependence of Eastern European
countries on the West. Eastern European trade with the West
has led to varying but important degrees of dependence on the
continuation of these economic ties. This dependance offers
opportunities to exert leverage on the affected countries. In
addition, ties with the West open up a freer flow of ideas
through exchanges.and increased interactions thereby
intensifying the Western orientation of the region's elites.
The need for Western supplies, replacement parts, markets,
etc., contributes to a gradual reorientation of the East
European economies toward the West. At the same time, care
must be taken in adopting trade and credit policies to ensure
that we and our allies do not develop an economic dependence on
the East Europeans or subsidize Warsaw Pact developments or
imports, and do not unduly relieve Soviet responsibility, for
the East European economic problems.
-- expose the region to demands for better human rights
performance. By making some of the rewards these countries
seek dependent on respect for internationally recognized human
rights, Western leverage in this important area will be
-increased. Without differentiation, Western influence in this
area would be almost non-existent.
-- increase antagonism between Moscow and some of the East
European states. Given Moscow's concern over East European
ties with the West, and the desire of these countries to
intensify or expand them, the East's reaction to a policy of
differentiation will be a potential source o.f disagreement
within the Pact.
-- weaken the Warsaw Pact as a unified military
institution. Western political-economic ties may also
undermine the USSR's ability to instill a strong fighting
spirit vis-a-vis NATO in the minds of those soldiers whose
countries have strong ties with the West. Overall Pact
military preparedness vis-a-vis NATO could be affected.
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II. A Policy of Non-Differentiation
Those who favor a policy of non-differentiation call on the
USG and its allies to minimize political and economic contacts
with the region. Proponents of this approach argue that it
would, over time, weaken the USSR by:
-- increasing strains within the Pact and forcing
diversion of resources away from military uses. Given the
demonstrated economic inefficiency of Communist states and
their inability to satisfy consumer demands, a sharp decrease
in political and economic contacts with the West would cause a
drop in living standards, especially if the USSR attempts to
maintain military spending at current levels. This could
result in an increase of unrest in Eastern Europe and, despite
(or because of) increased police suppression, ultimately force
the Soviets to allocate greater amounts of their scarce
economic resources to supplying the area with raw materials,
food and consumer goods. It is argued that such expenditures
will decrease resources available for building up the Soviet
military. While potentially dangerous, the interim instability
is judged not to be a serious threat to peace in Europe, and is
justified by the longer-run prospect of a weakened USSR.
-- helping to stem the flow of Western technology to the
USSR. By placing the same restrictions on exports to Moscow's
Eastern European allies as those now in force against the USSR
and, by persuading our allies to cooperate, we might
significantly slow Soviet development in many technical fields.
-- weakening the appeal of communism in the West. A
deterioration in the quality of life and harsher police regimes
in the Soviet-imposed systems in Eastern Europe, accentuated by
periodic explosions of public unrest, would cause
Marxism-Leninism to lose much of whatever allure it retains as
an ideology in the West. The same phenomena, while feeding
anxieties in some sectors of Western European opinion, would
result in a greater willingness on the part of the Western
public to support increased defense expenditures.
III. Evaluating U.S. Policy Toward Eastern Europe
A. The Interagency Group has carefully reviewed both of
these approaches and the problems facing the USG in the region.
It is the Group's opinion that the primary U.S. long-term goal
in Eastern Europe is to loosen Moscow's hold on the region,
thereby leading to its eventual reintegration into the European
community. The Group recognizes that differentiation is not
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likely to lead to a collapse of Soviet influence in Eastern
Europe since Moscow can be expected to continue to act to
oppose developments in the region which it believes threaten
its vital interests (e.g., East Berlin, 1953; Hungary, 1956;
Czechoslovakia, 1968; and Poland, 1981). Nevertheless, it is
the Group's judgment that while the impact of differentiation
may be marginal in some cases it offers the best vehicle for
achieving the primary U.S. goal of lessening overall Soviet
control in the region. This judgment is based on the following
factors:
-- despite the setback in Poland, the policy of
differentiation has had an important impact on the region. For
example, American -- and West European -- policies of
encouraging diversity and close ties with the West through our
economic and cultural policies helped facilitate the rise of
Solidarity. Furthermore, the Polish government's crackdown
does not demonstrate that the Soviet Union will not permit
liberalizing trends in the region, only that it cannot accept
such changes if they threaten to destroy the Communist Party's
leading role or take a country out of the Warsaw Pact.
Although the experiment of greater openness and democracy which
accompanied the rise of Solidarity has been crushed by the
government, it has had a cataclysmic impact on the Soviet
Empire, and its effects will linger on for years to come. At
the same time, we must keep in mind that in the aftermath of
the Polish events, Soviet tolerance for liberalization may have
lessened, out, of fear that small reforms will lead to big ones.
If true, the impact of our policy could be somewhat lessened in
the immediate future.
As a result of the policy of differentiation the U .S.
has followed vis-a-vis Eastern Europe in recent years, the
economic dependency on the U.S. of some of the countries in
that region has reached the point where we are in a position to
seriously hurt them. For example, the sanctions imposed by the
President on December 23 have seriously exacerbated Poland's
grave economic difficulties. As a result, our ability to
influence the actions of the Warsaw government -- while still
limited -- is greater than it would be otherwise. It should be
noted, however, that if these countries make up their minds to
resist Western pressures regardless of the costs to their
economies, they have the ability to do so. The Group does not
think that minimizing economic ties with the region will force
the Soviets to divert funds from military purposes in order to
maintain stability in the region. For under far worse
economic conditions prevailing in the past in the Soviet Union
(and in Eastern Europe), Moscow never hesitated to give its
military programs the highest priority.
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-- while some transfer of American technology to the
Soviet Union occurs via Eastern Europe, this is not the only
source of the problem. Our major task is to cut-off the
illegal transfer of technology which occurs either through
overseas intermediaries, or as a result of outright theft in
this country and abroad.
-- Despite the danger that differentiation could reduce to
some degree Western awareness of the "communist" rather than
merely Soviet danger to the West, one of the primary goals of
the U.S. is to build as wide a coalition as possible against
Soviet expansionism. If China, Yugoslavia, or Romania share
our concern about Soviet "hegemonism," then it is in the U.S.
national interest to coopt them and cooperate with them. We
know, and they know, that our other interests are not identical
and our cooperation is thus limited. But if we reject them
altogether, we weaken our cause and hence strengthen the Soviet
Union.
-- If a policy is adopted which treats all East European
states alike, countries which have or have had the most.
extensive ties to the West and have shown some reluctance to
follow the Soviet model, would be penalized the most. When
countries like Cuba or Vietnam act on behalf of Moscow, there
is every reason to treat them the same way as the USSR. A
thorough and careful analysis of the recent policies of the GDR
and Czechoslovakia may offer the conclusion that they, too,
fall in the category of Soviet proxies. As to the other
party-states in Eastern Europe, the pressure upon them to
become stronger Soviet proxies will increase sharply if their
present disinclination to support Soviet foreign policy or
duplicate Soviet domestic practices is not supported by Western
policies.
-- differentiation minimizes the danger of friction with
our Allies, who will be vital for us in implementing any policy
vis-a-vis the region. If we attempted to seriously cut-back
our ties with the region, many if not most of our Allies would
refuse to cooperate with us or provide only limited support.
Without Western European cooperation, we could not successfully
isolate Eastern Europe.
-- differentiation has helped advance human rights
concerns in the region. If we treated all Eastern European
states alike, our ability to influence human rights policies
would be severely hampered. In the past, we have been able to
gain concessions from countries such as Romania and Poland on
human rights issues in return for favored treatment in other
areas.
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-- the policy of differentiation especially in the area of
cultural programs and exchanges has reinforced the already
existing pro-Western orientation of the populace in Eastern
Europe. If we treat the region as a bloc, East Europeans will
perceive that they have been abandoned and will believe that
they have no alternative but to make accommodations with the
Soviets. As long as we continue to broaden and intensify
cultural relations with those countries showing the most
internal and external independence, there will continue to be
popular, albeit limited, pressure on the regimes in this region
to provide more openings to the West.
-- The policy of differentiation had an adverse impact on
Warsaw Pact military preparedness. While other factors also
played in important role, Western rewards for Romanian
independence from the Soviet Union reinforced Ceausescu's
willingness to refuse to increase military spending (supported
indirectly by other Pact members) and oppose closer Pact
integration. Both of those actions have hampered Moscow's
ability to strengthen the Pact's combat readiness. Furthermore,
increased ties with the West have strengthened the pro-Western
orientation of the populace and developments such as the rise
of Solidarity not only made the willingness of Polish soldiers
to fight a 'Soviet war" more problematical, they also tie the
Polish army down dealing with internal developments thereby
reducing the time available to them for training for a
confrontation with NATO.
The Interagency Group rejects the suggestion by some
Western Europeans that the U.S. should make only minimal
efforts to weaken the Soviet hold on the region. The Group
believes that loosening the Soviet hold on Eastern Europe is
the principal objective of U.S. policy, and that the problems
raised by West Europeans are manageable.
B. In implementing differentiation, the Interagency Group
agreed that the U.S. should follow a course of carefully
distinguishing in favor of those countries which:
-- show relative independence from the Soviet Union
in the conduct of foreign policy as manifested in the
degree to which they resist associating themselves with
Soviet foreign policy objectives and support or refrain
from obstructing Western objectives. In determining
whether or not a given East European country meets or fails
to meet these standards, criteria such as the following
will be used:
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--the degree to which a country withholds
support for Soviet foreign policy
initiatives;
--the degree to which a country grants
support for Soviet actions against other
East European states;
--the intensity of its support for Moscow on
issues such as defense budget increases and
Pact integration;
--the extent and nature of its support for
Soviet actions in the third world;
--its willingness to dissociate itself from
Soviet-sponsored acts of terrorism.
-- show a greater degree of internal liberalization
as expressed in a willingness to observe internationally
recognized human rights, and a degree of pluralism and
decentralization in the political and economic spheres.
Examples of actions in this area include:
--a willingness to observe internationally
recognized human rights including the
freedom of emigration and religion, and
ethnic tolerance;
--movement toward economic decentralization
and the tolerance of a private sector in
agriculture and trade;
--acceptance of trade union activity.
The Interagency Group also agreed that those states which
fail to show internal or external independence should be
penalized. It was also decided that to be effective, such a
policy should be carefully calibrated. For example, countries
like Hungary which are less involved in supporting Soviet
policy in the Third World through substantial military aid and
training programs, should be treated perceptibly more favorably
that those like the GDR which are deeply involved in the
military-security area.
The Group noted that in some instances credits can be
extended to Eastern European countries or a more flexible
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export policy implemented even if it can be shown that the
Soviet Union could benefit marginally from the transaction
through a diminution in demand on its resources. The criterion
should be whether there is a demonstrable benefit to the West
from the transaction and a net loss to the Soviets in terms of
their political and economic control over the Eastern European
country involved. In other words, transactions of this sort
are not always necessarily a zero-sum game; they are proper
subjects of cost-benefit analysis.
Finally, the Interagency Group noted that in the past too
little attention has been focused on negative differentiation.
To be credible, a policy of differentiation should visibly
penalize those countries which do not show progress in the
direction of internal or external independence. It cannot be
assumed that U.S. concessions will bring about greater
independence on the part of these countries. Such rewards must
be earned.
IV. Recommendation
That the U.S. Government follow a policy of differentiation
(as defined above) in its relations with the states of Eastern
Europe. In implementing such a policy, the USG should reward
those countries which exhibit either relative external
independence from the Soviet Union in their foreign policies or
show a greater degree of liberalization in their internal
policies. Likewise, those states which fail to show internal
and external independence should be penalized.
(0733A)
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III. THE BALANCE SHEET OF DIFFERENTIATION
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A. U.S. SOVIET RELATIONS
The policy of differentiation has been a contributing factor
toward weakening Soviet control over Eastern Europe, and has thus
been a net asset in our policy toward the Soviet Union. By
loosening the East European countries' economic dependence on the
USSR, by cultivating pro-Western attitudes among publics and
elites, and by encouraging steps toward national approaches and
political liberalization, differentiation has helped to increase
Soviet acquiescence in a greater degree of diversity within
Eastern Europe (as long as Communist Party control has remained
assured). To some extent, this acquiescence is attributable to
the complexity of indigenous in Eastern Europe and Moscow's
realization of the adverse impact and intolerant approach would
have on its overall international position. But, on balance,
differentiation has been a factor for restraint in Soviet policy,
particularly during periods of reduced strains in the U.S.-Soviet
relationship. At other times, it has not restrained Moscow as in
Czechoslovakia in 1968.
Political Impact on US-Soviet Relations: The policy of
differentiation has not historically posed an obstacle to efforts
to improve U.S.-Soviet relations. The Soviets have, to varying
degrees, tolerated the expansion by the West of economic and
exchange relationships with the East European countries, as the
result of: economic necessity; the attraction of letting the West
bear some of the burden of East European development; acceptance
of the need for a safety valve to avert a recurrence of the
explosions of the 1950s that the Stalinist system had produced;
and a recognition that sacrificing absolute control over the bloc
was the necessary price for an improvement in the USSR's own
economic and political relationships with Western countries. The
Soviets felt confident throughout the 1960s and 1970s that the
fundamental Western objective was no longer to overturn Communist
rule in Eastern Europe, and that improved Western ties with the
East Europeans would not prevent Moscow, in extremis, from
intervening to ensure Communist Party control when internal
pressures had undermined the local regime's position, as in
Czechoslovakia. In fact, the minimal Western response to the
1968 invasion must have reinforced Moscow's perception that
differentiation, while an undesirable encroachment on Soviet
authority in Eastern Europe, was not a threat to the USSR's
strategic interests.
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- 2 -
The recent events in Poland represent the fir:3t case in recent
years where Western policies of differentiation have become an
openly contentious issue in U.S.-Soviet relat:.ons. The Soviets
recognize that it was mistakes by the Gierek :egime and the
adverse economic conditions in Poland which brought about the
strikes of August 1980 and the discrediting of: the Polish
Communist Party. But they also recognize that: Gierek's conscious
effort to orient Poland's economy Westward, and the attendant
exposure of Polish society to Western influence, helped lay the
seeds for Solidarity's challenge to Party rulE!. Moreover, the
Soviets profess to see -- and probably do in fact see -- Western
efforts to link debt rescheduling and other economic assistance
to pluralistic development in Poland as an attempt at exploiting
that country's increased dependence on the West in order to steer
it toward Social Democracy and, ultimately, tc undermine Poland's
alliance with the USSR.
Western countries' imposition of sanctions following the
declaration of martial law, and U.S. insistence that improved
U.S.-Soviet relations will be difficult to achieve as long as the
repression continues,, may have prompted Moscow to question whether
the price of tolerating differentiated policies is too great in
terms of the threat to Soviet control in Eastern Europe. Thus
far, however, the Soviets have continued to seek expanded
relations with the West, and have not made a determined effort to
reinsulate the East European states from Western influence.
While drawing the line on Poland, then, the Soviets still appear
to be willing to tolerate Western policies of 3ifferentiation so
long as the basis for Soviet control is not directly threatened.
Economic Impact on the Soviets: Western economic cooperation
with Eastern Europe under the policy of differentiation has
relieved the USSR of some of the burden of supporting its Allies'
economies. This must be weighed, however, against the political
and economic benefits which have accrued to the West as a
result: reduced Soviet control and leverage over political and
economic decision-making in the East European states; and
expanded Western trade relations with the East Europeans, with
the corollary benefits for industrial production,.-employment in
Western Europe and, especially in the U.S. case, commercial
exports of agricultural products. Moreover the levels of Western
trade have not historically been so high as to have constituted a
significant indirect subsidy to the Soviet military sector, in
the context of a Soviet defense budget which, n dollar terms, is
approaching $200 billion per year. However, the qualitative
effect of indirect transfers of unique technolcgy and specialized
equipment needed for modernization of Soviet economic and
military capabilities has been important.
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Expanded trade relations with the East European states have, on a
few occasions, had the unintended side-effect of providing the
Soviets with indirect access to some advanced Western technologies,
whose export to the USSR is prohibited under national and 0000M-
guidelines. Such instances, however, were the consequence of faulty
implementation of the policy of differentiation rather than of the
policy itself.
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B. THE MILITARY BALANCE
The policy of differentiation together with developments in the
region, have had an adverse impact on Moscow's ability to
utilize the Warsaw Pact for its own ends. In particular, the
greater freedom of action in internal and external policy and
the increased emphasis on nationalism which differentiation has
helped foster has had an impact in five key areas.
Pact Military Budgets. Moscow has pushed hard for increases in
non-Soviet Warsaw Pact (NSWP) spending since NATO's 1978
decision to modernize its military forces. Only one country,
however, the GDR, appears to have significantly increased its
military budget in the last four years. The others, have
either flat out refused to increased military spending
(Romania) or have dragged their feet (most notably Hungary and
Poland). As a result, in terms of equipment, NSWP forces fall
considerably below the levels desired by Moscow's military
planners.
