Trading with the Communists

In Moscow bold minds are asking where Marxism-Leninism went wrong. Were its premises flawed? Was the execution inept? Communist governments are experimenting with the answers. Americans would do well to pose similar questions about U.S. economic policy toward these nations. Are the premises correct? Do changes in their policies require new assumptions and changes in our policy?

The candor of Soviet self-criticism demands a comparable dose of introspection on our part. We have never expected mea culpas from the Soviets, and we have always prided ourselves on a capacity for self-correction. Yet the United States has been slow to acknowledge evident shortcomings in its economic policy toward the Soviet Union and other communist countries.

Policies framed to deal with an expansionist imperial state driven by authoritarian ideology and marked by the sacrifice of its citizens' well-being to the appetites of its military establishment are not appropriate for a state being reshaped in the image projected by the architects of perestroika and glasnost. As evidence mounts that the reforms of Mikhail Gorbachev are real, the West is challenged to rethink its approach to the Soviet Union. If the international aggrandizement of Stalin and Brezhnev gives way to genuine restraint abroad and gradual democratization at home, it would ill serve the interests of the United States to play the implacable antagonist, blinded by preconceptions and paralyzed by inertia and timidity. The United States would begrudge the revolutionary changes in Soviet behavior which it had long demanded.

Even without such dramatic departures by Moscow, there is ample reason to reexamine Washington's policy. The United States could scarcely have blundered more often if it had followed a slapstick script. Over the past 15 years American policy has continually undercut its political objectives, harmed its economic interests and eroded its leadership in the Western alliance.

This pattern is partly attributable to the difficulties of dealing rationally with a state perceived as a powerful, atheistic enemy seeking world domination. Suspicious of Moscow's motives, Washington has not been inclined to give the Soviets the benefit of any doubt on important questions. U.S. laws still reflect an assumption that the Soviet Union reigns over a monolithic bloc of communist countries in a world divided by ideology and geography into two hostile camps. A fear of the worst-not always unrealistic-has blinded the United States to changes already made and failures self-inflicted. Consider the record.

II

The Jackson-Vanik Amendment to the 1974 Trade Act is the prototype of self-defeating policies. America's reverence for human rights led Congress to impose a link between free emigration from communist countries and the normalization of trade with them. Passed after protracted but unsuccessful bargaining between the late Senator Henry Jackson and Secretary of State Henry Kissinger, this measure effectively denied Moscow nondiscriminatory access to U.S. markets through the most-favored-nation status and access to credit facilities that a 1972 trade agreement pledged President Richard Nixon to seek. The law conditioned MFN, as well as government loans and guarantees for communist countries, on free emigration, subject to one-year waivers approved by Congress after the president reported a country's "assurances" of such emigration.

Jackson-Vanik was conceptually flawed, and it proved counterproductive in operation. By attempting to force Moscow to provide explicit public assurances regarding so sensitive a subject, the law failed on several counts.

It gutted the quiet diplomacy that had begun to yield significant increases in Jewish emigration. Under the Nixon Administration the number of emigrés leaped from barely 200 in 1968 to almost 35,000 in 1973. After passage of the Jackson-Vanik Amendment, the exodus fell sharply to 13,000 in 1975; emigration rebounded only as relations warmed during the SALT II negotiations, reaching 51,000 in 1979. After the Soviet invasion of Afghanistan in 1979 and the frictions of the first Reagan term, the number of Jewish emigrants plummeted to less than 900 in 1984. The conjunction of Gorbachev's accession to power as General Secretary and the overtures of Secretary of State George Shultz revived a more favorable trend. Obviously, the flow of Soviet exit visas depended on larger factors than one heavy-handed section of American trade legislation.

The Jackson-Vanik Amendment proved costly in economic terms when Moscow repudiated the 1972 trade agreement in response to what the Soviet Union perceived as an intrusion in its domestic affairs. While the trade potential of that accord is arguable, its demise meant an end to the Lend-Lease settlement laboriously negotiated as part of the package. The settlement called for the Soviet Union to pay back over $720 million in World War II loans from the United States, a substantially larger fraction of the assistance it received than Britain had repaid for similar aid. Moscow paid initial installments on that debt, but it suspended payments in retaliation for Jackson-Vanik. (The balance due remains $674 million.) At the same time an agreement between the Soviet government and the Export-Import Bank on credits, interest rates and repayment schedules also died aborning.

