THE UPCOMING SOVIET-CHINESE TRADE AGREEMENT: A POLITICAL AND ECONOMIC STEP FORWARD

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T01058R000507720001-5
• Release Decision: RIPPUB
• Original Classification: C
• Document Page Count: 14
• Document Creation Date: December 22, 2016
• Document Release Date: April 28, 2010
• Sequence Number: 1
• Publication Date: June 28, 1985
• Content Type: REPORT

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Central Intelligence ,Agency J1V
State Dept. review completed
DIRECTOR OF INTELLIGENCE
28 June 1985
The Upcoming Soviet-Chinese Trade Agreement:
A Political and Economic Step Forward
Summary
established as part of the agreement, although
Chinese Vice Premier Yao Yilin will sign a Long Term Trade
ana Economic Cooperation Agreement (1986-1990) during his visit
to Moscow in early July--the first such agreement in over twenty
years. No official target on trade turnover reportedly will be
To reach a trade turnover between $16-20 billion, the
Chinese will have to substantially increase their supply of farm
products, textiles and other consumer related items to the
USSR. In return, the Soviets can be expected to furnish China
with additional amounts of manufactured goods, chemicals, raw
materials and transport equipment. In addition, Moscow probably
will provide capital equipment, machinery and technical
assistance for a number of new development projects scheduled
during China's Seventh Five Year Plan (1986-1990)--the first such
made up about 50 percent of China's total trade.
on
during 1981-85. Even with such a large increase, bilateral trade
Dy 1990 would represent less than 10 percent of each country's
total trade. By comparison, in the late 1950s the Soviet Union
could reach $16-20 billion--compared with an expected $4 bill;
Perms ce Division, SOYA, with maior contributions from
This memorandum was prepared by Economic
W IVISIVn, Vr.A. t;omnents and queries are welcome and may be
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Although a last minute hitch could delay the signing of the
new agreement, both sides have strong political and economic
incentives for expanding trade ties. Politically, the agreement
builds on the success of Soviet First Deputy Premier Arkhipov's
visit to China in late December and represents yet another step
the two sides have taken to improve bilateral relations.
Although Moscow and Beijing remain at loggerheads over basic
security and political issues, they apparently see improved
economic relations as one way to partially balance their ties
with the US. At the same time, they probably hope that over the
longer term, increased trade and economic cooperation will help
pave the way for progress on other issues between them. 25X1
Economically, the new agreement should also prove beneficial
to both. Despite the low level of trade in recent years, the two
countries are natural trading partners in the sense that each has
goods to export needed by the other. On the Soviet side, for
example, increased agricultural and textile imports could give
some impetus to its troubled Consumer Goods Program that is
scheduled to be unveiled as part of the upcoming 12th FYP, as
well as to help conserve hard currency. At the same time,
increased trade will also provide the Soviets with an outlet for
their machinery and capital equipment for which there is little
demand in the West. The Chinese, for their part, will gain an
additional market for their fast growing supply of textiles and
other consumer related goods, exports of which are becoming
increasingly hard to sell in the West (including the US) because
of import restrictions. Soviet capital equipment and machinery
should help improve China's industrial performance without the
ex
dit
pen
ure of hard-currency. 25X1
Given the strong economic incentives for increasing trade,
we believe trade turnover could, indeed, reach $16-20 billion for
the period 1986-90. To reach this goal, however, the two
countries will have to overcome transportation problems that are,
even now, limiting shipment of goods. At the same time, a sudden
deterioration in bilateral political ties would also almost
certainly be reflected in a trade slowdown. 25X1
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I I
The New Trade Agreement: Where It Stands Now
After nearly two years of discussions, final details on a
long term trade and economic cooperation agreement for the 1986-
90 period were apparently worked out in early June when Soviet
Vice Minister Grishin traveled to Beijing and reportedly
initialed the accord. the formal 25X1
signing will take place sometime during Vice Premier Yao Yilin's
trip to Moscow, now scheduled for 9-16 July.
No official statements on the agreement's contents have been
released publicly so far. In fact, a Chinese expert on the
Soviet Union in the Ministry of Foreign Affairs stated recently
that even when the agreement is signed, no figure on trade
turnover will be announced publicly. In separate discussions
with US embassy personnel this spring, Soviet and Chinese sources
indicated that bilateral trade--excluding border trade--probably
would reach $4-6 billion by 1990 and total somewhere between $16-
20 billion for the 1986-90 period. More recently, however,
Yugoslav diplomats in Beijing indicated that total trade might
only reach $13 billion. Regardless of the precise figure, it
will represent a several-fold increase over the 1981-85 period;
based on trade figures for the first four years of this period,
total Sino-Soviet trade for 1981-1985 will probably reach just
over $4 billion, with trade in 1985 projected at around $1.6
billion. (See figure 1)
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Figure 1
Sino-Soviet Trade, 1950-90
i .-
?tliton US Dollars (owrsM)
p -=..r
_
Im ago 1966 7roda~or 1950-84 b--.-A
1
?
