INTELLIGENCE MEMORANDUM TRENDS IN SOVIET-JAPANESE TRADE

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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00875R001700030081-7
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• Publication Date: May 5, 1998
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DIRECTORATE OF
INTELLIGENCE
Intelligence Memorandum
Trends in Soviet-Japanese Trade
Secret
ER IM 72-81
May_ 1972
Copy No.94
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WARNING
This document contains information affecting the national
defense of the United States, within the meaning of Title
18, sections 793 and 794, of the US Code, as amended.
Its transmission or revelation of its contents to or re-
ceipt by an unauthorized person is prohibited by law.
GPOUP 1
Ertclud,d fro,, oulomatic
downgra ding and
dedmil6mtlon
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CENTRAL INTELLIGENCE AGENCY
Directorate o: Intelligence
May 1972
INTELLIGENCE MEMORANDUM
TRENDS IN SOVIET-JAPANESE TRADE
Introduction
1. Japan became the Soviet Union's 'leading non-Communist trading
partner in 1970. Further substantial growth in trade is indicated by the
recently concluded Soviet-Japanese trade agreements for the period until
1975. At the same time, discussions are continuing on a number of
cooperative ventures for development of raw materials and fuels in Siberia
which go beyond the scope and period of the trade agreement.
2. This memorandum reviews Soviet-Japanese trade in the period
1966-70 and discusses the outlook for future trade and economic
cooperation.
Background
3. Soviet-Japanese trade grew at an average annual rate of 15% during
the period 1966-70, well above the rate of increase in Soviet 'trade with
the other developed Western countries. Increases in Japanese-Soviet trade
during 1966 and 1970 have been outpaced by Japan's total world trade,
which grew by more than 17% annually during this period. The growth
in Soviet-Japanese trade resulted primarily from a significant rise in Soviet
exports to Japan - from US $239 million in 1966 to $379 million in 1970.
Japan's share of Soviet trade was about 3% in 1970; similarly, the USSR
accounted for only 2% of Japan's trade.
4. The volume of Soviet trade with Japan in 1966-70 was
considerably in excess of that planned. Two-way trade during the five-year
period initially was projected at about $2.1 billion, and cumulative Soviet
Note: This memorandum was prepared by the Office of Economic Research
and coordinated within the Directorate of Intelligence.
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imports were expected to exceed exports by about 0"l 00 million. In fact,
however, Soviet exports grew much more rapidly than anticipated, reaching
$1.7 billion for the period, more than $500 million in excess of imports
(see the graph). Two-way trade for the period was valued at $2.9 billion.
Development of Soviet-JapaneseTrade*
1960 61 62 63 64 65 66 67 68 69 70
'From official Sov;et trade date.
813704 5.72
A booming Japanese economy led to large increases of Soviet raw materials
exports, particularly wood and wood products. Order backlogs, tight credit,
and strong demand for Japanese goods in Western markets, however, limited
the responsiveness of Japanese exporters to Soviet import requirements,
particularly in the period 1966-68. As a result, the USSR registered a trade
surplus which peaked in 1968 at $206 million. A surplus was maintained
in 1969 and 1970, but its magnitude diminished as the USSR increased
imports of Japanese machinery and consumer goods.
5. About two-thirds of the increase in Japanese imports during
1966-70 consisted of wood and wood products (especially saw logs), which
rose from $58 million in 1966 to $150 million in 1970 (see Table 1).
Japanese importers, especially in 1967 and 1968, cultivated Soviet sources
in anticipation of possible future US and Canadian supply limitations. The
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Million
US
Percent
Million
US $
Percent
Million
US
Percent
Million
US $
Percent
Million
US S
Percent
Total
239
100
353
100
391
100
357
100
379
100
Coal and coke
18
8
27
8
31
8
36
10
35
9
Oil
42
13
37
10
34
9
25
7
33
9
Pig iron
38
16
40
11
26
7
16
4
16
4-
Non-ferrous metals b/
9
1?