In addition, Jackson-Vanik caught all communist states in its web. It retarded the development of U.S. economic relations with East European nations, ironically ensuring their continued dependence on the Soviet Union. Even when MFN status was granted to Hungary and Romania, trade was impeded by the uncertainties associated with annual waivers under Jackson-Vanik and the congressional debates required by the law. Romania, the one nation where the law may have favorably influenced emigration policy, finally renounced its trade agreement with the United States, forsaking commerce to be rid of Jackson-Vanik's waiver procedures. Thus the law did not promote either the economic or security interests of the United States-or increase free emigration from the Soviet Union.

The Jackson-Vanik formula was shortsighted, but it is not the only such example. The outrage that Americans felt at the Soviet intervention in Afghanistan, and the urge to punish the aggressor, prompted President Jimmy Carter to impose the famous embargo on grain sales to Moscow. The exercise told more about the vulnerability of U.S. foreign policy to domestic expediency than it did about U.S. capacity to pressure Moscow by withholding grain. The grain embargo became a central issue in the 1980 presidential campaign, and within weeks after his election, Ronald Reagan lifted the ban. By 1983 the United States had entered a long-term grain agreement with the Soviet Union in which the Soviets agreed to certain minimum purchases every year. President Reagan pledged not to impose such an embargo in the future. By 1988 he was offering to subsidize grain sales to the Soviet Union.

The grain embargo highlighted Moscow's leverage as a market for American grain exports. U.S. farmers' dominance in that market diminished because Moscow turned to other suppliers, notably Canada and Argentina. Now that the Soviets have diversified their sources, there should be no illusion about future U.S. potential to exploit Soviet dependence on grain imports.1

The confused U.S. attempt to impede construction of the major gas pipeline between the Soviet Union and Western Europe in the early 1980s was no more successful. Weighty considerations were raised. Would the deal lead to excessive European dependence on the Soviet Union for indispensable energy supplies? Would the hard currency earned by Moscow feed its military machine? Were components supplied by the Europeans likely to convey advanced technologies to the Soviets that the West would be safer withholding? Posing these questions, however, should not have triggered Washington's rush to judgment and extraterritorial actions that provoked the 1982 crisis between America and its allies. Perhaps the best to be said is the affair enabled Shultz to begin his tenure at the State Department with a notable achievement by repairing damage the United States had done to relations with its allies.

The Western alliance has long struggled to prevent commerce from fortifying an adversary. Repeated attempts to segregate strategic from nonstrategic goods, to control reexports, to differentiate between communist and free world exports, to ascertain foreign availability of comparable items, to resolve jurisdictional disputes and a host of other such problems have shown how difficult it is to regulate exports with military potential, especially when many products have dual purposes. Much attention has been drawn to periodic violations of the export control procedures agreed upon by members of the Consultative Group and Coordinating Committee for Multilateral Export Controls (COCOM), which includes Japan and all the NATO countries except Iceland. One prominent episode involved the transfer to the Soviet Union of critical technologies manufactured by subsidiaries of Japan's Toshiba and Norway's Kongsberg Corporations.

The responsible governments addressed those violations as criminal offenses. Nevertheless, both firms became the targets of legislated sanctions in the United States. Such sensational transgressions have grave security implications, but they also obscure the general debilitation that an overloaded export control regime imposes on U.S. firms' trade in nonstrategic goods. According to the Department of Commerce in 1987 national security controls affected one-third of all U.S. exports of manufactures (other than military equipment). The slow-motion review of export license applications conveys the impression at times that Washington is more interested in emulating Moscow's notorious bureaucracy than in rectifying its chronic merchandise trade deficit.

For much of the Reagan Administration, export control policy was snarled in a struggle between the Departments of Defense, Commerce and State, and between the House of Representatives and the Senate. The experience was not edifying, either for native observers or for the allies we purport to lead. Many felt that the result was again to wash U.S. firms out of competition for international sales that other suppliers were ready and willing to make. The Reagan Administration finally took advantage of a deadlocked Congress to formulate a policy that still subjects U.S. export licenses to long delays occasioned by Department of Defense review.