Wirm b ode for
985 projoehd according to trade orofoool.
official Sovf.t fore ian frado flaur~. ..~_ ,
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Boxed Inset
Sino-Soviet Border Trade
A dynamic element in China's trade with the Soviet Union
which will not be covered in the upcoming agreement between the
two countries is cross border trade. Such trade is arranged
among local Chinese and Soviet authorities to take advantage of
regional needs. This trade--which resumed in 1982 after a break
of more than 15 years--could reach $80 million this year. Border
trade presently consists primarily of Soviet fertilizer,
construction materials, timber and transportation equipment in
exchange for Chinese farm products and textiles. Trade officials
in Heilongjiang Province have indicated, however, that late this
year they will begin negotiating for the Soviets to renovate some
of their factories.
End Box Inset
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the long-term agreement 25X1
will set out a general framework within which the yearly trade
protocols can be negotiated. To handle the increased level of
trade, the agreement reportedly will establish two types of
barter exchange. The first--as is the case now--will require the
yearly settlement of accounts. The second type, however, will
allow the Chinese to pay for their imports of capital goods and
technical assistance over a multi-year period. 25X1
The agreement reportedly will also involve the Soviet supply
of machinery, capital equipment and technical assistance to
support China's Seventh Five-Year Plan (1986-1990). 25X1
the agreement will include Soviet 25X1
participation in 5 new Chinese development projects--two thermal
power plants, two coal mines and a 1000KM rail line--as well as
the renovation of 13 existing plants. If true, this would mark
the first time in over twenty years the Chinese have asked the
Soviets for assistance and technology in the construction of new
plants. In addition to these larger projects, there are a number
of smaller ones--such as helping renovate some of Beijing's
infrastructure--which have also been targeted for Soviet
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Soviet deliveries of manufactured goods, chemicals, raw
materials, and transport equipment are also likely to rise as
result of the new agreement. Beijing will continue to need
1 By way of canparison, during the height of the Sino-Soviet relationship
Nbscow was involved with over 200 projects in China.
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imports of such Soviet metals as nickel and steel alloys. At the
same time, despite recurring problems with quality and tardy
delivery, China will probably want to increase its imports of
timber, industrial chemicals, and fertilizers.
China will likely balance these imports with the shipment of
farm products and consumer goods (see figure 2). We expect
Moscow will seek to increase its imports of meat, soybeans,
grain--mostly corn--and other agricultural products. Similarly,
to supplement its own production, Soviet imports of wool, cotton,
apparel, and textiles--both fabric and fibres--are likely to
rise. Finally--if the Chinese can boost their domestic
production--the Soviets also may try to boost their imports of
consumer electronics such as TVs and radios.
The Politics of Trade
While both sides will benefit from an expanded economic
exchange, the decision to capture this expansion within the
framework of a publized offical trade agreement, after a 20 year
hiatus, reflects a number of political factors.
Recognizing that their total estrangement did them little
good--and actually helped Washington in its dealings with both of
them--the USSR and China began a fresh effort to moderate the
level of hostility between them about four years ago. With the
Soviets taking the lead initially, Beijing and Moscow began a
slow process of improving relations in 1981 that included:
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Figure 2
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o Regular political consultations at the Deputy Foreign
Minister level.
o Low-level nonpolitical contacts at athletic meets,
cultural events, and the like.
o A sharp increase in bilateral trade and a resumption
of scientific, and technical exchanges.
Probably the most important of these moves was the
resumption of Sino-Soviet political discussions in October
1982. Although the six rounds of "consultations" to date have
done little to resolve major political and security issues, they
have, nonetheless, helped lower tensions. Moreover, by expanding
various forms of cooperation, as well as increasing bilateral
trade, Moscow and Beijing have helped repair some of the damage
inflicted on their relationship during the 1960s and 1970s.
Their success in improving relations, in turn, has served to
remind the United States and other interested third parties that
Sino-Soviet ties are not frozen, even though the two sides remain
deadlocked on the main political and security issues dividing
them. The signing of the new agreement calling for a major
upturn in trade and Soviet participation in Chinese development
projects would reinforce this perception.
Besides helping both sides to show some balance in their
ties with the US, both countries have individual reasons for
signing a new trade accord. The Soviets almost certainly look
upon the new agreement with China--especially with its focus on
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project assistance--as a means of regaining some of the influence
that they had wielded in Beijing before relations deteriorated in
the early 1960s. Indeed, a 25X1
number of the USSR's top Sinologists believe that there are
Chinese officials who are dissatisfied with the current
leadership's policy of developing close ties with the West,
particularly with the United States. According to these Soviet
experts, many of the Chinese cadre were educated
in the USSR during the 1950s, and want a return to "the good
days" or at least a more balanced approach to the two
superpowers.
