CHARTS

1. VOLUME OF TRADE OF OEEC COUNTRIES WITH

EUROPEAN SOVIET BLOC 6

2. FREE WORLD TRADE WITH THE SOVIET BLOC 21

3. EDAC STRUCTURE 57

_INTRODUCTION_

=Note on "Strategic" and "Nonstrategic"=

To help protect the security of the free world, the United States and

certain other countries have been working together for more than four

years to withhold strategic goods from the Soviet bloc.

But how can you tell strategic goods from nonstrategic goods? A good

many people have asked that question. It is a reasonable question and

it deserves a nontechnical answer.

The answer is that strategic goods, as understood in the day-to-day

operations of the program, are those goods which would make a

significant contribution to the warmaking power of the Soviet bloc.

This is a practical guide to action. There is no rigid definition that

holds good for all times, places, and circumstances. All strategic

goods don't have the same degree of strategicness. The free countries

have embargoed some, merely limited others in quantity, and kept still

other items under surveillance so that controls could be imposed

if necessary. Even the same item may vary in strategic importance,

depending on the destination, the changing supply situation behind

the Iron Curtain, and other circumstances which may change from time

to time. Whether an item includes advanced technology is an important

consideration. In specific cases, two experts of equal competence may

disagree on these things. Two agencies of government, differing in

function, may bring different points of view to a given problem. The

same is true of governments.

Since there is no distinctly visible boundary between "strategic"

and "nonstrategic," some people insist there is no such thing as a

nonstrategic item at all. It is true that even bicycles, typewriters,

or ordinary hardware may help the other fellow by strengthening his

general economy. And these people argue that anything that contributes

to the general economy helps in a military way, too.

That is a correct concept in actual warfare but it is not an acceptable

concept of "strategic" in the present situation, for trade on certain

terms can help the free nations too. They carry on two-way trade with

the Soviet bloc for concrete commercial benefits. The problem is to

gain those benefits without permitting the Kremlin to accelerate the

growth of military power or to divide the free world.

In rating items as strategic or nonstrategic, it is clear that there

are innumerable commodities, used entirely or mainly for civilian

purposes, which would not make a clearly significant contribution to

war potential. No one would have trouble drawing a line between a jet

plane and a suit of clothing, to take an extreme example. Few would

have difficulty putting cobalt on one side of the line and butter

on the other. As for the border area where it is less clear what

contribution an item would make, the allied governments put their heads

together, pool their facts, and try to arrive at mutually acceptable

judgments.

As President Eisenhower has said, "Unity among free nations is our only

hope for survival in the face of the worldwide Soviet conspiracy backed

by the weight of Soviet military power."

_CHAPTER I_

=Stalin's Lopsided Economy=

_The weakest link of the socialist chain is merchandising and

distribution; if this can be strengthened, present difficulties

will be overcome. Upon it the Kremlin has wisely concentrated

attention. The Kremlin's immediate objective, as recently

announced by the resolutions voted at the plenary session of

Bolshevik leaders, is to increase the supply of foodstuffs and

consumers' goods and stimulate their mutual exchange._

That quotation is from a Moscow dispatch to the _New York Times_. The

dispatch was written by Walter Duranty and printed on November 6, 1932.

As long ago as that, and even before, the Russian people were wondering

when something was going to be done about the supply of food and other

things they needed, and the dictatorship was making motions--but not

very helpful--in that direction. Goals were set and decrees were

issued. But the results were disappointing, and the standards of living

of the Russian people stayed low.

Stalin's First Five-Year Plan called for a 50 percent rise in gross

farm production during 1928-32 inclusive. But by 1932, farm production

had declined by 20 percent. The difficulties have continued ever

since. For example, the Third Five-Year Plan, beginning with 1938, was

scheduled to bring a large increase in consumer goods--larger than the

increase being promised nowadays--but instead the supply of consumer

goods actually decreased, even in the three prewar years of the period.

Per capita consumption in the Soviet Union is lower now than it was in

the 1920's, before the 5-year plans commenced.

=Emphasis on Heavy Industry=

The basic cause of these continual disappointments now is widely

understood: The Communist elite, while preaching continually about

the "uneven development of capitalism" and the "ever-increasing

decomposition of the world economic system of capitalism," created a

remarkably lopsided economy of their own, in comparison with which the

free economies of the West look very well-balanced indeed.

Beginning in the 1920's the Bolsheviks deliberately concentrated on

building a base of heavy industry. In their 5-year plans, pig iron,

steel, coal, oil, electric power, factories, heavy machinery, armaments

have always been given the right of way over the needs of the people

for meat, fish, vegetables, vegetable oils, milk, butter, chairs,

tables, beds, bicycles, watches and clocks, radio sets, decent homes,

boots and shoes, fabrics of cotton, wool, and silk--and so on through

the myriads of consumer items that are commonplace in most Western

countries.

Impressive advances have been made in heavy industry. But this was done

at a staggering cost to the inhabitants. It was accomplished through a

vast use of forced labor and police discipline, and through the neglect

of the manufacturing of consumer articles, the growing of foodstuffs

and textile fibers, and the building of homes and retail stores.

The Kremlin made strenuous efforts to maintain the flow of farm

products to the cities, even while drawing labor away from the farms.

But heavy metalworking industry was always considered more important

than food and clothing. And more important, too, was the long, bitter

and as yet unsuccessful attempt to cram collectivism down the throat

of the Russian farmer. Stalin considered this struggle ideologically

essential. Moreover, it was the means of forcing the peasants to supply

food and raw materials to the growing industrial complex without

receiving consumer goods in return. All in all, the failure of Soviet

farm policy was one of the most resounding failures in the brief

history of the U.S.S.R.--and it still is. Bread and potatoes are the

principal diet of the masses, and even the grain and potato crops are

unsatisfactory.

During the years of Hitler's devastating invasion, the Kremlin had

to dedicate the energies of Soviet Russia to a fight for survival.

But when the Grand Alliance crushed Hitler, and the western nations,

hoping for a peaceful world under the United Nations, practically

dismantled their military establishments and fell back into their

normal roles as consumption economies, the Kremlin did not alter the

lopsided war economy of the Soviet setup. The Stalin regime inaugurated

a new phase of hostility toward the West. The grim drive to build

up an industrial-military foundation continued. Consumer goods were

still given a low priority in the scheme of things. And all this was

discouraging not only to prospects of world peace but also to the

prospects of happiness and dignity for the weary and heroic Soviet

peoples.

=How Forced Industrialization Affects Trade=

Moscow laid the same pattern upon the European satellite countries

and cut them to fit the pattern. Heavy industrialization was imposed

on them regardless of their desires and the needs of the people. This

forced industrialization absorbed large amounts of commodities that

were formerly available for export to the free world. At the same time

the collectivization of agriculture was imposed on the satellites, and

this aggravated the difficulties of keeping pace in farm output.

While these policies were reducing the total amounts of goods the

satellites had available for export to the West, the U.S.S.R. was

siphoning off great trainloads of what remained. The ability of these

countries to trade with the West was further reduced as they were

pushed into granting priorities to one another on the exchange of items

they could have more profitably sold to the free world.

Moscow also forced upon the satellites the characteristic Soviet

trading goal of reducing and eventually eliminating all dependence on

the free world. Lenin himself had emphasized that the first goal of the

Soviet Union in its economic relations with the outside world was to

gain "economic independence from the capitalist countries." A prominent

Soviet economist, Mishustin, in a book published in 1941, spelled out

this principle in greater detail:

The main goal of the Soviet import (policy) is to utilize foreign

products, and above all, foreign machinery ... for the technical

and economic independence of the U.S.S.R.... The import (policy)

of the U.S.S.R. is so organized that it aids the speediest

liberation from the need to import.

In 1946 the leading Soviet economist, Vosnosensky, restated the

objective in the Government periodical, _Planned Economy_:

The U.S.S.R. will continue in the future to maintain economic

ties with foreign countries in accordance with the tested line

of the Soviet government directed towards the attainment of the

technical-economic independence of the Soviet Union.

The Kremlin's new Eastern European empire included vast natural

resources and sizeable labor reserves. Nevertheless it was--and still

is--a long way from being self-sufficient, in the sense of being able

to match the production levels of the free world, or even in the sense

of fulfilling its own ambitious production plans, without trade with

the West. Imposing an ultimate goal of self-sufficiency thus could not

eliminate the Soviet bloc's dependence on the free world. Communist

trade planners still found it advantageous to import from the free

world many things the bloc countries needed. The new goal did, however,

affect the composition of the satellites' trade. The planners placed

much greater emphasis on the importation of industrial raw materials

and equipment that would, in the long run, reduce the need to import.

In the U.S.S.R. itself, the Government had always been disinclined to

offer exports in order to import consumer goods, like meat, butter,

textiles, and appliances. Now the same policy was clamped on the

satellites. So the bulk of Soviet-bloc imports from the West consisted

of goods that did not enter the homes of the people.

[Illustration: VOLUME OF TRADE OF OEEC COUNTRIES WITH EUROPEAN SOVIET

BLOC]

The result of all this was a big decline in trade between Western

and Eastern Europe, as compared with prewar years. Before the war,

countries which now make up the Soviet bloc in Europe carried on less

than 10 percent of their foreign trade with one another; now this has

risen to more than 75 percent.