III

These episodes illustrate the incoherence of U.S. policy. Sour experience makes a powerful case for change. That change should begin with repeal of the Jackson-Vanik Amendment. It has not only poisoned the atmosphere for economic relations with the Soviet Union and other communist countries but it has blocked a reasoned debate about those relations. Despite the fledgling progress in Soviet-American relations during the late 1980s, Jackson-Vanik still hovers like a predator, devouring economic possibilities before they can emerge from the nest.

The reasons for abandoning so flawed an endeavor are manifold. Apart from the failure to achieve the nominal purpose of unfettered Jewish emigration, the United States and its allies have now crafted more appropriate approaches to advance human rights. Frank and direct discussions with Moscow have resulted in some family reunifications and release of dissidents. Bilateral diplomacy of candor and detail has shown that it can address such matters fruitfully in the Gorbachev era. More important, the process created by the Conference on Security and Cooperation in Europe (CSCE) has reached a new plateau in agreements concluded at Vienna. These accords extend the commitment of all East European countries (except Romania) to freedom of movement and freedom of religion, including the right to provide religious instruction to children. And on these issues the Gorbachev regime has set benchmarks for itself which other states will be able to monitor.

Secretary of State James Baker has stated clearly that Soviet compliance with CSCE standards will determine whether the United States follows through on the Reagan Administration's pledge to attend the human rights conference planned for Moscow in 1991. It is through multilateral undertakings of this type, not misguided unilateralism, that we can best display our dedication to human rights. Nothing is more hopeful in the present era than the willingness of the Soviet leadership to expose its practices to wider international observation, whether in the verification of arms treaties or in the field of human rights. Perhaps here, too, Gorbachev sees that greater exposure to world opinion can make the Soviet fear of obloquy an ally in his striving for domestic reform.

Hopes for effective international action did not appear so promising in 1974, when the Jackson-Vanik provision was adopted. It has taken many years and disappointments to reach the current, more productive stage. Now that we have reached this point the various rationales for Jackson-Vanik have dissolved. What remains is the evident hypocrisy of applying the law in ways that are blatantly discriminatory and self-destructive of U.S. interests. It has never been applied as a sanction to force the free emigration of non-Jewish populations anywhere; waivers of the law for China have been routine since Washington and Beijing normalized relations in 1979. Nor was there ever an interest in China's emigration practices, especially after Deng Xiaoping reportedly asked President Carter "How many millions do you want?"

In fact, it is not unknown for our government to urge others-Vietnam, for example-to stem the flow of emigrants. Even advocates of the Jackson-Vanik provision might feel a twinge of embarrassment that the U.S. embassy in Moscow has had to slow the processing of visas for refugees because of inadequate funds to resettle them. U.S. immigration law is highly restrictive, assigning quotas by nations and giving preference to skilled professionals over less fortunate candidates seeking entry.

The issue of Jewish emigration from the Soviet Union has taken on new aspects lately. There is progress toward renewed diplomatic relations between Israel and the Soviets, although the timing is unpredictable. Israel's embassy in Moscow is being refurbished. El-Al and Aeroflot are preparing new flight schedules, and joint ventures are under discussion between the two sides. Meanwhile, friction has arisen between Washington and Tel Aviv, as Israel presses the United States to help ensure that Jews emigrating from the Soviet Union go directly to Israel. But America cannot consistently uphold the right of free emigration while insisting that Israel be the sole destination for Jews.

Obviously, Jackson-Vanik is not to blame for all the complications in U.S. trade relations with communist nations. Furthermore, there are occasions when an expression of moral indignation is worth the economic price. But our policy toward trade with communist countries is a strange concoction of political opportunism and paralysis. It embodies a prejudice against doing business with communist states that is shared by few other nations. It produces no perceptible gains, and the economic and human costs are high.

In the end it is the politics of the Jackson-Vanik Amendment that constitute its central defect. Tying MFN and access to U.S. export credit facilities to another nation's emigration rules never made sense. Such selective linkage implies that if Moscow releases enough Jews, its actions in the Middle East, Afghanistan, Central America or elsewhere are relatively unimportant-at least so far as trade is concerned. Whatever the utility of such a posture in American politics, it is an untenable stance in international politics.

