VERSAILES SUMMIT

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP84B00049R000300440001-5
• Release Decision: RIPPUB
• Original Classification: S
• Document Page Count: 23
• Document Creation Date: December 22, 2016
• Document Release Date: September 15, 2010
• Sequence Number: 1
• Publication Date: March 29, 1982
• Content Type: MEMO

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NATIONAL 31EGURITv COUNCIL.
WAMONGT J. Q. s+aM
March 29, 1982
Nancy Bearg Dyke
Assistant to the Vice President
for National Security Affairs
L. Paul Bremer III
Executive Secretary
Department of State
David Pickford
Executive Secretary
Department of the Treasury
Lt Col Robert P. Meehan
Assistant for Interagency Matters'
Office of the Secretary of Defense
Raymond Lett
Director, Executive Secretariat
Department of Commerce
Jean Jones
Director, Office of the
Executive Secretariat
Department of Commerce
William V. Vitale
Director, Office of the
Executive Secretariat
Department of Energy
system
90185 add-on
Executive secretary
Central Intelligence Agency
Jacqueline Tillman
Executive Assistant to the
United States Representative
to the United Nations
Executive Assistant to the United.`
States Trade Representative
James B. Burnham
Executive Assistant. to the
Chairman, CEA
Cal Charles F. Stebbins.
Executive Assistant to the
Chairman, Joint-Chiefs of
Gerald Pagano
Executive Secretary
AID
SUBJECT: Versailles Summit (C)
Attached are the final two papers' for the National Security Council
meeting scheduled for Tuesday, March 30, 1982, 2:00-2:45 p.m.,
The Cabinet Room:
1. East West Economic Relations
2. Energy Security Paper.
Attachments:
As stated.
Review 372VBB
D
Michael O. Wheeler
Staff Secretary
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FINANCIAL AND TRADE ASPECTS OF
EAST-WEST ECONOMIC RELATIONS
Summary and Introduction
East-West economic relations was a_principal topic at
Ottawa and led to progress in the area of strategic trade
controls. Ottawa contributed to an enhanced understanding
of the need to keep economic relations with the Soviet Union
and the Eastern European countries consistent with the broad
political-security objectives of the Summit countries.
However, follow-up allied actions in the economic area have
not proven adequate in light of subsequent developments in
the Soviet Union and Eastern Europe.
A high-level meeting of COCOM in January launched a
revitalization of common allied restrictions on the export
of strategic goods and technologies to the East. But in the
other three areas in which better allied coordination was
discussed -- contingency planning for economic measures
in the event of a crisis in relations with the Soviet Union;
joint planning to reduce Western economic vulnerability and
enhance Western economic security; and developing common
policies to improve western influence and leverage --
progress has been less visible.
The crisis in Poland has increased the risk that
Western differences will be exposed.ana exploited by the
Soviets. However, the Polish situation, and particularly
Polish debt, has also created exceptional opportunities to
forge coordinated allied positions that will greatly
strengthen the West.
There is an urgent need for a joint assessment of the
Western course and for joint action. Western taxpayers
should not underwrite increased Western defense costs to
offset enhanced Soviet military strength from Western '~ ?
technology transfers or the risks of East-West trade that
arise from the economic failures and political turmoil of
some Communist regimes. Western governments should also
develop Z. stra y' for dealing with Eastern-European debt ;jr
issues. Finally, Western governments need to follow up on
the COCOM high-level meeting that grew out of the Ottawa
Summit.
This paper organizes the objectives for Versailles
in the same conceptual framework as~that developed in last
year's summit document East-West Economic Relations: A
Prudent Approach. The objectives.are thus grouped under the
following four broad areas of concern:
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Strategic Controls. Report:on the progress following
from the Ottawa discussions. and the COCOH High-Level
meeting. Draw attention to the need for progress in
controlling and especially enforcing trade in strategic
goods and technologies and give continued impetus to
the work of COCOM.
2. Foreign Policy Contingency Plans. Review the effective-
ness of allied economic sanctions toward Poland and the
USSR.
3. Economic Security. Note that excessive reliance on-
Soviet energy poses liabilities for the West and
explore further safeguard measures and the development.
of alternative energy sources. Address East-West
trade, finance and debt problems, explore ways to
reduce Western vulnerability in these areas by
controlling credit flows, and reach agreement on an
appropriate mechanism to monitor/control credit flows
to the Soviet Union.