=How the Kremlin Controls Trade=

All foreign trade of the countries of the enlarged Soviet empire was

placed under absolute state control. For both the U.S.S.R. and the

satellites, international trade is now not only a 100-percent monopoly

of the state, but also an integral part of the planned economy,

officially proclaimed as such. Each country, as a part of its general

economic plan, estimates its import requirements and then develops a

program of exports to pay for the imports. These country plans are

coordinated by Moscow. Part of the machinery of all this economic

planning and trade coordination is an organization, with headquarters

in Moscow, called the Council of Mutual Economic Assistance.

This totalitarian trading system insures that foreign trade serves the

purposes of the state.

Top priority in trade planning is given to the requirements of the

U.S.S.R. Bloc countries are required to give one another preferential

treatment in trade. With this system the export of any items to the

West is easily restricted as it suits government purposes--whether or

not the items could be considered as "strategic."

A vast amount of commercial information is obtained by bloc governments

through their dealings with free-world traders and through their

intelligence services. This provides Moscow with a comprehensive

picture of the bargaining strengths and weaknesses of free-world

traders.

Moreover the Soviet-bloc governments, as large buyers and sellers

controlling the production and trade of a whole country, indeed a group

of countries, enjoy certain bargaining advantages in dealing with the

many smaller competing buyers and sellers in the marketplaces of the

free world. Since losses on individual transactions can be absorbed in

longer-term government gains on other deals, the unit profit need not

be the factor that determines the advantage of a deal, as it generally

does for the free-world trader. Soviet-bloc governments can--and not

infrequently do--set their prices at levels which discriminate among

the various buyers and sellers with whom they deal. They exercise

monopoly control not only in selling their own goods abroad but also

in disposing of imported goods at home. The Soviet-bloc governments

get bargaining advantages from such practices, made possible by their

totalitarian trading system--practices which the West would not wish to

imitate but which it might as well squarely face.

Foreign trade is a political as well as an economic weapon in the hands

of the Soviet Communist state. By way of illustration, in 1948 it was

possible for the Kremlin first to reduce and then to cut off all trade

between Eastern Europe and Yugoslavia as a part of the attempt to

bring Marshal Tito to his knees. The attempt failed, but the Yugoslavs

suffered serious economic difficulties before they could readjust.

Even earlier, the world had seen how the Kremlin refused to allow the

Eastern European countries to benefit from the flow of Western goods

that could have been theirs under the Marshall plan--another evidence

of how the state's objectives took precedence over the people's needs.

The Kremlin in its propaganda made much of Western trade restrictions.

But the West's limited controls over the shipment of strategic goods

did not come into existence until long after the Kremlin had begun

using trade as a cold-war weapon. Even then these Western controls,

far from being aggressive actions against peaceful trade or against

the welfare of populations, were common-sense measures of economic

_defense_, designed only to foster Western security by withholding from

aggression-minded governments the important war-building materials that

would make aggression easier.

On the other hand, the Kremlin's long-term objectives in its economic

relations with the free world are far more than defensive. They have

a dual character: strengthening the bloc and weakening the free-world

powers. These objectives can be summarized as follows:

1. To feed the economy, especially the industrial-military base,

with imports that help the bloc become more powerful and less

dependent on the free world.

2. To drive wedges among free-world nations at every opportunity.

3. To increase the reliance of free-world nations on the bloc for

markets or supplies, and thus make the free world more vulnerable

to bloc pressures.

=West Has Never Barred Peaceful Exports=

The Kremlin, while coldly managing the East-West trade of its domain

in the manner described, always had its propagandists and fellow

travelers out beating the drums and making a continual outcry against

the security trade controls of the West. The main line of the

propaganda was that trade was equivalent to peace and prosperity,

and that the Soviet bloc always stood ready for unlimited trade, but

that the Western "economic blockade" barred the way. In each country

the businessmen were constantly handed the false but inflammatory

story that they were being shamefully discriminated against by their

government and that the businessmen of neighboring countries were less

subject to restrictions. Western Europe as a whole was treated to an

alluring picture of a vast prospect of East-West trade, beyond all

factual probability in view of Soviet policies.

This propaganda cannot be separated from the Soviet trading objectives.

It is merely one of the instruments used in trying to achieve those

objectives. It was used lavishly at a Moscow Economic Conference in

April 1952, but although some Western businessmen who attended that

meeting were impressed, the chief result was not an expansion of

trade or elimination of Soviet discriminatory practices, but only the

formation of new propaganda councils. And one of the significant facts

of the present situation is that, although some new economic factors

have arisen, the main propaganda line stays the same. At the Berlin

four-power conference in late January 1954, Molotov used it again.

The truth is that Western controls, which did not become effective

until the 1950's, have never been an "economic blockade." The controls

apply to a small percentage of the types of goods which made up

East-West trade in the prewar years or in 1948. They leave room for

the expansion of trade in many items. There are even many kinds of

industrial raw materials and products which have never been embargoed

by the Western Governments. Western security controls were not

primarily responsible for the low levels of East-West trade.

The main causes were Soviet policies, which wrenched the customary

trade of the satellites away from Western Europe, tying it to the

U.S.S.R., and which forced industrialization upon the whole European

bloc in a manner which reduced its ability to trade with the West. In

addition to these basic causes, the bloc countries were unsatisfactory

trading partners in many ways. The prices were often higher than the

world market; the deliveries were uncertain and sometimes deliberately

withheld; the quality of their goods was often inferior; and some of

the countries had a regrettable--and perhaps intentional--tendency to

go into debt to the West.

=Stalin's Last Gospel=

Stalin himself, in the year before he died, made some illuminating

statements about the reorientation of the trade of Eastern Europe. He

wrote an article, The Economic Problems of Socialism in the U.S.S.R.,

which was published in October 1952, though it had been written earlier

in the year. In this article Stalin said that the most important

economic consequence of World War II was "the disintegration of the

single, all-embracing world market." Actually there was scarcely a

single world market before the war, but Stalin obviously was talking

about the change in the trade of those countries that fell into the

Soviet orbit during the war or shortly thereafter. He said that "now

we have parallel world markets," confronting one another. He then made

the customary charge that the Western countries, through an "economic

blockade," had tried to "strangle" the Eastern European countries. He

said the West had thereby unintentionally contributed to the formation

of the new parallel world market. On this occasion, however, Stalin

went on to say that "the fundamental thing, of course," is not the

Western economic blockade, but the fact that since the war the Eastern

European countries "have joined together economically and established

economic cooperation and mutual assistance."

He made it perfectly plain that, in Kremlin thinking, the breakdown of

the "one world market" and the establishment of two rival markets was a

tremendous boon to the Communist cause, because it shrank the markets

available to the "capitalist countries" and intensified a struggle

which the Communists always see as going on among those countries. And

this, Stalin said, rendered more acute what he called the "general

crisis of capitalism."

To picture the free world as in or near a general economic crisis is

of course familiar Communist mythology. But Stalin's discussion did

reveal clearly the Communist indifference to the mutually fruitful

and expanding international trade that the West desires. It was an

admission of Communist responsibility for--or at least satisfaction

with--a divided trade world.

So much for Stalin's last economic gospel. Stalin's death was announced

on March 5, 1953. Now let us examine what has been going on in his

absence.

_CHAPTER II_

=The New Regime and the Consumer=

After Stalin, the Soviet leadership was taken up by a group of top

party officials. Georgi M. Malenkov was the Premier and the most

influential, but apparently several other men held important shares

of the responsibility and the power. This elite group included, with

varying degrees of personal influence, Beria (temporarily), Molotov,

Khrushchev, Voroshilov, Bulganin, Kaganovich, and Mikoyan. None of this

new group was new to Soviet leadership. All had been close lieutenants

of Stalin. All are known to have had important roles in previous policy

formulation, and in directing key operations.

The system that this group took over in the U. S. S. R. was their

own as well as Stalin's creation. Under this system, the economy

is organized along authoritarian lines and characterized by state

ownership of the means of production and state planning of practically

all economic activity. It is the Central Committee of the Communist

party which lays down the economic and social policies which the state

production plans are desired to implement. The new regime modified this

system in no essential respect.

In addition to inheriting the _system_, Malenkov and his associates

inherited economic policies and economic conditions which they

themselves had helped to create.

In the U.S.S.R., as we have seen, Soviet economic policy had long

been to force industrialization by every means. And this objective

required such a concentration of capital investment--both civilian

and military--as to deprive the growing population of advances in

living standards commensurate with the overall expansion of the Soviet

economy. That is another way of saying they took it out of the people's

hides.

Each of the European satellites, too, had undertaken, under Soviet

direction, to develop an economic structure similar to that of the

Soviet Union. By 1953 all foreign trade, nearly all industry, and

a very substantial portion of domestic trade had been nationalized

in those countries. Where collectivization of agriculture was

not completed, the Government controlled agriculture by means

of centralized planning and a system of compulsory deliveries.