Pact Military Integration. The public Romanian refusal in 1978
to integrate its forces more closely within the Pact, has
hampered Moscow's efforts to gain tighter control over NSWP
forces. While NSWP forces in the Northern Tier region (the
GDR, Czechoslovakia, and Poland) appear to be more closely tied
to the Soviets than those in the Southern Tier (Hungary,
Romania, Bulgaria), their degree of integration still leaves
much to be desired from the Soviet standpoint. For example,
the Polish armed forces operate independently to a significant
degree.
Exercises. Romania's refusal to participate in many Pact
exercises, and its tendency to send token contributions to
others, seriously hampers Moscow's ability to operationalize
the Pact's doctrine of 'coalition warfare.' It should be
noted, however, that despite the Romanian problem, a large
number of highly integrated exercises do occur among Northern
Tier countries and the U.S.S.R.
Reliability. The emphasis on national independence, which is
fostered by a policy of differentiation serves to reinforce the
strong anti-Soviet feelings of the vast majority of East
Europeans. At the same time, our efforts to build close ties
with this area intensify the region's pro-Western orientation.
Taken together, these two factors severely undercut the
willingness of NSWP forces--especially conscripts--to fight
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with vigor if they perceive the conflict to be primarily in
Moscow's interest. As a result, the reliability of these
forces in a NATO-Warsaw Pact conflict becomes more
problematical.
Political Support. While the Romanians have taken the lead in
opposing Moscow on a number of its favored policy positions
within the Pact, other NSWP countries have also at least
passively opposed the Soviets in some instances. As a result,
the Soviets have found it necessary to modify some of their
positions in key areas (e.g., China, Afghanistan) in order to
gain the Pact's imprimatur for certain foreign policy
statements/proposals.
EUR/EE: DRHerspring
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C. RELATIONS WITH OUR ALLIES
The Allies tend to consider the Eastern European countries as
estranged members of the same family. Traditionally, they have
tried to avoid retrogression in East-West relations and a
monolithic approach to Eastern Europe because they have feared
this might contribute to a tightening of Soviet controls over
Eastern Europe and increase tensions in Europe. There were
infrequent occasions, such as after the Soviet intervention in
Hungary in 1956 and Czechoslovakia in 1968, when
differentiation temporarily gave way to a more monolithic
approach. However, this state of affairs did not last long.
The Allies quickly revived their economic and cultural ties
with Eastern Europe and sought to restore their political
influence in the East-West balance.
Allied Differentiation. Since World War II our European Allies
generally have practiced a policy of differentiation toward the
various countries in Eastern Europe. Today they strongly favor
such a policy. Historically, those Allies closest to Eastern
Europe, the FRG in particular, have taken the lead in
differentiating among their Eastern neighbors. Germany's
Ostpolitik and specific relationship with the GDR have been the
most visible example of differentiation, but others, including
France and Italy, have also sought to avoid lumping all Eastern
European countries together with the Soviet Union into an
undifferentiated whole.
Harmel Report. Formal Allied commitment to the improvement of
relations with the East began with the Harmel Report. This
document, which was approved by the NATO Foreign Ministers in
December 1967, focused on the continuing relevance of the twin
political and military functions of the Alliance: to assure
defense and to pursue dialogue. It set forth the idea that
the ultimate political purpose of the Alliance is to achieve a
just and lasting peaceful order in Europe accompanied by
appropriate security guarantees." The importance lent to
dialogue presupposes - or has as its logical corollary - the
development of relations with Eastern European countries on a
case-by-case basis and on the merits of each of them.
East-West Cooperation. The establishment of relations between
the FRG and the GDR in 1972 and the implementation of the
Quadripartite Agreement on Berlin in the same year provided
practical examples of East-West cooperation and gave further
impetus to differentiation. Discussions leading to the
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Conference on Security and Cooperation in Europe in 1975
stimulated increased bilateral relations between individual
Allies and the Eastern European states.
Ties in the 1970s. Indeed, relations with both much of
Eastern Europe and the USSR increased and broadened during the
1970s as the pattern of political and economic interaction
between East and West became more intensive and varied.
Political dialogue and the development of economic cooperation,
together with modest progress in human contacts, constituted an
important element in West European relations with individual
Eastern European countries. Intensified contractual
cooperation between the two German states played an essential
part in attempts to abate political confrontation at the
dividing line between East and West in Europe.
European Economic Relationships. Our European Allies have
economic relations with Eastern Europe and the Soviet Union
which are moderately important in the present world economic
situation. In 1980, imports of European NATO countries from
European CEMA states were 4.3 percent of their total imports.
European NATO countries sold to these countries 4.0 percent of
their exports in the same year. Nearly half this trade, in
each direction, was with the Soviet Union. Still, the absolute
amounts of Allied trade with Eastern Europe are significant.
More important, East/West trade is concentrated in relatively
few commodities unlike West/West trade. In a few West European
industrial sectors, this commerce has an importance
commensurate with the impact on the U.S. agricultural sector of
Soviet grain purchases. For the FRG, the GDR is also, partly
for political reasons, a major trade partner, absorbing 3.2
billion dollars of FRG exports in 1980.
European Economic Relationships. France and Italy were the
second and third largest traders with European CEMA countries
in 1980 after the FRG. The UK and the U.S. reflected a lower
level of trade ties in fourth and fifth place respectively.
These trade patterns between Eastern and Western Europe have
been relatively stable in recent years.
NATO Policy. In May 1978, the NATO Foreign Ministers confirmed
the validity of the Harmel Report and concluded that, while
maintaining a credible level of deterrence and defense, there
was no acceptable alternative to the pursuit of meaningful
relations with the East. The Allies agreed that strengthening
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bilateral relations, particularly in the economic, cultural and
social fields, with the Eastern European countries, could
contribute to the objective of securing cooperation rather than
confrontation in Europe. Logically, such a policy could only
be implemented vis-a-vis Eastern Europe in a differentiated
manner. For example, clearly the FRG will not have the same
set of relationships with Romania that it has with the GDR.
Allied Views on U.S. Policy. U.S. continued adherence to a
policy of differentiation in Eastern Europe likely would be
welcomed by the Allies and would be a positive factor in the
relationship between the U.S. and its NATO partners. The
European Allies have vital interests of their own to protect
and promote - - especially in the economic sphere - - in
Eastern Europe. They would likely offer strong resistance to
attempts to treat Eastern Europe as an undifferentiated whole.
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D. EAST-WEST ECONOMIC RELATIONS
Introduction
This paper addresses only the economic aspects of the
policy of differentiation as it relates to East-West economic
relations and thus is only a partial assessment. The benefits
and costs of a policy of differentiation, however, cannot be
judged solely in economic terms. The economic gains or losses
of extending or withholding MFN, credits, and other advantages
were always considered to be modest and of secondary importance
to our political objectives.
Background and History
The history of U.S. commercial and financial policy towards
Eastern Europe reflects a certain tension between two goals:
(1) encouraging the development of more liberal political,
economic and social trends within these countries and fostering
their adoption of foreign policies independent of the USSR; and
(2) denying preferential treatment and assistance to countries
considered to pose a threat to U.S. security interests. In
seeking to achieve these objectives, U.S. policy has
differentiated in favor of Hungary, Poland, and Romania but has
maintained a restrictive stance towards the USSR, Bulgaria,
Czechoslovakia, and the GDR. The economic policy tools used to
implement differentiation between the treatment accorded the
USSR and Eastern European countries and among the latter
include: extension of Most Favored Nation (MFN) tariff
treatment (by law based on reciprocity in tariff concessions
and mutual benefit and assurances on emigration); extension of
Export-Import Bank and Commodity Credit Corporation (CCC)
credits guarantees (terms on some such credits may be more
favorable than market rates, and government lending may
facilitate private bank lending by raising confidence);
concessional sales of foodstuffs (Poland has received the great
preponderance of such assistance); and modestly less
restrictive application of export controls for some countries
in comparison with treatment accorded the USSR. In general,
Poland has benefited the most and over the longest period from
this differentiated approach. It gained MFN treatment in 1960
and has enjoyed considerably more benefits from U.S. credits
than Hungary and Romania.
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In the early 1970's the impetus for improving economic
relations with Eastern Europe was associated to a large extent
with detente and expanded ties with the USSR, rather than with
differentiation per se, although differentiation was in fact
practiced, giving Poland and Romania more favorable treatment
than either the USSR or other Eastern European nations. In
1972, the US-USSR Trade Agreement promised MFN treatment and
other economic benefits for. Moscow and the Soviets gained
access to Export-Import Bank credits. The Jackson-Vanik
Amendment to the Trade Act of 1974, however, defined the limit
of U.S. policy by making MFN and official credits for communist
countries (except Poland and Yugoslavia) contingent on the
individual country's performance in ensuring free emigration.
The USSR has failed to meet the Jackson-Vanik criteria and thus
did not obtain MFN and, since 1974, was denied EXIM credits.
Romania in 1975 and Hungary in 1978 were certified as
eligible for MFN and official credits, and they have cleared
the subsequent annual reviews. East Germany, Czechoslovakia,
and Bulgaria have not yet begun the process. In the mid-1970's
Poland drew heavily on both EXIM and CCC credits, and $670
million in CCC credit guarantees were crucial to Poland during
1980-81 when commercial credits were not otherwise available to
finance Warsaw's huge grain imports. Romania also has used EXIM
and CCC credits, while Hungary, a food exporter, has drawn only
a very small amount of CCC credits. With the exception of
Poland, the preponderance of U.S. lending to Eastern Europe has
been by private commercial banks. Export control policy has
also differentiated among bloc countries, if slightly. COCOM,
the multilateral Western export control body, adopted a
procedure in 1957 permitting special consideration on exception
cases to Poland, but in recent years there has been no
effective differential applied to exports to that country.
Since 1980 the COCOM members have applied with a few exceptions
a no-exceptions policy on the USSR. This policy has now been
extended to Poland. Largely because of U.S. licensing policies
differentiation on COCOM cases for Hungary has been only
cosmetically more favorable and only marginally more liberal
for Romania. Under unilateral export controls Romania and
Hungary are still in a separate country group for licensing
purposes, implying more favorable consideration.
Costs and Benefits
In embarking on a policy based on differentiation, the
United States sought to improve relations with the countries of
Eastern Europe on a broad range of issues as well as to reap
possible economic gains from increased trade. U.S. businessmen
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envisioned untapped markets in CEMA for grain, capital goods
and technology, and even consumer goods. Bankers were willing
to lend to facilitate the trade and to cover the East's
temporary inability to export enough to pay for the imports.
Western imports were expected to strengthen the Eastern
economies and increase their export potential. - -
As result of the improved climate for trade, U.S. trade
with Eastern Europe climbed dramatically from a very low base.
U.S. exports to the area increased 250 percent between 1972 and
1975, and imports rose 191 percent. Poland, Hungary, and
Romania -- favored by U.S. policy -- recorded much faster
growth than did the other three, even before the liberalization
of economic relations. Although the trade flows have always
been too small to have more than a negligible impact on our
economy, manufacturers of capital equipment and farmers
welcomed the sales to the East, and the cost to the U.S.
government was small and confined largely to direct CCC credits
at subsidized interest rates. On economic grounds, the
benefits of detente and differentiation in the first half of
the 1970s did outweigh the costs since the latter were small.
Beginning in the mid-1970s, the onset of debt and
absorption problems in Eastern Europe began to reduce the rate
of growth of their trade with the West. The flows of Western
capital goods to the East proved ineffective in producing the
needed increase in East European exports. The result was a
further increase in debt and debt service. Trends in U.S.
trade with Eastern Europe were similarly affected, with the
exception of a continued boom in sales of agricultural products
as a result of several disappointing crops in Eastern Europe.
U.S. trade with Romania and Hungary, for example, increased for
a short period after they gained MFN and access to
Export-Import Bank credits.
-- U.S. trade with Romania rose sharply between 1975 and
1980, but stagnated last year as a result of payments problems.
-- U.S. trade with Hungary recorded a modest increase after
Budapest was granted trade benefits in 1978, but also slowed in
recent years. Regardless of U.S. policy, until the East
European countries are able to improve their export performance
and deal effectively with their debt servicing problems, the
West will not enjoy the gains from trade anticipated in the
early 1970s although some of the Eastern European countries
remain significant markets for agricultural exports, notably
grain, even at present levels of trade.
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In the past year, the costs to the U.S. of our past lending
policies to Poland have escalated as it has been unable to
service its debts. The United States has rescheduled Warsaw's
direct official loans and assumed the debts to U.S. banks--that
carry a government guarantee. The revenues foregone and
payments made in 1981 totaled $381 million; the comparable
figure for 1982 could be about $640 million. Because the
prospects for repayment of loans originally extended and
recently assumed are questionable, the ultimate costs could be
much higher. Romania also has approached the Paris Club for a
rescheduling of official debt, but the United States has not
yet agreed to reschedule. Romania's debt to the United States
is not as large as that of Poland, and the cost to the
government would be correspondingly smaller.
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E. INTRA-WARSAW PACT AND INTRA-CEMA RELATIONS
The Polish crisis has sorely tested Moscow's willingness to
accept "national peculiarities' among its Warsaw Pact allies as
the price for their political stability and economic viability.
Earlier crises, resulting in the Soviet invasions of Hungary in
1956 and Czechoslovakia in 1968, had given form to a so-called
"Brezhnev Doctrine' by which the Soviets reserved the right to
intervene militarily "to defend socialism". Imposition of
martial law in Poland marked for the first time their
willingness to accept undisguised military rule in a communist
country for the same purpose.
Yet despite the facade of Pact cohesion, Moscow has often been
unable to achieve a consensus among its allies on key issues or
in times of stress, e.g., foot dragging on military integration,
opposition to increased defense spending, and reluctant support
on Afghanistan and Poland. Their individual stances on these
and other issues had reflected persistent efforts to preserve
national identities and pursue individual national interests.
Most of Moscow's allies nevertheless welcomed martial law as
arresting Poland's potential drift from the Warsaw Pact and
CEMA. Still, most did not issue formal party and government
statements endorsing it. Uncertainty over duration of military
rule and the eclipse of the Polish communist party were of
serious concern to them, as well as to Moscow. But most were
also concerned over the implications of martial law for
detente, especially its impact on the CSCE process.
Generally, the East European countries have supported the CSCE
process because they perceived it as a way to expand their
political, economic and trade relationships with the West
without causing undue anxieties in Moscow. US sanctions
against the USSR and Poland, as well as possible West European
retaliation, threaten these prospects. Trade patterns within
CEMA had already altered substantially in recent years; only
Bulgaria's overall trade remains overwhelmingly (72%) within
the Council framework. For Romania and Poland, CEMA trade in
1980 comprised only 39% and 56% respectively, Hungary noticeably
reduced its CEMA trade level as well, to 62%. This pattern of
redirection has been primarily to the advantage of the West.
The Polish crisis has also strained relations within the Warsaw
Pact. Since its onset, Moscow has evidently been able to
convoke only one multilateral Pact gathering specifically on
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Poland -- an extraordinary "Summit" of party chiefs in Moscow
in December 1980. The party chiefs affirmed then that Poland
would remain a socialist state, but, apparently because of
Ceausescu's presence (he boycotted the 1968 pre-invasion Pact
sessions on Czechoslovakia), there was no consensus for
immediate military action.
Consensus on Poland apparently eluded Moscow at the meetings of
the Pact's foreign ministers' committee (October 1980 and
December 1981) as well. In any event, the communiques failed
to mention Poland. Furthermore, the latter session reportedly
was delayed because of Romania's determination to avoid any
appearances of concerted, overt pressure on Poland. Romania,
which limits participation in Pact military activities, has
toned down its anti-Pact demeanor in the last two years, but
Ceausescu's policy of differentiating Romania from the Pact
(e.g., on the Middle East, Afghanistan, Kampuchea, and
disarmament issues) remains largely intact. (Bucharest has
not, however, formally followed up on its earlier requests for
U.S. military assistance.)
Romania, and to a lesser extent Hungary, also appeared to
disassociate themselves from their Pact allies in the polemics
over Poland during the recent CSCE session in Madrid. Hungary
is the only Pact state to notify small scale maneuvers under
the CSCE notification regimes; Moscow and most other Pact
countries comply only on a strictly minimal basis.
Moscow also tried with little success, apparently, to use the
Council for Mutual Economic Assistance (CEMA) to coordinate
policy on Poland. But the crisis seems to have disrupted
CEMA's annual summit in 1981; among other things, there was no
agreement on ways to provide economic assistance to Warsaw and
some grumbled over Poland's failure to meet delivery schedules.