Many factors impinge on U.S. relations with each of the communist countries. Congress and the president need to weigh them all in order to reach a rounded judgment of the national interest. The singular preoccupation of the Jackson-Vanik standard prevents them from doing so. Repealing it would help to clear away the incoherences obstructing trade and finance. It would enable the United States to shape a fresh assessment of East-West relations and to pursue its security interests with useful political flexibility. It would signal American recognition of meaningful change in the Soviet Union's behavior, both within and outside its boundaries. It would also comport with the nascent pluralism among communist nations now treated as a Soviet bloc.

Others will press for the use of the president's authority to grant waivers under Jackson-Vanik instead of its repeal. Exercising the waiver authority would place the Soviets on the same footing as the Chinese, and would let the leash out a bit without abandoning the legislation per se. Members of Congress might find it politically easier to support a waiver, rather than outright repeal.

In making the case against the waiver option we consider several points compelling:

-Waivers focus exclusively on Jewish emigration, neglecting other aspects of Soviet behavior important to the United States.

-The Jackson-Vanik Amendment only applies to communist countries, suggesting that the emigration policies of non-communist countries do not matter.

-Annual waivers deny businesses the multiyear-planning frames needed for trade and investment decisions, threatening orderly economic relations.

-The Soviet Union might again refuse to capitulate and offer the "assurances" demanded to gain a waiver; holding to the waiver option might be tantamount to rejecting MFN and to barring normal commerce. After all, Andrei Gromyko emphasized to Kissinger before the amendment passed that the Soviet Union would not accept a trade relationship based on Jackson-Vanik.

In short, a waiver would do little for trade-and its invidious character may do more to inflame the Soviets than to encourage them.

The Union of Councils for Soviet Jews has called for the repeal of the so-called Stevenson Amendment, repeatedly enacted since 1974, which places a $300-million ceiling on new Export-Import Bank loans and guarantees for the Soviet Union (beyond the $469 million outstanding in 1974). As it happened, the blanket prohibitions of the Jackson-Vanik Amendment render that provision moot. Repealing the Stevenson Amendment would be meaningful only in conjunction with lifting the Jackson-Vanik constraints. Neither provision is appropriate to today's circumstances.

Repealing Jackson-Vanik would not resolve the specific issues that a coherent policy must address. Negotiations would be necessary to determine on a country-by-country basis whether, when and under what conditions to grant MFN status. The abandoned 1972 trade agreement and the concomitant Lend-Lease settlement would have to be renegotiated. There would surely be no presumption of automatic access to Export-Import Bank guarantees or credits. Statutory restraints on loans by private U.S. lenders, i.e., the 1934 Johnson Debt Default Act, would remain applicable until the Soviet Union and the United States reached satisfactory settlements on long-standing disputes over "sovereign debt." Though evaded by U.S. banks with foreign branches, this act is another candidate for review-one more example of how U.S. policy restricts American companies to the benefit of foreign competitors but with little effect on the targeted country.

Once the legislative barriers are eased, most of these issues may be properly handled in executive branch channels and in multilateral venues. If commercial bank lending to the Soviet Union poses undue economic or political risks, then one sensible recourse would be cooperative reserve requirements or other measures worked out through the Bank for International Settlements (BIS).

IV

It would be shortsighted to swing abruptly from the rigidity of the Jackson-Vanik Amendment to an arrangement that excluded Congress from the process of continuing review of Soviet-American economic relations. Congress will continue to oversee trade agreements with communist countries, including the decision to grant MFN status. It will want to be assured that remedies against dumping and other unfair trade practices, unavailable under the General Agreement on Tariffs and Trade (GATT), are readily available from the International Trade Commission and other U.S. agencies.

However encouraged they may be by Soviet behavior under Gorbachev, legislators also share their constituents' wariness. They will insist upon a step-by-step approach. They share with the president the responsibility to gauge those steps, and they will not displace the Jackson-Vanik Amendment with a carte blanche for Soviet use of Export-Import Bank facilities. What is needed is a flexible procedure that enables Congress to join with the executive in a periodic evaluation of the relationship, taking account of the entire range of relevant factors.

With respect to Export-Import Bank assistance, Congress could establish a separate authorization procedure for loans and guarantees to communist countries. These authorizations would be reviewed in the normal course of Export-Import Bank legislation. The proceedings would provide an occasion for wide-ranging legislative appraisals of overall relations with communist countries. In this manner the United States could establish implicit linkage to the full range of relevant behavior, rather than the explicit linkage to a single factor that the Jackson-Vanik Amendment requires.