Each satellite government had drawn up a long-term comprehensive

economic plan which, like that of the U.S.S.R., emphasized rapid

industrialization.

These developments brought the Communist leaders many serious

problems--and the people many deprivations. Before the war, as

independent states, most of these satellite countries had devoted a

much higher percentage of resources to the consumer sectors of their

economies than was customary for the U.S.S.R. When the Communists took

control, belts were tightened. The standards of living of the satellite

peoples began to decline toward the low levels long prevalent in the

U.S.S.R. But denying the satellite peoples the fruits of their labors,

in imitation of Moscow patterns, still did not bring the overambitious

war-economy plans to success. Agriculture and industry both had

difficulty in keeping pace. The world has heard how the transformation

of satellite agriculture into the Soviet pattern was impeded by the

opposition of the rural populations to collectivization and by the

difficulties of mechanizing farm output; how shortages of raw materials

slowed the textile program in Czechoslovakia and the electric power

industry in Hungary; how the mining and metallurgical industries lagged

in some areas; how the rights of labor were obliterated in the attempt

to shift manpower into heavy industry; how purges furnished scapegoats

for Communist failures.

=Letting Off Pressure=

In the summer of 1953 came the electrifying news of rioting in East

Germany.

Also in the summer of 1953, new economic targets were announced in the

U.S.S.R. and some of the satellites. These new targets--which will be

discussed further in a moment--were said to be a means of improving the

lot of consumers.

Some observers in the West assumed that economic difficulties in the

bloc were erupting with such force that they threatened to topple the

Malenkov regime. This interpretation is understandable--any democratic

nation would have long since replaced a regime that in peacetime so

subjugated the needs of the people--but such an interpretation of the

Soviet scene must be viewed with great skepticism. At this writing

there was some evidence that the problems faced by the Kremlin may in

some respects have become more difficult since Stalin's death, but one

could not infer that the chronic economic difficulties of the Soviet

bloc were especially different in nature from previous post-war years,

nor that the Communist governments with their inhuman police control

were about to collapse.

What the Communist rulers were facing was their perennial problem of

developing lopsided economies without letting the lopsidedness become

so repressive on the people as to upset the plans and timetables.

Even in police states there are physical and psychological limits

beyond which human beings cannot be driven without lowering their

incentives, their energy, their morale to the degree that production

is severely hampered. The Soviet leaders have always recognized this.

At three different periods in the thirty-odd years of their control of

the U.S.S.R. they have shown themselves adept at opening the valves

enough to relieve accumulating pressures and then shutting them

again--always without swerving very far in the basic drive to build the

industrial-military machine.

Many observers believe that even prior to Stalin's death the time

was ripe for a slight relaxation in the postwar consumption squeeze.

The Kremlin faced multiple problems in consolidating its new empire.

External foreign developments had been adding to the difficulties of

achieving the overambitious industrial and military goals. Western

export controls on the shipment of strategic goods into the bloc had

been impeding the planned development of the military sectors of the

economies.

In any event, a close examination of the new actions proposed by the

Malenkov regime to improve the consumer's lot, insofar as they have

been revealed, indicate that plans for heavy industry and for military

preparation will not be materially affected.

=The "New Economic Courses"=

During the summer and fall of 1953, Communist governments all over

Eastern Europe announced in turn so-called "new economic courses."

East Germany announced its "new economic course" on June 11, just

before the East Berlin riots of June 17. Then came Hungary (July 4),

the U.S.S.R. (August 8), Rumania (August 22), Bulgaria (September 8)

and Czechoslovakia (September 15). Smaller adjustments were announced

earlier for Albania, and later for Poland.

The announced programs differed according to local problems, but almost

everywhere the solution of agricultural troubles was a key objective.

Better collection and distribution facilities for farm products were

demanded. This theme was almost invariably played to the popular tune

of helping the consumer--especially in the U.S.S.R. Deplorable housing

conditions came in for a share of the attention.

In the satellites the programs reflected openly the inability to meet

many of the exacting goals that had been set. In some countries,

the emphasis was on bigger industrial investments in scarce basic

materials. In others, concessions to the peasants were paramount. The

initial implementation, as well as some of the program announcements,

was confusing and sometimes contradictory.

=Malenkov's Big Announcement=

The new economic course for the U.S.S.R. itself was unfolded in three

major speeches during the second half of 1953--by Malenkov in August,

Khrushchev in September, and Mikoyan in October--and in a series of

decrees and lesser pronouncements.

Premier Malenkov, addressing the Supreme Soviet on August 8, made

repeated claims of Soviet strength and progress. For example, he said

the United States had no monopoly on the hydrogen bomb and added that

such facts "are shattering the wagging of tongues about the weakness

of the Soviet Union." But in the section on consumer goods he gave a

revealing picture of weakness.

He spoke at great length about lags and failures in agriculture and

in the manufacture of consumer articles. He severely criticized the

poor quality and appearance of goods, the "serious shortcomings" in

the organization of domestic trade, the "unsatisfactory leadership

of enterprises," the "high production costs" and high prices of coal

and timber, the "neglected state" of agriculture in many districts,

the "serious lagging" in livestock, potatoes, and vegetables. He said

the Government considered it "essential to increase considerably" the

investment in consumer industries.

The urgent task [Malenkov said] lies in raising sharply in 2 or

3 years the population's supply of foodstuffs and manufactured

goods, meat and meat produce, fish and fish produce, butter,

sugar, confectionery, textiles, garments, footwear, crockery,

furniture and other cultural and household goods; in raising

considerably the supply to the population of all kinds of consumer

goods.

The program was to be accomplished in "2 or 3 years," and this was

later repeated in other official statements. In other words it was to

be a relatively short-term program of expansion, hardly long enough to

make a major shift in industrial emphasis--nor did Malenkov claim such

a shift. He said, "We shall continue to develop, by all possible means,

heavy industry and transport.... We must always remember that heavy

industry constitutes the basic foundation of our socialist economy,

because without its development, it is impossible to insure further

growth of light industry, increase productivity of agriculture, and the

strengthening of the defensive power of our country." Taking up this

theme, the Communist propagandists in the U.S.S.R. and the satellites

have constantly assured the people that they should not interpret

the "present tasks of the economic policy as a retreat from the

Marxist-Leninist principles of building up socialism." The continued

growth of basic industries was declared to be essential.

The assertion was made, not that the consumer program would displace

basic industrialization, but that both could progress simultaneously.

Malenkov said that heavy industry had risen from 34 percent of the

total industrial output in 1924-25 to 70 percent in 1953. And while

that was going on, he said, the U.S.S.R. was unable to develop light

industry (textiles, garments, shoes) and the food industry at the same

rate as heavy industry. But now, he said, the Nation was at last able

to develop those industries rapidly.

This "now-we-are-strong-enough" theme runs all through the Communist

propaganda on the subject. But it doesn't harmonize with existing facts

and figures.

In the first place, though the Soviet Union has made large industrial

gains, it has not built its industrial base anywhere near the long-term

goals that Stalin set in 1946 for the ensuing 15 years or so--goals

which, even if attained, would not bring the U.S.S.R. in most respects

to the production levels which the United States has already reached.

In the second place, the "now-we-are-strong" theme seems to leave

out of account the truly deplorable condition of Soviet agriculture.

Malenkov himself said a drastic increase in consumer goods could not

be achieved without "further development and upsurge" of agriculture,

because agriculture "supplies the population with food and light

industry with raw materials."

=Khrushchev and the Livestock Lag=

On the condition of agriculture, Nikita S. Khrushchev had a great

deal to say at a session of the Communist Party's Central Committee

on September 7. Khrushchev is the First Secretary of the Party. His

speech was an even more dismal confession of the "serious lag" than

Malenkov's. He revealed that the Soviet Union had 10 million fewer

cattle at the beginning of 1953 than in 1928, and that the number fell

by 2,200,000 during 1952 alone, instead of increasing by that same

number as planned. In biting words he described the sharp decline in

pork production and in wool, the unsatisfactory fodder situation, the

deficiencies in potatoes and vegetables. His speech showed beyond doubt

that even the production of grain, traditionally the Soviet Union's No.

1 food staple and No. 1 export commodity, was in bad shape and that a

far greater acreage needed to be devoted to feed grains in order to

bolster the faltering livestock industry.

Khrushchev listed a number of measures to raise production. They

included higher farm prices for livestock, milk, butter, and

vegetables; the reduction of obligatory deliveries from the small

private plots still held by collective farm members; the assignment

of more tractors and more skilled workers to the collective farms;

and _the tightening of Communist Party control over agriculture_. The

decisions to place greater reliance on material incentives and to give

slightly more recognition to what remains of private enterprise were

intriguing, but the collective farm system itself remained basically

unchanged.

Students of the Soviet economy, surveying previous efforts to stimulate

agriculture and especially mindful of the biological limitations on the

reproduction of livestock, were doubtful that the new measures could

bring anything like the planned increase in 1954 or 1955.

=Mikoyan Advertises the Program=

Anastas I. Mikoyan, the Soviet Minister of Domestic Trade, then made a

speech October 17 before the All-Union Conference of Trade Workers.