4. Economic Influence. Reduce harmful competition
among Western countries for Eastern European and Soviet
business and avoid applying terms (i.e. credit subsidies
and'countertrade) to East-West trade which contravene
widely shared practices among western countries.
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I. Strategic Controls: COCOM
OL1F1BEN11AL
Convening Bigh Level Meeting
During the past year, important initial steps have been
taken towards a revitalization of COCOM and strengthening of
controls on the export of strategic goods and technology to
the Soviet Union and other Warsaw Pact countries. This
process was set in motion in Ottawa when the Summit leaders
agreed that consultations and coordination are "necessary to
insure that in the field of East-West relations our economic
policies continue to be compatible with our political and
security objectives." More specifically, they agreed to
"consult to improve the present system of controls on trade
in strategic goods and related technology with the USSR ",
encompassing a commitment to support a high-level COCOM
meeting.. This, coupled with the agreement of non-Summit
COCOM member governments, resulted in the first high-level
political meeting of COCOM in over two decades in Paris on
January 19-20.
Discussions at this COCOM High-Level Meeting (HLM) .
reflected a shared recognition that export controls constitute
an important element of the collective security of the induAtri-
alized democracies. The HLM produced a consensus on a number
of key ij$ueS'lated to the multilateral system of exports
controls. Thos was clearly reflected in the Agreed Minute
unanimously adopted at that meeting.
Agreements at the High Level Meeting
There was a clear acknowledgement that improvements
were needed in the multilateral system of export controls.
The member governments agreed that the Warsaw Pact countries
had made significant progress in the field of military
equipment and tecnnology, aided by systematic exploitation
"of every means of access to Western technologies" including
legal transfers of technology to the Soviet military machine.
There was agreement that COCOM embargo limits must be
established based on an up-to-date analysis of the allies'
lead over the Warsaw Pact countries in critical strategic.
areas. With regard to that embargo coverage, COCOM governments
agreed to take the following steps as soon as possible: (a),
identify specifically the really critical military technologies
which are not at present covered or for which present controls
are inadequate, taking into particular account information
available on the priority defensei inaustries in the Warsaw
Pact countries; and (b) delete from the present embargo lists
equipment and tecnnologies wnicn are not critical in the Warsaw
Pact countries. The HLM also agreed that COCOM should give
priority attention to providing em~nbargo coverage to a-number
of specific strategic areas, inciluaing dry docks, robotics and
space launcn vehicles.
C
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At the HLM, the member governments noted the need of
improving embargo enforcement efforts, both multilaterally in
COCOM and at the national level. COCOM was instructed among
other things to "propose means to avoid re-export from
non-participating third countries of embargoed equipment and
technology". 'The HLM stated that member governments should
undertake several steps to improve 'their enforcement including
"facilitating precaution, detection, and prosecution of ' ?
violations and alerting exporters to the risks of diversions
and violations".
* Th ,1 L1M"' o' addressed the need of harmonizing tht -
licensing practices and procedures of the member governments.
It was agreed that, even where it might not be possible for
national procedures to be identical, they should be of equal
effectiveness. The HLN called upon COCOM to convene a meeting
of the organization's Export Control Subcommittee to examine
means of harmonizing national control measures.
Follow-up to the HLM
COCOM has already initiated activities to follow-up on
the agreements reached at the HL.M. Negotiations are underway
on several proposals for strengthening coverage in certain
of the special areas of security concern specified by the
HLM. In addition, COCOM has scheduled the comprehensive
1982-83 List Review to begin in October. Member governments
are now actively preparing proposals for that review which
must be submitted to COCOM in June. COCOM is also-scheduling
meetings of the Export Control Subcommittee later this
spring to discuss the recommendations of the HLM on enforce=
ment and on the harmonization of;the licensing practices of
member governments.
Role of the Versailles Summit
The COCOM High Level meeting has been an important first
step in the strengthening of the: multilateral system of export
controls. However, it is only the first step in a lengthy
process that will involve many months of detailed discussions
of embargo levels and procedural issues. -It is important
that the momentum created by the-HLM be maintained until
the COCOM system is truly revitalized. The Versailles
Summit could play an important role in this regard.