The financial setting for Soviet participation in Export-Import Bank programs is today quite different from that of the early 1970s. In 1973-74 Export-Import Bank credits to the Soviet Union surged from zero to over $450 million before screeching to a halt. The Organization for Economic Cooperation and Development (OECD) now classifies the Soviet Union as a "Category I" borrower, for which no subsidies are permissible. Except for Israel, the Export-Import Bank tends not to lend directly to Category I countries, and officials doubt that the Soviets would find the bank's loans competitive with those available elsewhere.

While the bank is strapped for funds to offer credits, its authority for loan guarantees is more ample and relevant to the Soviet case. For U.S. banks, the Export-Import Bank guarantee programs could be useful in spreading the risk and in easing the limits on loans to a single sovereign debtor. Although reluctant to pay the bank's fees, Moscow might wish to exercise a right to guarantees as a demonstration that the taboo on doing business with the Soviet Union no longer prevails. Thus, as a practical matter, the issue today concerns guarantees of loans by other lenders, not the direct loans that increased so noticeably in 1972-74.

The Reagan Administration began a gradual movement toward more normal economic relations with the Soviet Union. Led by the late secretary of commerce, Malcolm Baldrige, the U.S.-Soviet Joint Commercial Commission in 1985 resumed sessions that had been suspended indefinitely in 1978. Various trade promotion activities have ensued, with hundreds of American businessmen visiting Moscow. Reagan lifted a ban on sales of some oil and gas equipment to the Soviets, a sanction tightened at the time of the Afghanistan invasion. He also allowed imports of Soviet nickel and furs to resume. Before leaving office Secretary Shultz recommended that COCOM end the "no exception" ban on high-technology exports after the Soviets withdrew from Afghanistan. The European allies support this return to a case-by-case review of such sales. U.S. reticence on this point could revive European fears of more "light switch" diplomacy-and Soviet suspicions that concessions only invite demands for more concessions. The ban should be lifted.

Increased commerce with the Soviet Union has been slow, but some developments are potentially significant. Several major firms have formed an American Trade Consortium and negotiated arrangements to permit repatriation of profits from operations in the Soviet Union, perhaps a model arrangement that will permit more income and capital flows to and from joint ventures there. In December 1988 the Soviets further adjusted their rules for joint ventures to permit foreign participants to hold equity majorities and to delay taxation until several years after initial profits are realized. They also increased the number of Soviet organizations authorized to deal directly with foreign partners and suppliers. These attempts to accelerate the pace of the Soviet economy's engagement with foreign investors and markets reveal an alertness to the weaknesses of Moscow's first steps in this direction. American firms were involved in only about 15 of some 200 joint ventures.

These Soviet reforms follow similar measures in China and Hungary. Perhaps the largest economic opportunities for the near future are in Eastern Europe, where capitalist, free market traditions are rooted. Natural trading partners are divided by artificial political demarcations, and the human and economic infrastructures run deeper than in the Soviet Union and China. These different economic potentials, reflecting the various political and economic contexts of the several countries, invite an East-West trade policy that itself is capable of differentiating. The present U.S. policy takes too little account of the liberalizing tendencies within communist countries and of the decentralizing tendencies within the communist "bloc."

This policy flaw bears on export controls. The United States pays a high price for the quaint notion that trade is a privilege. By some estimates export controls have cost U.S. firms between $7 billion and $9 billion in exports and 180,000 jobs annually. A National Academy of Sciences survey of almost 200 firms found that over half claimed to have lost sales because of these controls. Such controls also hurt U.S. sales with non-communist countries; 26 percent of the companies surveyed said they had lost deals with free world customers because of export controls, and over a third of the companies reported such customers preferred to shift to other suppliers outside the United States. In 1985 the control process handled proposals approaching $80 billion in value. This gives an idea of how far it ranges beyond direct trade with the Soviets.2

In a wide-ranging review of COCOM's record, the National Academy of Sciences studies have urged a new balance between national security export controls and commercial considerations. They called into question the feasibility of enforcing the extensive COCOM list of controlled items and pressed for stronger enforcement of more limited restraints-"higher fences around fewer items." These studies and consultations within COCOM have helped build a consensus to shrink the export control list. In addition, the verdict emerged that, however compressed the list, the executive branch had to pick up its own tempo to reach timely decisions on export applications. With that goal in mind, the 100th Congress trimmed the Department of Defense's authority to delay the process, limiting DOD export license evaluations to "national security" as distinct from "foreign policy" considerations. It remains questionable whether such exhortations will be more effective than those in the past.

In the end, there must be some recognition that technology is inherently difficult to control. It travels on paper and in the human mind, as well as in tangible products. It is usually available from many sources. Security requires control of exports with clear military applications to adversaries. But the West's technological supremacy depends upon its economic and intellectual environment, resources for the development of inventions and their rapid application to commercial and military uses. The United States must stay ahead through a nurtured process of basic research and technological innovation.

V

It is essential to state the issues confronting U.S. policy with some precision. Posing the question "Should we help Gorbachev?" tends to divert discussion into narrow byways. If all the change that is transpiring in the Soviet Union rests on a single individual, if it has no roots beyond Gorbachev's alluring rhetoric, then there is little ground for optimism about its durability-or his. If the innovations are tentative and perishable, one would not be wise to argue for shifting American policy onto sandy terrain.

The dawning consensus, however, is that the changes within the Soviet Union are erupting from sources too deep to permit their suppression even if Gorbachev's tenure turns out to be relatively brief. He is a creature of economic and strategic necessities already recognized in China and other communist countries. What is remarkable is that this historical inevitability has been so slow in coming-and that it has not yet appeared in many communist countries. Fidel Castro and Nicholae Ceausescu are defiant.

Some reform initiatives may prove abortive, but the United States can shape policy on the probability that the broad tides of change will continue to flow. That expectation rests not on naîveté, but on the calculation that attempts to revert to Stalinism would guarantee economic failure and political decline-and that even the old guards in Moscow and Prague can perceive these hazards. It rests on some conviction that what we have been saying about the superiority of our self-governing, capitalist systems in the West is inescapably true.

For policy purposes, it is not necessary to predict an outcome with certainty in order to prefer it. Surely, from the Western standpoint, a Soviet system that must become more benign in order to become more powerful is preferable to one that joins excessive military capability with the malign impulses of totalitarianism in decline.

But to welcome perestroika is not to advocate paying for it. In truth, there is little likelihood of excessive American investment in the still risky Soviet economy. The U.S. business community has long since discounted forecasts of easy or early profits in the Soviet market. There is impatience with the sluggish bargaining required to close deals with Soviet bureaucrats and enterprises. Permitting U.S. investment in the Soviet economy is not payment for perestroika. It merely means repealing provisions that hamper commerce and penalize American companies.

As far as Soviet exports to the United States are concerned, the range of candidates remains limited. Over 90 percent of Soviet hard currency exports consist of oil, gas, gold and arms, not manufactures that would displace major domestic sales by U.S. firms. It is conceivable that buried deep in Soviet archives and laboratories are ingenious developments waiting to be commercialized, but so far the examples are few, e.g., sales of electromagnetic casting technology and an ion-gun hardening system for industrial cutting tools.

Understandably Moscow hopes that the joint ventures it now encourages will concentrate on exports to generate hard currency revenues, but the projected scale of such enterprises remains relatively modest. The volume of trade with communist countries may be small, but these are nations with which the United States can run a needed trade surplus.

The apprehension that the United States might be lured into paying for perestroika seems to focus on official credit arrangements, perhaps reflecting concern about methods once employed to pursue détente. If Moscow were to become eligible for Export-Import Bank financing, as agreed in 1972, today it would face stiff competition for the bank's limited resources. There is no disposition in either Congress or the executive branch to allow Export-Import Bank guarantees to become a surrogate for foreign aid, for example, underwriting development in Soviet Siberia. In the midst of U.S. budget stringencies and chronic trade imbalances the bank is obliged more than ever to husband its authority and to devote its efforts to improving American export performance.

We do not suggest lending money to finance perestroika or denying credits to achieve some political purpose. It is unlikely that Soviet policies will be influenced materially by proffering or withholding cash. The clearest justification for official export assistance is the competitive imperative. If assistance is necessary to put U.S. exporters on an equal footing, then the Export-Import Bank should be in position to help. If there is foreign competition that requires official financial participation in U.S. ventures, the solution is not to punish American exporters but to negotiate international terms that prohibit subsidies. Such negotiations are best pursued with leverage, not with a unilaterally disarmed Export-Import Bank.