Mikoyan, as the man in charge of large segments of the consumer goods

program, enthusiastically described the program as "gigantic". In the

manner of Malenkov and Khrushchev, he also enthusiastically flayed

an astonishing number of deficiencies in the production, packaging,

distribution, and marketing of consumer goods. He even condemned dull

advertising slogans and inconsiderate retail clerks, and said there

were some things about capitalist business methods that were worthy of

emulating.

He stated, too, that not only the Ministry of Consumer Goods Industry

but other ministries--including aircraft and defense--were getting

assignments to produce such things as refrigerators, washing machines,

metal beds, bicycles, and radio and television sets. Actually, small

quantities of durable consumer goods have always been produced by heavy

industry ministries. Mikoyan's statement was, no doubt, intended to

sound as if these ministries were being transformed, but there is no

evidence that the U.S.S.R. actually planned to reduce its production of

aircraft and armaments to make way for household appliances. If such

evidence shows up, the free world will welcome it.

Mikoyan gave a few figures on the production of household appliances.

They revealed plans for large percentage increases, but even if

achieved, these increases would still leave the consumer many years

behind. For example, he said the output of refrigerators would rise

from 62,000 in 1953 to 330,000 in 1955 (for a population of more than

200 million). This, even if achieved, would still be tiny by Western

standards.

In August, Premier Malenkov had spoken cordially of the expansion

of trade of the U.S.S.R. with Western countries but he had avoided

connecting this with consumer goods. Now, however, the following brief

passage appeared in the middle of Mikoyan's long and rambling speech:

A few words must be said about the import of consumer goods.

During recent years we have been making use of this additional

source of supply for the population. Having become better off we

can now allow ourselves to import such foodstuffs as rice, citrus

fruits, bananas, pineapples, herrings, and such manufactured goods

as high standard woolens and silk fabrics, furniture, and certain

other goods supplementing our range. These goods are in demand by

the population.

Although we are buying 4 billion rubles' worth of consumer goods

from abroad this year, two-thirds of this sum will be spent on

goods from the People's Democracies. In turn, we are exporting

certain consumer goods of which we have a sufficiency, and are

helping the People's Democracies with certain commodities.

Mikoyan, revising his figures in December, estimated the Soviet Union's

imports of consumer goods from non-Communist countries in 1953 at 1

billion rubles. Rubles are not used in foreign trade and translation

into dollar values may be misleading, but at the official (although

artificial) rate, 1 billion rubles would be 250 million dollars. This

is a slender figure in relation to the annual consumption needs of

more than 200 million persons. Even so, the amount that was actually

imported during the year did not equal the $250 million estimate.

There is, however, some connection between the new regime's promises of

more consumer goods and the recent activities of the Soviet Union in

the field of East-West trade. We shall be examining those activities in

the next chapter.

=Has Stalin Been Overruled?=

In early 1954 the situation could be summarized something like this:

The Soviet-bloc rulers have put on a more affable diplomatic face and

made a number of conciliatory gestures to the Western world without

altering their fundamental hostile objectives, and they have made a

great fanfare about supplying more consumer goods to their people

without basically changing their war-oriented economy.

The conciliatory diplomatic tactics of Stalin's successors have

sometimes been called a "peace offensive," but the term is hardly

justified. Since last June the peaceful sounds have alternated

curiously with renewals of the old name-calling and intransigeance.

And behind their Curtain the Communists never stopped teaching their

students that capitalistic society must be overthrown. The North

Atlantic Council could not avoid the conclusion at Paris on December

16 "that there had been no evidence of any change in ultimate Soviet

objectives and that it remained a principal Soviet aim to bring about

the disintegration of the Atlantic alliance."

The evidence indicated that the Communist rulers, while making

gestures to their multitudes, were trying not to interfere with

industrial-military development.

The evidence included the Soviet Union's own budget figures, which

indicated that the state investment (there is no private investment) in

consumer goods ministries is still extremely small; that the extremely

large specific allocations to the military in the 1953 budget were

no lower than actual expenditures in 1952; and that the budget's

"unexplained" category, which almost certainly includes "sensitive"

military projects, greatly increased.

It seemed most unlikely that increases in domestic output of consumer

goods, even supplemented by increased imports, could be large enough

to make a substantial improvement in the traditionally low living

standards in the Soviet Union.

We must suppose that the intent of any steps to improve the lot of

the Soviet-bloc consumer is to improve it just enough to rescue his

productivity in the interest of the state, but not enough to give

him such a taste of better living as would lead to a wider and wider

opening of the valves and hinder the buildup of the totalitarian war

economy.

If that is a correct assumption, the world, yearning for assurance of

peace, is entitled to wish that the Kremlin's calculations might be

upset and the consumer might get enough to whet his appetite in a big

way.

_CHAPTER III_

=The Kremlin's Recent Trading Activities=

In midsummer of 1953, at about the time of the Korean armistice of July

27 and just before Malenkov's major speech of August 8, the Soviet

Union attracted world attention by a flurry of new trade agreements

with non-Communist countries. There was another flurry around the end

of the year.

During the last 9 months of 1953 and the early part of 1954, the

representatives of U.S.S.R. adopted a somewhat more polite and

businesslike manner in their commercial dealings with the free world.

They not only _said_ they wanted more trade (they had never stopped

saying it) but they took more steps to bring it about. Besides trade

agreements, they signed more contracts with private firms. In Moscow

they warmly entertained traveling salesmen from the West. In Western

capitals they staged a few cocktail parties and press conferences. They

poured more funds into eye-catching exhibits at "trade fairs" from

Copenhagen to Bangkok. They made grandiose offers to buy, and gave

them great publicity. Some offers to buy, sell, or barter they made

quietly through commercial channels. They showed signs of wanting the

nonindustrial portions of the world to regard them as a helpful "big

brother" bringing both trade and aid.

These activities, which many writers have called a "trade offensive,"

carried with them important meanings for the free world. In this

chapter we shall examine the activities and probe for the meanings.

=The New Trade Agreements=

In a period of about 3 weeks, in late July and early August, the

U.S.S.R. concluded trade agreements with France, Greece, Argentina,

Denmark, and Iceland. These were not mere renewals of expiring

agreements. The U.S.S.R. had never before had trade agreements with

France, Greece, or Argentina (or any other Latin American country). Its

last trade agreement with Denmark had expired in 1950, and with Iceland

in 1947. Its trade with three of the countries, Greece, Iceland, and

Argentina, had been almost nonexistent in recent years. Considerable

trade, however, had been carried on with France and Denmark without

benefit of trade agreements.

The U.S.S.R. also renewed existing trade agreements with Iran and

Afghanistan and signed a "payments agreement" with Egypt. Most of these

trade agreements signed during the summer of 1953 became effective as

of July 1.

The second group of trade agreements, clustered shortly before or

after January 1, 1954, and mainly effective as of that date, was with

India, Belgium, Norway, Sweden, and Finland. It was the first time the

U.S.S.R. had ever had a trade agreement with India. There had not been

one with Belgium since 1951. The others were renewals. Barter deals

were also made with some of the countries already mentioned, and with

Israel and Japan.

Not since 1948, when the U.S.S.R. had entered into annual or long-term

trade agreements with eight countries of Western Europe, had there been

a period of Soviet trade-agreement activity that could compare with the

paper blitzkriegs just described. And the result was that in the early

part of 1954 the U.S.S.R. had trade agreements with more free-world

countries than at any other time in the postwar period.

This fact and the hefty amounts of trade which were called for in

some of the agreements have given many people the impression that a

historic increase in the size of East-West trade was taking place. The

impression seems hardly justified.

In the first place, trade agreements are usually only hunting licenses.

They merely authorize--but do not guarantee--the exchange of goods.

The governments agree to permit the export and import of the types

listed--if contracts can be arrived at between Soviet monopolies and

Western business. If the goods turn out to be unavailable, or if

the demand is not forthcoming, or if the price is too high or the

quality too low, the publicized amounts of the trade agreements do

not materialize in the export-import statistics. And this fact rarely

receives as much public attention as the original announcement. To

illustrate, a spokesman for the Greek Foreign Ministry told the press

on January 19 that the U.S.S.R. had lagged far behind in shipments

under the 1-year trade agreement of July 1953. That agreement had been

publicized as calling for trade of $10 million each way, but the Greek

official said few Russian deliveries had been made and "it will be a

miracle" if these deliveries reached $3 million.

In the second place, even a big percentage of fulfillment would not

necessarily increase trade between the U.S.S.R. and the free world

to the high points of 1948 and 1952. The 1948 turnover--that is, the

sum of exports and imports--had been about $1 billion. It declined

to $545 million in 1950. By 1952 it was back up to $943 million. The

preliminary estimate for 1953 is $790 million. Thus the year which saw

the Kremlin's new trading tactics was also the year that saw a slump

of about 16 percent in the dollar value of its trade with the free

world. The trade was rising moderately in the last part of 1953 and a

further moderate rise in 1954 would not be surprising.

[Illustration: FREE WORLD TRADE WITH THE SOVIET BLOC]

But there is still another reason why the new Soviet trade arrangements

will not necessarily mean a historic upsweep in East-West trade: The

satellite countries have not been behaving in quite the same way.