23
7
15
4
19
5
13
3
Platinum and platinum group metals J
23
10
31
9
50
13
42
12
40
11
Wood and wood products
58
24
95
27
134
34
127
36
150
40
Of which:
Saw logs
39
16
69
20
108
28
103
29
127
34
Cotton fiber
18
8
41
12
55
14
35
10
18
5
Other and unspecified
33
14
58
16
45
12
56
16
73
19
A. Unless otherwise noted, data are from Sovl,t sources. Because of rounding, components may not add to the totals shown.
b. Excluding platinum and platinum group metals.
c. Data are from Western sources, with the 1970 value estimated.
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Soviet wood supplies, bolstered by a curtailment of Soviet timber sales to
the People's Republic of China in 1967, also increased, although Siberian'
port facilities soon became a critical constraint. When expected US.
restrictions failed to materialize and domestic Japanese demand for'wbod
products declined, the Japanese timber market became glutted. Although
there were cutbacks in Japanese orders in 1969, Japanese wood imports
from the USSR continued to rise on the basis of long-term contracts under
a forestry cooperation agreement signed in 1968, when the Japanese were
still anxious to develop Soviet timber sources (see the Appendix).
6. Soviet oil exports to Japan declined between 1966 and 1970.as
increases in shipping costs associated with the closing of the Suez canal
limited Soviet supply capabilities. The USSR exported 2.7 million metric
tons of crude oil and petroleum products to Japan in 1970, down from
the pre-Suez (1966) level of 4.1 million tons. Cotton fiber became a major
Soviet export commodity during this period, rising to $55 million in 1968 -
more than one-half of Soviet exports of cotton to the West. Soviet supply
limitations led to a sharp decline in exports to Japan in 1969 and 1970.
7. Japanese machinery and equipment accounted for 37% of total
Soviet imports from Japan during 1966-70 (see Table 2). The 1966 trade
agreement placed particular emphasis on increased Soviet imports of
Japanese ships, providing for Soviet imports of $260 million in ships during
1966-70. The purchase of these ships had been incorporated into the
1966-70 Soviet plan, and the USSR considered Japan a prime supplier of
certain specialized ships (for example, icebreaker freighters and fish
processing motherships) which were not available from East European
shipyards at that time. However, major Japanese shipbuilders (who
apparently were not fully consulted during the original negotiations) were
operating at full capacity and were in no position to respond to Soviet
import requirements. Earlier disagreements on financing were resolved by
1968, but by that time order backlogs would have largely precluded ship
deliveries before 1970. As a result, contracts eventually were signed for
only three ocean dredgers with a total value of approximately $7 million.
The Soviet-Japanese cooperative forestr; project, however, resulted in some
expansion of imports of Japanese machinery and equipment, particularly
of trucks; bulldozers, and other equipment (see Table 3).
8. Japan has shared in increased Soviet imports of manufactured
consumer ,,oods from the West. These imports have more than tripled since
1966, reaching $65 million in 1970, and were second in importance only
to machinery and equipment. Increases in Soviet imports of readymade
apparel led this rise, averaging $35 million per year over the last four years.
Soviet imports of Japanese textile materials also increased. Imports of wool
yarn :ilo,.e increased from a 1968 level of $3 million to $31 million in
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1970. Other Soviet import categories showing large increases during 1966-70
included steel - from $2 million in 1966 to $26 million in 1970 - and
chemical products - from $18 million to $33 million.
Problems in Soviet-Japanese Trade
9. Although Soviet-Japanese trade grew impressively, it continued
to be hobbled by a variety of constraints. One of these is the low Japanese
demand for Soviet manuficti.red goods. The Soviets attempted to take
advantage of the Japanese desire to improve economic relations with the
USSR by making Japanese purchases of Soviet machinery and other
manufactures conditions for Soviet imports of Japanese machinery and
equipment and chemicals. This sort of barter trade, which at times
represented up to 30% of the value of Japanese export contracts, often
resulted in obtaining unsalable goods and reduced the attractiveness of
trading.