Evidently, the differing interests and perspectives of the CEMA
members precluded any workable consensus. CEMA's Executive
Committee in Moscow in January 1982 did pledge 'all-around
assistance' for Poland, but again the results to date appear to
be minimal. The committee was, however, able to agree on
critizing sanctions by the US and other NATO countries as "crude
violations' of the Helsinki Act and the UN Charter.
Soviet economic assistance to Poland in 1982 encompassed ruble
credits to cover a projected 1.2 billion ruble trade deficit
(approximately $1.7 billion) and additional deliveries of goods
(worth up to $100 million) which Poland normally purchases in
the West. The Poles assert that other CEMA partners have
provided an additional 50 million rubles (equivalent to about
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$70 million) in grants or, more likely, above-plan deliveries,
mainly of consumer goods. Jaruzelski's Moscow visit in March
1982, his subsequent follow-up trips to the GDR and
Czechoslovakia and to Hungary and Bulgaria -- after three
months of relative isolation from Pact contacts -- reflect the
Polish regime's determination to obtain whatever political and
economic support it can get from its allies.
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UNCLASSIFIED
F. THE U.S. PRIVATE SECTOR
A number of factors have influenced the perceptions of U.S.
banks and corporations about Eastern Europe. Profitability has
been a major criterion in their decisions to enter a certain
East European market. U.S. companies and banks also have
responded to the improvement in the economic and business
atmosphere resulting from application of different USG
instruments of differentiation.
Banks. Most U.S. banks decided to enter the Soviet and Eastern
European market in the early 1970's on the basis of senior bank
managements' perceptions that East-West detente and improved
U.S.-Soviet relations had greatly reduced the political risk of
East-bloc lending. These impressions were reinforced by the
profitability banks experienced in lending to the East during
most of the period. Subsequently, bank loan officers
aggressively expanded credit to the region, building up the
highest exposures in countries where U.S. and Western trade --
and hence demand for credit -- was greatest. By the end of
1981, U.S. banks had their greatest exposure in Poland,
Hungary, and the GDR. While assessments for commercial risks
among East European borrowers varied, there is no evidence that
banks pursued a conscious policy of differentiating between
these countries on political risk factors alone.
Since the late 1970's, U.S. banks have reappraised their
earlier commitment to East bloc lending. In response to rising
U.S.-Soviet tensions over Afghanistan and Poland, and growing
criticism from bank stockholders, directors, and the media,
American banks have sharply scaled back, and in some cases
terminated, credit lines for Soviet and East European
borrowers, including Yugoslavia, not a member of the Warsaw
Pact. According to information provided by U.S. bankers, the
high-level decisions to curtail or withdraw credits have been
applied across-the-board, with little or no differentiation
between the USSR and Eastern Europe or among individual East
European countries. Senior banking officials, in contrast to
bank loan officers, are less likely to be familiar with the
nuances of East-West affairs and are more readily influenced by
adverse political developments and attendant publicity than
arguments about the distinctiveness of individual Eastern
European countries.
Corporations. Improvement in the business atmosphere resulting
from U.S. differentiation policy has affected corporations'
assessment of the profitability of doing business in Eastern
Europe. Key elements of USG differentiation have been MFN
tariff treatment; government-supported credits; and joint trade
commissions with Hungary, Poland and Romania.
UNCLASSIFIED
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Application of these elements of differentiation has aided in
fostering a network of business relationships between U.S.
companies and Eastern European enterprises. Total U.S. exports
to the six Eastern European countries have grown from $240
million in 1970 to over $2 billion in 1981. Although exports
to Eastern Europe comprise less than one percent of total U.S.
exports, Eastern Europe has been a particularly important
market for U.S. agricultural and chemical exports.
Generally, U.S. business presence is more visible in Poland,
Romania, and Hungary than it is in the other three Eastern
European countries. Poland's well known economic and financial
problems have halted development of private business
relationships. But there has been no general move by U.S.
business interests in Poland to close or curtail their
operations. As an indication of this:
Total trade turnover between the U.S. and Poland,
Romania, and Hungary reached $2.3 billion in 1981,
compared to $785 million total bilateral trade with
Czechoslovakia, Bulgaria and the GDR;
The number of U.S. companies engaged in industrial
cooperation arrangements with Polish, Romanian and
Hungarian enterprises exceeds 100 (including nine
joint ventures), compared to an estimated 20 with
enterprises from the GDR, Bulgaria and Czechoslovakia,
with which there are no joint ventures.
The number of U.S. company representation offices in
Poland, Romania and Hungary is 55. This compares to
around 11 offices in the other three Eastern European
countries.
-- U.S. company involvement in major projects in Poland,
Romania and Hungary generally has been more extensive
than in the other three countries. The availability
of USG financing for major projects has been one
factor behind this involvement.
-- Private sector cooperation and government
agricultural cooperation activities generally are
more strongly developed in Hungary, Poland and
Romania than in the other countries.
In part, U.S. company physical presence in Eastern Europe has
been a function of the regulations in the individual countries
governing joint ventures, industrial cooperation, and Western
company representation. It also reflects U.S. company response
to business operating conditions and the bilateral business
atmosphere in a particular country. Generally, U.S. firms have
developed more extensive commercial ties in those countries
which the USG has treated more favorably in its differentiation
policy.
UNCLASSIFIED
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Appendix
Western Banks' Lending to Eastern Europe
The following table sets forth lending flows to individual
Eastern European countries since the end of 1977 from banks in
the BIS (Bank for International Settlements) reporting area.
This lending has accounted for roughly five percent of total
international lending by these banks. The bulk of the credit
during this time span has gone to Poland, the GDR and Romania,
with lending to Romania having grown the most rapidly in
relative terms. Loans to the USSR grew relatively slowly
through 1980 but accelerated in 1981.
There are two significant limitations to the data:
1) The claims reported by banks include those which are
guaranteed by Western governments, largely under export credit
programs. (It is possible to separate guaranteed claims for
U.S. and U.K banks, but that is not done here.)
2) Exchange rate fluctuations distort the data because
non-dollar claims are translated into dollar equivalents at
current exchange rates; this means that the actual increase in
claims is understated during a period in which the dollar
appreciates. The estimated increase in claims on all of
Eastern Europe after taking this factor into account is as
follows:
1978:
$8.4
billion
1979:
$5.1
billion
1980:
$7.7
billion
Jan-Sep
1981:
$3.5
billion
In addition, Germany does not report claims of banks vis-a-vis
the GDR.
UNCLASSIFIED
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Appendix
Bank Claims on Eastern European Countries
$ billions
Jan-Sep Position
1979 1979 1980 1981 Sep 30, 1981
Albania - - - - 0.1
Bulgaria 0.5 -0.1 -0.5 -0.6 2.1
Czechoslovakia 0.5 1.0 0.5 -0.3 3.2
German Dem.Rep. 1.3 1.8 1.4 0.6 9.8
Hungary 1.7 1.1 0.1 -0.7 6.9
Poland 2.6 3.4 0.3 -1.4 14.2
Romania 1.1 1.5 1.4 -0.8 4.7
USSR 1.1 - 0.4 2.3 15.4
Total 9.2* 8.6 3.6 -0.6* 58.7*
*While the primary source is a series which covers all
lending, in some cases it was necessary to use a series with
less complete coverage, mainly reflecting non-reporting of
claims of banks in Switzerland. The difference between the
sum of the figures for individual countries and the total
figure represents an unallocated residual.
UNCLASSIFIED
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A. MFN AS AN INSTRUMENT OF DIFFERENTIATION
Current Status
At present, three Warsaw Pact members in Eastern Europe
(Poland, Romania, and Hungary) receive non-discriminatory
tariff treatment (Most-Favored-Nation tariff treatment--MFN).
Both Romania and Hungary, whose MFN waiver requires annual
renewal under Section 402 of the Trade Act of 1974,._-have
expressed interest in receiving either permanent or at least
multi-year MFN. Bulgaria, Czechoslovakia and the GDR do not
now receive MFN. All three countries have expressed interest
in receiving MFN and consider its denial discriminatory and a
major barrier to improved relations.
Effectiveness of MFN as an Instrument of Differentiation: MFN
was withdrawn from Poland, Romania, Hungary, Czechoslovakia,
and Bulgaria in 1951. Since non-discriminatory tariff
treatment was restored to Poland in 1960, MFN has become a very
visible step in improvement of U.S. relations with a communist
country and a symbol of our differentiation among them.
MFN was extended to certain East European countries in
recognition of domestic and/or foreign policies we regarded as
positive and sought to encourage further. In the case of Poland
in the early 1960's, we sought to respond to the first instance
of a Warsaw Pact country adopting internal reforms, allowing
certain freedom of action to institutions such as the Catholic
Church, and actively attempting to improve its bilateral
relations with us over a broad spectrum of issues. MFN was
extended to Romania largely as a gesture of support for
Romanian efforts to develop a foreign policy line independent
from that of its Warsaw Pact neighbors. The granting of MFN to
Hungary came towards the conclusion of an extended normalization
process in our bilateral relations. This process was fostered
by the strong Hungarian interest in expanding economic
relations with the West, its continued pursuit of the most
extensive program of market socialism and economic decentrali-
zation in the Warsaw Pact, and Budapest's relatively
enlightened approach to dissidents, travel and emigration.
Politically, our failure to extend MFN has been viewed by the
East European countries as a blatantly discriminatory action,
particularly by those countries which have not been made
eligible. This is especially so since the U.S. extends MFN to
well over 100 of its trading partners, with the communist
countries being the only major group to which we deny this
treatment. Furthermore, the United States is the only
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developed (OECD) country that does not extend MFN treatment to
the East European countries. In normal international commerce,
MFN is not a special privilege, but a reciprocal and minimal
treatment one accords all one's trading partners within the
GATT framework.
For the East European countries, non-discriminatory tariff
treatment is also an economic issue with long range
importance. Since U.S. non-MFN tariff rates are far higher
than MFN rates for almost all manufactured products, the
absence of MFN renders a wide variety of East European products
non-competitive in the U.S. market, and, at best, sharply
reduces profit possibilities. Given the greater share of
manufactured goods in their exports to the West, MFN has
proportionately greater economic importance for the East
European countries than it does for the USSR. The extension or
denial of MFN, therefore, is a significant form of leverage in
a differentiation context.
Recent analyses by the Commerce Department of the prospects for
trade with each of the East European countries estimated that
each country's exports to the U.S. in 1985 would be $25 million
to $35 million higher with MFN than without MFN (Table 1).
Although MFN is not the sole determinant of export prospects,
the large difference between the export levels of MFN and
non-MFN East European countries ($1 billion vs. $149 million in
1981), especially for manufactured goods ($585 million vs. $121
million in 1979), is striking (Tables 2 and 3). Although the
rate and speed of growth varied, Polish, Romanian and Hungarian
exports to the U.S. all grew following the extension of MFN
(Table 4).
These figures suggest that the East European countries stand to
gain economically from reduced average tariffs on exports to
the U.S., but that these gains are likely to be gradual and
modest. Western Europe remains the key market for East European
manufactures, even for a country such as Poland which has long
enjoyed MFN with the U.S.
The benefits of multi-year MFN are even more difficult to
estimate. The principal benefit of multi-year MFN most often
cited by both East European and American companies is the
greater confidence and security it would provide for long-term
co-production and joint venture arrangements.
For the United States, the economic benefits to be gained from
MFN are less important than they are for the East Europeans,
but still not insignificant. U.S. exports to the countries
having MFN have grown more rapidly and are significantly larger
than exports to non-MFN countries ($1.3 billion vs. $636
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million in 1981). (Table 5) This is especially true for
manufactured goods ($260 million vs $65 million in 1979).
(Table 6) Failure to grant MFN can produce pressure for
retaliation against U.S. products, such as in Czechoslovakia,
which has just introduced a special high duty for American
products. Trade Ministries may instruct enterprises and
foreign trade organization to view the U.S. as a supplier of
last resort.
Although recent Commerce-analyses suggest that an MFN
relationship would have a positive effect on sales to these
countries (Table 7), Eastern Europe will continue to be a small
market for U.S. exports (about one percent). This is not true
for grains, however, in which Eastern Europe take 13 percent of
U.S. exports.
MFN relationships undoubtedly make it somewhat easier for U.S.
exporters to do business in these countries. The business
facilitation, trade promotion, patent protection, disputes
settlement, and information sharing provisions of the trade
agreements improve conditions for U.S. companies. Of value to
us also are the contacts established between institutions and
people in the course of commercial contacts.
Effectiveness Summarized: In addition to the economic benefits
it holds out for the East European countries, MFN has come to
represent the culmination of a process of normalization in our
bilateral relations. These factors make MFN a significant
instrument of differentiation in dealing with countries of
Eastern Europe. We should not overestimate, however, how much
we can obtain from Eastern European governments. While MFN may
serve as a "reward" for either domestic or external behavior
which we approve or encourage, MFN is not a very large "carrot"
by which to bring about a major change in a country's basic
orientation. Countries will not change their basic foreign or
domestic policies for the sake of MFN. At the same time
experience suggests that MFN can be used to advance other
important objectives, such as resolution of U.S. claims, better
media treatment of the U.S., or improved emigration and human
rights performance.
We should make it clear in discussing possible future MFN
agreememts, that we will not accept the separation of MFN and
our commercial relations as a whole from the other aspects of
our bilateral relationship. For our part, the conclusion of an
MFN agreement is symbolic of our desire to have productive,
positive relations across the board. Such a relationship
presupposes that governments will demonstrate responsiveness to
U.S. concerns on issues such as family reunification, human
rights and extremely negative treatment of us and our policies
in the domestic media.
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Constraints on MFN as an Instrument of Differentiation
Sec. 402 (Jackson-Vanik Amendment) of the Trade Act of 1974:
The Jackson-Vanik Amendment constrains our use of MFN as an
instrument of differentiation in three ways:
(a) Section 402 does not differentiate among communist
countries. The Soviet Union, China and the East European
countries (with the exception of Poland, which is not
covered by Jackson-Vanik) are all treated in the same way
regardless of their individual political, economic, or
emigration policies. The fact that the basic legal
authority for extension of MFN does not differentiate
complicates U.S. efforts to use MFN as an instrument of
differentiation.
(b) Section 402 constrains the Executive in setting
conditions for MFN. Under this section, the emigration
policy of a country is a preeminent legal condition for
extending MFN. The Executive may set additional conditions
for extension of MFN to a given country, but it legally
cannot extend MFN even if all these conditions are met
unless the President has received assurances that the
emigration practices of the recipient country will lead
substantially to the achievement of free emigration.
(c) Section 402 limits the period for which MFN can be
extended under the waiver procedure to one year only and
the attendant trade agreement to a three-year term.
Differentiation Through MFN: At present we differentiate by
extending MFN to three Warsaw Pact members in Eastern Europe
and not to the other three or the Soviet Union. Greater
differentiation through MFN could be accomplished along two
lines.
I: Differentiation between Eastern Europe and the USSR could
be advanced by making a policy decision to work toward the
extension of MFN to Bulgaria, Czechoslovakia and the GDR. This
would result eventually in the extension of MFN to all the
Eastern European countries, but not the USSR. This could be
accomplished without changing present legislation provided
governments were willing to provide us with assurances on
emigration.
In those cases in which Eastern European ountries meet the
criteria o U.S. law for_ the extension of MFN, the extension of
MFN on an annual basis serves as a tool of leverage for
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promoting our emigration and human rights objectives. Should
it be determined that these objectives would be advanced
further through the extension of multi-year MFN, the
possibility of an attempt to amend the law should be considered.
Giving the President greater discretion in using MFN as an
instrument of differentiation would require amending
legislation loosening the link between MFN and emigration and
introducing broader national interest considerations. It is
doubtful whether the benefits would be commensurate with the
difficulties and possible domestic costs of seeking such an
amendment since there would be broad opposition publically, and
in the Congress as well as within the Administration.
Action Required
Identification and satisfactory achievement of the
political and economic conditions we would expect each
country to satisfy for proceeding with MFN (e.g., GDR
settlement of claims; more positive Czechoslovak and
Bulgarian media treatment of U.S.; Czech progress on
emigration, family unification and the treatment of
dissidents as well as its media portrayal of the U.S.).
(At least one country, Bulgaria, has indicated it will be
seeking clarification of our conditions, other than
Jackson-Vanik, for progress toward MFN, the implication
being that the development of emigration assurances might
proceed forward if other conditions proved acceptable.)
II. In addition to the present policy of withholding MFN from
countries not meeting our condition, differentiation among the
Eastern European countries could be increased by extension of
multi-year or permanent MFN to the most favored East European
countries.
Required Action:
Amendment of Trade Act of 1974.
III. Proceeding simultaneously along both line I and II would
permit maximum differential use of MFN.
RECOMMENDATION
The following is suggested as the recommendation on MFN
emanating from NSSD 5-82.