The U.S.S.R. is only one part of the Soviet bloc, albeit the center

of power. The U.S.S.R. accounts for about 30 percent of the trade

which the European Soviet bloc carries on with the free world. (The

percentage would be still less if Communist China were included, but

Communist China will be discussed in another chapter.) In other words,

Czechoslovakia, Poland, Hungary, the Soviet zone of Germany, Rumania,

Bulgaria, and Albania, despite the long, steady decline of their trade

with the free world ever since "sovietization" took hold in about

1948, still exchange about twice as much merchandise with free-world

countries as does the U.S.S.R. These satellites, or some of them, have

long had trade agreements with countries in Western Europe. During the

last year or so they have renewed about 45 of those. In addition they

renewed about a dozen agreements with non-European countries.

The brand-new agreements which the satellites concluded in Europe were

mainly with France and Greece, thus conforming to the Soviet pattern

of increased attention to those two countries. But in other respects

the satellite trade pattern was different from that of the U.S.S.R.,

for while recent U.S.S.R. commitments, if fulfilled, seem to indicate

increased trade, there was no evidence of a reversal in the long

slide of the East-West trade of the satellites. Therefore one could

not ignore the possibility that the U.S.S.R., with a flourishing of

fountain pens and a blare of trumpets, was merely shifting to itself a

bigger percentage of all bloc trade with the rest of the world.

Now let's see what kinds of goods are involved in the new trade

agreements and other commitments that the U.S.S.R. has been making.

=More Consumer Goods Ordered=

Consumer goods, the items about which Malenkov, Khrushchev, and Mikoyan

made such a fanfare in announcing the new course for the Soviet

domestic economy, make up one class of commodities, though not the most

important, that the U.S.S.R. has been ordering from the Western world.

It appears that the U.S.S.R. has committed itself to buy consumer goods

at a somewhat brisker rate than in recent years.

Most of these consumer goods were food items. During the last 6 months

of 1953 and the first month of 1954, the known Soviet arrangements to

buy food from the free world amounted to about $90 million. Some of the

deliveries were scheduled in 1953, some in 1954.

Butter was the biggest item. In trade agreements and contracts, butter

quotas amounted to 37,500 tons, with an estimated value of $40 million.

Denmark was to provide about $18.6 million of this. The second most

important source of butter was to be the Netherlands, with $13.7

million. Lesser amounts were to come from New Zealand, Australia,

Sweden, and Uruguay.

Meat quotas came to about $22 million, with Denmark and Argentina the

leading suppliers. Smaller amounts were to come from the Netherlands,

Uruguay, and other countries.

Fish quotas amounted to $15 million. Nearly all of this was herring.

The leading suppliers were to be Iceland and Norway, and others were

the United Kingdom, the Netherlands, and Denmark.

The U.S.S.R. during the 7-month period also arranged to buy $7 million

worth of citrus fruits from Italy, Japan, and Israel (and apparently

made a whopping profit selling oranges to the Russian people); $4

million worth of cheese from Argentina and the Netherlands; $2.4

million worth of lard from Denmark and Argentina; and $1.4 million

worth of sugar from the United Kingdom and Cuba.

Besides food, the most important consumer item ordered from the West

was textiles. The amount is harder to estimate, but it was somewhat

larger than the Soviet textile imports of any recent year. The

principal suppliers were to be Belgium, France, the Netherlands, Italy,

and the United Kingdom.

In addition to contracts already made, the Soviet officials were still

putting out feelers for consumer goods. Some of them reached across

the Atlantic. In January much publicity was given to the efforts of

an American firm to buy a large quantity of Government-owned surplus

butter and sell it abroad--ultimate destination Russia.

Secretary of Commerce Sinclair Weeks announced on January 15 that he

would not approve any application "which would permit an exporter to

buy butter at considerably lower prices than those paid by the American

housewife and then send that butter into Russia." On February 10 he

announced that it had been "decided as a matter of policy to deny

commercial export license applications for the export for cash of

United States Government-owned surplus agricultural or vegetable fiber

products to Russia or her satellites." He pointed out, however, that

this ban "does not preclude study of export license applications for

these nonstrategic products to the Soviet bloc if acquired by exporters

in the open market and not from the Commodity Credit Corporation

surplus stocks."

It is difficult at this writing to compare the Soviet Union's new

commitments to buy consumer goods with the actual imports of previous

years. _Total_ free-world exports to the U.S.S.R. in 1953 are estimated

at $410 million (compared with $481 million in 1952) but how much of

this $410 million was consumer goods is not yet determined. The 1954

figure can only be speculated upon. But certain generalizations about

consumer goods are possible.

As evident in chapter 1, the U.S.S.R. was never very much interested

in importing consumer goods from the West. The items it did import

for the consumer were not the household appliances and luxury items

we sometimes think of as consumer goods--but were usually food. These

imports have been higher at times than others: for example they were

relatively high in the late 1930's and again in 1948. Since 1950

they have been rising again, but by 1953 they were still breaking no

records. They have always represented a relatively small percentage

of total Soviet imports. At the same time, during the postwar years

Soviet policies were forcing the consumer-goods imports of the European

satellites steadily downward.

These contrasting trends of rising Soviet imports and sinking satellite

imports seemed likely to continue in 1954. This probability, plus

Mikoyan's statement in his October speech that "we are helping the

People's Democracies with certain commodities," made one wonder how

much of the new Soviet imports of butter and other food were being

reshipped to Eastern Germany and other satellites to alleviate the

unrest there.

=A Shopping Spree for Ships=

The U.S.S.R., while ordering more consumer goods, seemed even more

anxious to buy ships.

Every trade agreement which the U.S.S.R. has signed with a shipbuilding

nation of Western Europe since mid-1953--that is, with Finland, Italy,

Belgium, the Netherlands, Denmark, France and Sweden--has included a

sizeable quota for ship purchases, particularly fishing vessels and

refrigerator ships. Contracts for fishing vessels were also made with

firms in the United Kingdom and Western Germany.

It was safe to say that Soviet activity with respect to Western

European shipyards since mid-1953 surpassed the biggest previous

shopping expedition for ships, which came around 1949. And it was clear

that by early 1954 the U.S.S.R. had greater commitments on the books to

buy ships from the West than at any other time in its history. This was

true in tonnage, value, and number of vessels.

Probably not all the trade agreement commitments will result in actual

deliveries; on the other hand, the shopping spree is still going on and

further commitments are likely.

Because of Western restrictions on the export of certain types of

ships, the new vessels destined for the Soviet Union were mainly of

smaller types. A large number were fishing vessels, such as trawlers,

fish processing craft, and refrigerator ships. Others were cargo ships,

tugs and barges.

The buying of fishing vessels accords with the shortage of food in the

Soviet bloc. Mikoyan in his October speech admitted there had been many

complaints about the fish supply and that the Soviet fishing goals

had not been met. But the Soviet search for ships could not be viewed

entirely in the light of a desire to produce more consumer goods. The

U.S.S.R. was seeking cargo ships in addition to fishing boats, ordering

other marine equipment such as component parts and floating cranes and

trying to arrange for more ship repairs in free-world ports. Western

shipbuilders were inclined to be receptive to orders for vessels at a

time when ship orders from Western countries were declining. At the

same time it was impossible to ignore the fact that Soviet-bloc orders

in the West can have the effect of freeing Soviet-bloc shipyards for

the building of naval vessels. The campaign to buy ships thus presented

the free world not only with more orders but also with a security

problem.

The development of a Soviet merchant fleet is relatively recent. In

1939 the U.S.S.R. had seagoing merchant vessels totaling only 1,135,000

gross tons. It emerged from World War II with more than twice this

tonnage. The main sources of the increase were lend-lease ships from

the United States and war reparations. The United States in its

lend-lease program leased to the U.S.S.R. 121 merchant vessels with

gross tonnage of some 750,000 tons. Of these, 30 were returned to the

United States and 4 were lost. The U.S.S.R. kept the others, and long

exhaustive negotiations since 1946 have failed to settle this and

other lend-lease claims. Through war reparations the U.S.S.R. acquired

170 more ships with gross tonnage just over one-half million tons. By

1953 the Soviet bloc--the U.S.S.R. and Poland for the most part--had

a seagoing merchant fleet with a gross tonnage of 2-1/2 million tons,

compared with free-world fleets totaling about 21 million tons.

=Most of All, They Want Hard Goods=

The new Soviet purchases of butter, meat, and other consumer items have

sometimes obscured the continuing heavy demand for equipment and raw

materials needed for industrialization. There has been no appreciable

decline in the Soviet interest in buying industrial commodities. Such

goods still dominate Soviet imports and new agreements to import--and

that goes for the European satellites, too.

The Soviet bloc has shifted some of its priorities. The Soviet

eagerness to buy ships is an example of a raised priority. The sharp

drop in Soviet buying of Malayan rubber from the United Kingdom in 1953

was an example of a lowered priority. There are some other changes, but

no change in the emphasis on industrial goods in general.