To preclude Export-Import Bank participation in business with communist countries discourages exporters, investors and private lenders from exploring opportunities. In any case, the bank's primary function is not to do the whole job but to lubricate the larger process. To the extent that there develops a need for selective use of Export-Import Bank assistance in trade, the option should be open. Otherwise American traders and financiers carry a handicap that their counterparts in other Western countries do not.

VI

There appears to be a good understanding at the highest levels in Moscow that one way to energize Soviet domestic enterprises is to subject them, albeit gradually, to the stresses of international competition.

The emphasis on opening the Soviet Union to foreign investment and on working toward convertibility of the ruble reflects this insight. More than nostalgia lies in the recollection that Lenin had a convertible currency. This opening is a farsighted appeal for a return to pragmatism, coupled with a straightforward acknowledgment that the transition from the current 6,000 variations ("currency coefficients") to a unitary ruble exchange rate will take a decade or more.

For the West the prospect of convertible currencies and an end to the Council for Mutual Economic Assistance poses interesting policy questions. Few measures would contribute more to the predictability of transactions with communist countries than the shift to currencies readily traded on world markets. Such a development could testify to the growing strength and independence of communist economies. It could help to stabilize East-West economic relations.

Yet Soviet reformers who foresee a "fully" convertible ruble by the end of the century are optimistic. The painful changes entailed in moving to convertibility are meeting both bureaucratic and grass-roots resistance. Retail price reforms are already behind schedule and worries about inflation are mounting. Western imports needed for restructuring will be costly, while Soviet export potential (barring an oil price increase) appears rather low. Without a surge in hard currency earnings, Moscow's borrowing capacity will be limited, perhaps to another $20 billion or so. This calculus puts full convertibility of the ruble far into the future, although there may be intermediate stages centered on special economic zones, hard currency auctions and partial convertibility.

But do we want communist economies to be integrated into the world capital and trading system? Certainly not the Soviet economy we have learned to distrust. The economy Gorbachev envisages, however, would be a different matter. A Soviet economy that had undergone the transformations now contemplated could become a constructive participant in the international economic system arduously constructed by the free market countries.

With commitments to change being advertised by Moscow and other communist regimes, the United States and its allies cannot avoid a considered judgment about how to respond to these innovations as they unfold. The speed of reform will vary from one country to another, but the direction seems clear. Hungary is leaning West, and Czechoslovakia and East Germany could restructure sooner than the Soviet Union, if they were so disposed. The prudent case-by-case engagement of these nations with the Western economy is a looming opportunity. It poses a particular challenge for the European Economic Community. It might as well involve a reformed Hungary as a remote Turkey.

The rejection of a Soviet request for observer status at the 1986 GATT meetings in Punta del Este conveyed reasonable doubts about whether a state-run economy could mesh with the market-oriented universe to which that organization is dedicated. But a number of American analysts incline more positively toward some form of Soviet association with GATT, on the theory that it could provide a window on Soviet economic activity and enable outsiders to encourage genuine price reform and the decentralization of markets.

Looking ahead, there has been speculation regarding future Soviet involvement in the International Monetary Fund. Leaders in Moscow have pointed out that an IMF relationship could expedite the country's graduation to currency convertibility. They note that a place in IMF would not give a veto to the Soviet Union and that, given the IMF structure, Moscow would hardly have enough leverage to disrupt its functions. Hungary and Poland are already members and the prospect of an eventual Soviet connection to IMF warrants examination.

As we evaluate these issues, it is reasonable to argue that a Soviet Union more engaged in the global economy would be less prone to backsliding in its economic and political evolution. In the phrase of one close observer, Brezhnev wanted foreign investment to avoid reform, Gorbachev wants it to foster reform.

Another development demands consideration by U.S. policymakers. While the Soviet or communist "bloc" is fragmenting, other nations, bound by a commitment to capitalism and by geographical proximity, are forming economic blocs in Western Europe, the Persian Gulf and North America. Where will the colossi of the communist world fit in this emerging, regional shape of things? It is too glib to say that they do not fit. In a new age of regional cooperation the free countries of the Pacific will be dealing with two communist mammoths, Russia and China, both hungry for trade and capital.

Does the communist countries' pursuit of foreign investment threaten U.S. interests? One can imagine scenarios in which it might do so. Gullible Western investors, shown the green light by changes in public policy, might divert so many resources to Soviet projects and joint ventures that they deprive other needy nations of capital. That redirection of capital flows could drive up the cost of funds to everyone, including the United States. Reverse leverage could come into play, with the American government and its allies under pressure to do nothing that might prompt the Soviets to default. These concerns are valid, but not conclusive. Western banks' painful over-exposure in Latin America and Eastern Europe, especially Poland, has bred a healthy caution about concentrating too many eggs in the Soviet basket. Most lenders have relearned the old banker's adage that "if a man owes you a hundred dollars, he's got a problem; if he owes you a million dollars, you've got a problem."

Present evidence makes worst-case anticipations implausible. The Soviets and Chinese historically have been prudent, cautious, even reluctant borrowers. Sovereign borrowers, no less than others, cannot afford to antagonize the big players in Western capital markets. Besides, the West always has its assets to sequester, as Iran discovered. The risks are not exorbitant.

An interagency study done late in the Reagan Administration found that rumors of massive Soviet borrowing in the mid-1980s were exaggerated. Dependable data are difficult to come by, but it appears that, adjusting for exchange rate shifts, total hard currency debt in the Soviet bloc grew by only about 14 percent from 1981-86, and in fact declined if measured in constant dollars. Net Soviet debt to lenders reporting to the Bank for International Settlements, i.e., gross debt minus deposits in BIS banks, was actually less in 1986 than at the start of the decade. The study concluded that the Soviet capacity to service its debt is quite adequate.

To be sure Moscow has begun to dabble with bond issues underwritten in the West, and during 1988 Western lenders extended lines of credit amounting to several billion dollars, most of which are thought to be tied to purchases of consumer goods and equipment. The U.S. government believes that the majority of these credits are officially guaranteed, export-related borrowings permissible under OECD guidelines. This contrasts with the pattern of Soviet loans earlier in the 1980s, which appeared to be generally untied. Two-way trade with nonsocialist countries slackened somewhat, but Wharton Associates projects volume reaching $95 billion in the early 1990s. In the estimate of Soviet economist Abel Aganbegyan, removal of trade barriers could bring bilateral U.S.-Soviet trade levels up to a range of $10 billion to $20 billion within five to seven years.

Some analysts foresee Soviet hard currency debt rising from less than $30 billion in 1985 to over $50 billion in the near future.3 The Soviets themselves are quite chary about this trend, and Gorbachev's advisers seem determined to hold debt service below 25 percent of export earnings. They look instead to joint ventures to attract perhaps $20 billion in the near future, noting that China already has foreign investment commitments of that magnitude.

All things considered, alarm over Soviet penetration of Western capital markets is premature. From a policy standpoint the important objective in the near term is to improve the means of monitoring Moscow's activities in those markets. That task is part of the more general need to develop adequate information about capital flows-now so rapid and dominant an element in the global economy-as a building block for intelligent policy and for government interventions, when necessary to maintain stability. The United States will have more clout in extracting that information from the Soviets if it is a player, rather than a bystander, in Gorbachev's enterprise.

The shift in policy emphasis recommended here does not prejudge whether American firms will discover enticing and large-scale opportunities in the Soviet Union. Our contention is simply that the government should not strangle their search for such opportunities by policies that preempt consideration of mutually acceptable economic possibilities. The message is: let businessmen strike bargains they deem profitable-and keep enough steerage over U.S. policy to hold a safe and steady course in our overall relationship with communist states.

It is often the essence of political decision-making that governments must choose before there is a confident basis for judgment. So it is in shaping the next phase of U.S. economic relations with communist countries. The mistakes of the past 15 years are clearer than the path into the next century. But, while remaining alert to the dangers, American policy should lift the impediments barring its citizens from exploring that path actively. In today's world economy, inertia is a recipe for neither prosperity nor security. There is no standing still.

3 See "Report of the Special Interagency Task Force on Western Lending to the Soviet Bloc, Vietnam, Libya, Cuba and Nicaragua," 1988; also Hansen, op. cit., p. 32.