"It will be U.S. policy to extend MFN to the countries
of Eastern Europe not currently receiving it only when
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they meet our criteria for eligibility. Our actions in
this regard will depend on the readiness of each East
European government to settle outstanding issues and enter
into a constructive bilateral relationship with us. Such a
relationship presupposes that an East European government
will be responsive to our concerns on issues such as
family reunification, human rights, (including emigration).
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- 7 -
Table 1.
ESTIMATED EAST EUROPEAN EXPORTS TO U.S. 1985
(millions of dollars)
Country
1981 Actual
1985 Without MFN
1985 With MFN
Bulgaria
34
52
86
Czechoslovakia
67
70
108
GDR
48
80
105
Source: U.S. Dept. of Commerce Staff Papers
Table 2. 1981 EXPORTS OF EAST EUROPEAN COUNTRIES TO U.S.
(millions of dollars)
Countries Receiving MFN Countries Not Receiving MFN
Hungary
128
Bulgaria
34
Poland
365
Czechoslovakia
67
Romania
560
GDR
48
TOTAL
1053
149
Table 3. U.S. SHARE OF IW MANUFACTURED IMPORTS FROM
EASTERN EUROPE - 1979
(value in millions of dollars; share as percentage)
Countries Receiving MFN Countries Not Receiving MFN
$ Million Share $ Million
Share
Hungary
82
5.9
Bulgaria
7
2.3
Poland
.251
11.2
Czechoslovakia
83
2.6
Romania
252
16.6
GDR
31
1.2
Source:
U.S. Dept. of Commerce Trade Trends
Table 4.
GROWTH OF EAST EUROPE EXPORT TO U.S. FOLLOWING
EXTENSION OF MFN (millions of dollars)
Country
Date of MFN
Year
Exports to U.S.
Poland
Dec. 1960
1960
39
1961
41
1962
46
1963
43
1966
66
1968
97
1971
107
1975
259
1979
426
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Romania
July 1975
1975
155
1976
199
1977
233
1978
347
1979
329
1980
312
1981
560
Hungary
July 1978
1978
68
1979
112
1980
107
1981
128
Table 5 1981 U.S. EXPORTS TO EAST EUROPEAN COUNTRIES
(millions of dollars)
Countries Receiving MFN
Countries Not Receiving MFN
Hungary
78
Bulgaria
258
Poland
681
Czechoslovakia
82
Romania
503
DGR
296
TOTAL
1262
TOTAL
636
Table 6 U.S. SHARE OF IW MANUFACTURED EXPORTS TO
EASTERN EUROPE - 1979
(value in millions of dollars; share as percentage)
Countries Receiving MFN
Countries Not Receiving MFN
$ Million Share
$Million
Share
Hungary
53
2.5
Bulgaria
11
1.2
Poland
105
2.6
Czechoslovakia
31
1.6
Romania
102
3.8
DGR
23
0.7
NOTE:
IW-Industrialized West, which includes the EC plus
Austria, Canada, Finland, Japan, Norway, Sweden,
Switzerland, and U.S.
Table 7 ESTIMATED U.S. EXPORTS TO EAST EUROPE - 1985
(millions of dollars)
Country 1981 Actual 1985 Without MFN
1985 With MFN
Bulgaria
258
260
330
Czechoslovakia
82
215
301
GDR
296
620
730
(0822A)
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B. CREDITS
U. S. and Western lending to CEMA countries expanded rapidly
from a low base in the 1980's as part of a general expansion in
international lending and the policy of detente. In many ways
this was a natural development for the Eastern European
countries which were eager to industrialize, wean their
economies from total dependence on the Soviet Union, and
overcome the economic stagnation such dependence implied.
All the Eastern European countries depend on the West for an
important share of their trade, and all have accumulated hard
currency indebtedness to the West as a result of trade which
must be serviced. Eastern Europe is thus absolutely dependent
on continued access to international financial markets; either
denial or substantial curtailment of Western credit to Eastern
Europe would cause serious economic dislocation and policy
difficulties with attendant political implications for
governments in the region.
Differentiation is thus a key factor in determination of our
credit policy toward Eastern Europe. No Eastern European
country is free to follow an independent course of economic
development without access to Western credits. The alternative
is lower productivity and slower economic growth as a result of
more autarchic economic policies and greater economic
dependence on the Soviet Union. Moreover, experience has
demonstrated that such economic dependence reinforces Soviet
political leverage.
U.S. experience with the policy of differentiation, including
relatively free access by Eastern European countries to Western
capital markets as well as the extension of U.S. direct credits
and credit guarantees (EXIM and CCC primarily), has produced
mixed economic results but substantial political and foreign
policy benefits. Western official and private bank credits,
more than any other factor, are responsible for enabling the
leadership of Eastern European countries to raise living
standards and adopt more flexible market-oriented economic
policies and management techniques as an alternative to rigid
Soviet-style economic centralism. Hungary is the best example
of evolution toward Western economic structures. In Poland,
however, economic structures were not adapted to the new
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technologies being purchased from the West. The result has
been a gross misallocation of investment resources,
overdependence on Western food and industrial imports and a
hard currency debt accumulation which Poland-could not now
service even with the debt rescheduling and continued flows of
new credits from the West. Poland, as a major debtor, now
enjoys a reverse leverage over the West. Romania, with debt
servicing problems of its own, presents the West with a
similar, though far more manageable, problem.
Eastern European debt problems notwithstanding, a consistently
applied policy of differentiation in credit policies toward
Eastern Europe can still maximize our economic leverage on
governments in the regions, provided greater attention is paid
to the borrowing country's economic policies and overall
creditworthiness. The large European role in lending to
Eastern Europe limits the effectiveness of a unilateral credits
policy. Consequently, allied cooperation should be sought for
a differentiated credit policy toward Eastern Europe.
A more prudent policy would be complemented and strengthened by
IMF requirements for economic data and conditionality on Fund
programs for Eastern European members. The U.S. should
therefore reaffirm its policy of supporting the membership in
the IMF of any country which accepts the obligations of
membership, since it would reinforce longstanding U.S. policy
of resisting politicization of the Fund and strengthening the
hand of those officials in Eastern Europe who advocate economic
reforms.
Because Western lending to Eastern European countries includes
both official (government-backed) and private commercial bank
lending, a differentiation policy on credits must take both
phenomena into account along with their relative importance in
East-West trade financing. The terms of reference approved by
the President for the Buckley mission directed us to seek
restrictions on credits and guarantees to the Soviet Union only.
Official Lending. Official direct and guaranteed lending
accounts for a widely divergent share of U.S. exposure in
individual CEMA countries: 60% in Poland but a relatively small
share for the other Warsaw Pact countries eligible for official
U.S. credits. However, the share of government-backed credit
in total lending to Eastern Europe could grow substantially in
the next few years if the cutback in private bank lending
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continues. Although commercial and creditworthiness
considerations have played the main role in government lending
decisions, political factors have also been important. This
political influence in decisions to lend to Eastern Europe is
probably inevitable.
That should not mean, however, that a thorough and objective
creditworthiness evaluation should not continue to be a key
criteria for official lending decisions. What it does mean is
that within the framework of economic criteria, foreign policy
factors may play a significant role in deciding whether or not
credits are to be extended to a specific East European country.
Interest rates, terms, and conditions of official and
government guaranteed loans should be set in accordance with -
prevailing market conditions. As a matter of principal, there
should be minimum subsidization of interest rates.
Multilateral agreements (e.g. the OECD Credit Arrangement) is
necessary to ensure the efficacy of these conditions and
prevent any country from gaining commercial advantage by the
circumvention.
Commercial Bank Lending. It is USG policy that lending
decision of commercial banks should be made by the banks
themselves without government intervention: the banks have the
expertise best to make this judgment, and they bear full
responsibility for their actions. Extension of credit to
individual countries involves a host of considerations
extending beyond the evaluation of transfer risk that only the
banks are in a position to assess. Further, bank officers and
directors have a legal and moral responsibility to their
stockholders and depositors for the funds placed in their
trust. All of these arguments militate against the U.S.
Government attempting to influence directly the flow of credit.
However, the USG differentiation policy toward Eastern Europe
and USG-Soviet relations in general establish the climate in
which private sector lending takes place. The former more
favorable official policy climate fostered private bank
lending, for example, and current strains in US-Soviet
relations are producing the reverse effect. The USG,
therefore, has a responsibility to enunciate clearly to the
private sector its differentiation policy as it applies to
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specific countries and be prepared to back up explanations with
jawboning and the use of official credits and credit guarantees
if necessary and appropriate.
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C. IMF MEMBERSHIP
The traditional approach by the United States to membership in
the IMF has been to support widespread participation in the
institution, so long as applicants for membership are prepared
to undertake the obligations of membership. This approach
reflects the following considerations:
-- Widespread participation strengthens the IMF's ability to
promote the open, stable international financial and
economic system essential to the achievement of U.S.
domestic economic and foreign policy objectives.
-- The basic IMF approach to economic issues is supportive
of Western economic philosophies and practices.
Consequently, widespread membership encourages adoption
of economic policies compatible with the open, market-
oriented systems of the Western industrial nations.
-- The membership of the IMF includes a wide diversity of
countries. A general approach to membership which
focused on political "suitability" as a guiding criteria
could lead to politicization of other IMF activities --
for example, decisions on financing -- which could
undermine the Fund's.ability to promote sound economic
policies and members' willingness to meet their IMF
obligations.
Similar considerations underlie the approach of the other major
countries to IMF membership questions. Decisions on membership
require a simple majority vote (weighted), and the U.S., with
roughly 20 percent of the voting power, would need to obtain the
support of a number of countries on a continuing basis to
implement successfully a general policy of political selectivity
on membership questions. It would probably be extremely
difficult to obtain such support and could be costly in terms of
other U.S. objectives.
Nevertheless, basic membership questions inherently involve
political judgments and questions that do not normally arise in
the course of applying the institution's rules uniformly to
countries that have already been accepted into membership. The
U.S. does consider each request for membership on a case-by-case
basis and decides such requests on the basis of a careful review
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of all factors. There may be specific cases in which U.S.
interests in other areas will outweigh the general factors noted
above, and the United States should continue to review each
application for membership on an individual basis in light of
all U.S. interests and the circumstances of each case, including
the attitudes of other major IMF members.
In this regard, the U.S. recently supported the IMF Executive
Board's recommendation to governors that Hungary's application
be approved. At this point, Poland's application appears to be
on hold and there are no other Eastern European countries likely
to apply for membership in the foreseeable future. Thus, in
practice, there is little likelihood that we will have to make
any decisions anytime soon regarding IMF membership as an
instrument of differentiation.
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D. CONCESSIONAL SALES OF FOODSTUFFS
Issue. Whether to apply a policy of differentiation in
concessional sales of foodstuffs to the countries of Eastern
Europe, and whether such a policy could be implemented under
current U.S. law.
Discussion. The U.S. has been involved in providing
concessional food sales to Poland under PL-480 Title II since
1956 when Poland was determined to be a "friendly country"
under the terms of the Act by Secretary of State Dulles.
Between 1956 and 1974, about $520 million in such sales for
local currency were granted to Poland. Poland's eligibility
for PL-480 funding was reaffirmed by Secretary Haig in 1981
prior to granting $55 million in PL-480 Title I credits.
Finally, PL-480 Title II food grants to private relief agencies
for distribution in Poland are still underway, with $30 million
of such aid approved to date.
Current U.S. policy is to provide long-term concessional
credits under PL-480 Title I to finance the importation of U.S.
agricultural commodities by friendly developing countries. The
amount of such credits to a particular country, as well as the
terms of repayment (initial payment, interest rate, grace
period, term) reflect the recipient's needs and ability to
repay. The law requires that a minimum of 75 percent of Title
I commodities be allocated to countries with a per capita
income of not more than $730, in accordance with the IDA's
current poverty criterion. In view of the high per capita GNP
in the Eastern European countries, major programming in Eastern
Europe would require difficult policy choices on allocation of
limited resources to countries such as Morocco, Jamaica, Costa
Rica, Tunisia, Mauritius, Peru and the Dominican Republic.
Our policy of not providing food aid to wealthier countries has
helped us manage recipient country pressures for Title I in the
face of budget stringency, since worldwide demand for U.S.
concessional food sales far exceeds the available budget.
Current policy is not to engage in concessional food sales to
Eastern Europe or other countries with similar GNP levels, but
rather to offer U.S. agricultural exports on a cash basis,
supported by CCC credit guarantees as appropriate. Such sales
would discriminate against other countries of similar GNP
levels which do not receive Title I at present (e.g., Portugal
and Korea) and would negate efforts to phase out other less
needy recipients.
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Section 103(d) and 103(j) of PL-480 limit PL-480 programming to
"friendly" countries. With the exception of Poland, the East
European countries have been considered to be outside the
definition of "friendly" as defined in PL-480, adding to the
reasons why such assistance has not been provided to them over
time. In the case of China, the decision was made to seek a
legislative amendment establishing eligibility. Congressional
consultations would be required to decide the appropriate way
to deal with this issue for the countries of Eastern Europe.
Congressional perceptions and the Executive Branch's assessment
of the human rights situation in each East European country may
require that serious consideration be given to including human
rights language in any PL-480 agreement, in accordance with
Section 112 of PL-480. This provision requires that either the
commodities themselves or the proceeds from their sale be used
for specific, agreed upon projects or programs which will
directly benefit the needy. Poland agreed to such provisions
in its Title I sales contract in 1981 but in general this
requirement is politically sensitive to PL-480 recipient
governments and may prove unacceptable to the East European
countries.
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E. DEBT RESCHEDULING
The policy of the U.S. has been to extend debt relief only when
it can be justified financially. While political or security
objectives may influence our eagerness to provide relief and
the terms we are willing to accept, our action must be
defensible on financial grounds.
Our traditional approach to rescheduling has been largely
reactive in that we decide to reschedule (generally in the
multilateral context of the Paris Club) following a formal
request by the country concerned and a USG determination that
the country is in 'imminent default' (i.e. it will not have
sufficient foreign exchange to meet its external debt servicing
obligations and, therefore, rescheduling offers the only hope
of being repaid). We also generally insist on IMF approval of
the country's economic adjustment program before negotiating a
debt relief agreement; the purpose of this condition is to
ensure that our debt relief is not wasted. In sum, the USG and
other governments have almost always based rescheduling
decisions on financial criteria.
As is the case with most other issues in East-West-economic
relations, political factors have been, and will inevitably
continue to be, given a far greater weight in U.S. decision-
making on rescheduling of the debts of the Eastern European
countries.
In the case of Poland, our position has changed radically in
reaction to political developments there, reflecting a shift
from the positive to the negative aspects of our differentiation
policy. Poland's external debt is a massive $26 billion.
Official creditors rescheduled $2.3 billion in debt service
payments due in 1981 and provided Poland with substantial new
credits. Our decision to join in the rescheduling was based
primarily on economic factors; the terms of the rescheduling
plus the successive decisions to provide credits were
determined in connection with political objectives reflecting
our differentiation policy. Our objective was to weaken a
major pillar of the Warsaw Pact by: (1) helping to insure that
the nascent liberalization process did not founder on the
shoals of economic disruption; and (2) encouraging the
establishment of a more Western-oriented economic structure in
Poland through the implementation of far-reaching economic
reforms. In pursuit of the latter objective, the Western
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governments kept Poland on a short economic leash, agreeing to
reschedule Polish debt at only six-month intervals and
conditioning sucessive rescheduling agreements on the
implementation of the economic reform program which the
Government of Poland was to implement in January 1982.
With the imposition of martial law in December 1981, the NATO
Alliance agreed to suspend discussions on rescheduling of
Poland's 1982 debt pending: (1) lifting of martial law; (2) the
release of political prisoners; and (3) the restoration of a
meaningful dislogue between the government, the Church and
Solidarity. The continued refusal to reschedule will increase
the risk of a Polish default and will drive Poland closer to
the Soviet Union. However, it is not clear that dropping the
three conditions and agreeing to reschedule would lead to a
favorable evolution of the Polish political situation. By
itself rescheduling would appear to be a weak political
instrument viewed in a narrow perspective of the Polish
situation, but its utility as a part of a broader strategy
should be explored. The most we might have expected would have
been Polish adoption of economic reforms in response to our
conditions for rescheduling.
Regarding the other countries of Eastern Europe, if differen-
tiation were the sole or overriding criterion, we would be more
receptive to requests for rescheduling assistance from Hungary
and Romania in solving their debt problems, and negative toward
the GDR. (Czechoslovakia and Bulgaria are in reasonably healthy
financial positions and are not likely to require such
assistance in the foreseeable future.)