10. The growth of Soviet-Japanese trade was also affected by the
limited Japanese success in expanding machinery and equipment exports
to the USSR. Japan enjoys a significant competitive advantage for many
types of machinery in Asian and Far Eastern markets, but Soviet imports
of machinery and equipment are largely for use in Western regions of the
USSR. In addition, Soviet requirements to import machinery and equipment
have included few of the products for which Japanese competitiveness is
strong (for example, electronics). Soviet requirements for Western
equipment have been largely satisfied by West European countries which
have had a long trading relationship with the USSR. Many West European
governments, mo' cover, have a,;tively promoted such trade through the use
of generous government-guaranteed credits at subsidized rates and of large
interbank credit lines. Filled orderbooks and full-capacity operation, created
in part by Japanese success in expanding their exports to major Western
markets, further limited both the ability and desire of many Japanese
exporters to respond to Soviet import requirements for machinery and
equipment.
11. Japanese exporters - already at a disadvantage because of their
relative unfamiliarity with the Soviet market - could not offer the credit
incentives necessary to improve their competitiveness during most of this
period. Those firms which attempted to exploit the Soviet market often
were frustrated by restrictive Japanese credit policies, particularly during
1966-69. Government guarantees covering export credits to any develophd
nation (including the USSR) are confined by Japanese law to the "supplier
credit" system. Under this arrangement, the Japanese exporter bears the
responsibility of obtaining the required credits from either the Japanese
Export-Import Bank or private sources. Furthermore, to qualify for a
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government guarantee, the exporter must set credit terms which are
acceptable to the government, and these may differ significantly from terms
the USSR is willing to accept. K.S. Sangyo Co., for example, was forced
to make up the difference between the interest rate acceptable to the USSR
(5.8%) and the then minimum (6%) established by the Japanese government
before the firm could conclude the 1968 forestry development agreement.
Official interest and debt length restrictions nave bee\\i gradually lowered
to a point where individual Japanese firms are no longer deterred by having
to make such costly supplemental arrangements in order to offer competitive
financing. This in turn may partly explain the upsurge in Soviet orders
for Japanese plant and equipment since late 1970.(1)
12. The USSR, however, still objects to "supplier credit" for financing
Siberian joint ventures. The "supplier credit" arrangement for financing a
cooperative venture ties all Soviet purchases of Japanese goods under the
agreement to the firm or consortium which has exclusive rights to this
particular venture. In effect, this method puts the Japanese firms in a
monopoly position. This procedure was followed in 1968 when the USSR
obtained a $133 million line of credit from a Japanese consortium of 14
firms for the development of Siberian forestry reserves. The Japanese firms
planned to raise the prices of the machinery and equipment to be provided
under the agreement to offset their costs in extending credit, whereas the
USSR was seeking to pay only normal competitive prices.
13. Furthermore, it is difficult for private firms under the "supplier
credit" arrangement to obtain the large blocks of credit that would be
required for very large cooperative ventures, such as the Tyumen' oil pipeline
(see the Appendix). For all these reasons the USSR has pressed for the
extension of "buyer's credits" to cover proposed Siberian development
projects. Such credits are issued directly to the foreign buyer (either by
financial institutions with government guarantee or by the government
itself), allowing him tc `,nose his supplier and thus maximize the value
of the loan. However, thes3 credits are at present restricted to less developed
countries.
14. The importance of current Japanese credit restrictions with
respect to financing cooperative ventures was reflected in Soviet Foreign
Minister Gromyko's request during hls January 1972 visit to Tokyo that
the Japanese Government provide financial backing for the much-discussed
Tyumen' oil pipeline project, either directly through Export-Import Bank
loans or government guarantees for funds advanced through private Japanese
1. Soviet orders for Japanese plant and equipment during 1970 amounted to at least
$165 million, placed chiefly at the end of the year. This high level of orders has
continued to date.