It would be extremely useful if at Versailles the
Summit leaders could: (1) review;tne results of the HL.4
wnich had resulted from their discussions in Ottawa; (2)
strongly endorse the agreements eached at that meeting to
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improve and strengthen the multilateral controls on exports
to the Soviet Union and the other Warsaw Pact countries;
and (3) seek another HLM in January 1983 to provide additional
political impetus to the review process. Since most of the.
follow-up activities to the HLM will only be getting underway
about the time of the Versailles Summit, it would not be
appropriate for the Summit leaders to review in any depth
what has occurred since the meeting in January. However,
they could take stock of the activities underway and strongly
urge that recommendat ions of the HLM be implemented as soon
as possible. To emphasize the importance of certain of tne.
key agreements at the HLM, the Summit leaders could agree on
a number of specific points related to the revitalization of
the COCOM system such as the following:
(1) If there is to be. a meaningful and expeditious strengthening,
of the embargo. to cover "really critical technologies"
and an associated release of non-critical items, allied
governments must assure that priority high level attention
is devoted to the review activities. Negotiations on the
embargo involve a careful and precise identification of
what is of security concern. In this process, allied
governments must give a priority to long-range security
requirements including the impact of Western technology
on Warsaw Pact defense priority industries. Allied
governments must work to prevent embargo levels from
becoming the lowest common denominator established by
perceptions of short-term commercial requirements. At
the same time, lists must be sufficiently precise to
avoid needlessly inhibiting trade in noncritical items.
(2) Allied governments should give priority attention both-in
COCOM and at the national level at dealing with the
serious problem of diversion; of embargoed products
through non-COCOM countries.` They should also 'take steps
to assure that national penalties and sanctions on export
control violations are at a level where they will have a
deterrent effect on diversions. .
(3) The allied governments should work toward a more open
exchange of information both: in COCOM and bilaterally to
deal with the growing diversion problem.
(4) The allied governments should work towards an effective
harmonization of their national export control proceaures
so that differences do not favor the commerce of one
country over another.
(5) There is the strong need fora commitment from the
allied governments to modernize the COCOM infrastructure
and communications. This is required to enhance the
professionalism and efficiency of COCON as well as its
status as a unique international forum for dealing
with complex and sensitive East-West technology trade
issues and policies.
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(6) The January 1982 HLM was a useful exercise. It provided
the first political guidance to the technical level of
COCOM in over 25 years. Prior to 1958 a high level
political committee met frequently to provide such
guidance. It would help the strengthening process if
the HLM recommended again in 1983 to review the progress
made during the fall list review and provide additional
political guidance.
II. Foreign Policy Contingency Plans
Summit countries may wish to assess the economic and
political measures adopted to date in response to the Polish
government declaration of martial law and consider what
additional measures and/or contingency planning may be
appropriate. Contingency controls were discussed at Ottawa as
the pace of the Polish liberalization process quickened and
Soviet interference mounted. The allies agreed on the importance
of coordinated, joint action, particularly in the event of a
Soviet invasion of Poland. The GOP declaration of martial law
December 13 and ensuing crackdown posed a direct challenge to
the Alliance and required a, unified Western response.
The NATO allies reacted with a series of individual
economic and diplomatic measures adopted as a-result of
agreement at the ministerial session of the Worth Atlantic
Council on January 11. On the economic side in particular,
some countries decided to hold further commercial credits
for Poland and negotiations on 1982 debt in suspense and
adopted measures directed at the USSR in the areas of
imports, maritime and air agreements and commercial repre-
sentation. Each of. our countries acted in accordance with
its own situation and laws, but.the message was the same:
our countries would not continue business-as-usual and would
re-examine economic and commercial relations with Poland and
the USSR in light of Polish events.
The deterioration in the Polish and Romanian financial
situations and general financial weakness throughout Eastern
Europe necessitate continued allied policy coordination, and
a closer look at the repercussions of possible default on
the Western financial system.
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III. Economic Security: Controlling East-West
Financial Flows
western economic security is impaired to the-extent
the Soviets can exercise economic leverage and the West
becomes vulnerable to Soviet actions. At the Ottawa Summit,
the U.S. raised the issue of the Siberian gas pipeline,
European dependency on Soviet energy supplies and the
leverage such dependency will accord the USSR. The U.S.
continues to believe that the pipeline decision was unwise.
To reduce our potential vulnerability it is most important
that priority attention be given to the development of
appropriate safeguards as well as alternative sources of
energy.
The subsequent Polish financial crisis has underscored
another source of Western vulnerability and Soviet leverage:
the existing large stock of Soviet and Eastern Europe debt
owed to the West and the growing Warsaw Pact indebtedness as
a result of continuing East-West trade financing. East-West
trade, and the credits that finance it, are an inescapable
element in considerations relative to western security.
Through its credit policies, the West has enhanced the
economic development of the Soviet Union and Eastern Europe
and has become more dependent on Eastern markets and resources.
This affects Western political, economic and security
interests. At the same time, Western credit policies have
fostered growing Soviet bloc indebtedness and increased the
vulnerability of the Western financial system to financial
disruptions in Eastern Europe.
Western Europe is more vulnerable than the U.S., which
stopped according official credits to the Soviet Union
in 1975. Moreover, Western Europe may become more vulnerable
still if governments continue to respond favorably to what
could be a growing Soviet requirement for official credits
and guarantees over the next five years.
1981 was a watershed year in East-West financial
relations highlighted by. the Polish,' then Romanian, financial
crises and by the general erosion of Eastern European ?
creditworthiness. Poland declared a moratorium on debt
service in March and opened negotiations with official and
private creditors on debt rescheauling shortly thereafter.
By the end-'of ~h?elyear, Romania had accumulated $1.2
billion in debE arrears (and announced a similar moratorium
in February 82). Even the Soviet Union, faced with a rising
agricultural import bill and stagnant hard currency exports,.
encountered an unprecedented liquidity bind. Western banks,
reacting to the rapid economic and political deterioration
in Poland, heightened political concerns over East-West
relations in general, and instability in Eastern Europe,
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began applying the brakes on new medium and long term
lending to Eastern Europe in 1981, thus exacerbating
its economic/financial dificulties. Syndicated Eurocurrency
loans dropped from a peak in 1979 of $6.9 billion to only
$2.8 billion in 1981. There have been no major Eastern
European syndications since the spring of 1981 when Hungary
and the GDR completed $400 million and $100 million Eurodollar
loans, respectively.
Western governments, however, have concluded new
agreements with the Soviets on major project financing, most
notably the Yamal pipeline. In response to the declaration
of martial law in Poland, allied consideration of new
credits and a 1982 rescheduling was suspended.
Poland's debt service problems and the growing risk of
default have drawn attention to Eastern European credit-
worthiness in general. Gross Soviet bloc debt grew from $8.4
billion in 1971 to over $80 billion in 1981. The USSR
and Poland hold by far the largest share of this debt -- $20
billion and $26 billion respectively. However, with $7.0
billion in assets in the West, a gold stockpile worth $25
billion, and significant hard currency exports (oil),
Soviet indebtedness is not perceived as a problem; total
Eastern European hard currency reserves, on the other?hand,
were only about $5.0 billion at the end of 1981, and economic
performance has deteriorated sharply. In a comparison of
Soviet bloc 1981 debt service ratios, the USSR is by far the
smallest at 15%, while Eastern European debt service ratios
all exceed 308 (except for Czechoslovakia), including 68%
for the GDR and 157% for Poland.
On the whole debt owed Western government creditors or
guaranteed by Western export agencies represents about one
third of total Soviet and Eastern European indebtedness,
although the relative importance of official and private
debt varies widely from country to country. In Poland and
the USSR, official debt represents 52% and 40% respectively
of total indebikdpess; however, official debt is a relatively
small p*'t of tal indebtedness "for other-Eastern Europeam
countries' -- only 49 of Hungarian debt, for example.
Short and Long Term Prospects
Eastern Europe's 1982 debt service bill amounts to $31
billion, including $6 billion in interest alone. Even
assuming a roll over of the short term component of this
debt ($11 billion), additional cutbacks in hard currency
imports, and drawdown of reserves, Eastern European countries
will clearly need access to new Western credits in 1982 to
avoid default. Romania has joined Poland in insolvency, and
Hungary is now under pressure. Only Czechoslovakia and
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Bulgaria, both with relatively small outstanding debt,
appear better able to weather the current credit squeeze for
the time being. I
Long term Eastern European economic prospects appear
bleaker still, now that the Western credit prop for the .
inefficient, overly centralized Eastern European economies
and Soviet raw material, fuel and food subsidies are being
cut back. Moreover, the USSR also faces a period of hard
currency shortfalls as the prices of its exports to the West
stagnate or decline, and will need to increase its borrowing
from the west to avoid a decline in crucial hard currency
imports. Although most of this borrowing will probably come
from private capital markets, albeit at higher costs,
Western government credits and guarantees may be asked to
play a large role.
Policy Implications
The financial- choices facing the Soviets this decade
provide an unusual opportunity to use credit policy as a
means to reduce Moscow's available resource pie and also
influence Moscow's trade offs among its key priorities --
enhancing the military, feeding the population, improving
the civilian economy, sustaining its Eastern European allies
and expanding its overseas influence. Western countries can
reduce the flow of capital to the Soviet Union both directly
by regulating the availability of government-guaranteed
credits, and indirectly by affecting the willingness of the
private sector to lend. Indeed, the private market reaction
to new Western government limits on credits/guarantees would
likely far outweigh the direct impact of official.credit
restrictions. i
Availability of credits. The Soviets borrowed $3.6
billion in private unguaranteed medium and long term credits
and another, $6 4AIlion in short-term credits in 1981.
Private &redit thus accounted for about 80% of total 'new s
borrowing of $12 billion. For the Soviet Union and Eastern
Europe, private credits accounted for 75% of total borrowing.
Private capital market decisions on lending to the USSR and
Eastern Europe are thus the key to Eastern European-finances
and creditworthiness. Indeed, private market reactions to
the situations in Poland and Romania and the missing Soviet
"umbrella" have already led to a retrenchment in new bank
lending to the USSR and all Eastern European countries, a
shortening of loan maturities and increased interest
rates. The Soviets have not borrowed on the Eurodollar
market since May 1981. Under these circumstances, it would
be unnecessary and even counterproductive for Western
governments to attempt to restrict private bank lending
directly.
Official Western credits and guarantees to the Soviets
amounted to $2.4 billion in 1981 and are estimated at
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another $2.0 billion in 1982 (not counting $2.0 billion in
Yamal pipeline credits) -- about 6% of total expected Soviet
hard currency imports. Official Western lending to the rest
of Eastern Europe (except Poland) was only approximately
$1.5 billion in 1981 and is considerably less important to
Eastern European economies. The FRG, France, UK, Italy, and
Japan account for over 90% of the official credits, which
are generally used to finance major plant and equipment
exports.
Western government credit restraints, if sustained, .
could moderately reduce the USSR's hard currency capabilities
in the next few years, further tightening resource constraints
on the USSR and increasing Soviet difficulties in coping
with its defense burden. The Eastern European economies.
would feel the main impact indirectly through the private
market reaction to Western government action affecting the
Soviet Union. On the other hand, Western government official
credits and credit guarantees at the current rate, will
increase the Soviet and Eastern European debt burden, and
increase western vulnerability to those countries future
debt servicing problems. Moreover, maintaining current
official financing levels in the'face of general private
bank cutbacks would in effect be bailing out. the private
banks at government expense. For these reasons we recommend
increased western monitoring of official credit flows to the
Soviet Union and of Eastern Europe debt accumulation, as
well as controls on official lending to the Soviet Union.
Proposal. Assuming the allies reach agreement on
monitorirg controlling credits and credit guarantees to the
Soviet Union, an informal institutional mechanism could be
established to review western credit policies in light of
Soviet and Eastern European financial developments and
allied security interests. Membership in the group might be
along the lines of COCOM (i.e. NATO countries plus Japan,
minus Iceland). Specific responsibilities of the new
'Western creditor club' would include:
-- exchange of specific Western government credit
information to ensure greater transparency of Western
credit policies;
-- analysis of economic trends in the Soviet Union and
Eastern European countries and the economic/financial
implications for the West;
-- review of major project financing, e.g. development
projects and major plant and equipment sales, both in
terms of volume and terms of credits provided and
security implications for the West; and
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-- coordination of debt policy (in effect absorbing
the Polish official creditors task force and expanding
it for use in other problem Eastern European countries).
The creditors' group would be independent from the
OECD but draw on the existing OECD resource base -- in
particular work in the East-west Trade Group and Credit
Arrangement -- and coordinate credit policies for action,
both inside and outside the OECD. The informal link with
the OECD would be essential in involving the neutrals such
as Austria, Switzerland and Sweden. The creditors' group
could also draw on the NATO Economic Committee data.
The allies should strive to reach an agreement on a
credit control mechanism and a reduction in credits to the
USSR before the Versailles Summit.
IV. Economic Influence: Using East-West Trade
to Affect Soviet Behavior
Western governments should consider how they can
best utilize trade and financial relations with the East to
influence the economic and political behavior of these
countries in ways which are favorable to Western interests.