The weakening of the Warsaw Pact, the paramount goal we are
pursuing through differentiation is, and will inevitably
continue to be, an important factor in deciding what position
to take on a rescheduling or other request for financial
assistance from an Eastern European country. Other priority
U.S. economic and political objectives, some of which may
conflict with those of our differentiation policy, also will be
weighed. The question is in each case what are the relative
weights to be assigned to each in arriving at a final position.
Our position that it is premature to consider rescheduling
Romania's debt clearly illustrates these points. While at about
$10.7 billion, Romania's external debt is far smaller than
Poland's, Romania experienced severe liquidity problems in
recent months, building over $1.0 billion in arrears to private
creditors. Responding to informal soundings by the GOR on an
official rescheduling, all official creditors, with the
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exception of the U.S., have agreed to proceed. (The GOR has
recently formalized the request.) The U.S. has indicated that
it would be premature to make a decision on an official
rescheduling until the IMF Executive Board has approved of a
new lending program for Romania. In effect, we have followed
our normal practice of conditioning our participation in
rescheduling Romania's debt on the GOR's getting its economic
house in order.
There are arguments for and against our agreeing to proceed
with a Paris Club rescheduling of Romania. One argument in
favor is that the financial considerations involved would
increase the chances of being repaid. Indications are that
banks will not reschedule in the absence of an official
rescheduling. Moreover, the IMF staff will not send its now
approved lending program to the Executive Board unless they are
certain that Romania's official and private debt will be
rescheduled.
There are political reasons for rescheduling Romania's debt. A
decision not to reschedule could be viewed by the GOR as a
political decision calculated to downgrade sharply the
bilateral relationship, and would drive Romania toward a much
closer economic, and therefore political, relationship with the
USSR. Therefore, a rescheduling would help the GOR to maintain
a relatively independent foreign policy and its quasi
arms-length relationship with the Warsaw Pact. Thus a decision
to reschedule Romanian debt while continuing to hold back on
Poland would constitute a powerful statement on
differentiation. It would also help lift the veil of political
uncertainty which is adversely affecting the implementing of a
policy of differentiation.
There are also political and potential economic costs to
rescheduling. However, the degree of cooperation we receive
from the Europeans on other important aspects of East-West
financial relations (e.g., restricting credits to the USSR) may
help reduce the political costs and thus increase our
flexibility. On the economic side, an argument against
rescheduling is that there is a potential danger that the
rescheduling will enable Romania to obtain credit from the IMF
and possibly from the private sector, which could be diverted
to the USSR, which is also experiencing a financial squeeze.
Given Romania's financial pinch and its political/economic
relations with the Soviet Union, such diversion is unlikely,
but it cannot be ruled out.
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We should be aware that moving slowly on the Romanian
rescheduling while we weigh other political/economic
considerations carries risks. For example, the credit/USSR
process may play out slowly and still not bear fruit. But we
will have to make decisions relatively soon on rescheduling.
Thus, through inaction we may sacrifice differentiation and
receive nothing in return.
(0859A)
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F. TECHNOLOGY TRANSFER
History:
In the past, despite the stated policy of differentiating
in relations with Eastern Europe, there has been little
significant reflection of this policy in the administration of
security export controls towards individual East European
-countries. Until January 1980, the United States controlled
exports of strategic goods and technology:
(a) to Albania, Bulgaria, Czechoslovakia, and the GDR on
substanially the same basis as to the USSR;
(b) to Hungary and Poland on the basis of a largely
cosmetic favorable differentiation in controls; and
(c) to Romania on only a marginally more liberal basis,
even though overall US policy was markedly more
favorable in recognition of Romania's relatively
independent foreign policy
The March 1980 "no exceptions" policy on exports to the
USSR and December 30, 1981 suspension of all licensing of
controlled exports to the USSR did not apply to other Warsaw
Pact countries. On the other hand, the March 1982 suspension
of licensing of exports to Poland removed security export
differentiation between the USSR and Poland. Moreover,
differentiation has also been reduced significantly in practice
during the past two years by denial of US cases and US
objections in COCOM to types of cases for the other Eastern
European Warsaw Pact countries which had been previously
approved.
In 1957 COCOM agreed to a special Polish procedure which
was supposed to permit more liberal treatment of exceptions
cases for that country, but there has been little substantive
effect from that procedure. In 1967 and 1978 COCOM agreed
de facto with the substance of US proposals for more liberal
treatment of Romania. However, France opposed recording such
an agreement in a COCOM document and US actions on COCOM
Romanian cases have been virtually as restrictive as for other
Eastern European countries.
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Objectives of Differentiation
Differentiation in the application of export controls is
one of the few options available for giving tangible,
continuing substance to such overall differential policy as may
be politically justified: for example, (1) encouragement of
Eastern European regional differences from the USSR and (2)
support for (a) Romania's increasing independence of the Soviet
Union in both foreign policy and military activities and (b)
Hungary's domestic economic liberalization and increasing ties
to the West. The arguments for a clear differential policy in
technology transfer are the same ones as those for a general
differential policy. They include encouraging more independent
policies within Eastern Europe, building up the economic base
of certain countries in order to lessen the dependence on the
USSR, and encouraging 'quasi-capitalistic" experiments (joint
ventures, Western equity positions, etc). The arguments
against a differential policy vary from intentionally pushing
weak economies towards the USSR to increase the Soviet economic
problems (umbrella theory) to the unadvisability of increasing
the Warsaw Pact's military growth and industrial capabilities
through transfers of military-related high technology.
Limits of 'Differentiation
Differentiation on export controls to Eastern Europe risks
diversion of equipment and technology both to the USSR and to
military activities in the individual Eastern European
countries. The most effective safeguard against diversion is
to limit technology transfers to an acceptable strategic
level. This risk is particularly serious with regard to
transfer of technology which is often difficult to protect in
the best of circumstances. This coupled with the strong
evidence of cooperative efforts of the intelligence services of
the Soviet Union and several Eastern European countries argues
strongly against the inclusion of significant military relevant
technology transfer in the application of any export control
differentiation policy. On the other hand, there has been
little evidence in recent years suggesting diversion to the
USSR of embargoed equipment purchased legally by East European
countries, but this could be partly attributable to the modest
scope of differentiation in the administration of controls.
The risk of diversion to the USSR is lower from some countries,
e.g., Romania, than from others, e.g., the GDR. The risk of
diversion could be further reduced through cooperation from the
Eastern European governments concerned. For example, Hungarian
officials informally advised us that they would be prepared to
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provide information about production links with the USSR which
would allow us to evaluate that problem in individual cases.
We should proceed to test this offer.
We might also explore the possibility of-an agreement with
the Hungarian government concerning: (1) where feasible, Post
shipment verifications by US officials; (2) Hungarian
government controls on reexports of specified items unless
approved by the US; and (3) Hungarian assistance to the United
States in the investigation of alleged diversions. We could
also inquire whether other Eastern European governments would
enter into such undertakings in return for a more liberal
export licensing policy expressed in terms of specific items.
Differentiation requires COCOM recognition that approvals
for one country do not necessarily constitute precedents for
approvals to other proscribed destinations: This has been
achieved as a general principle by a 1978 amendment to the
exceptions procedures which permits taking international
political factors into consideration.
Extent of Differentiation
One of the criticisms of our export control system has been
the lack of clarity and predictability. Previous
administrations have articulated a differential policy based on
a Presidential Directive but specific examples of a
preferential treatment practice despite this, are hard to
document. The export license processing bureaucracy has tended
to view Eastern European countries primarily in light of their
Warsaw Pact affiliation. Any policy which intends a more
substantial differential must therefore be articulated clearly
in technical terms.
History shows that, without an understanding of what is to
be approved to one country and not to another, a differential
policy is largely devoid of substance. One possibility could
be a series of Eastern European notes similar to the "two
times' formula Notes which now apply to China.
License applications should not automatically be denied to
end-users in Eastern Europe that may somehow be engaged in both
military and civilian production. The criteria used in
individual cases should be whether the specific proposed export
could contribute significantly to enhancing military production
and whether there is a likelihood that a diversion to such
activity might occur.
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At the COCOM High Level Meeting the member governments
agreed that in considering embargo coverage of "critical
military technologies' the Committee would take 'particular
account of information available on the priority defense
industries in the Warsaw Pact countries." It is appropriate,
therefore, that case review for Eastern Europe involve a
consideration of the potential impact of proposed exports on
those defense priority industries.
To help clarify USG policy, there is a need for clear
policy guidelines.
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G. COMMERCIAL POLICY AS AN INSTRUMENT OF DIFFERENTIATION
The United States has employed a number of commercial policy
instruments to influence the development of bilateral trade
relations with the non-Soviet Warsaw Pact countries. Relations
with Romania, Hungary, and Poland (until the imposition of
martial law) were broadened significantly by application of
these instruments, thereby reinforcing MFN and other actions
(e.g., credit extension) associated with differentiation.
Similarly, we have used some of these techniques with Bulgaria,
Czechoslovakia and the GDR, countries not receiving MFN, to
achieve a more modest expansion of commercial relations.
Bilateral Agreements. In addition to having concluded trade
agreements providing for reciprocal MFN treatment with Hungary
and Romania, the United States has entered into numerous other
bilateral agreements with CMEA countries. These include
agreements on: long-term cooperation (Romania); double taxation
avoidance (Romania, Hungary, and Poland); maritime transport
(Romania and Bulgaria); textiles (Romania and Poland);
fisheries (Romania, Bulgaria, Poland and the GDR); science and
technology cooperation (Bulgaria, Hungary, and Poland); and
civil aviation (Poland, Romania, Czechoslovakia and Hungary).
In addition, the Department of Agriculture has negotiated
agricultural trade and cooperation agreements with Poland,
Romania, Bulgaria and Hungary. There are preliminary signs of
GDR interest in an agreement.
Our willingness to sign these agreements was based not only on
our desire to improve our relations with these countries, but
also to serve particular U.S. interests, such as the growth of
industrial cooperation and investment activities in Romania,
Hungary, and Poland, which led to the double taxation avoidance
treaties.
The implementation of these agreements provides opportunities
to reinforce our differentiation policies. Both our textile
and fisheries agreements contain quota levels for certain
textile and fish catch categories respectively, which are
adjusted annually and which can be used in support of our
interests. For example, following the imposition of martial
law in Poland, we suspended Polish fishing rights in U.S.
waters.
By renewing individual agreements we can demonstrate our
continuing interest in differentiation or, conversely, withdraw
our support in selected areas. New economic or commercial
agreements might be used to implement our policies toward
individual East European countries.
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Economic and Commercial Commissions. The United States has
established joint trade commissions with three Eastern European
countries (Poland, Romania and Hungary) to guide trade
relations through a governmental framework, to review trade
issues and to seek resolution of economic and commercial
problems. The scheduling of commission meetings and frequency
of commission activities between sessions allow us to modulate
our differentiation policy. Commission meetings themselves
provide a forum to press our views on Polish, Romanian and
Hungarian policies and practices.
Trade and Economic Councils. In addition to the three joint
govermental commissions, private trade and economic councils
have been established by the United States with each of the six
East European countries. The councils have varied greatly in
their degree of activity, usually in proportion to the amount
of bilateral trade or level of bilateral relations. USG
support for and participation in the council meetings usually
reflects the degree to which we differentiate that country from
others in Eastern Europe, greater support being given to the
Romanian and Hungarian Councils, and in the'past to the Polish
Council.
Trade Promotion. The Department of Commerce sponsors official
American participation in annual exhibitions in every Eastern
European CMEA country. In 1981, U.S. company off-the-floor
sales at these events totalled $10 million. Other official
trade promotion events in the past few years have included
technical sales seminars and video catalog exhibitions on
specific industrial themes. Trade promotion events have been
used as an instrument of differentiation. We have expanded
participation in East European trade fairs and increased the
number of our own seminars and shows to demonstrate our
interest in developing relations. We also have facilitated
East European trade missions to the United States. On the
other hand, we have withdrawn our support for such events and
programs, as has been done in Poland and the USSR, in response
to political actions of which we strongly disapprove.
The USG has operated overseas trade promotion facilities in
Warsaw, Budapest and Prague, which have enabled U.S. companies
to market successfuly their products. To the extent we find
expanded trade relations helpful, they could be increased.
East European Offices in the United States. To date, 15
offices outside Washington have been authorized for East
European official commercial and banking representations, as
well as tourist promotion. The authorization for such offices
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and their operating conditions can be used to support
differentiation objectives.
CONCLUSION
-- We should continue to use bilateral agreements,
economic commissions, trade and economic councils, trade
promotion and the establishment of East European offices in the
U.S. as instruments of differentiation.
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H. Cultural and Scholarly Exchanges and
Information Policies
The activities of the U. S. International Communication
Agency in East Europe fall into five categories: international
broadcasting (VOA), the operation of libraries and cultural
centers, programs of academic exchange and specialist visits,
information distribution including magazine publication and the
programming of speakers, and cultural exchange programs such as
exhibits and performing arts. With the exception of broadcast-
ing, these activities take place both within formal bilateral
agreements and negotiated bienniel programs of exchange
(Hungary, Romania and Bulgaria) and without such formal
instruments (GDR, Czechoslovakia, and Poland). Taken together,
ICA's program is a major effort in public diplomacy to communi-
cate U.S. policies and American ideas and perceptions by
providing "a window on America" for the people of the closed
societies of East Europe.
Excepting the Voice of America, which broadcasts "over the
heads' of governments directly to its listeners,.ICA activities
in Eastern Europe are the beneficiaries of positive differenti-
ation, expanding to a position of greater access to publics
where the U.S. relationship is perceived as positive, and
operating to a more limited extent where the U.S. relationship
is seen as less positive. Since ICA's public diplomacy effort
in East Europe is directed toward people and not governments,
it exists with the sufferance of authorities who display toward
it degrees of hostility, tolerance and cooperation reflecting
the leadership's perception of the U.S. relationship. The
breadth of USICA activities provides our officers with
extraordinary access to East European societies. An active
program, and the opportunities for personal contact with
intellectual elites and larger publics which it represents,
provides a unique opening for U.S. policy. Differentiated
relationships are, then critical to the ability of USICA to
wage actively the battle of ideas on behalf of the national
interest 'on-the-ground' in communist East Europe.
USICA activities in East Europe, are designed to serve the U.S.
national interest. They represent "instruments for implementing
differentiation' only to a limited extent. ICA's academic
exchange programs, for example, enhance U.S. security by: a)
providing insights into work underway at East European academic
research institutes; b) developing a "successor generation"
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cadre of American specialists fluent with East European
history, languages and policies; c) forming continuing contacts
between American and East European intellectual and scholarly
peers; and d) establishing links between academic institutions
as an alternative for East Europeans to closer Soviet bonds.
USICA programs such as exhibits, performing arts, speakers,
magazine and policy information distribution, as well as our
operation of libraries and cultural centers provide the U.S.
with the opportunity to communicate directly with East European
publics on behalf of democratic ideas, free enterprise, and
Administration policy. In this sense, these activities cannot
be described with complete accuracy as "carrots" with which to
reward acceptable behavior nor as aspects of a relationship
which would, by withdrawal, meaningfully penalize hostile
governments. The U.S. security gain which derives from a full,
direct and active encounter between American ideas, views, and
accomplishments and the people of East Europe far outweighs the
possible "punishment" which depriving East Europeans of these
programs would inflict on governments.
With academic exchange programs as a basis, however, the option
to conclude formal bilateral agreements of cultural exchange
with the governments of East Europe is an important tool with
which to differentiate between regimes which meet our criteria
and those which do not. Formal programs of exchange are often
sought by governments as further legitimization and as a
statement of their bilateral relationship with the U.S. Our
preference has been, and continues to be, to operate without
formal agreements, entering into them only as a statement of
policy when recommended by the Department of State and, in
addition, where we judge USICA activities to be limited
unacceptably without an agreement.
The Voice of America's East European language services reflect
VOA's world-wide mission: to broadcast, with truth and accuracy,
news and information about international events, about America,
as well as statements of U.S. foreign policy as articulated by
the President and his Administration on global issues.
The Voice of America can differentiate among its broadcasts to
the various countries of Eastern Europe by adjusting the
relative proportion of news, commentary and feature material,
or by increasing or decreasing the total hours of broadcasting
and frequencies used to reach a particular audience. This is
especially true in times of crisis.
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The policy content of VOA broadcasts closely mirrors the public
U.S. positions articulated by the President and his policy
spokesmen. VOA differentiates among the East European nations
in policy terms, therefore, only to the extent that the U.S.
government does likewise.
(0824A)
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I. SCIENTIFIC EXCHANGES
We have differentiated between the USSR and EE and among EE
countries in S&T relations on the. basis of (1) the value to the
US of scientific cooperation, (2) the political value to the US
of using S&T cooperation to encourage openings to the West, and
(3) the political and intelligence value of good access to
their S&T establishments, which often are important elements in
those societies and whose members are becoming increasingly
important as political leaders.
The USG S&T program provides a number of means to support the
policy of differentiation toward the USSR and EE. The form of
the relationship ranges from individual memoranda of
understanding between interested agencies, through the
inclusion of an S&T component in a general exchanges or
cultural agreement, to a government-to-government level S&T
agreement. One factor in the choice of form is degree to which
we wish to show government approval for conducting this
activity with the particular country.
Other aspects of the mechanics of these programs give us the
means not only to differentiate among countries but also to
take timely actions to improve the balance of benefits to the
US. We can work to ensure reciprocity and mutual benefit by
controlling the number, duration, and itineraries of visits in
both directions. We can oversee the choice, number, and
content of projects and activities, and we can, if necessary,
postpone meetings whose purpose is to agree on work programs
for the coming year or two. All of these are controls that can
be exercised for political reasons, but such exercise of those
controls is not costless. To the extent that projects
represent research and other activities of benefit to the US
side, including USG agencies, it is harmful to slow them down.
To the extent that private institutions and scientists are
involved, we run some public relations risks in attempting to
control the flow of information and travel of scientists for
political purposes.
Finally, it should be noted that close government supervision
of these programs enables us to address questions of technology
transfer both early and on a regular basis in the exchanges.
The US intelligence community plays an important role in this
process. While some technology transferred to EE countries has
made its way to the Soviet Union, we have found no evidence
that sensitive technology has leaked through official USG
bilateral S&T programs.
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Until recently our most extensive and productive EE programs
were with Poland. After martial law was imposed in December
1981, we cut down the level of activity as a signal of our
displeasure: we suspended the process of approving a new S&T
agreement, allowed the 1974 Agreement to lapse, cut the travel
of American scientists down to the minimum necessary to keep
approved projects alive, and turned aside a Polish proposal to
hold a meeting of the Joint Board which oversees the program.
As we intended, the Poles understood these. actions to be
another manifestation of US displeasure over the course of
events in Poland. Cutting back official S&T cooperation was a
useful signal at low cost to the US.
Our S&T relations with Hungary and Romania go together with --
and reward -- their willingness to distance themselves from
some aspects of Soviet policies. To a lesser extent some
increase in S&T cooperation with Bulgaria has come about
because of a slight thaw in relations as perceived by the
Embassy in Sofia. In a number of fields the cooperation has
produced useful scientific data and analyses, but the primary
justification for the programs is political. (Under these
circumstances it is difficult to avoid political overtones on
actions caused by budget reductions, such as a reduction in
levels of activity and the abolition of the Science Attache
position in Bucharest.) By the same intent, our S&T relations
with East Germany and Czechoslovakia are minimal and we, along
with ICA, have not acted to initiate negotiations toward
cultural and scientific exchange agreements with them.
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J. HIGH LEVEL VISITS, SHIP VISITS, CONSULTATIONS
Sending and receiving high-level visitors is one of the
clearest and most highly visible means available of indicating
the state of relations with other countries. It is
particularly useful with the East European regimes. Such
visits have played a key role in the development of U.S.
relations wih Romania, Hungary, and Poland before the
imposition of martial law, and they are an important tool in
achieving the broad aims of U.S. policy in the area. They
serve both as recognition of and encouragement to those regimes
which have shown the ability in their internal and external
policies to act independently of the Soviet Union.
Frank discussions with East European leaders, such as Hungary's
Kadar or Romania's Ceausescu, who are close enough to the USSR
to offer a unique view of the Soviet leadership's thinking yet
independent-minded enough to understand Western concerns, are
valuable for U.S. policy makers. These contacts can encourage
an understanding of the U.S. among these leaders and provide
opportunities to broaden contacts on a wide range of issues in
the political, economic and cultural fields. The Polish
Government's decision not to suppress Solidarity at its birth,
the development of the market-oriented New Economic Mechanism
in Hungary, and the independent foreign policy in Romania over
the past decade all received encouragement from Western leaders
at critical moments through high-level contacts. The
importance which East European leaders place on personal
contact with U.S. leaders has been demonstrated by the efforts
which East Germany, Czechoslovakia, and particularly Bulgaria
have made to bring about about such meetings between their
leaders and top American officials. The U.S. for its part is
awaiting evidence from these three regimes that they are able
and willing to detach themselves to a degree from their
extremely close identification with Soviet policies and to live
up more fully to their obligations under the Helsinki Act.
The U.S. Government has made limited use of visits by naval
vessels as a means of encouraging an independent attitude in
East Europe. They allow us to show the flag and demonstrate
that the U.S. has as much right in the Baltic and the Black
Seas as the Soviets. The only Warsaw Pact nation with
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sufficient independence and self-confidence to receive U.S.
Naval calls to date has been Romania. Calls at Romania's Black
Sea ports by the U.S. Navy have been an important symbol of
Romania's foreign policy independence, and it is to be hoped
that developments in other Pact countries will provide
opportunities to initiate similar programs elsewhere in the
region. We have also practiced differentiation in our dealings
with Warsaw Pact military representatives, both at their
embassies in Washington and in East Europe. In addition, high
level military visits also provide a useful vehicle for
indicating U.S. policy concerns when appopriate
In addition to sending and receiving high-level delegations and
port visits, the U.S. carries out regularly scheduled,
working-level political consultation with a number of countries
in the area. These non-protocolary visits are designed to
permit the frankest possible airing of views by the
participants. They are not freighted with political symbolism
of Presidential or Cabinet-level discussions and are one of the
principal means by which governments, such as Bulgaria, which
often exhibit a determinedly hazy understanding of U.S. policy,
can be given full exposure to U.S. position on a wide range of
issues. Working-level consultations may be used to work toward
high-level contacts when they are deemed desirable, or to put
the brakes on such initiatives when they are not.
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K. ACTIVITIES IN INTERNATIONAL FORA
The Eastern European countries vote with the Soviet Union and
serves as its faithful agents in UN bodies. We have assumed
that they have little choice in the positions they take and
that US diplomatic efforts to persuade some of them to take
positions independent of the Soviet Union would be futile. The
only possible exception to this rule is Romania, which has on
rare occasions taken different stands than the USSR on minor
resolutions on arms control and other insignificant matters in
the UN General Assembly. We have, in general, tried to avoid
statments in UN bodies that identify the Eastern European
countries as Soviet satellites. We avoid direct attacks on
them unless they attack the US.
We have moved on several fronts within the UN system to direct
attention within the UN system to the military crackdown in
Poland. In mid-December 1982, we urged the Secretary General,
the Director of the UN Human Rights Commission and the Director
General of the ILO to make appeals to the Polish authorities to
cease violations of human rights. Secretary General Waldheim
made such an appeal to Warsaw and "all others concerned to
exercise restraint," but he indicated that he regarded the
situation in Poland as a domestic matter. Waldheim's
successor, Perez de Cuellar, made somewhat stronger statements
of concern in January although he too characterizes the
situation as a domestic matter.
The ILO has responded vigorously to the martial law crackdown in
Poland. Director General Blanchard requested Polish authorities
to approve travel of an ILO fact-finding team. This was
refused, but Poland countered with a proposal to send represen-
tatives to explain the situation in Poland. On January 23
Secretary Haig sent a follow-up letter to Blanchard expressing
U.S. concern over the violation of worker rights in Poland.
The ILO Committee on Freedom of Association recommended that
Poland formally be called upon to accept a fact-finding
mission. This was adopted on March 5 by the ILO Governing
Body. The ILO requested information on reestablishing trade
unions, internment of Solidarity members, criminal charges
against strikers, and anti-union discrimination in employment.
It also requested an inquiry into worker deaths at the Wujek
Mine. Though they argued strenuously against the measure, the
Soviets in the end did not call for a vote. The situation in
Poland is on the agenda of the Governing Body in may and the
annual Conference in June. The Conference will also reconsider
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the Soviet Union's application of freedom of association, since
last year's routine consideration left some questions
unanswered. This year the USSR is further scheduled to report
on its complicance with the forced labor conventions. Non-
discrimination in employment in Czechoslovakia will also be
reconsidered. (While all Soviet Bloc countries can be faulted
on these conventions, the understanding has been that it is
more fruitful to examine selected country practices than to
criticize the Bloc as a whole.)
Pressure was also brought on Poland in the Human Rights
Commission. At U.S. instigation, and despite the best efforts
of the USSR, the 38th UNHRC adopted a resolution on March 10
which expressed its deep concern over the widespread violations
of human rights and fundamental freedoms in Poland. The
resolution affirmed the right of the Polish people to pursue
their political and economic development, free from outside
interference. It called for the end of measures restricting
human rights and fundamental freedoms, release of prisoners
detained without charge, and a review of sentences imposed
under martial law. The resolution also requested the Secretary
General to undertake a thorough study of the human rights
situation in Poland and present a comprehensive report to the
next annual session of the Commission.
Such action by the UNHRC itself demonstrates that we and the
community of nations can hold the Soviet Union and Eastern
Europe up to censure for failure to comply with international
obligations. The UNHRC action clearly treated Poland as a
sovereign and independent country; the resolution's emphasis on
freedom from all outside intrference certainly demonstrated
this.
The U.S. is prepared to join with our Allies in seeking
Security Council action if the USSR employed its own military
forces in Poland. We wold expect strong support for action
against the Soviets in this event, and although the Soviets
would cast a veto, this could set the stage for an Emergency
Special Session of the UN General Assembly for the purpose of
condemning Soviet aggression. We have not sought to convene
the Council in respose to the imposition of martial law by the
Polish government because of lack of support from friendly and
Allied members on the Council for this. There is general
concern that it might be difficult to present a compelling case
of a situation endangering international peace under the UN
Charter which would be necessary to justify the Council's
jurisdiction; also, we are concerned that even if we could
obtain the necessary nine procedural votes to inscribe Poland
on the UNSC agenda and hold a debate, the Soviets might be able
to block the nine vote majority needed to force a veto of any
substantive action by the Council, thus vindicating their
position.
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The threat of UN censure of overt Soviet aggression in Poland
would not alone deter a Soviet invasion, but knowledge that
action in the UN would further isolate it politically in
international bodies, as the invasion of Afghanistan did, is
one of many deterrent factors.
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L. RESTRICTIONS ON EASTERN EUROPEAN DIPLOMATIC
AND CONSULAR PERSONNEL
Historically, the United States has supported the maximum
allowable freedom for diplomats, both U.S. and foreign, in the
exercise of their duties. This principle has been embodied in
the Vienna Convention on Diplomatic Relations of 1961 to which
the U.S. is a signatory. Recent events in Iran strengthened
the U.S. commitment to protection of diplomatic privileges and
immunities.
The United States has also historically supported the
principle of diplomatic and consular reciprocity. We have
afforded other countries the same diplomatic privileges that
they have accorded our diplomatic and consular personnel.
Thus we have only limited the freedom of foreign diplomats
in this country in response to limitations placed on our
diplomats in a foreign country. This same principle has been
applied to the issuance of visas, both diplomatic and non-
diplomatic. We stand for the maximum possible freedom of
movement of people both between countries and within countries.
At this time no Eastern European country imposes travel
restrictions on American diplomatic and consular personnel.
There are, of course, certain military areas that are con-
sidered off limits, but otherwise travel in and through Poland,
East Germany, Czechoslovakia, Hungary, Romania and Bulgaria is
relatively unhindered. It is safe to say that if the U.S. were
to impose restrictions on diplomats from any of these countries
for whatever reason, they would quickly and effectively impose
similar restrictions on American diplomats.
The U.S. is at a disadvantage in enforcing travel restric-
tions on diplomats simply because we do not have internal
travel controls found in most Eastern European countries. We,
of course, have no desire to match the pervasive police influ-
ence found in these communist systems, but we cannot hope to be
as uniformly restrictive as they would be able to be.
Both on the grounds of principle and of practicality,
imposition of travel restrictions against Eastern European
diplomats in the United States would seem to be an unpromising
avenue. We should impose such restrictions only on the grounds
of reciprocity and even while doing so we should be seeking to
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return to normal travel freedom and should recognize that our
restrictions will not be as effectively enforced as those of
the opposing side.
The U.S. could impose restrictions on the number of Eastern
European diplomats accredited in the U.S. Doing so would
certainly lead to reciprocal action by the other side. Given
the much greater openness of our society, and the more
important role our diplomatic personnel play in gathering
information on developments in these countries, such actions
would have to be very carefully evaluated to ensure that they
did not hurt us more than the other side.
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V. ALLIED COOPERATION
The relaxation of East-West tensions during the last
decade, symbolized by the Quadripartite Agreement on Berlin,
the CSCE accords and the SALT talks, psychologically reinforced
West European inhibitions about confrontation with the USSR.
Even though their apprehensions about Soviet intentions appear
to be increasing, the Europeans seek to avoid a return to the
rigid bipolarism of the 1950s.
U.S. Differentiation. Turning to the specific issue of
differentiation, a fundamental point of departure is the
distinction between the Soviet Union and Eastern Europe and,
indeed, among the countries of Eastern Europe themselves. In
relations with the Warsaw Pact countries of Eastern Europe, we
have sought to encourage evolutionary change toward greater
diversity and national independence. We have done so from the
conviction that this approach will serve best our interest in
peace and stability in Europe, reflect our concern for the
peoples of Eastern Europe and support trade and other forms of'
economic cooperation there.. We have differentiated among these
countries to the degree that they pursue independent foreign
policies and/or more liberal domestic policies.
European Differentiation. Our European Allies also support the
proposition that a peaceful Eastern Europe, which is engaged in
constructive interaction with the rest of Europe, can be a
force for stability. They have strengthened bilateral
relations, particularly in the economic, cultural and social
fields, with the Eastern European countries in the belief that
this could contribute to securing cooperation rather than
confrontation in Europe. They generally have been ahead of us
in differentiating among the various countries of Eastern
Europe during much of the post-World War II period. However,
our European Allies understand that the concept of
differentiation has two discrete, if related, aspects. They
have supported differentiation as a means of influencing change
and encouraging acceptable behavior in Eastern Europe. They
are less inclined toward differentiation as a vehicle for
anti-Soviet activities likely to increase East-West tensions.
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Allied Response to U.S. Policy. We can reasonably expect then
that the Allies would be inclined- to support us on
differentiation toward Eastern Europe if they perceive this as
directed primarily at the Eastern Europeans and not as
surrogate anti-Soviet activity. On the other hand, we can
expect difficulties with the Allies if we choose not to follow
a policy of differentiation. Based on past experience, the
Allies will not be eager to treat Eastern Europe as an
undifferentiated whole. Given the way the Allies tend to react
to actions they perceive as increasing East-West tensions, it
would be difficult for NATO to adopt and nearly impossible to
enforce a policy of non-differentiation. Indeed, U.S. attempts
to do so would exacerbate relations with our Allies.
European Economic Relations. It is also essential that West
European economic relations with Warsaw Pact states are
significant for these nations global trade, of crucial
importance in some West European industries, and existed before
the advent of communism in Eastern Europe. Well over forty
percent of this trade of our European NATO Allies is with
Eastern Europe, with the balance being with the Soviet Union.
In consequence, any policy which would treat West European
economic relations with Eastern Europe less favorably, in order
to achieve a par with existing treatment of the Soviet Union,
would collide with our Allies' national economic objectives.
Influencing the Allies. With regard to the instrumentalities
of differentiation, Allied response to recent U.S. efforts on
Poland demonstrated that the Allies can be brought along to
support our policies. Careful planning and preparation,
including advance consultations with the major Allies;
appropriate consultations in various fora, including POLADS and
NAC in NATO and in OECD; evidence of high level U.S. interest;
realistic goals which take into account legitimate European
interests; some well-timed prodding; and recognition of
individual Allied actions in the direction of the unified
response we hope to achieve are all elements in the formula for
successful policy implementation.
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Importance of Consultations. The importance of continuous and
meaningful consultations cannot be overemphasized, particularly
when the U.S. plans policy initiatives that affect Allied
interests. Springing a major policy decision, even one such as
differentiation to which the Allies could be expected to be
basically sympathetic, without sufficient preparation and
notice is a virtual guarantee of resistence and resentment.
This does not mean that we will always gain uniform support for
our objectives nor will we necessarily wish to act in concert
with our Allies on all occasions in our own interests. It does
mean, however, that shared policy inputs and responsibilities,
including incorporating Allied values, beliefs and interests
into policy decisions, are prerequisites for strengthened
Allied cohesion and Allied cooperation on specific policies.
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A. POLAND
The decision by the USG in the late fifties and early sixties
to provide Poland with credits and generally more favorable
economic treatment than we accorded the Soviet Union, together
with the establishment of a number of cultural/scientific
exchange programs, which have been continued and expanded under
both Republican and Democratic Administrations, has had a major
impact on that country's development. In fact, it can be
argued that the special treatment given to Warsaw over the past
twenty-five years -- which has included three presidential
visits -- has had a major impact on reinforcing the somewhat
pluralistic nature of the Polish system (e.g., private
agriculture, the important role of the Church), while at the
same time encouraging those forces which led to the rise of
Solidarity and that country's brief, but vitally important
experiment with greater openness and democracy.