All the trade agreements concluded between countries of Eastern

and Western Europe since mid-1953 have included quantities of such

items--limited, of course, by the West's security controls which

provide for the embargo of some items and quantitative restrictions on

others. In the trade agreements of Czechoslovakia and Poland, we find

quotas for deliveries from the free world of electrical equipment,

ball bearings, steel products, pyrites, lead, zinc, aluminum, and

many others. Bulgaria also has shopped for capital equipment. In

exchange for their grain, vegetables, fruits, tobacco, and a small

amount of manganese and chrome, the Bulgarians made trade-agreement

commitments to get important amounts of cables, rods, bars, plate

steel, railroad equipment, floating cranes, electrical machines and

installations, mining equipment, and miscellaneous machinery. The

U.S.S.R., besides its procurement program for ships, has written into

its trade agreements certain kinds of machine tools, various kinds of

steel, equipment for electric power plants, construction equipment,

chemical products, textile machinery and machinery for the timber and

food-processing industries. An analysis of one recent trade agreement

showed that three-quarters of the value of the Soviet imports consisted

of products of the metal working industries. Businessmen in the United

Kingdom, which has concluded no recent trade agreement with the

U.S.S.R., have reported that the Soviet bloc's real interest in buying

British goods was confined mainly to items for production.

The attempts to purchase items like those named in the foregoing

paragraph are nothing new. The point is, these efforts are continuing.

Many of these items have been under quantitative controls by the

major free-world countries--that is, exported to the bloc in limited

quantities only. Some of the most highly strategic items, such as

the types of machine tools and bearings that are essential to war

production, have been under embargo, and when that was true, the

free countries that participate in the international control program

have generally shipped them only to fulfill commitments made before

controls went into effect, or in special cases where the countries felt

strongly that the shipment was justified in view of the benefits to the

free world that resulted from the two-way trade made possible by the

shipment. In 1952 and 1953, for example, all nations receiving aid from

the United States permitted the shipment to the Soviet bloc of roughly

$15 million in items that were listed for embargo under the Battle Act

(Mutual Defense Assistance Control Act of 1951), as compared with total

free-world shipments to the bloc of about $2.7 _billion_ in the same 2

years.

These highly strategic items, of course, are the ones which the

countries of the Soviet empire have wanted most of all. And when not

able to get them legally, they have continued their efforts to get

them illegally. The third semiannual Battle Act report, _World-Wide

Enforcement of Strategic Trade Controls_, contained a detailed account

of the underground trade that violates Western regulations. Since all

foreign trade of a Soviet-bloc country is a state monopoly, it follows

that the state is an active participant in this underground traffic.

With the bloc, circumvention is an official policy.

The Soviet Union, despite its publicized buying of consumer

goods--which have never been restricted by the free world--has

definitely not slackened its efforts to obtain industrial goods whether

strategic or nonstrategic in nature.

=Something Different in Soviet Exports=

As told in chapter I of this report, the economic planners of the

Soviet empire first figure out their import requirements and then

decide what they want to export in order to pay for the imports. They

look upon exports primarily as a means of obtaining goods which are

more advantageous to import than to produce, or which they cannot

produce.

In the present chapter, we have seen what sort of items they are

currently interested in importing. Now we turn the coin over and look

at the export side.

The most noticeable feature is that the U.S.S.R. in the last half of

1953 and the early part of 1954 introduced into free-world markets a

number of mineral products which they had not sold in such quantities

for some years.

These commodities included manganese, petroleum, and gold. All of

them at one time or another have been among the major Soviet exports.

Together with grain, timber, and furs, they make up the principal means

that the U.S.S.R. possesses to procure the imports they want.

Why have the mineral exports been revived at this time? This leads us

to the grain situation.

Grain has long been the Soviet Union's No. 1 export commodity, and

still is. But Soviet grain shipments declined precipitately in 1953.

The United Kingdom, usually the main Western customer for this

commodity, stopped buying grain on a government-to-government basis

and turned the purchasing over to private firms. At the same time

the U.S.S.R. apparently decided to keep more of its grain stores at

home. The efforts to furnish more fodder to livestock, together with

below-average crops and collective-farm headaches in the U.S.S.R. and

satellites, suggest the motivation for this. At any rate the private

British firms were unenthusiastic about signing large contracts at the

high prices set by the U.S.S.R., and grain shipments to the United

Kingdom skidded from $101 million in 1952 to only $10.1 million in 1953.

Although grain was far from disappearing as a Soviet export to the

West, it became less potent--for the time being, at least--as a means

of acquiring foreign exchange to pay for imports. This loss was only

partially offset by a moderate increase in sales of Soviet timber

to Britain and a big drop in the amount of Malayan rubber that the

U.S.S.R. bought from the British. Meanwhile war reparations from

Finland had ended in 1952, and deliveries of Swedish goods under

a long-term credit agreement ended the same year. The Finnish and

Swedish developments meant that about $80 million worth of goods which

the U.S.S.R. had received from those countries in 1952 could not be

duplicated in 1953 unless some other means of payment were created.

All these events contributed to the reviving of some other export

commodities.

How far the shift is going and how long it will continue cannot be

predicted. Abrupt alteration in Soviet exports is hardly a novel

development. For a time, around 1930, when forced collectivization of

agriculture and forced exports of grain had induced famine in some

areas of the U.S.S.R., the Kremlin opened the pressure valves a mite,

heavily slashed the exportation of grain, and even _bought_ some grain

on the Baltimore exchange. That was a breathing spell in the midst

of the first big Soviet push toward rapid industrialization. During

the same general period, the U.S.S.R. found it expedient to force

more production and more exports of furs, coal, and some of the same

commodities now receiving special attention--petroleum and metallic

ores--in order to get imports of capital goods needed in the ambitious

industrial program.

=They Have Dug Up Manganese=

Manganese is a silvery-white metal used in the making of hard steels.

The U.S.S.R. is one of the world's major sources of manganese. It can

produce a large amount each year, depending on how much manpower it

decides to throw into the effort. It consumes a lot in its own steel

industry, even using manganese as a substitute for scarcer alloys like

nickel and molybdenum. In addition, its plans usually provide for

certain quantities of manganese ore to sell abroad.

These exports have continually fluctuated. Before the war they ranged

from about 400,000 metric tons a year to about 1 million. The United

States, which produces very little manganese, was a major customer. In

the 1930's we got about 40 percent of our manganese imports from the

U.S.S.R. Other important customers were France, Germany, Belgium, and

Japan.

During the war, Soviet manganese vanished from world markets. The

United States and other customers turned to sources in Africa, Latin

America, and India.

In March 1945, Soviet manganese ore reemerged. The United States

was the principal buyer, receiving 1,168,000 tons in about 4 years.

In February 1947 the Soviet Foreign Trade Journal pointed out the

importance of the United States to future Soviet plans for the export

of manganese. But late in 1948 the Kremlin suddenly reduced its

shipments to the United States almost to the point of embargo. A few

shipments trickled in during the next 2 years and stopped entirely

in 1951. Meanwhile deliveries to Western Europe did not undergo a

compensating rise; they were little more than 100,000 tons a year.

Came the season of the last half of 1953 and the early part of 1954.

The Kremlin's zeal for exporting manganese bloomed again. Commitments

to ship over 300,000 tons of the ore were written into trade agreements

with Western European countries. Offers of manganese reached the United

States through various channels.

Chrome is usually part of the package when manganese is sold. As could

be expected, Soviet chrome commitments also climbed in late 1953.

There was also a revival of activity in the export of silver, platinum,

and palladium.

=The Emergence of Russian Oil=

But a more interesting commodity which the U.S.S.R. has begun to put on

the market in bigger quantities was oil.

In approximately the last half of 1953 the U.S.S.R. made agreements

to ship to free-world countries about 3.5 million metric tons of

crude petroleum, kerosene, diesel fuel, and other petroleum products.

The countries due to receive the largest amounts--if delivered--were

Finland, France, and Argentina. Other customers were Greece, Italy,

Iceland, Denmark, Sweden, Israel, and the Netherlands. Some deliveries

were made in 1953; more would be made in 1954; there was no certainty

that all the commitments would be fulfilled. But even a two-thirds

fulfillment apparently would be enough to hoist petroleum ahead of

lumber and furs and place it second only to grain among Soviet exports

to the free world.

What would this mean to the free world? What problems would it raise?

Again we can find clues in the past. The present situation is not the

first time that the U.S.S.R. has created a stir by abruptly entering

oil markets. This also happened in the late 1920's, when the U.S.S.R.

began exporting large amounts of oil as a means of obtaining industrial

imports. These exports grew each year and were 6.1 million metric tons

in 1932. This was around 10 percent of the world's oil exports, and

was almost 30 percent of Soviet oil production at the time. The United

Kingdom and Italy were the major customers for this oil, but there

were many others. The marketing was done through various channels. The

Soviet monopoly that controlled all oil exports set up a network of

sales offices abroad. Long-term contracts were made in Spain, Italy,

France, Belgium, and the Netherlands.