Key agenda items should include joint allied action to raise
the costs of Soviet borrowing in the West, allied cooperation
in rejecting countertrade demands, and continued allied
coordination in dealing with Polish, Romanian and other
Eastern European debt problems.
Credit subsidies In. addition to progress in.l.imiting
official export credits/guarantees, a parallel goal must be
to reduce the degree of export credit subsidization to the
Soviets. If we do not reduce the subsidy element, we are in
effect encouraging further Soviet borrowing (through cheap
credits) that leads to increased western vulnerability as
discussed in Section III. Roughly 40% of the USSR's out-
standing debt carries terms which are below commercial
market rates. Current minimum lending rates under the OECD
credit arrangement are 10.5 to 11.0 percent (for Category II
countries) depending on the termof the loan. Replacing
concessional with market interest rates on the roughly $2
billion a year the USSR now receives in official, medium-term
financing could raise Moscow's cumulative debt service costs
by over a billion dollars over a five year period. In
addition, the $14 billion in Yamal pipeline credits were
accorded by the West Europeans and Japanese at under 88
interest with maturities of up to 8 1/2 years. while
Western firms have reportedly compensated for some of the
subsidy by raising the prices of exports for the Siberian
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pipeline, the differential with private market finanicing is
worth over 54 billion to the Soviets over the payback period
of the loans.
Negotiations are already underway within the OECD
Export Credit Arrangement that could result in a.general
reclassification of certain countries, including the USSR,
from Category II (intermediate) to Category I (relatively
rich) countries. This would result in raising the minimum
lending rates to 11 or 11.25% depending on the term of the
loan. In addition, a general increase in the Arrangement
matrix of minimum interest rates of 1/2 to 1 percent will
also be considered in May, and thid will'affect all countries.
The combined effect of these two actions would still leave
official government lending rates to the Soviets over 2
percentage points below current Euro-market rates.
Ar 31te3be approach would call fQt. the US, Japan
and major Wee European countries to act unilaterally
outside the OECD to raise interest rates to the USSR closer
to market levels. Action outside the OECD would avoid
neutral country objections but leave the path open to
undercutting by these countries. Additional measures to
raise the cost of lending would include increasing minimum
downpayments'beyond the 15 percent allowed in the OECD
arangement, shortening maturities on medium term lending
(most official lending falls in the 5 to 8 1/2 year maturity,
category), and limiting the extent of short-term official
cover.
Debt Policy. The Polish and Romanian financial
crises and requests for debt relief make debt rescheduling a.
key issue in 1982. Moreover, private bank cutbacks on
lending to other Eastern European countries, most notably
Hungary, if sustained, may force these countries to seek
debt relief in 1982 as well. Western influence,?not only on
these countries but indirectly on the Soviet Union, can thus
be exerted through a coordinated Western deot policy. Close
collaboration among western creditor nations is thus necessary.
Countertrade. Countertrade;may be generally defined .i
as an international trade transaction where sellers are
obliged to accept a supply of products from the purchasing
country in partial or total payment. Examples of countertrade
are straight barter transactions, buy-back agreements where;, ..
turnkey facilities are paid for by a plant's resultant .
output, and parallel but separate contracts linking sales to
Purchases.
The practice has been long promoted by many East
European governments who have seen it as a way to reduce
hard currency expenditures for needed Western equipment and
technology and at the same time find Western markets for
their frequently second rate manufactured goods. The East
has even tried to promote the idea that long term countertrade
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arrangements are a higher form of economic relations between
countries because of their 'lasting character." The Soviets
have been the largest and most frequent participants in
countertrade arrangements, particularly-in the energy and
chemical sectors. The Romanians have come forth with
probably the most burdensome requirements stipulating that
Western imports must be balanced by counterpurchases up-to
140% of the value of the export contract. The success of
Eastern countries in inducing western firms to enter into
countertrade arrangements has also recently encouraged
certain LDCs such as Indonesia and Brazil to try and boost
exports by introducing counterpurchase requirements.
Summit governments have often criticized countertrade
in principle but have not activeiy;'discouraged the practice.
However, concerns within the OECD, particularly by smaller
countries whose small to medium sized forms have a particularly
difficult time coping with countertrade demands, has led to
a closer examination of the pnenomenon within the organization.
Member governments endorsed an OECD study made public in the
fall of 1981 which reached.the following conclusions:
(1) Prospective Eastern payments deficits and a continuing.
lack of competitiveness of Eastern industrial products
will result in continued strong pressure on Western firms
to enter into countertrade arrangements;
(2) An attitude of benign neglect should not be adopted
towards practices imposed unilaterally by Eastern countries.
The arguments which they use to justify countertrade are
not acceptable. Except for a few particular transactions,
countertrade formulae have trade distorting effects by
comparison with normal practices of multilateral trade..
They entail unnecessary complications in the transaction
process and introduce additional trade risks for eastern
firms that are not countered by any significant advantage.
Furthermore, the development of compensation deals would
accentuate the bilateralism in East-West trade. This
would certainly have negative effects on trade expansion;
(3) There is a need for Western countries to analyze the
countertrade phenomenon more thoroughly, if only to
be in a position to hold a discussion with the countries
requesting these types of deals and claiming special
merits for them;
(4) Greater efforts should be made to obtain a statistical
coverage of the volume of and better knowledge of counter-
trade deals;
(5) Eastern governments should be shown that the short term
benefits they derive from the system are counterbalanced,
even for themselves, by elements which will show up as
negative in the medium and longer term;
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Countertrade was discussed with Eastern governments'
at a special ad hoc meeting of the Economic Commission for
Europe (ECE) in November 1981. Although Western governments
were consistantly critical of Eastern countertrade practiced,
largely citing the points raised in the OECD study, the
East, and particularly the Soviets, rejected these criticisms.
The meeting adjourned without any commitment to further
discussions in the ECE.
Western steps to discourage countertrade would be.
timely. Joint action at this juncture could help us resist.
Eastern pressures for countertrade and possibly help to
inhibit the spread of the practice to newly industrializing
LDCs. As the OECD study indicated, additional examination
and discussion of countertrade is called for. Governments
should also consider if measures such-as the withholding
of government credits and credit guarantees and the erection
of special barriers to deal with possible import surges
resulting from countertrade would be appropriate.
A possible agreement on countertrade might be as
follows:
"The persistence and spread of countertrade in
East-West trade and elsewhere is a cause for concern. Counter-
trade is a retreat towards bilateralism and distorts trade
patterns. It inhibits countries from reaping the full
benefit of .the multilateral trading system based on compara-
tive advantage and the international division of labor.
Further examination of countertrade in multilateral organiza-
tions such as the OECD and ECE is, called for. Governments
also should oppose demands for countertrade more actively
and consider in the OECD whether specific policy actions
would be appropriate.'
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SECRET
Energy Security at the Versailles Summit
Summary
While energy today is not the front page news issue
which it was at the Tokyo (1979) and Venice Summits (1980)
it still remains a vital element of overall economic
performance in Summit countries. Indeed, instead of
a constraint on economic development, as we have viewed it
in the past, energy may be a factor contributing to recovery.
Lower prices for energy bring long awaited relief from
inflation and pressure for higher wages and business costs.
Economic recovery in turn will bring new opportunities for
greater energy investment.
Without confusing optimism with complacency, the time
is right to reconsider international energy imperatives
in a more positive vein. There are abundant and economically
attractive energy resources within the Western community.
Developing these resources will allow revenues to stay at
home, reduce inflation and bring; new employment and economic
opportunities. What is needed at the Versailles Summit is a
renewal of commitment to develop indigenous energy resources
through greater reliance on market forces supplemented by
government action when broader Western economic and security
concerns are threatened.
Energy- security involves both.reliance on market forces
and a prudent concern for political and strategic factors.
The basis of energy security cooperation among the industrial-
ized countries rests on a network of political, economic and
strategic commonalities and values that tie the industrialized
democracies together and give them a collective strength
tnat is greater than the sum of each individually. A
threat to the energy security of one is a threat to them
all. In recognition of this fact, the major industrialized
democracies have jointly endeavored to develop means within
the International Energy Agency and European Community to
minimize at acceptable cost the disruptive effects of energy
shortfalls when they threaten the common interest of all.
The Versailles Economic Summit can renew and strengthen this
resolve and provide the foundation for a more economically
efficient and more secure energy,future.
Energy security objectives at Versailles should be
threefold: ?
(i) to underscore the importance and effectiveness of
primary reliance on market forces in encouraging
11_deve:p8ment of energy supplies and more efficient
OY,
IF us*
SECRET
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(ii) to encourage summit countries to fully develop
on an economical basis the rich resource base of
the community of