Since 1956, U.S. economic ties with Poland, including trade,
PL-480 funds and the granting of credits have expanded
dramatically. For example, U.S.-Polish trade turnover grew
from about $250 million in 1972 to over $1.2 billion at its
peak in 1979. The United States has provided Poland with over
$2 billion in Commodity Credit Corporation.(OOO) loans since
1962. Loans by the Export-Import Bank to finance U.S. exports
of manufactured goods to Poland amounted to over $250 million
since 1972. Most of the Export-Import Bank's lending was for
capital equipment which helped develop Poland's industrial
capacity in areas such as foods processing, chemicals,
metallurgy, and electronics.
Since 1956, The U.S. has provided Poland with a total of $520
million in PL-480 food assistance in the form of local currency
sales. Considerable sums of money have also been used for
agricultural technical assistance and education in Poland. One
result is the successful adoption by private farmers of modern
U.S. developed poultry raising techniques.
U.S.-Polish economic ties -- despite their limited nature when
compared with our Allies -- have provided the U.S. with
important advantages. To begin with, the U.S. is in a position
to block any chance for recovery of Poland's shattered economy
by maintaining our refusal either to reschedule Poland's debt
or to extend any new credit. These sanctions, together with
the NATO decision to deny additional government-to-government
credits to Poland until internationally recognized human rights
are restored, have significantly increased USG leverage
vis-a-vis the Warsaw government.
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The influx of U.S./Western technology has brought with it
increased personal contacts between Polish and Western
specialists and the need to train a significantly large part of
the Polish elite in Western managerial techniques. This
exposure increased the pragmatism and Western orientatin of key
segments of the Polish economic and industrial middle
management and led to growing tensions between it and the more
ideologically oriented party and government factions.
Disaffection with rigid Soviet style economic management is
widespread among key middle level technocratic and management
cadres and in some cases extends to the upper reaches of the
government and party. These groups are the core of the
national consensus that formed around Solidarity demanding
drastic economic reforms. The martial law regime has silenced
these individuals for now but most remain in positions of
authority since their regime must depend on them for the
nation's economic well-being over the long-term. Their
influence in the Polish heirarchy is likely to grow over time,
and with it pressure on the regime to install a more
market-oriented, decentralized economic system. It is strongly
in our interest to support and cultivate these groups which are
a natural constituancy for Western views as well as a thorn in
the party hardliners' side.
In the cultural sphere, the hundreds of U.S. cultural groups
which have traveled to that country have helped reinforce the
populace's pro-Western orientation. The same has been true of
RFE/VOA broadcasts, which are viewed by many Poles as crucial
sources of objective information, particularly in periods of
crisis. U.S. exchange programs have also had a major impact,
especially in the social sciences. For example, almost every
single well-known Polish sociologist has studied in the U.S.,
and the same is also true to a lesser degree of historians and
economists. Furthermore, most of Poland's journalistic elite
has traveled to the U.S. at one time or another. As a result,
Polish social scientists,. and Polish journalists have tended to
be significantly less ideological in their writings than is
true of most of their Warsaw Pact allies.
Our strong ties with Poland have also had an important
influence on Poland's human rights behavior. Poland's record
on emmigration has been relatively good, and Warsaw has been
unusually tolerant--by Pact standards--of dissent. In both
cases, Poland's actions have been influenced by our Embassy's
constant prodding and reminders that Polish behavior in these
areas will impact on our overall relations, especially in the
economic area.
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Finally, while the policy of differentiation cannot be said to
have led to the rise of Solidarity, it clearly played an
important role by allowing, through U.S. policy, the greatest
possible access to American thought and institutions.
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B. THE GERMAN DEMOCRATIC REPUBLIC
Relations with the GDR, to a greater extent than our
relations with most other Eastern European countries, are
deeply interwoven with specific strategic and political
interests of the United States in Europe. In most cases, the
more usual aspects of bilateral diplomatic and trade relations
are overshadowed by the important role played by the GDR in the
overall geopolitical situation in Central Europe. This situation
often limits what we can realistically expect to achieve
bilaterally with the GDR. At the same time, it heightens the
importance of expanding our understanding of the situation and
of developing additional possibilities for exerting influence
there.
-- A basic fact affecting the US-GDR relationship is that
as one of the four victorious powers from World War II, the
United States retains a share of ultimate responsibility for a
peace settlement in Central Europe. Continuation of these four
power rights and responsibilities for Berlin and Germany as a
whole" results in certain rights and practices of the United
States which daily violate the GDR's concept of its dignity and
sovereignty. The continual exercise of many Allied rights may
damage the pride of the East German leadership, which lays
claim to many of the same rights in its quest for power and
legitimacy. Maintenance of these rights and the practice
attached to them remains a primary American interest in Europe,
thus establishing clear limits to the development of our
relations with the GDR.
-- The most important operational imperative of these
rights is the existence of West Berlin and continued Western
responsibility for maintaining the freedom and viability of the
Western Sectors. Since we hold the Soviet Union responsible
for maintenance of these rights, we refuse to discuss Berlin
matters with the GDR, even though the problems which arise are
often of direct importance to East German interests and often
arise as a result of calculated GDR actions. Equally as galling
to the GDR is the fact that we refuse to recognize East Berlin
formally as the East German capital, and that we continue to
exercise special rights within East Berlin. Protection of our
rights in Berlin as a whole remains more important to us than
progress in bilateral relations with the GDR.
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-- Second in importance as far as American interests are
concerned are the unique geographic and national situation of
the GDR. As part of the former German Reich, the GDR occupies
one of the most strategic areas of Europe. Its common national
heritage with the Federal Republic provides a continuous source
of potential instability and infection from the West. Whatever
the state of "normal' US-GDR bilateral relations, we have an
overriding national security interest in knowing as much as
possible about the country and its leadership and in finding
means of exerting as much influence as possible over its
behavior. This basic interest will continue as long as the
geopolitical balance in Europe continues to revolve around
Germany and the "German question."
Our relations with the GDR must also take into account
to a unique degree the FRG's natural preeminence and vital
interest in matters East German. Inner-German relations are a
matter of extreme importance and sensitivity with all factions
in Bonn and throughout the FRG. Regardless of party affiliation,
it is an article of faith for the vast majority of West Germans
that the West should help lessen the division of Germany and
that the FRG must pursue improved relations with the GDR as a
means of lessening the hardships on fellow Germans behind the
Wall. For us, this means the maintenance of 'correct" relations
with the GDR, taking care to avoid getting either ahead or too
far behind the FRG.
This fact adds special importance to the West German
commitment to maintian opportunities for progress in political
relations with the GDR and Eastern Europe. Development of
these political relations and expansion of humanitarian
contacts with the GDR provide an outlet for German national
concerns which might otherwise be expressed in more dramatic
and destabilizing forms. It is thus in our interest to support
FRG efforts to improve ties with the GDR, and to stay in step
with Bonn in development of our own bilateral ties with the
East Germans.
The GDR was a creation of the Soviet Union and remains
almost totally dependent on the Soviet Union for its
independence and existence. Its location on the front lines
between NATO and the Warsaw Pact makes it a strategic asset
that the Soviet Union is never likely to risk losing. The
importance of the GDR to Stoviet strategy insures that the
Soviet Union will not tolerate any movement or development that
might alter the GDR's political and strategic role. Nor would
the East German regime want the Soviets to do so. Given this
mutually-reinforcing need for each other, the prospects for the
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United States being able to encourage liberalization and
greater independence internationally are limited. We should
also keep in mind that given the importance of the GDR for both
the USSR and the FRG, any sign of instability within the East
German political system could--have immediate, negative
consequences which could damage broader U.S. interests in both
East and West.
-- Finally, our leverage with the GDR is comparatively
limited. We want far more from the GDR in concrete terms than
the GDR wants -- or can expect to get -- from us. Aside from
the Berlin issue, the GDR's primary bilateral goal is winning
Most Favored Nation treatment for GDR exports in order to boost
sales, since bilateral trade runs about ten to one in our
favor. Unfortunately for the GDR, to get MFN treatment the GDR
must first satisfy the Jackson-Vanik amendment's requirements
on free emigration and settle over $78 million in U.S. claims,
as well as satisfying the private, international Jewish
material claims of $100 million. Though the GDR's treatment of
its few remaining Jews is good, its overall emigration policy
and the issue of unsettled claims present serious problems.
Emigration to the U.S. is not a great problem. About fifty
East Germans apply to emigrate to the U.S. every year and
almost all receive permission without inordinate delay.
Emigration to the Federal Republic is entirely another matter,
however, and the Jackson-Vanik amendment applies to emigration
worldwide. Since millions of East Germans want to travel to
West Germany where many of them would doubtless stay, the GDR
sees restricted emigration as a matter of national survival.
As for claims, it will be hard for the GDR to find the
means to settle. The GDR is short of manpower and almost
entirely dependent on imported raw materials and energy. This
mix has increased the pressure on the GDR to devote hard
currency to the purchase of imported raw materials and energy.
At the same time, the GDR must acquire Western high technology
and equipment to maintain industrial productivity in the face
of aging industrial plants and unexpandable manpower
productivity problems.
Though there is consequently little possibility of major
breakthroughs in bilateral relations, our policy of seeking
practical solutions to non-ideological issues has been
successful in a number of significant ways since relations were
established in 1974. The GDR has bought hundreds of millions
of dollars of U.S. grain each year and bilateral trade has run
over ten to one in our favor. A Consular Agreement guaranteeing
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access to detained U.S. nationals was signed in 1979, and the
GDR has fulfilled its conditions. The GDR agreed in 1979 to
expedite the resolution of divided family and fiancee cases, a
long-standing U.S. goal. The GDR's performance since then has
been generally good.
The GDR also agreed to renegotiate the costly short-term
leases we now have in East Berlin, provided the GDR could
relocate its chancery in Washington.
These positive developments are balanced by continuing
points of friction. GDR activities in the Third World,
generally in support of Soviet efforts, pose serious threats to
U.S. interests (Angola, Ethiopia, South Yemen, Central America).
It supported Soviet intervention in Afghanistan with lots of
words, some nonmilitary equipment, but no troops. It took a
hard line against Solidarity and strongly supported the
December 13, 1981 crackdown. It increased the amount of
Eastmarks each Western visitor must buy per day in an effort to
stem the flow of FRG visitors while maintaining the level of
hard currency receipts.
On balance, however, it would appear that the policy of
realistically tailoring our expectations and policy to what is
possible has been advantageous to the U.S.
(0828A)
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C. CZECHOSLOVAKIA
The Husak regime has a well-deserved reputation for harsh
repression of relatively modest internal dissent and rigid
adherence to Soviet foreign policy positions. After more than
a decade in power, the leadership remains insecure and lacks
significant domestic support. Perhaps to a greater extent than
any other regime in Eastern Europe, it has succeeded in
securing widespread political apathy through outright
concessions to the material wants of the population.
With Husak himself a one-time supporter of Dubcek and
victim of the Stalinist purges of the 1950s, there were early
Western hopes that under his leadership there might gradually
evolve a more liberal system, as occured in Hungary after 1956
under Kadar. These hopes have not been realized. The
leadership has made no serious attempt at broad accommodation
with those who supported the reform movement. It has declined
even to try to reintegrate most of the technocrats expelled
from positions after 1968, whose expertise the Czechoslovak
economy sorely needs. The regime's response to any manifes-
tation of dissent, particularly following the emergence of the
Charter 77 movement five years ago, has been swift and harsh.
Events in Poland over the past year have heightened the
regime's insecurity and its vigilance. The leadership's
handling of dissent, and its repressive image, have been an
occasional source of embarrassment to other East European
regimes and even to the Soviets in their dealings with the West.
The availability of the Czechoslovak government to maintain
domestic tranquility by ensuring a continued rise in the
standard of living is in question. The Czechoslovak economy,
once second only to that of East Germany in Eastern Europe, is
stagnating. There is a widespread feeling among the populace
that the standard of living has begun to deline. However,
given the relatively high standard of living Czechoslovaks
already enjoy -- and the still conscious experience of 1968 --
this popular perception does not now constitute a political
threat. Analyses of whether or when growing economic
discontent might become politically threatening are necessarily
speculative. The regime is sufficiently concerned about the
economic difficulties facing Czechoslovakia to have undertaken
modest steps to improve economic performance. It remains
doubtful, however, whether this extremely cautious, insecure
group of leaders could muster the political will to undertake
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the types of reform many believe may soon be necessary to stave
off major economic deterioration. Lack of serious reform could
lead to closer Czechoslovak integration with the Soviet Union
and other CMEA countries.
US-Czechoslovak political relations -- and trade -- have
been at a minimal level. U.S. influence in Prague, even on
issues not directly affecting Czechoslovak interests, has been
extremely limited. Recent resolution of the longstanding
claims/gold issue has not led to an improvement in the
substance or the atmosphere of the relationship (nor, given
events in Poland, did we anticipate it would.) Antipathy
toward the U.S., obsequiousness toward the Soviets, andinternal
repression do not reflect total unanimity of view among the
leadership. However, among leaders all of whom must constantly
bear in mind Soviet sensitivities, those whose fortunes are
most clearly tied to Moscow have had a relatively easy task
perpetuating US-Czechoslovak friction. Those potentially
inclined toward a more moderate internal or external course
have perceived too little incentive and too great a risk --
primarily to themselves -- to rock the boat.
Prague -- and Moscow -- fully appreciate that U.S.
differentiation places Czechoslovakia near the bottom of the
list. Moscow, at least, is content that it remain there.
While there may be little we can do to alter the regime's
political and economic dependence on Moscow, we should be
concerned, from a policy standpoint, with how most effectively
to increase the cost Moscow pays for Czechoslovak
subservience. Given the poor state of U.S.-Czechoslovak
relations, our mix of policy instruments with which to deal
with Prague is severely limited. The most important among them
will continue to be measures of "deprivation" (e.g., denial of
MFN). Other than strongly to discourage private U.S. lending,
there are few overtly "punitive" measures available.
(0774A)
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D. HUNGARY
Though consistently supportive of Soviet positions on major
security issues, Hungary presents a unique case of a Warsaw
Pact country which has gradually, and so far successfully,
modified its policies to the point where they reflect a ,
distinct shift toward increased ties with the West and its
monetary system.
U.S. Interests: The record shows that differentiation has been
a workable and positive policy in strengthening Hungary's
Western orientation.
Strategic Benefits to the U.S. Gained From Differentiation:
Hungary became part of the Soviet sphere against its will
following World War II. Since then, the USSR has maintained up
to 70,000 troops in the country to ensure its strategic
interests and to protect its forward military posture in the
area. The population remains fundamentally anti-Soviet and
nationalistic and despite various economic reforms instituted
by the Hungarian leadership over the past two decades, there
have been manifestations of dissidence, some of which have been
spawned by the events in Poland. Differentiation (trade with
the West on non-discriminatory terms, intellectual and
scientific contacts, etc.) has been a politically feasible way
for the Hungarian leadership to channel the population's
pro-Western sympathies and inclinations. For the Soviets,
however, the Westward pull on Hungarians complicates the job
of Soviet military planners.
Since the early 1970's, the Hungarian regime's emphasis on
housing construction and on production of consumer goods has
directly affected Hungary's defense posture. Between 1975-1980
Hungary spent the smallest proportionate amount of GNP on
defense among the Warsaw Pact countries except for Romania. In
1980 it spent the lowest amount. Since 1981 military service
has been reduced in order to alleviate the manpower shortage in
various sectors of the economy; conscripts may be released
after serving six months but must agree to fixed job terms or
to complete their military obligation. Despite Hungary's
professed fidelity to the Warsaw Pact, the USSR probably
continues to harbor distrust of the Hungarian military which,
to some extent, is not unmindful of the 1956 Soviet invasion of
Hungary.
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Economic Benefits to the U.S. Gained from Differentiation: The
Hungarian leadership's decision to shift away from the Soviet
model and to decentralize the economy began after 1965 and
sought to restructure Hungarian agriculture. Hungary's success
in agriculture is based on the reduction of central
administrative controls, the application of market forces in
setting prices, production and investment levels, and the
institution of economic profit incentives. These reforms could
not have been achieved without a conscious decision by the
country's political and technical leadership to use Western
equipment, non-strategic technology and know-how. Hundreds of
Hungarians learned their agriculture in Des Moines rather than
Minsk, and dairy, meat and poultry production is based on the
successful implementation of a Chicago firm's production
system.
The notable improvement in the Hungarian standard of living has
given Hungarians a greater stake in preserving and advancing
ties with the West. It adds to internal pressures for faster
liberalization and greater pluralism in the social as well as
economic sphere. The economic reforms are oriented in a
liberal direction. They have brought Hungary closer to Bonn,
London and Washington, not to Moscow, Warsaw or Prague. And,
because Hungary courts U.S. and Western business and finance,
Hungary is particularly sensitive to Western CSCE concerns.
Whether it is divided families, treatment of dissidents, travel
to the West, or access by Western journalists, Hungary presents
the best CSCE record of any Warsaw Pact country, with the
exception of Poland before December 13, 1981.
Our policy of treating Hungary differently from other East
European countries -- along with similar policies pursued over
the years by our NATO Allies -- has encouraged and facilitated
Hungary's drift away from economic dependence on the USSR and
CEMA. By establishing various forms of linkage, we made it
advantageous for them to reorient their economy (with attendant
social implications) toward trade with the West. This
transformation required familiarity and acceptance of U.S. and
Western thinking, concepts, technology. It required readiness
to open Hungary to more tourists, family visits, businessmen,
religious leaders and political and cultural exchanges, e.g.,
the first crusade in Eastern Europe by an American religious
leader (Billy Graham), the "America Now' and other exhibits
with mass impact, cooperation in narcotics control (a voluntary
decision to stop Hungarian production of methaqualone), and
improved consular relations.
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Hungary's economic advances have created economic and political
tensions within CEMA between the advocates of increased
liberalization and the proponents of more conservative
philosophies. Hungary's recent application for membership in
the International Monetary Fund showed another independent step
away from the Soviet economic grasp and toward a major Western
financial institution.
A perceived change in U.S. policy, adverse world economic
conditions and a drying up of Western credit sources in the
wake of Poland now imperil the success of Hungary's economic
reform program. So far, Kadar and other leading party
officials continue to voice strong public support not only for
the reforms but for their broader application. Clearly,
however, if Hungary reschedules its debt and suffers
perceptible reductions in its standard of living, it will cease
to glitter as a reform model anywhere in the East. In Hungary
and throughout the Warsaw Pact, anti-Western forces would be
comforted. And, at least in Hungary, the failure of a
fifteen-year economic reform program based on trade and
contacts with the West would have adverse long-term effects
that could only be contrary to U.S. interests.
(0578A)
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E. ROMANIA
The fundamental long term goals which the US has pursued in
Romania since President Nixon moved to revitalize relations in
the late 1960's have been to encourage and support Romania's
efforts to extract itself from the grip of the the Soviet Union,
which had thoroughly dominated it throughout the 1940's and
1950's, and to encourage a liberalization of its internal regime.
Our goals with respect to Romania are the antithesis of Soviet
objectives.
Under whatever name, our policy of cultivating Romania's
aspirations for greater freedom of action in the realm of foreign
affairs, has worked to erode Moscow's influence and has increased
our own. The process is complex, long-term, and marked with
occasional set-backs and frustrations.
In differentiating among the countries of Eastern Europe we have
looked to the degree of internal liberalization which has taken
place or manifestations of a country's independence in foreign
affairs.
Evidence of independence in Romania.'s foreign policy, whether in
economic, political military or 'straight' political realms, is
readily apparent. Our support of Romania's efforts to gain
greater freedom of movement within the confines of geography,
membership in the Warsaw Treaty Organization (WTO) and CEMA has
had, as stated, the two pronged aim of weakening Soviet influence
and increasing our own so that we can pursue our other interests
in political, stragegic, commercial, human rights, scientific and
other fields.
In our relations with Romania we have sought to act in concert
with our NATO Allies. They, like we, are attempting to encourage
Romania's relative independence through the expansion of
diplomatic, trade and other contacts.
To the extent that any medium sized state caught up in the
competition of two rival groups of states can act independently,
Romania does what it does in foreign affairs largely of its own
choosing. This naturally means that it will occasionally act
contrary to our interests or in taking a nuanced position on a
crucial East-West issue will seek to straddle the fence between
us and the Soviets (e.g. the military take over in Poland.)
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Owing in part to the support provided by the US and the West,
however, Romania has been able to pursue a foreign policy which
more than in the case of any other WTO nation has either
coincided with our own interests or has not coincided with those
of the Soviet Union and the rest of the WTO. For example Romania:
-- does not permit the stationing of WTO troops on its soil
and does not particpate in WTO military exercises except at the
staff level. Even then its level of participation is the lowest
of any WTO state (16 percent in recent years).
-- repeatedly stressed it would not participate in a Warsaw
Pact intervention in Poland were one to take place, just as it
refused to join in the 1968 WTO intervention in Czechoslovakia
(which Ceausescu publicly condemned at a mass rally in
Bucharest).
-- was the only WTO state to criticize the Soviet invasion
of Afghanistan and to call for Soviet withdrawal. It alone of
WTO states refused to vote against the UN resolution condemning
the Soviet invasion.
has consistently called for reduced military spending
both in public and private. In 1978 Ceausescu drew the public
ire of Brezhnev for his public statements to reduce military
spending instead of increasing WTO military budgets as requested
by the Soviets.
-- has sought, in an apparent effort to reduce dependence on
the WTO, to diversify its source of supply for some major
military components such as helicopters, transport and civil
aircraft and even fighter aircraft.
-- has sought closer ties with the West on a variety of
military related issues. It engages in regular exchanges with
the US National Defense University. It welcomes annual US Navy
fleet visits.
-- has taken a relatively even-handed position on the INF
issue, supporting President Reagan's call for a "zero base"
option, seeking to find common ground between the US and Soviet
positions and urging successful negotiations in Geneva.
Similarly Romania has consistently supported UN disarmament
resolutions (many of which the Soviets have opposed).
-- alone among WTO states maintains diplomatic relations
with all Middle Eastern countries; alone among WTO states
supported the Camp David agreements, indeed played an
instrumental role in bringing Sadat and Begin together.
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-- provided the link between Iran and Israel in the 1960's
and 70's when the supply of oil to Israel was crucial to its
survival. 4
-- refuses to recognize or even support the Soviet backed
Vietnamese regime in Phnom Penh.
-- maintains excellent relations with the People's Republic
of China (unlike other WTO states).
-- pushed at the original Helsinki Final Act negotiations
for Confidence Building Measures, in defiance of the Soviet
position; at Madrid, Romania's willingness to work with the West
resulted in its regular exclusion by WTO nations from their
caucuses on CSCE agenda items.
-- has made serious long-term efforts to increase
participation in the Western economic structure and decrease its
dependence on the Soviets and CEMA. It was the first WTO country
to join the IMF and World Bank, and it has qualified for the
GATT.
-- defied the Soviets and broke ranks with the other WTO and
CEMA states to negotiate separate trade agreements with the U.S.
(1974) and the EC (1980).
-- has diversified its trade and economic relations from a
point in the early 1950's when it was dependent on the Soviets
for nearly 90 percent of its trade to the point today where
nearly 60 percent of its trade is with the West and Third World
and less than 20 percent is with the Soviet Union.
-- has increased its level of two-way trade with the US from
approximately $350 million in 1974 to over $1 billion in both
1980 and 1981.
-- is the only Communist state to support the Western
position on the sharing of scientific data obtained from
satellites.
-- was the first WTO state to accept the presence of an
American Library open to the general public.
-- was the first WTO state to accept the terms of
Jackson-Vanik with the result that more Romanians are approved
for emigration to the United States per year than the United
States is willing to accept.
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-- since 1962 has resisted Soviet initiatives to establish
joint planning mechanisms and hasten integration within CEMA.
In sum, Romania is a country which, ever mindful of geography and
the current geo-political realities, has nonetheless, with the
support and encouragement of the West managed to assert a
remarkable degree of independence in its foreign policy.
The area in which we have experienced the least relative success
has been human rights (exclusive emigration.) This has been the
most difficult area to achieve success. Human rights involves
internal policies which are the most difficult to influence
directly and which the Romanians are least interested in
changing. Successes have been registered, however, as in the
cases of Ababai, Prejban, Dascalau, Teodosiu, Goma, Georgescu,
Crisan and Capusan, while limited success was achieved in the
cases of Cana, Brasoveanu and the four Bucharest Baptist
pastors. If some Romanian Christians are in jail for smuggling
several score thousand Bibles through Romania to the Soviet
Union, others, working quietly through legal channels with the
support of the Department have succeeded in bringing smaller
numbers into the country. Successes or failures in individual
cases neither prove or disprove the effectiveness of differ-
entiation with respect to resolving human rights cases in
Romania. Progress in this area will require fundamental
adjustments both in Romanian society and policy, and will take
time.
Recent statements and actions by the Romanian leadership indicate
the Romanians place significant stock in maintaining their
options in the West. In order to do this Romania has sometimes
found it necessary to act more in conformity with Western
interests. MFN requires annual review of Romania's emigration
and human rights policies and subjects it to constant pressure in
these areas. IMF and World Bank membership require Romania to
accept both the outside audit of its economic and financial
activities and the imposition of requirements for systemic in the
economic system.
The policy of differentiation with respect to Romania works in
part because in one important area our policies coincide and are
mutually supportive. Both of us wish to limit Soviet hegemony
over Romania. A Romania fully integrated in the Warsaw Pact and
firmly aligned with Moscow on all international issues would
strengthen Moscow's hand in the region (and for the immediate
future in the third world where Romania presently has extensive
contacts). The policy of differentiation may also, over the long
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run, serve our interests in that area where Romanian and US
interests do not coincide, the liberalization of,the internal
regime.
Our ability to have our voice heard and to make our influence
felt, however, depends on maintaining a constructive relationship
with Romania, and on Romania's being able to look to us as a
nation on which it can depend. Over the past decade to decade
and a half we have constructed a network of political,
commercial, cultural and scientific ties as a result of our
policy of differentiation. Now, when the issues are the hardest
between us, is the time to make use of that network.
(0766A)
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F. BULGARIA
Bulgaria is one of the Soviet Union's most reliable and stable
Warsaw Pact allies and its sole strong backer in the Balkans.
Sofia's economy, political system and foreign policy are
generally patterned after, dependent upon, and responsive to
Moscow's preferences. While there have recently been some
manifestations of Bulgarian nationalism, there is no indication
that Bulgaria will alter significantly its basic policy of
allegiance to the USSR. Some 75 percent of Bulgaria's trade is
with the Soviet Union and Eastern Europe, including the bulk of
its raw material and oil imports. The Zhivkov regime believes
that its acceptance of Soviet political tutelage and economic
largesse has helped it to ward off the political and economic
upheavals that have occurred elsewhere in Eastern Europe. The
Bulgarian population, which has shown little inclination for
dissent, appears to be satisfied with a modestly improving
standard of living and cowed by a regime which reacts
ruthlessly to the slightest indication of unrest.
Bulgaria's 70-year-old President and General Secretary, Todor
Zhivkov, has headed the Bulgarian Communist Party (BCP) since
1954 and is expected to remain in office for the foreseeable
future. Zhivkov has in recent years permitted some clear
manifestations of Bulgarian nationalism and allowed increased
contact with the West in some areas. The regime has also
instituted a program of limited economic reform, which would
allow individual enterprises greater leeway in decision making.
However, there is no indication of any appreciable, substantive
change in Bulgaria's internal or foreign policy.
Bulgaria remains a Soviet loyalist on all foreign policy
issues. Though its commentary on the Polish crisis was
initially restrained, it eventually joined in the hard-line
Pact chorus. Recently, via its proposals for a Balkan nuclear
free zone and a Balkan summit, Bulgaria has tried, obviously
with Moscow's blessing, to move the Balkans in an anti-NATO
direction. Its anti-U.S. propaganda is intense and constant,
notwithstanding the protestations of Bulgarian leaders who play
this down in private and stress their desire for broader ties
to the U.S. and the West. In the Third World, Sofia has
expanded its political activity and military aid, suggesting
the possibility that it could become a modest adjunct to the
Soviet-surrogate roles of Cuba and East Germany -- especially
in Africa and Central America.
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Bulgarian performance regarding the Helsinki Accord has been
spotty at best. The Bulgarian Government has been generally
unresponsive in areas of interest to the U.S. such as divided
families and family visitations. In addition, the Bulgarian
authorities have been uncooperative in efforts to halt the flow
of narcotics to the West from the Middle East through Bulgaria.
(0589A)
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APPENDIX: A. YUGOSLAVIA
This Administration has reaffirmed the U.S. policy of
support for the independence, territorial integrity and
national unity of Yugoslavia. This policy is rooted in an
awareness of the benefits to American interests from our
generous treatment of that country, and of the high political
and possibly military risks were it to be discontinued or even
reduced. We recognize the limits on our ability to influence
the Yugoslavs, and the undesirability of attempting to draw
them completely into the Western camp.
At the most basic level, Yugoslavia's loss to the Soviets
in 1948 was and is the West's gain. We would not want to risk
a reversal. Yugoslavia, by providing an example of an
independent socialist state which has successfully (so far)
made its own way between East and West, serves our long-term
interest in encouraging other Eastern European countries to
loosen the Soviet grip. In addition, we view a militarily
capable Yugoslavia as a key element in preventing Soviet
expansionism and hegemony in Southern Europe.
Beyond these important considerations, the U.S. has gained
in other ways from the existence of a nonaligned Yugoslavia.
Despite its reliance on Soviet oil, Yugoslavia has not
hesitated to attack the Soviet invasion of Afghanistan and the
Vietnamese takeover of Cambodia, nor to criticize interference
in Poland. Yugoslavia has been a stalwart opponent within the
nonaligned movement (NAM) of Cuban efforts to convert that
organization into a Soviet rubber stamp. While we differ on
many issues, Yugoslavia has been helpful to us in bilateral
consultations and, when consistent with Yugoslavia's own
position, has headed off or diluted international initiatives
(e.g., the Soviet terrorism resolution at the last UNGA)
unacceptable to us. On the bilateral level, American
businesses and banks have benefitted from their involvement
with Yugoslavia, and the U.S. continues to be the largest
foreign investor there.
Yugoslavia's third world economic and political ties would
not enable it to sustain its current relatively high prosperity
or freedom of maneuver vis-a-vis the USSR, without Western
economic and political support, and the availability of Western
military equipment. Should the Yugoslav economy collapse, not
only would Yugoslavia lose its appeal as an independent model,
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but it would suffer severe internal political strains and
probably be unable to continue an active role in the NAM. At
worst, events could lead to a return to the Soviet orbit. It
would certainly mean a much more repressive and suspicious
regime, and a leadership less inclined to be helpful to U.S.
concerns. Thus, any significant downgrading of our relationship
or failure to implement our commitments would damage U.S.
interests while weakening Yugoslavia's position.
(0827A)
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ALBANIA
Since its break with the Soviet Union in 1961 and with the
PRC in 1978, Albania has pursued a course independent of the
major powers. It has taken limited steps in recent years to
strengthen ties (primarily in trade) with various West European
and non-aligned countries. Internally, the Albanian Workers'
Party continues to control rigidly nearly all aspects of life
in accordance with the uncompromising Stalinist ideology of
First Secretary Enver Hoxha.
There is no hard corroborating evidence for the widespread
speculation that former PM Shehu's recent "suicide" resulted
from a leadership struggle, let alone that it resulted from a
struggle over the pace or direction of an Albanian "opening
up". Factionalism in the Party is also difficult to
substantiate. There is sufficient circumstantial evidence,
however, that we cannot discount the possibility of ongoing
jockeying for position in anticipation of Hoxha's eventual
demise.
Given its strategic location, Albania could significantly
affect security and stability in the Balkan-Adriatic-Eastern
Mediterranean area. The primary U.S./NATO interest in Albania
continues to be to prevent the re-establishment of Soviet
political influence or of a Soviet military/naval presence.
Such a presence would adversely affect NATO regional security
interests and would pose a specific threat to Italy, Greece,
and Yugoslavia (whose sensitive Kosovo region lies aside and is
culturally and ethnically linked to Albania.)
Although Soviet overtures toward Albania continue, there is
little likelihood of a positive Albanian response as long as
Hoxha remains in power. But leadership changes loom nearer in
both countries.
The U.S. has had no relations with Albania, directly or
through third parties, since World War II. On several
occasions, including quite recently, the U.S. has indicated
publicly its readiness to consider establishing relations.
Albania's attitude has been negative and there is no immediate
prospect of change. Its public hostility toward the U.S.
matches in vituperativeness that toward the Soviet Union.
Despite poor prospects for U.S.-Albanian relations, we have
a clear interest in strengthening Western-Albanian relations in
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general, a major irritant in which has been the unresolved
claims/gold issue. Albania is now the only country which has
not received its allocation of recovered Nazi-looted gold from
the American-British-French Tripartite Gold Commission.
Delivery of Albania's share, now worth $15-20 million, has been
blocked for 30 years by unresolved U.S., UK, and Italian
claims. Now may be propitious time to attempt to resolve this
issue. We will soon begin exploratory talks with the UK,
France, and Italy.
(0793A)
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