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financial circles. The Japanese Ministry of International Trade and Industry
announced in September 1971 that it intended to introduce a bill that
would provide government ;guarantees for financial institutions offering
"buyer's credits" for the development of resources, wherever located, for
use in Japan - that is, Siberian oil, coal, and natural gas.(2)
Prospects for Soviet-Japanese Trade, 1971-75
15. Tentative trade targets set at the September 1971 signing of the
1971-75 trade and payments agreement reflect the shift in the pattern of
Soviet-Japanese trade beginning in 1969, when Soviet exports declined while
Soviet imports from Japan rose significantly. Total two-way trade during
this period is scheduled to reach $5.2 billion (see Table 4), representing
a projected 12% average annual increase. Soviet exports during the period
are forecast at $2.4 billion and imports in excess of $2.7 billion, The
resuiting Soviet deficit of approximately $300 million contrasts with the
$535 million surplus realized by the USSR over the previous fi;?e-year
period. The projected shift in the Soviet balance-of-trade position stems
from large planned increases. in Soviet imports of Japanese machinery and
equipment as well as the slower growth expected in Soviet raw material
exports to Japan. In marked contrast to the earlier agreement, there was
no mention of Japanese ship exports as part of the 1971-75 agreement.
The USSR evidently has placed ship orders with other suppliers - Ears`
Germnay, Poland, Finland, Sweden, and Yugoslavia. France also obtained
a Soviet order for about $100 million.
16. The importance of machinery and equipment in Soviet imports
from Japan should increase during the 1971-75 period. More than $350
million in orders for machinery and equipment were placed by the USSR
during 1970 and 1971 alone, led by orders for chemical and petrochemical
equipment ($183 million) and trucks, bulldozers, and related construction
equipment ($58 million). An additional $115 million to $135 million in
Soviet orders for machinery and equipment should soon be forthcoming
as part of the Soviet-Japanese cooperative ventures in port development
and wood chip processing. In addition, Japanese exports of equipment and
pipe may grow significantly in this period if the Tyumen' oil agreement
should be concluded. Soviet imports of Japanese chemicals and consumer
goods probably will continue to increase over the period. Soviet and
Japanese officials expect a particularly rapid growth in Soviet imports of
textiles and textile raw materials.
2. The Japanese have heretofore managed to expand their raw material sources (for
example, Canada and Australia) with very little use of domestic capital. Japan has
recently had large annual balance-of-payment surpluses, however, lessening its need to
control the capital outflows which would be required to finance the proposed cooperative
ventures in Siberia.
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17. The growth of Soviet exports to Japan during the five-year period
will be restrained by the limited ability L:- the USSR to increase its supply
of those raw materials desired by the Japanese. The exception is saw logs;
the USSR has the capacity to increi;z:, the Jevel of exports to Japan but
actual expansion probably will be limited by a continued leveling off in
Japanese demand. both the USSR and Japan recognized the Soviet
limitations and forecast an 8% average annual growth rate for Soviet exports
to Japan for the 1971-75 period, compared with 15% in 1966-70. Sibc:.an
reserves of crude oil, natural gas, coal, timber, and ,opper constitute a
considerable base for future Soviet exports. But with the exception of the
forestry industry, the USSR has not developed these reserves sufficiently
for a substantial expansion of exports to Japan in the 1971-75 period.(3)
The construction of port facilities at Wrangel Bay (with the first phase
scheduled for completion by the end of 1973) and the concomitant joint
USSR-Japanese development of Soviet wood ship processing facilities should
significantly increase Soviet wood chip exports, particularly during the latter
part of the period.
18. Although the targeted growth rates for Soviet-Japanese trade for
1971-75 are not dependent upon further joint cooperative agreements, the
long-run growth of Soviet-Japanese trade will depend in part on the
development of Siberian raw materials resources for use by Japanese
industry. Conflicting national priorities of the USSR and Japan have limited
Soviet-Japanese economic cooperation, although three joint development
agreements have been signed since annual discussions on the development
of Siberia began in 1966. Until recently, relatively low priorities have been
assigned by the USSR to the development of raw material deposits in
Siberia, and little investment capital has been made available.