The expansion of Soviet oil sales gave rise to bitter price wars

with established oil groups. The bitterness was made more intense by

the fact that the Bolsheviks had neglected to settle for the foreign

oil properties that they had seized after the revolution. As in all

exports, the U.S.S.R. was more interested in total receipts of foreign

exchange than in making high per-unit profits; so it could and did use

price cutting as a means of achieving a foothold. Subsidiaries of some

of the world oil trusts then tried to drive the Soviet oil back home by

underselling the Soviet monopoly. But the attempts failed, and Soviet

oil won an important place in world markets.

In the late 1930's, the oil was withdrawn. Soviet exports dropped back

to 1.4 million tons in 1938, and kept fading. After the war, they came

back only in a trickle--for example, 100,000 metric tons in 1951 and

250,000 in 1952, then rising to 450,000 in 1953 as some of the new

commitments of 3.5 million tons began to be fulfilled.

Meanwhile the war had swept additional oil into the Kremlin's hands,

including the oil wells of Rumania and those which were taken over as

"German assets" in the Soviet zone of Austria. And the oil exported to

the West from these new Eastern European acquisitions greatly exceeded

the exports of the U.S.S.R. itself, amounting to 1.2 million metric

tons in 1951, 1.7 million in 1952, and 2.3 million in 1953. In recent

months, while the U.S.S.R. was making agreements to ship 3.5 million

tons, the new export commitments of these other properties in Eastern

Europe became known only in part, at least at this writing.

The Soviet bloc, though still short of certain specialized refined

products, probably has the oil capacity to make considerable exports

for at least some years, if the Kremlin so decides. Whether the bloc

will indeed step into the world markets in an important way, as

the U.S.S.R. did in the twenties, is of course not known. The West

is watching closely to see whether the Kremlin will again use its

monopoly control to undertake a major campaign of underselling other

suppliers in world markets.

It was natural for oil-importing countries in the free world to be

interested in new supplies from the Soviet bloc, especially if the

price was attractive or if the transaction also enabled a free country

to market its own products in the East. But the West could not forget

past patterns, nor ignore the problems brought by new Soviet sales.

When the Russians abruptly disappear from markets, free-world importers

turn to free-world sources to make up the difference. And if the

importers later jump whenever the Soviet Government decides to stage

another of their dramatic entrances, the free-world sources whose

production has been stimulated will be the losers. And who can predict

when the dictates of the Kremlin--economic or political--will override

the dictates of the market place, and the oil, manganese, chrome, or

whatever it may be, will suddenly be whisked out of reach?

=Gold Sales Expanded=

Down through the centuries, the word _gold_ has exerted a powerful

effect upon the imaginations of mankind. And last December, when the

news came out that airplanes laden with gold bullion were flying from

Moscow to London, there was a great buzz of interest. What were the

Russians up to now?

The export of Russian gold was not new. The Soviet Union had been

selling a sizeable amount each year in the free world. But in the last

few months of 1953 a larger amount of Russian gold came out into the

free world than had emerged in any recent year. Most of it, instead of

entering the free market, went to the Bank of England. The total amount

exported to England, Switzerland, and other countries during 1953 was

not announced, but it was somewhere between $100 and $200 million.

There has been much speculation on the reasons for an increase in gold

sales. The best explanation seemed to be that the Kremlin, hard pressed

for adequate exports, decided--as in the case of manganese and oil--to

use a fraction of its gold hoard so that it could continue to import

the things it wanted from the free world. It has done the same thing on

past occasions. For example, in 1928 the U.S.S.R. exported $167 million

worth of gold and in 1937, $212 million worth.

Whether still larger amounts of Russian gold would be exported in

the future was of course unknown. Concerning the size of the Soviet

gold stock many guesses have been made, most of them ranging from $3

billion to $6 billion. The Soviet Union attaches great importance

to its gold reserve. It has been willing to part with gold only in

limited amounts or for special purposes. In any event, the gold hoard

would not be big enough to use as a base for a large-scale, long-term

trade relationship. Nevertheless, over the short run, and for limited

purposes, the U.S.S.R. could, if it desired, export a lot more gold

than it has to date. Gold therefore is an intriguing question mark of

East-West trade.

=Reaching Outside Europe=

Moscow, while shopping for more ships, peddling more gold, and making

other moves in the industrial countries of Western Europe, also reached

outside Europe and tried to fasten closer economic ties with Asia and

Latin America. The trade of the Soviet Union with the non-Communist

areas of Asia, and with Latin America, has never amounted to more than

driblets. That of Czechoslovakia and Poland has been a little bigger.

The U.S.S.R. entered this field in 1953 with a good deal of propaganda

effect. The effect in delivery of goods was still to be seen.

The Soviet trade bosses used a number of devices.

One device was to offer loans and technical assistance. Some of the

loans were connected with trade. Others, related to construction

activities within free-world countries, were more suggestive of

investments and provided opportunity for increased Soviet or Communist

Party economic penetration. There was a marked interest in assisting

in the establishment of storage and supply facilities. So far, few

Soviet offers have been accepted. Possibly this is because they are

disturbingly reminiscent of the penetration techniques that were used

to gain economic leverage inside the Eastern European countries and

China prior to Soviet political domination of these regions. Or it may

be that skepticism has been aroused by the experience with Communist

Party use of commercial enterprises in some Western European countries

to finance the local party and the Kremlin's activities.

Another device has been to build lavish exhibits at "trade fairs."

This activity, though carried on in Western Europe too, was especially

marked in South Asia. On an increasing scale, since 1951, the Soviet

Union and its satellites have been using trade fairs for a double

purpose--to promote the kind of trade the bloc desires and to propagate

Communist ideas.

By elaborate and costly displays the Soviet-bloc governments seek to

dominate the fairs; to overshadow the exhibits of the United States and

other free-world countries; and to create the illusion of an industrial

and commercial superiority over the Western nations, especially the

United States. The U.S.S.R. makes a concerted and determined effort to

discredit and minimize the industrial and technological achievements

of the United States by contrasting the great size of the Communist

nations' participation with the usually modest representation by

United States firms. An important distinction between Soviet and

U.S. exhibits is that the former are developed as a state trade

promotion and propaganda undertaking, and involve the building of

special pavilions, whereas U.S. participation amounts to the sum total

of exhibits of individual U.S. industrial and commercial companies

assembled for the single purpose of promoting the sale of individual

products.

The importance which the bloc attaches to these undertakings is found

not only in the mountains of propaganda it issues on the subject,

but in the sizeable expenditures it makes. For example, in 1952

the U.S.S.R. and its satellites dominated the Bombay International

Industries Fair with four big exhibits. The Soviet exhibit was the

largest; it cost more than $200,000 and was manned by a staff of

40. Communist China's exhibit was the second most pretentious, with

Czechoslovakia and Hungary also participating in an impressive way. At

the Thailand Constitution Fair at Bangkok in December 1953, the Soviet

exhibit was again the most elaborate. The Soviet Government established

a special pavilion that cost an estimated $500,000 and housed 5,000

items, including trucks, automobiles, precision equipment, glassware,

rugs, and preserved foods.

Yet another device was to join hands with a key nation of each

continent in a brand-new impressive trade agreement which seemed to

offer attractive benefits to that nation and which might stimulate

neighboring countries to hanker after similar opportunities. The

Kremlin chose India and Argentina. The U.S.S.R. concluded trade

agreements with those two countries for the first time. So did some

of the European satellites, and other satellites renewed existing

agreements. The U.S.S.R. and the satellites also renewed existing

agreements with certain other countries in Asia and Latin America.

The two-year Russian trade agreement with Argentina, signed in August

1953, was one of the most interesting of the year. For one thing

it came at a time when trading missions of the U.S.S.R. and its

satellites were becoming more active throughout Latin America--and the

Soviet-Argentina agreement helped those missions to gain a somewhat

more receptive audience for their overtures. Latin American governments

have cooperated with other Western nations in withholding highly

strategic commodities from the Soviet bloc; for example, bloc proposals

to buy Chilean copper and Bolivian antimony and lead were not accepted.

Obviously the Kremlin hoped to bring about more resistance to the

control of strategic materials and to create Western disunity over that

issue.

This trade agreement between the U.S.S.R. and Argentina was also

interesting for its size and composition, at least on paper. It called

for deliveries of $60 million in each direction, presumably during the

first year, with an additional Soviet credit of $30 million. Argentine

shipments were to include wool, hides, linseed oil, meat, and other

goods that the Soviet Union could undoubtedly use. But the list of

Soviet exports included some items for which the Soviet bloc seemed to

have equal or greater need. The U.S.S.R. promised to deliver a large

quantity of machinery and transportation equipment on credit, as well

as petroleum, coal, and other items. Proposals to deliver certain kinds

of machinery also cropped up in Soviet agreements with India and Iran.

Machinery, as we know, is what the Soviet rulers go to extreme pains

to _import_. If they were serious now about exporting it, and if they

really intended to deliver large quantities and not mere tokens, it

would be something new, although even then they would probably not be

exporting the advanced types which they usually seek to obtain in the

West. It remained to be seen whether the U.S.S.R. would come anywhere

near to complete fulfillment of the trade agreement with Argentina,

for example. But one could only suspect that the promises of big and

attractive deliveries--whether fulfilled or not--were made in large

part for the purpose of weakening the ties of those countries with the

rest of the free world.