Although the Soviets almost certainly have tailored such
remarks for the benefit of Western interlocutors, we believe, in
fact, that there are some senior Chinese who are more receptive
to Soviet proposals to expand relations than others in the
leadership. While the degree of support is probably not as
widespread as the Soviets claim, some Chinese apparently do see
increased trade and economic exchanges--which are unlikely to
evolve into economic dependencies--as a comparatively safe way to
improve their relationship with the USSR without compromising on
more fundamental political issues.2 Other Chinese leaders also
may find it politically expedient at present to show their
2
According to the Chinese, there are three major "obstacles" to
better relations. They involve Soviet troops along the Sino-
Soviet borders, Soviet involvement in Southeast Asia, and the
continued occupation of Afghanistan.
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domestic opponents that they are ready for some progress with the
Soviets, at least in the economic area. 25X1
Economic Benefits From Increased Trade: The Soviet Perspective
In addition to these political reasons, both the Soviet
Union and China have strong economic incentives to sign the new
agreement. The Soviet Far East, due to its northern location,
does not produce sufficient amounts of agricultural products to
support itself. Because of the high transportation costs
involved in moving such items--in addition to most other goods--
to its Far East region, Moscow is undoubtedly anxious to beef up
imports of agricultural products and consumer goods from China.
Besides reducing shortages in the Far East, increased
imports of textiles and other consumer related goods also would
provide a boost to the Soviet Long Term Consumer Goods program
that is scheduled to be unveiled as part of the upcoming 12th
the completion of
plans for the program have been delayed because of the lack of
investment resources internally, as well as problems in
negotiating future deliveries of appropriate consumer goods from
Another positive aspect of increased trade from Moscow's
vantage is that it will allow the USSR to import some goods that
would otherwise require the expenditure of foreign exchange.
Although any hard currency savings from increased Chinese imports
Eastern Europe.
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will be relatively small in comparison with total hard currency
expenditures, they are important at the margin. China can
probably supply Moscow with 1-3 million tons of grain--primarily
corn--and several hundred thousand tons of soybeans annually for
at least the next few years. To the extent that these purchases
replace those from Western suppliers, Moscow could save anywhere
from $200-500 million a year. Similarily, Moscow would
undoubtedly like to reduce its hard currency expenditures for
meat--which averaged $350 million in 1981-1984--by additional
purchases from China. In 1984, imports of meat from China
totaled over $100 million.
The Soviet cost in boosting consumer goods and agricultural
imports is not that great. There is minimal free world demand
for the Soviet equipment which will be exported to China in
return.
The Chinese Side of the Ledger
While increased imports of textiles and other consumer
related goods would help Moscow to deal with its supply problems,
they would also provide China with an outlet for its growing
textile fibres and textile product production. Both the U.S. and
Europe have placed restrictions on the import of some Chinese
products--including textiles and consumer related goods--forcing
Beijing to search for alternative markets.
The use of Soviet capital equipment, machinery, and Soviet
assistance--in addition to raw materials--will also prove
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beneficial to Beijing. The Chinese have apparently decided that
for some of those factories built originally with Soviet help, it
is cheaper to modernize using Soviet equipment. Although this
equipment may not be as technologically advanced as that
available from the West, it will still improve industrial
performance. The Chinese probably also believe that for a number
of new projects--primarily energy--the Soviets can provide
technology that is as good as in the West and without the
expenditure of hard currency.
Prospects
Given these incentives, we believe trade turnover of $5-6
billion by 1990 is possible. Indeed, the present level of Sino-
Soviet trade is such a small faction of each side's total trade--
1 to 2 percent--that even if it reaches the $6 billion level by
1990--it still will probably represent less than 10 percent of
each country's total trade. Even this level could prove elusive,
however, if bilateral political ties deteriorate.
Beyond 1990, we would also expect trade -to continue to
increase, although probably at not as rapid a rate. Whether
modernizing existing plants or planning new ones, Beijing may see
merit in drawing upon increased imports of Soviet machinery,
capital equipment and technical assistance. For its part, Moscow
will probably continue to want increased quantities of farm
products and textiles to supply the Far East and increase
consumer welfare.
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Transportation problems, however, may prove a long-term
impediment to trade. Even now, rail transport is so tight on
both sides that many products are shipped by sea, where port
congestion in both China and the Soviet Union has slowed
movement. China is building new port capacity to alleviate sea-
going freight delays, but planned improvements to the rail system
are not likely to be sufficient to eliminate major problems.
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