19. The USSR has proposed the' `reign financing of some Siberian
investment cover the total development cost, not just the cost of capital
goods and equipment, contending that the foreign investor receives the full
benefit of any development project through the subsequent availability of
Soviet raw materials. Prospective Japanese investors, however, view Siberia
as only one of several areas containing deposits of the raw materials required
by Japanese industry, and they compare Soviet proposals with other similar
proposals. The Japanese private sector has been reluctant to channel large
amounts of capital into Siberian development projects which do not allow
for foreign equity and/or controls. Facing little foreign competition for
development of many of the proposed Siberian resource projects (for
3. The USSR has recently begun construction of a railroad which will eventually link
the Takutsk coal deposits with the Trans-Siberian railroad. The first segment, scheduled
for completion by 1975, will cover 110 of the 270 miles separating the coalfields from
the main Trans-Siberian line.
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examples, petroleum and coal), the Japanese can afford to postpone
investment until Soviet terms become more generous or until the needs
of the Japanese economy cannot be satisfied by alternative sources of
supply.
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22. In 1970, Japan became the leading non-Communist trading
partner of the USSR, as it also was of Mainland China. This is a logical,
if somewhat delayed, result of clearcut comparative advantages arising from
Japan's manufacturing efficiency, the USSR's large raw material reserves,
and the proximity of the two countries. Barring an unforeseen politicall
disruption, trade between the two will continue to grow briskly.
23. Soviet trade with Japan grew at an average annual rate of 15%
in the 1966-70 period. In 1970, total trade between the two nations rose
to $725 million. The period was characterized by a rapid growth in Soviet
exports of those primary goods needed by an expanding Japanese economy.
Soviet imports from Japan fell below the planned level for 1966-68 as a
result, in part, of the inability of Japanese shipbuilders whose orderbooks
were ah eady filled - to reach agreement with the USSR foi the projected
delivery of 92 ships. Soviet imports from Japan rose significantly in 1969-70,
however, when Japanese ability to fulfill Soviet requirements for machinery
and equipment improved.
24. The 1971-75 trade agreement recently signed by the Soviet Union
and Japan forecasts a total trade for this period of $5.2 billion. Annual
growth in projected at 12%, a late which is not likely to be fulfilled. The
USSR has enjoyed six consecutive years of trade surpluses with Japan, but
under the new agreement would incur deficits beginning in 1972 because
Soviet imports are expected to continue to grow more rapidly than exports.
Japanese machinery and equipment will account for the major portion of
the rise in Soviet imports, but a significant growth in imports of textiles
and textile fibers is also expected. Soviet exports to Japan during the next
five years will continue to consist primarily of raw materials and
semimanufactures - for example, petrnleum, coal, and wood and wood
products - but the growth in most of these exports will be limited by
supply constraints.
25. Three cooperative agreements for developments in Siberia -
timber, wood chips, and Wrangel Bay port - have been signed by Japan
and the USSR since talks began in 1966. Japanese credit restrictions have
been an important factor in the failure to reach further agreements.
Although the Japanese Government has relaxed restrictions on the interest
rates and debt length of those credits which Japanese exporters may offer
to the USSR, the amount of capital available remains limited by government
regulations. The importance the USSR attaches to the removal of such credit
restrictions was highlighted by Soviet Foreign Minister Gromyko's recent
insistence on Japanese Government backing of Siberian development either
through Export-Import Bank loans or via broadened government credit
guarantees.
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26. The targeted growth rates for trade during 197.1-75 are .not
dependent on further joint cooperative projects. However, the longer run
growth of trade is likely to depend to a considerable extent on the
cooperative development of Siberian raw materials for use by Japanese
industry. Negotiation on the largest of these cooperative projects, the
Tyumen' oil pipeline, continues, but Japanese reservations, both political
and economic, indicate that agreement is not imminent. Agreements on
proposed joint development of Siberian copper and coal are not likely in
1971-75, but an agreement for the development of Sakhalin and East
Siberian natural gas may be concluded. The proFpects for Japanese
involvement in Soviet development schemes in Siberia will be improved if
.Moscow and Tokyo are able to resolve the status of the Northern Territories
dispute during peace treaty negotiations later this year.
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Approved For Release 2008/03/03: CIA-RDP85T00875RO01700030081-7