* * * * *

In this chapter we have traced various threads of the Soviet trading

activities, and have suggested reasons why they engaged in each kind of

activity.

Now it is necessary to look more deeply into the whole complex of

Soviet foreign trade policy and sum up what's behind it all.

_CHAPTER IV_

=What's Behind It All=

From the Kremlin comes a continual flow of propaganda, spread to the

ends of the earth by the international Communist movement, to the

effect that the Union of Soviet Socialist Republics is the Champion of

Peace.

Stalin's death afforded the Communists a convenient opportunity to

portray a new regime zealous for a peaceful, normal world. They did not

say out loud that Stalin had been _less_ zealous, but they were not

reluctant to play upon the world's fervent wish that the new management

would turn over a bright new leaf. And they were willing, even eager,

for the world to believe that one part of the pursuit of peace was the

promotion of East-West trade.

=The Kremlin and Peace=

Can the so-called Soviet "trade offensive" of 1953-54 really be

explained as an effort to establish a just and lasting peace, as the

West understands the word? If we could believe that, the world might

suddenly seem a more comfortable place to live in. We must always

keep the door ajar for any genuine steps to abandon the Soviet brand

of imperialism, to abandon the basic unfriendliness of purpose toward

everything not under Moscow's control. The free world was looking for

such a movement at the Berlin Conference in the early part of 1954, but

it did not show up.

The only way peace could be accepted as a Soviet trading motive would

be to define peace as the Soviet leaders themselves have defined it in

the past, not in their propaganda but in their party teachings.

"The peace policy of the proletarian state," according to a Comintern

Congress resolution of 1928, "certainly does not imply that the Soviet

state has become reconciled with capitalism ... It is merely ... a more

advantageous form of fighting capitalism, a form which the U.S.S.R. has

consistently employed since the October Revolution."

Lenin, in a statement which was reprinted in 1943, said that "every

'peace program' is a deception of the people and piece of hypocrisy

unless its principal object is to explain to the masses the need for a

revolution, and to support, aid, and develop the revolutionary struggle

of the masses that is starting everywhere...."

There is no evidence that the new Soviet regime has overnight embraced

free-world ideas about peace and warfare. To the disciples of Marx,

Lenin, and Stalin, the world is always in a state of warfare. The

warfare waged by them is three-fold: psychological, economic, and

military. Military action is a last resort, but psychological and

economic action never ceases. Stalin did not invent this concept,

though he put it into action on a large scale. Nor was it exclusively

Russian. The German military philosopher, Clausewitz, whose mid-19th

century writings were carefully noted by Lenin and Stalin, wrote:

"Disarm your enemy in peace by diplomacy and trade, if you would

conquer him more readily on the field of battle."

=A Mixture of Motives=

Hence the question arises: Can the Soviet trade offensive be explained

as a campaign of "economic warfare"?

That depends on what is meant by economic warfare.

Paradoxically, many people think of economic warfare as meaning

economic action in which economic considerations are relatively

unimportant, and the gaining of political or psychological advantage is

dominant.

If economic warfare is taken in this sense, the answer to our question

is "no". The explanation of the Soviet trade offensive is not that

simple. The Soviet Union and its satellites have economic needs. They

use foreign trade to serve those needs. We have noted in this report

how they determine what imports they want from the free world, and then

develop a program of exports to pay for the imports. They are not in

the Olympian position of being able to pick and choose these imports

and exports solely on the basis of whether the choice will help them

deceive, confuse, embarrass, or divide the capitalistic West. Therefore

it is a grave oversimplification to assume, as some people do, that

the Soviet Communist's every action in the market places of the world

inevitably brings him advantages in international politics.

On the other hand it would be an even greater mistake to assume that

economic considerations always govern; that because the Soviet-bloc

governments often use normal trading channels and devices they must

be looking upon trade through the same eyes as the businessman of

Indianapolis, Manchester, or Stockholm; and that politeness at the

bargaining table is the undoubted mark of innocently "economic"

commerce, free of ulterior motives.

The truth is: Soviet-bloc trading actions are neither purely economic

nor purely noneconomic.

The Soviet trade offensive can be explained in terms of economic

warfare, if we define economic warfare as economic action by the state

that is designed to serve basic hostile objectives directed at another

nation or group of nations--whether or not the immediate gains are

economic.

=Their Objectives Haven't Changed=

In Chapter I, the Soviet bloc's long-term objectives in its economic

relations with the free world were outlined. It was pointed out that

these objectives have a dual character: strengthening the bloc and

weakening the free-world powers. The objectives were summarized this

way:

1. To feed the economy, especially the industrial-military base,

with imports that help the bloc become more powerful and less

dependent on the free world.

2. To drive wedges among free-world nations at every opportunity.

3. To increase the reliance of free-world nations on the bloc

for markets or supplies, and thus make the free world more

vulnerable to bloc pressures.

Within this broad framework the Kremlin pursues more immediate and

specific goals, such as:

# Obtaining through normal commercial channels the ships, machinery,

and other industrial goods which they can produce only at relatively

high expenditure of labor and resources--or which they cannot produce

at all.

# Obtaining through illicit channels those strategic materials whose

shipment is restricted by free-world governments in the interest of

their national security.

# Forcing the relaxation of free-world security controls in order to

get strategic goods more cheaply and easily and to create dissension

among free nations.

# Fostering rivalry among free-world merchants in trading with the

bloc, thus reducing the net cost to the bloc of obtaining goods it

desires from the West.

# Buying increased quantities of certain consumer goods, though

apparently just enough to help with problems within the bloc and to

rouse the interest of the West. (Of course it would not take a "trade

offensive" to obtain these consumer goods, for they have never been

restricted by the West.)

# Selling the West an exaggerated idea of the size and reliability of

markets, supplies, and general benefits that can be obtained through

East-West trade.

# Making their limited export commodities go as far as possible in

solving their import problems without draining vital resources away

from their program of forced industrialization.

# Making financial and other economic arrangements in neighboring

countries and nonindustrial areas in order (1) to gain more influence

and more access to resources there, and (2) to diminish the influence

and access to resources of free-world industrial nations.

The foregoing can be recognized, as among the things being attempted in

the Soviet "trade offensive" of 1953-54. They did not fall in separate

compartments, but were woven together in a central plan and they

contributed to one another. They were not so new as some of them might

look at first glance. The long-term objectives which they served were

not new at all.

=Their Practices Haven't Changed=

Some new tactics have been adopted, as we have seen. But even many

tactics have more of an old look than a new. Soviet-bloc business

practices still clash with Western concepts of normal, peaceful trade

relations.

Soviet-bloc representatives have access to many free-world factories,

visit docks and inspect merchandise destined for the bloc, maintain

offices in commercial centers, receive technical materials from

libraries and business firms, and pick up voluminous statistics on

free-world resources, production, exports, and imports.

The governments of Soviet-bloc countries do not reciprocate.

Although they entertain delegations of diplomats and businessmen and

occasionally allow individuals to visit certain places when it serves

their purposes, the Western business community in general is barricaded

out of their cities, factories, and countrysides, and the peoples of

the bloc firmly locked in. Disclosures of even the simplest facts and

figures about their economies is a serious crime. They do not enter

into the customary international agreements for the protection of

patents. Though they claim to have invented almost everything, much of

their industrial progress is based on piracy of Western inventions and

technology, from the tiny Moskvich automobile to the jet engine. They

have failed to settle promptly and adequately claims for confiscation

of Western properties and for lend-lease assistance. Furthermore the

terms on which they often seek to trade omit customary guarantees

of fair dealing. For example, the U.S.S.R is still trying to insert

clauses in its East-West contracts requiring that any dispute between

the Soviet Government and the free-world businessman be arbitrated by

the Chamber of Commerce of the Ministry of Foreign Trade--an organ of

the Soviet Government. And as we have already seen, they make every

effort to circumvent the export controls of other nations; they pay

citizens of those nations to violate the laws of their governments.

The best way to characterize the Soviet "trade offensive" is that the

Soviet rulers have improvised for their trade structure a new facade

of papier mache but have not reconstructed the interior. In changing

circumstances the Kremlin was seeking effective ways of accomplishing

the same traditional objectives of feeding its industrial-military

machine and weakening the free world.

In the absence of Soviet-bloc policies conducive to furnishing a

long-term steady supply of exports desired by free-world countries,

the West could hardly expect East-West trade to return to the prewar

volume, though a short-term boost would not be surprising. The combined

value of the trade in both directions between the free world and the

Soviet bloc in Europe was $2.6 billion in 1951 ... $2.4 billion in 1952

... and about $2.2 billion in 1953. By contrast, total foreign trade

within the free world in 1953 was about $148 billion.

It is not only the amount of trade that must be considered, however,

and that is why we have devoted attention in this report to what goods

were involved and what the new Soviet regime was trying to accomplish.

=The Free World Is Strong=

What are the implications of all this for the free world?

In the face of the Soviet objectives, methods, and recent trade

activities, one can recognize the inadequacy of two extreme policies

that are often urged upon Western governments. Those extremes are: